Responses to Readers — Austrian Economics Versus Marxism
Some readers have expressed interest in the Austrian School of economics. What is the Austrian School, and what is its role?
The Austrian School is a branch of marginalist economics. It differs from the other schools of marginalism by avoiding mathematics. Instead, it specializes in advocating marginalist ideas in ordinary language. In contrast, most of the other schools of modern marginalism specialize in building mathematical models that are only accessible to those who have mastered the necessary higher mathematics.
The reason why the Austrian School avoids math is that unlike most professional economists they aim their arguments at the “non-mathematical” lay public. The Austrian School—as its name implies—began in German-speaking Austria. As a result, it soon found itself in intense ideological combat with the Marxist-led Austrian workers’ movement. While most marginalists simply ignored Marx, the Austrian School attempted to refute him. (1)
The Austrians specialize in demoralizing intellectuals attracted to the workers’ movement, attempting to steer them toward reactionary bourgeois economics and politics instead.
Since they concentrate on refuting Marx, they are frequently somewhat more familiar with Marxist ideas than are most professional bourgeois economists. As intellectuals they love to play with ideas, and have in fact absorbed certain ideas from Marx, which they use for their own purposes. Undoubtedly, Austrian economic theory was influenced by the Austro-Marxist School and the Austro-Marxists were, in turn, influenced by the ideas of the Austrian School. I will examine some of these mutual influences below.
In the manner of intellectuals in love with their own ideas, partisans of the Austrian School love to take the ideas of marginalism to extremes. While they have had considerable influence on modern mainstream bourgeois marginalist economics in the sphere of theory, their policy recommendations are so extreme that they are simply not taken seriously in policy-making circles.
While the Austrian School originated in Austria, not all Austrian economists are from Austria. For example, Murray Rothbard (1926-1995), an outspoken “Austrian” economist, was an American. Today most “Austrians,” as far as I can tell, are from the English-speaking world as opposed to the German-speaking world where the school originated.
Austrian economists claim that the capitalist system breeds peace, and sometimes oppose colonial wars, such as the current U.S.-NATO wars in Iraq and Afghanistan. And they appear to make “radical” criticisms of capitalist governments and imperialism, sometimes denouncing “state monopoly capitalism.”
Some leftists have been attracted to the Austrians at times, and see them as potential allies in the fight against imperialism and the wars it breeds. This is a dangerous tendency and should be combated. All supporters of Austrian economics are without exception bitter enemies of the working-class movement.
The U.S. Congress has one outspoken “Austrian” member, Republican Congressman Ron Paul of Texas. Paul is a medical doctor and not a professional economist. However, he is a student of and outspoken supporter of Austrian economics. Congressman Paul has opposed the Iraq and Afghanistan wars. He has run for president several times either as a candidate on the Republican ticket or as a third-party candidate. Because of his opposition to these colonial wars, he has won the support of certain sectors of the anti-war movement. Ron Paul posters and banners are sometimes seen at anti-war demonstrations in the United States.
Ron Paul on liberty and democracy
While Ron Paul likes to talk a lot about defending “liberty,” he is perhaps unique among elected officials in the United States in his open opposition to bourgeois democracy.
In an article entitled “Democracy is Not Freedom,” Congressman Paul makes his case against bourgeois democracy.
“Americans have been conditioned to accept the word ‘democracy’ as a synonym for freedom,” the Texas congressman explains, “and thus to believe that democracy is unquestionably good.”
“The problem,” Paul continues, “is that democracy is not freedom. Democracy is simply majoritarianism, which is inherently incompatible with real freedom.”
To Paul, “real freedom” is the right of property owners—the owners of capital and land—to dispose of their property as they see fit, no matter what the “masses” think about it. This is very much in accord with the Austrian School. In Europe, the economists who supported the Austrian School favored the aristocracy and monarchies. They always flaunted any names they had suggesting nobility, such as those that included “von.” It was Frederich von Hayek and Ludwig von Mises, for example.
Since the United States never had a feudal aristocracy—therefore no Ron “von” Paul—or a home-grown monarchy—there are no kings, kaisers, counts, viscounts, dukes, lords, sirs or “vons” in the United States—Paul is forced to defend the concept of a “republic” as opposed to a democracy.
Paul’s campaign against the Federal Reserve System
Whenever a major economic crisis occurs, it leads to a wave of anger against the large banks in general and the central bank in particular. Taking advantage of the recent panic and current depression, Congressman Paul has published a book entitled “End the Fed.”
In this book, Paul claims that “the Fed” has been responsible for every economic crisis that has occurred since the Federal Reserve System was set up in 1913-14. He is a little bit vague about the causes of the numerous economic crises that affected the United States in the years before the Federal Reserve System was created. (2)
The book carries this blurb by folk singer Arlo Guthrie: “Rarely has a single book not only challenged, but decisively changed my mind.” If this left-wing—or formerly left-wing—folk singer has really endorsed Paul’s book, this would be an example of the Austrian School at work in winning left-wing intellectuals to the cause of capitalist reaction.
Among those who have gotten on Paul’s bandwagon is the racist and anti-immigrant former Nixon aide and far-right columnist Pat Buchanan. In recent years, Buchanan has claimed that Mexican immigrants are taking over the United States and demands that they be expelled. Buchanan has never gone out of his way to hide his admiration for European fascist movements and dictatorships that flourished during the 1920s and 1930s. (3) While Buchanan is not a supporter of Austrian economics as such, he like many supporters of Austrian economics has opposed the U.S.-NATO wars in Iraq and Afghanistan.
“The decades-long campaign of Ron Paul,” Buchanan wrote in a column entitled “Temple walls at the Fed should be brought down,” “now has 313 sponsors in the House.” Buchanan concludes his column with the slogan “Bring on the auditors!” (San Jose Mercury News, Dec. 13, 2009)
In reality, Paul’s “abolish the Fed” campaign—which has earned the support of the arch-racist pro-fascist Buchanan—is a dangerous diversion from a genuine struggle against the economic crisis and the terrible effects it has had on the working class and working people in general.
The great amount of anger among the American people about the failure of either the government or the Federal Reserve System to avert the economic crisis—which was preceded by years of boasting about the glories of the “Great Moderation” and the success of “monetary policy” in flattening out the “business cycle”—the crisis has provided an opening for Congressman Paul.
The congressman, realizing that he could not get serious support in Congress to actually abolish the U.S.—and, under the dollar system, the world—central bank, has instead teamed up with other members of Congress including liberals—not neoliberals—under the democratic-sounding slogan—from a congressman who opposes democracy in principle—to audit the Federal Reserve System.
“I introduced a Federal Reserve audit bill,” Paul explains, “the Federal Reserve Transparency Act, HR 1207, which Progressive/Socialist (and friend) Bernie Sanders of Vermont introduced in the Senate.” It is typical of members of the Austrian School to be “friends” with left wingers. Senator Sanders is not actually a member of any organized labor-based political party—no mass workers’ parties of any type exist in the United States—but is a nominally independent senator from Vermont who functions as a member of the Democratic party caucus in the U.S. Senate.
Sanders’ “socialism” is modeled on that of the modern European Social Democratic parties and is very far from socialism in the Marxist sense of the word. By teaming up with the bitterly anti-labor and avowedly anti-democratic Ron Paul in introducing legislation to “democratize” the Federal Reserve System, Sanders is actually playing into Paul’s hands—and those of other far-right demagogues such as Pat Buchanan. (4)
The economic theories of the Austrian School
So much for politics and ideology. What are the economic ideas of the Austrian School, and where to they come from?
Around the year 1870, a new school of bourgeois economists arose that launched a headlong assault against the labor theory of value of classical bourgeois political economy. These economists included William Stanley Jevons in England, Leon Walras in Switzerland, and Karl Menger, the founder of Austrian School, in Austria. Interestingly enough, what is called the “marginalist revolution” in bourgeois economics occurred some three or four years after the publication of the first German edition of Volume I of “Capital.”
Marx demonstrated in “Capital” that surplus value—profit, including interest and rent—arises on the basis of the exchange of commodities that on average take equal quantities of labor to produce. (5) Or what comes to exactly the same thing, Marx demonstrated that just like chattel slavery and feudal serfdom, capitalism—even when commodities exchange at their values—is a system of exploitation whereby the workers are forced to perform unpaid labor for the ruling class. Nothing would ever be the same in economics again. The concept of labor value had to be banished from bourgeois economics once and for all.
The marginalist revolution and theory of marginal utility
Any theory of “economic” value begins with what is known in economics as the diamond-water paradox. Diamonds cost a huge amount of money, yet they are not necessary for life. Water, on the other hand, is very cheap—though not as cheap as it use to be—yet is absolutely necessary for human life. Indeed, you cannot live for more than a few days without water, but you can get through life fine without ever owning a diamond.
The classical economists and then Marx answered this paradox by explaining that it takes a much larger amount of labor on average to find and polish a diamond than it takes to find and collect the quantity of water that a glass can hold. Since a diamond represents a much greater amount of labor than a glassful of water, the price in money terms of a diamond is much higher than the price—if any—of a glass of water.
This is even more true if we replace water with air. Air is provided free of charge by nature—it is not produced by human labor—and has no money price at all. Yet we cannot live without breathable air for more then a few minutes.
Bourgeois political economy had been in full retreat from any notion of labor value since around 1830, yet the bourgeois economists had not replaced the classical bourgeois labor theory of value with any really coherent alternative theory. (6) Instead, the post-Ricardian bourgeois economists simply limited themselves to explaining that prices are determined by the “costs of production.”
But what determines the cost of production of a given commodity? Why the cost of production of the commodities including the labor that is necessary to produce the given commodity in question. Or what comes to exactly the same thing, the prices of commodities are determined by the prices of commodities. If the bourgeois economists could not do any better than this, the superiority of Marx’s perfected labor theory of value would be so obvious that the workers’ movement would have had a huge advantage in what former Cuban President Fidel Castro has called the “battle of ideas.”
Marginalism to the rescue
Karl Menger in Austria, Leon Walras in France and William Stanley Jevons in Britain proposed what they considered to be a coherent alternative answer to the diamond-water paradox. If I am in a desert dying of thirst, I would—assuming I had the money—indeed pay more for a glass of water that would save my life than I would for a diamond. Under those circumstances, my subjective valuation of water would be much higher than my subjective valuation of a diamond. But normally I have plenty of water and if I am thirsty I simply go to a tap and obtain another glass of water for a nominal cost. Therefore, my subjective valuation of an additional glass of water is normally quite low.
But since diamonds are very scarce, my subjective valuation of an additional diamond compared to an extra glass of water will probably be quite high, certainly much higher than my subjective valuation of an additional glass of water. I will under normal circumstances almost certainly be willing to pay a lot more money for an additional diamond—assuming I even want to own a diamond—than for an additional glass of water. Therefore, Menger, Walras and Jevons concluded, the value of a commodity is determined not by its use value as such but by its use value—or utility—at the margin.
While the overall utility for a person of diamonds compared to water is quite low, the utility of an additional diamond compared to an additional glass of water is normally very high. Therefore, the founders of the new marginalist school of economics argued, the value of a commodity is determined neither by its utility nor by the quantity of labor socially necessary to produce it but rather by its marginal utility.
Unlike the concept of labor value, which is objective, the concept of marginal utility, as it was called, is subjective. Whether I personally like or hate diamonds, for example, has no effect on how much labor measured in terms of time that it takes on average under current conditions of production to produce them. It might indeed be that I really hate diamonds, and even if I had plenty of water, I would pay more for an additional glass of water than I would for an additional diamond. But this is rather unlikely. Most people under normal conditions put a higher subjective valuation on an additional diamond than they would on an additional glass of water.
Unlike the concept of labor value, which begins with production, the theory of marginal utility begins with consumption. This caused N.I. Bukharin in his book against the marginalists, entitled “The Theory of the Leisure Class,” to propose that the rise of the theory of marginal utility in bourgeois economics reflects the view of the capitalists who have withdrawn from production—the rentiers, or money capitalists—as opposed to the active industrial and commercial capitalists.
The trouble with the concept of marginal utility
Marx defined value as a homogeneous social substance—abstract human labor. All attempts to reduce utility—use value—to a similar abstract social substance failed. The mainstream marginalists who became known as the “neoclassical school”—though they are really the negation of the classical school of bourgeois political economy—therefore satisfied themselves with building mathematical models of consumer behavior. In these models, consumers make choices among alternative scarce “goods” according to the intensity of their subjectively determined needs for an additional “good” of a particular type. However, this “solution” was not really open to the Austrian School because of its “non-mathematical” nature. So they remained stuck with marginal utility.
The Austrian theory of surplus value—or interest
In order to explain—rather to explain away—surplus value, the Austrian economists combine marginal utility and time. While modern bourgeois economists, including the Austrians, explain away much of the profit as the “wages” of the active capitalists, and by a considerable stretch the landlord’s rent as the reward for “improving” the land, this leaves unexplained the interest earned by the idle money capitalists. Where can the interest come from if not from the unpaid labor of those who work?
The Austrian economists “explain” that we subjectively value “goods” that are immediately available more than we subjectively value “goods” that are available only sometime in the future. For example, let’s assume I need a new coat to stay warm this winter. Won’t I pay more for a new coat that I can take home at once, than a new coat that won’t be available for another year? If I don’t get a coat for another year, I will have to use my old worn-out coat to stay warm this winter. I might be willing to pay $100 if the coat is immediately available so I can use it this winter, but perhaps only $90 if the coat is delivered a year from now. I “discount” my subjective valuation of the coat due a year from now compared to a coat that I can wear today under these assumptions at a rate of 10 percent. According to the Austrian economists, the difference in my subjective valuation of a “good” I can receive at once compared to a “good” that won’t be available until sometime in the future is the rate of interest.
The “property-owning” members of society—capitalists—have two choices. They can consume now, or save. If they save, they will have a lower standard of living today but a higher standard of living in the future. In a “free society”—as opposed to a democratic society where the “masses” can interfere with the free choices of the “property owners”—it is up to the individual property owners or capitalists to decide how much they save for the future as opposed to consume in the present.
The function of the rate of interest in Austrian economics
According to the Austrians, the purpose of the rate of interest is to equalize the supply of savings with investment. If society—the capitalists—wish to save more, everything else remaining equal, the rate of interest will fall. This shows that the capitalists as consumers are subjectively discounting the value of consumer goods available only in the future compared to consumer goods available immediately at a falling rate of interest. They do this when consumer goods are becoming less scarce relative to their subjectively determined human needs. Savings and investment are being equalized at a falling rate of interest.
Under these conditions, according to Austrian economics and marginalism in general, the falling rate of interest (profit) means that society has a decreasing need for additional means of production and therefore fewer additional means of production are being created.
If, on the contrary, the capitalists wish to save less, the rate of interest, all else remaining equal, will rise. If the capitalists desire to save less, this means that they are subjectively discounting the value of consumer goods available only in the future at an increasing rate of interest. According to the Austrians (and marginalism in general), this means that the “goods” and the “capital” necessary to produce them are growing scarcer relative to subjectively determined human needs. Saving and investment are being equalized at a rising rate of interest. Therefore the natural rate of interest—rate of profit—will rise. The higher rate of interest (profit) will cause means of production to be created at a rising rate—expanded reproduction.
According to the Austrians, as long as liberty prevails, and the market rate of interest does not diverge from the natural rate of interest, a correct proportion between—using Marxist terminology—Department I, the department of industry that produces the means of production, and Department II, the department of industry that produces the means of personal consumption, will prevail. Here hiding behind the marginalist arguments we meet an old friend, Marx’s diagrams of simple and expanded reproduction from Volume II of “Capital.”
Inevitably, individual industrial capitalists can and undoubtedly will make wrong decisions about whether to produce items of personal consumption as opposed to capital goods. That happens every day of the week. But doesn’t the market reward those industrial capitalists who prove expert at determining the demands of the market while punishing those who do not? Acting much like the law of natural selection in biology, the Austrian economists explain, the industrial capitalists who generally make correct determinations of what the market desires will be “selected” to survive for another day while those who make the wrong choices on what to produce will be eliminated.
According to the Austrian economists, every individual industrial capitalist will want to increase the production of the particular commodity that he—most Austrians probably take a dim view of female industrial capitalists—produces up to the point where his individual rate of profit falls to the rate of interest. According to the Austrian theory, the economy will be in prefect equilibrium if the rate of profit realized by each industrial capitalist equals the the market rate of interest, and the market rate of interest equals the natural rate of interest.
In the real world, even the Austrian economists will concede that this would never exactly be the case, but the Austrians argue that the market is so efficient that, assuming the government doesn’t interfere and trade unions are absent, the economy can never get very far from this equilibrium position.
Say’s Law and the Austrian theory of crises
While mainstream “neoclassical marginalist economists” accept Say’s Law at least implicitly, the Austrians loudly proclaim Say’s Law explicitly. The Austrian economists give Say great credit for discovering that a generalized overproduction of commodities is impossible. Remember, according to Say, commodities are purchased with commodities—money being a simple technical device to facilitate the circulation of commodities. However, Say did allow for a partial overproduction of some commodities backed by an underproduction of other commodities. Therefore, Say’s Law is compatible with a theory of crises based on disproportionate production.
But the Austrian economists argue that as long as the market rate of interest coincides with the “natural” rate of interest, there cannot be any significant disproportion between Department I and Department II.
But what if the market rate of interest is allowed to deviate from the natural rate of interest? What happens if an evil institution known as a central bank—let’s call it the Federal Reserve System—is created by a democratic government that under the influence of “the masses” is determined to keep the market rate of interest below the “natural” rate of interest?
The Austrian definition of inflation
While most economists define “inflation” as a situation of rising prices, the Austrian economists reject this common definition. According to them, the economy is in a state of inflation whenever the market rate of interest is below the natural rate of interest, whether commodity prices are rising or falling.
The Austrian economists “explain” that “well-meaning” people who are uninformed about economics will generally favor policies of lowering the rate of interest in order to achieve high economic growth and “full employment.” These include small businessmen and farmers, who are often highly indebted as they attempt to hang on to their small enterprises in the face of competition from much larger and more efficient capitalist competitors. Naturally these people are in favor of policies that lower the rate of interest. This is exactly why democracy is dangerous.
If the government and its “monetary authorities” expand the money supply in a way that causes the market rate of interest to fall below the natural rate of interest, the individual industrial capitalists will be misled into producing too many capital goods and too little means of individual consumption.
According to the Austrian theory, there is no way for individual industrial capitalists to distinguish between the natural rate of interest and the market rate of interest. As far as the industrial capitalists are concerned, there is only one rate of interest, the market rate of interest. As I have already explained, according to the Austrian—and marginalist theory in general—individual industrial capitalists will increase production of the particular “good” that they produce up to the point where their individual rate of profit equals the market rate of interest. Therefore, the Austrians argue, if the market rate of interest is below the natural rate of interest, the industrial capitalists will over-invest.
In Marxist terms, Department I, the department of production that produces the means of production, will expand excessively relative to Department II, which produces the means of personal consumption. In Austrian terminology, this is a called “lopsided production” or “malinvestment.” There is no general overproduction—Say’s Law can never be violated—but there is disproportionate production. Such disproportionate, or “lopsided,” production or “malinvestment,” according to the Austrian theory, is the inevitable result of inflation as defined by the Austrians—a situation where the market rate of interest is below the natural rate of interest.
Once “lopsided production” or “malinvestment” develops, a crisis becomes inevitable. In such a situation, the only correct policy is to “bite the bullet” by allowing interest rates to rise as quickly as possible back up to the “natural rate” and getting the crisis over with as quickly as possible.
According to the Austrian School, no policy of monetary expansion can prevent the market rate of interest from equaling the natural rate of interest in the long run. If the central bank—the monetary authorities—attempt to resist the rise in interest rates, they will be obliged to print more and more money. If they persist, the result will be galloping inflation and eventually the kind of hyper-inflation that occurred in Germany in 1923, where the currency became entirely worthless.
The Austrians hold that the longer the economy remains in a state of inflation—the market rate of interest remains below the natural rate of interest—the more lopsided production will become and the worse the inevitable crisis will be.
Therefore, the Austrians hold, the solution to a threatening crisis is always a sharp rise in the rate of interest. By encouraging the inevitable “liquidation,” the Austrian economists explain, the crisis will be shortened and its intensity reduced.
But central banks under the pressure of the “masses”—or in fear of them—try to keep interest rates low in an attempt to stave off the crisis and then minimize the crisis when it breaks out anyway. According to the Austrians, the rapid reduction in interest rates carried out by the U.S. Federal Reserve and the other central banks during the crisis of the last couple of years is an example of exactly what should not be done.
Instead, the Austrians economists and their supporters argue, interest rates should have been allowed to soar. This would have meant, the Austrian economists concede, that foreclosures of homes and farms, business bankruptcies and unemployment all would have risen even more than they actually have. But, the Austrians and their supporters such as congressman Paul explain, this is exactly what is needed. According to the Austrians, this is the only way to cure the “lopsided production” that is behind the crisis.
But would such a brutal policy have been compatible with democracy? Obviously not, which is precisely why supporters of Austrian economics such as Ron Paul want to get rid of it.
The Austrians versus Milton Friedman
The Austrian theory is in many ways similar to that of Milton Friedman and his followers. Both Austrians and Friedmanites equally hate trade unions and the entire organized workers’ movement. Both are equally opposed to social insurance such as single-payer health coverage, not to speak of socialized medicine, public schools, Social Security and unemployment insurance.
Like the Austrians, Milton Friedman, especially in his younger years when he was more on the fringe of bourgeois economics, wanted to see the Federal Reserve System and other central banks abolished. As he grew older and of course more “respectable,” Friedman became reconciled to the Federal Reserve System as an institution. Shortly before he died in 2006—which happened to be on the eve of the panic of 2007-09—he expressed admiration for how well the Federal Reserve System was managing the “money supply” and thus bringing out the natural stability of the capitalist economy.
But even leaving aside the retreat in his “old age” from his position that the Federal Reserve System should be abolished, Friedman and the Austrians had one significant difference. Friedman believed that the “monetary authority”—and Friedman believed that there should be one if not necessarily in the form of a central bank—should aim for a steady rate of growth in the money supply.
The Austrians consider this proposal to be nothing but a form of “socialist central planning”! Instead, they explain, the quantity of money should be left to the private sector—the market. That is, money should be produced for profit just like any other commodity. (7) If the quantity of money is subject to “central planning” such as Friedman advocated, the Austrians claim, the market rate of interest will fall below the natural rate of interest leading to “lopsided production” and sooner or later to a major economic crisis.
While Friedman blamed the Depression on the Federal Reserve System’s failure to prevent the contraction of the U.S. “money supply” by one-third between 1929 and 1933, the Austrians complain that the Federal Reserve did not allow the money supply to contract enough.
Friedman, in contrast to the Austrians, held that the U.S. Federal Reserve System’s “monetary policy” was far too restrictive during the 1920s. The Austrians hold that, on the contrary the Fed followed a highly “inflationary policy” during the 1920s keeping the market rate of interest far below the natural rate of interest. Therefore, according to the Austrians, despite the fact that commodity prices were generally falling during the 1920s, the U.S. economy was really experiencing severe inflation—the market rate of interest was far below the natural rate of interest—and as a result a situation of massive “lopsided production” developed.
Then, according to the Austrians, the Fed made the crisis worse and considerably prolonged it by following an even more “inflationary policy” once the crisis broke out.
Friedman, in contrast—for example, in the “Monetary History” he co-authored with economist Anna J. Schwartz—denied there was “inflation” in the U.S. economy in the 1920s and explained that the Fed should have moved to prevent the collapse of the money supply in the early 1930s. This is the exact opposite of the Austrian position.
The Austrian cure for crises
Can economic crises, according to the Austrians, be eliminated under the capitalist system? While Marx said they could not, the Austrian economists say they can. But in order to end crises, according to the Austrian economists, government interference in the economy must cease. Above all, the central banks—the monetary authorities—must be eliminated. Money like all other “goods” must be produced only for profit by private capitalists. There should be no “monetary authority” or any kind “central planning” of the money supply.
If the “central planning” of the supply of money were abolished, the Austrians claim, the market rate of interest would no longer deviate from the natural rate of interest. With the market rate of interest equaling the natural rate of interest, “lopsided production” would no longer be possible.
For example, private capitalists should be allowed to mint gold coins without any particular gold coins declared legal tender. The individual commercial banks should be allowed to issue their own banknotes much like they did under the so-called “free banking system” that prevailed in the United States before the U.S. Civil War of 1861-65. The use of gold coins should be encouraged and the gold standard should be restored.
If this were done, the Austrians hold, competition among the various capitalist entities creating money—for example, gold mining companies, private for-profit mints, and note-issuing commercial banks—would ensure the best monies would prevail, just like free competition among the producers of other types of “goods” ensures the best products prevail. The issuers of inferior “monies” would be forced out of business just like the producers of any inferior products.
A contradiction in Austrian (and Friedmanite) economics
Both the Austrians and the Friedmanites strongly oppose fractional reserve banking—bank-created credit money. Though the Austrians believe that production of money should be left to private for-profit capitalists, they don’t believe that privately created money should include any form of credit money. According to the Austrians, any form of credit money is evil because it drives the market rate of interest below the natural rate of interest.
But the Austrians and the Friedmanites are at a loss to explain exactly how they would prohibit the creation of credit money in a “free capitalist economy.” Wouldn’t a law that requires the commercial banks to maintain a 100 percent reserve behind their deposits in the form of either state-created token money—Friedman—or gold—the Austrians—represent the very kind of state interference with the capitalist system that the Austrians and Friedmanites oppose?
And even if a law were passed requiring 100 percent reserves to back bank deposits—what would prevent the commercial banks—or other capitalist financial institutions—from issuing commercial paper or bonds that would in practice function as credit money—that is, act as means of purchases and means of payments.
Any attempt to suppress credit money such as advocated by the Austrians and Friedmanites would mean putting the capitalist economy in a straightjacket. It would require a huge financial police force that would examine virtually any transaction to make sure that no new forms of “circulating credit”—to the use the old 19th-century term for credit money—are created. And the business world would always finds way of creating credit money in one form or another. In the end, the market always wins, does it not?
The revolutionary side of the credit system
In truth, both the Austrian and Friedmanite Schools sense that credit money and the credit system in general allows capitalism to develop the productive forces beyond their capitalistically determined limits and that such a development of the productive forces—as long as capitalism is retained—always ends in a crisis. Both the Austrians and the Friedmanites, while they pose as unconditional champions of capitalism, actually oppose the revolutionary side of capitalism, its unconscious drive to establish a higher mode of production without exploitation. Faced with this revolutionary side of capitalism, both the Austrians and Friedmanites abandon economic liberalism and take refuge in the most draconian and reactionary forms of state intervention imaginable.
Differences between the Marxist and Austrian theories of crises
The Austrians notwithstanding, the cyclical crises of capitalism are above all crises of the general relative overproduction of commodities. Both Department I and Department II overproduce. Marx showed that interest is just a portion of the profit—interest plus profit of enterprise, which itself is a fraction of the total surplus value—profit plus rent.
And what is surplus value? It is the unpaid labor that the productive workers—all workers who produce surplus value—under pain of starvation to perform for those who monopolize the means of production in capitalist society—the capitalist class. While commodities have natural prices—prices of production—around which market prices fluctuate, the same isn’t true of the rate of interest.
While it is true that interest rates cannot in the long run be equal to or higher than the rate of profit, they can be considerably lower.
Is the rate of interest determined by the rate of profit?
Many Marxists hold that the rate of interest is determined by the rate of profit. While there is an element of truth to this, since the rate of interest cannot in the long run be higher or even equal to the rate of profit, this claim doesn’t explain why the rate of interest is one percentage of the rate of profit rather than some other percentage of the rate of profit.
According to Marx, interest rates can be 10 percent of the rate of profit, 25 percent of the rate of profit, 50 percent of the rate of profit, 75 percent of the rate of profit. If there were a fixed percentage of the rate of profit that the rate of interest tended toward, there would be some justification for speaking of a natural rate of interest around which market rates of interest fluctuate. But in fact there is no such fixed percentage of the rate of profit around which the rate of interest fluctuates.
What really determines the rate of interest?
In Volume III of “Capital,” Marx gives figures that show that interest rates in England were extremely sensitive to changes in the size of the gold reserve held by the Bank of England.
Ultimately, the rate of interest will tends toward the point where the supply and demand for gold—money material—are equal. This the closest we can get to a “natural rate of interest”. (8) All other things remaining equal, a relatively high level of gold production—relative to the production of other commodities—will mean a low rate of interest relative to the rate of profit, while a relatively low level of gold production will mean a high rate of interest relative to the rate of profit.
Or more precisely, a high rate of gold production relative to total commodity production will mean that interest rates will tend to decline, while a low rate of gold production relative to total commodity production will mean interest rates will tend to rise.
A situation where the supply and demand for gold—money material—are equalized by an interest rate equal to or higher then the rate of profit cannot be sustained. In that case, gold production must rise or the production of commodities must fall, or what is the case in the real world, some combination of both occurs. This is exactly what we see during crises of overproduction.
Thanks to crises, the rate of interest in the long run is kept below the upper limit set by the rate of profit, ensuring a positive profit of enterprise and thus an actual incentive for a section of the capitalists class to act as industrial capitalists producing surplus value.
The rate of interest and overproduction
Indeed, when a general overproduction of commodities is occurring, the rate of interest will tend to rise relative to the rate of profit, assuming that all the surplus value produced is actually realized. Such a situation cannot be sustained and must sooner or later end in a crisis that once again lowers the rate of interest.
The rate of interest and underproduction
A crisis is a forcible halt to an situation of generalized overproduction. The situation of overproduction is “cured” by a period of generalized underproduction. During a period of generalized underproduction of commodities, the relationship between the production of money material—gold—and the production of other commodities is such that the rate of interest is tending to decline relative to what the rate of profit would be if the total amount of surplus value were actually being realized. (9)
The masses, to use Congressman Paul’s favored terminology for the working class and other working people who don’t “understand” the laws of capitalism, put pressure on the governments and central banks to take measures to avoid crises, and when that proves impossible, to accelerate recovery. We see this at present. Are the “masses” being stupid or irresponsible? Not at all.
They are instinctively striving to free the forces of production from their character as capital. The only advantage that we Marxists have over other workers is that we consciously understand the laws of capitalism from which the workers are correctly though unconsciously trying to free themselves.
Today, we see that the “masses” are becoming extremely impatient with the failure of current cyclical “recovery” to generate jobs. The most the authorities in most of the imperialist countries can claim is that the rate of job loses is slowing down. Naturally the people are saying—and quite correctly—that is not good enough! The “masses” naturally want the government and the central bank—after all, isn’t the central bank an organ of the democratic government that represents the people?—to bring about a recovery that actually produces jobs in sufficient number to end unemployment once and for all.
But Congressman Paul, as a student of Austrian economics, complains that to the extent the government—or the Federal Reserve System—actually does anything to accelerate recovery—it is interfering with the necessary “liquidation,” and in the case of the Fed, it drives the market rate of interest below the natural rate of interest. According to Paul and the other supporters of Austrians economics, this leads only to more “lopsided production.”
The way out of the crisis, according to Paul and the Austrians, is not to keep interest rates “low for an extended period of time” but rather to keep “interest rates high for an extended of period of time. Only in this way can the “lopsided production,” which caused the crisis in the first place, according to the Austrian theory, be eliminated once and for all.
Is there any truth in the Austrian theory of crises?
As long as the gold standard prevailed—a situation where the central banks had to redeem their notes in a certain fixed quantity of gold—central banks would suffer a drain in gold reserves if they kept the interest rates below the point where the supply and demand for gold was equal. If they kept interest rates below this point, the central bank had to reduce their own “demand” and increase the “supply” available to the “private sector” by running down their own gold reserves. As long as the gold standard lasted, the central banks could not do this for very long. If they did, there would be a “run” on their gold reserves and they would be “forced off gold.”
The advantages of the gold standard to the capitalist system
The advantage to the capitalist system of a gold standard is that over the long run it means interest rates are much lower than they would be under a paper money—or fiat money—system where the central bank—or other monetary authority—is under no obligation to redeem its notes in gold. Why is this?
Assuming the rate of interest is given, the demand by the capitalists for gold will be low if the capitalists believe that devaluation of the currency is extremely unlikely. This is the whole point of the gold standard. If a capitalist believes that the currency will not be devalued against gold at least for the foreseeable future—that is, the currency price of gold will not rise—it makes more sense to keep any money capital that our capitalist cannot invest profitably in either industrial production or trade in interest-bearing securities. Even if the yield—interest rate—is very low—this is still better then hoarding gold, which yields no interest at all and imposes storage costs.
But without the “discipline” of a gold standard, the central banks faced by a major crisis of overproduction and its aftermath are under great political pressure to “keep interest rates low for an extended period of time.” Such a policy has the downside of encouraging capitalists’ fear that this will mean that interest rates will be kept below the level where the supply and demand for gold are equal. Under these conditions, the capitalists will increase their demand for gold, making their fear that the currency will depreciate against gold a reality.
The result is that the rate of interest necessary to equalize the supply and demand for gold rises. A rise in the dollar price of gold and the subsequent rise in commodity prices in terms of the depreciating currency is simply the market’s way of forcibly raising the rate of interest to the level where the supply and demand for gold are equal.
The Austrians incorrectly perceive the rate of interest that equalizes the supply and demand for gold as their imagined natural rate of interest that equalizes savings and investment.
Lopsided production versus the generalized relative overproduction of commodities
In the 1970s, a huge battle developed between the governments and central banks, which in an attempt to force recovery tried to drive down the rate of interest, on one side, and the attempt of the market to raise the rate of interest to the level where the supply and demand for gold was once again equal, on the other. The Austrian economists, blinded by the dogma of Say’s Law, misinterpreted the causes of the crisis that led to this battle. The Austrians claimed it was caused by “lopsided production,” the overproduction of means of production relative to means of consumption, when in reality it was caused by a generalized relative overproduction of both the means of production and means of consumption.
The market always wins
But the Austrian are right on one crucial point. Assuming that capitalism is retained, when a battle develops over the rate of interest between the governments and central banks that are attempting to hold interest rates down by expanding the “money supply,” on one side, and the market, which is attempting to drive interest rates higher, on the other, the market always wins. Indeed, we can go further: In this kind of battle, the market not only wins, it exacts a penalty by driving the rate of interest much higher than would have been the case if the government had not resisted the rise in interest rates in the first place. (10)
The extremely high interest rates of the 1980s that did so much long-term damage to economies around the world are an example. Most liberal—not neoliberal—and progressive economists denounced the Federal Reserve Board chairman, the Democrat Paul Volcker—congressman Paul indicates his respect for Volcker in “End the Fed”—for allowing interest rates to soar after his appointment as Fed chief by Jimmy Carter in August 1979—as a terrible “mistake.” These “progressive” economists point out correctly that the double-digit interest rates of the “Volcker shock” led straight to prolonged and severe recession-depression with its double-digit unemployment of the early 1980s.
But the Austrian economists are correct when, in answering the “well-meaning progressives,” they point out that under the laws of the capitalist system Volcker really had no choice but to allow the rate of interest to rise. The Fed chief was simply surrendering to the inevitable victory of the market.
If Volcker had kept resisting the market’s attempts to raise the rate of interest like his immediate predecessors had, inflation would have rapidly increased to galloping levels. If the Fed had continued to resist the rise in interest rates anyway, the market would have served up its ultimate punishment by consigning the U.S. dollar and all the paper currencies linked to it under the dollar standard to the fate of the German mark in 1923.
Those progressive economists are actually guilty of idealizing the capitalist system by denying its brutal laws. Compared to these “well-meaning” progressives, the Austrian economists are cold-blooded realists, and this only increases their influence in times of crisis.
If a situation like 1979 arises again—and we might not have to wait all that long to see it happen—the only viable alternative to a new and possibly much worse “Volcker shock”—will be to strip the productive forces of their character of capital—the solution that the “masses” are striving towards, even if in a not fully conscious way.
Or what comes to exactly the same thing, a socialist revolution.
Ron Paul versus populism
Now I want to return to congressman Paul. Is he some kind of modern day populist? Not at all.
The U.S. populist movement of the late 19th century supported a policy of monetary inflation either through the free coinage of silver or the issuance of paper money “greenbacks” through the U.S. Treasury. But the 19th-century U.S. populists opposed the creation of a central bank, fearing correctly that it would be a tool of Wall Street, or in those days, London as well.
The populists hoped that an increase in the “money supply” brought about either through a free coinage of silver or the issuance of paper money directly by the U.S. Treasury would raise the prices of agricultural commodities and lower interest rates, thereby saving many small farmers and businessmen who were succumbing to the relentless competition of large capitalist farms and businesses. (11)
When Ron Paul demands that the Federal Reserve System be abolished, he seems to be reviving this old-time populist demand. Just as today’s neo-populists and Ron Paul charge, the Federal Reserve System was indeed created by Wall Street and remains a servant of Wall Street interests. “Although William Jennings Bryan was hardly a champion of our cause,” Paul explains in “End the Fed,” “he was … an enemy of central banking.”
The difference between Paul and the Austrians on one side and American populism—the heirs of William Jennings Bryan—on the other is that the populists wanted—and want—monetary expansion and lower interest rates in order to make capitalism more bearable for the small farmers and businessmen. Paul and other Austrians want the exact opposite—monetary contraction and higher interest rates in order to accelerate “the necessary liquidation.” And who would in practice be liquidated at an accelerated pace? Why the remaining small businessmen and farmers, of course!
But this radical difference in perspective is obscured by Paul’s slogan of “Ending the Fed” and the willingness of so-called progressives—and in the case of Senator Sanders a “socialist”—in the U.S. Congress to make common cause with Paul in his democratic-sounding demand to “audit the Fed.”
What should we demand?
The working class has absolutely no interest in Ron Paul’s campaign to abolish the Federal Reserve System and return to the pre-U.S. Civil War system of “free banking,” where individual commercial banks issued their own banknotes. In fact, under the “free banking system” the U.S. economy was more unstable than the economies of capitalist countries that had central banking systems. In those days, at the first sign of trouble capitalists would hoard gold, silver and the banknotes of stronger banks. In England, when a crisis broke out the “Bank Act” could always be suspended, but in the United States the abnormal demand for money as a means of payment could not be broken before additional gold arrived from abroad. In the meantime, the U.S. economy would be semi-paralyzed. Farmers and small businessmen would be driven into bankruptcy in droves and unemployment would soar!
In today’s economy, which is far more dependent on credit than the U.S. economy was in the days of pre-U.S. Civil War “free banking,” the abolition of central banking combined with a crisis of overproduction, would lead to a disaster of almost unimaginable proportions. That is why no serious policy maker would even consider the recommendations of Paul and the Austrian School.
Instead of looking to an idealized past that never existed, as Paul and the Austrians economists do, we should look toward the socialist future. A good first step in the United States would be a campaign to unionize bank workers—whether they are employed by the Federal Reserve Banks or the for-profit banks. In some countries, bank workers are already unionized but not in the United States.
Unions of bank workers allied with unions of industrial and commercial workers could by opening up the books of all the banks establish workers control over the entire banking system. Obviously, much would be revealed about the relations between the central bank and the for-profit bankers.
What is needed is an “audit” of the entire banking system, including but not confined to the Federal Reserve System and the other central banks, carried out by the organized labor movement and its allies. This is not the same thing as an “audit” confined only to the central banks and carried out by Paul and his liberal, conservative and “socialist” allies—many of whom are the direct representatives of the private for-profit banks—in the U.S. Congress and their counterparts in other bourgeois parliaments.
1 Eugene Bohm-Bawerk (1851-1914) dominated Austrian economics in the early 20th century. Bohm-Barwerk held in his 1896 book, “Karl Marx and the Close of his System,” that there was a contradiction between Volume I of “Capital,” where Marx assumed that commodities sell at their values, and Volume III of “Capital,” where Marx assumed that commodities sell at their prices of production. Bohm-Bawerk’s arguments have helped muddy up the waters of economic thought throughout the 20th century in the form of the so-called “transformation problem.” Radical economists who fail to fully understand Marx’s theory of value, money, exchange value and price have stumbled badly on this point. And, unfortunately, as I have shown in my posts, their numbers are legion.
Another example is Ludwig von Mises’ 1922 book “Socialism.” Von Mises was probably the most influential Austrian economist of the 20th century. In his “Socialism,” Mises claimed that a socialist economy was impossible because there is no way to calculate the value of capital goods without the existence of private property in the means of production. Mises’ argument boils down to the claim that there would be no way to duplicate in a socialist planned economy the distribution of the labor time of society that arises as a result of competition in a capitalist economy.
Actually, von Mises was correct on this point. The whole point of a socialist revolution is to abolish the allocation of the labor of society in which a large amount of social labor is devoted to the luxury goods industries, thereby meeting every whim of the large capitalist exploiters and to a lesser extent their middle-class hangers-on while ignoring the most basic needs of billions of poor people.
This is not even to mention the vast amount of labor that must be allocated to the means of destruction that is necessary to defend the market-determined allocation of labor in the first place.
Not surprisingly, von Mises’ arguments against socialism sounded quite convincing to many members of the former ruling classes—as well as the generally privileged strata that existed in the former Soviet Union and Eastern Europe. In those countries, there was no large luxury goods industry. Instead, the scarce labor time of society was devoted to producing either new means of production or means of defense against imperialist aggression, and within the limits allowed by these two requirements, the production of items of personal consumption for the working class.
Enraged by this distribution of labor time—so “irrational” from the viewpoint of the Austrian School—the privileged strata of the Soviet Union and Eastern Europe, who believed that they were being deprived of their basic human right to become rich through the exploitation of the labor of others, finally succeeded after a 70-year-long struggle in decisively defeating the working class. They then launched “perestroika” and the even more “radical” economic reforms that followed to correct the “intolerable” situation and reintroduce private property in the means of production.
The supporters of the “radical economic reforms” that destroyed the economies of the former Soviet Union and the East European countries did not hide their admiration for the Austrian School in general and von Mises’ “critique” of socialism in particular. Today, Moscow, which had been the capital of the Soviet Union and is now the capital of the capitalist Russian Federated Republic, is among the most expensive cities in the world while tens of millions face homelessness, cold, hunger and death from preventable diseases as a result of the triumph of the ideas of the Austrian School.
2 Paul explains that “following Andrew Jackson’s executive order that withdrew the federal government’s deposits from the bank, the Second Bank was also allowed to close in 1836.” The “Second Bank” refers to the Second Bank of the United States, an early experiment in central banking somewhat modeled on the Bank of England. Indeed, with his “specie circular,” the slave-owning President Andrew Jackson demanded that the payments owed to the U.S. government in payment for land be paid in gold and silver coins—specie—and not banknotes.
Jackson’s policies were well in accord with the recommendations of the Austrian School—even if Austrian economics did not yet exist at that time. What Congressman Paul somehow forgot to mention is that during the following year, 1837, the U.S. economy suffered one of the worst panics in its history. According to the Austrian theory, the panic and the depression that followed should have been short-lived and quickly followed by a return to prosperity as the “lopsided production” was quickly liquidated.
Instead, the depression that followed the 1837 panic dragged on into the early 1840s. Milton Friedman himself has described this as one of the worst economic crises in U.S. history. And there was no central bank in the United States at all to blame!
3 The Austrian economists did not support fascism in the 1930s. Instead, they denounced fascism as a “left-wing socialist movement” of the masses. They preferred traditional aristocratic forms of undemocratic government and did not support the mass-based fascist movements of the 1920s and 1930s. One of the reason for this might be that the main leader of the Austrian School at the time, Ludwig von Mises, was—notwithstanding the “von”—of Jewish origin. Mises’ Jewish origin precluded any cooperation between him and the Nazis. Like many other intellectuals of Jewish origin—whether right wing or left wing—von Mises was forced to flee Europe and emigrate to the United States. Unlike many ordinary Jews, Mises was able to do that.
Today, however, Austrian economics helps provide cover for conspiracy theorists who blame the recent panic and continuing depression on “the Fed.” Among these one can find out-and-out fascists, including such admirers of Adolf Hitler as Willis Carto. In his younger years, Carto supported Adolf Hitler’s “National Socialism” but today prefers to paint himself as a “populist.”
By blaming “the Fed,” attention is diverted from the real cause of capitalist crises—the capitalist system, which combines socialized production with private appropriation. Such conspiracy theories of economic crises centered on “the Fed”—and encouraged by “Austrian” Ron Paul and his dupes in the U.S. Congress—then become grist for the mill of extreme reactionaries including outright fascists.
4 U.S. mainstream bourgeois economists are quite alarmed by Paul’s bills to audit the Fed. They fear that if political pressure on the Fed increases, the Fed might fail to raise interest rates in good time, and thus trigger a run against the U.S. dollar.
There are many ironies here. First, Paul’s bill appears to be a move to “democratize” the Fed and is supported by liberals and conservatives, Democrats and Republicans, alike. Yet Congressman Paul is an open opponent of the very idea of democracy!
While most mainstream economists in the United States would describe themselves, unlike Congressman Paul, as supporters of a democratic form of government, they strongly oppose extending the principle of democracy to the sphere of central banking. After all, democratizing the Fed and other central banks would pressure the central banks to follow irresponsible inflationary policies.
Paul for his part by supporting, against his own anti-democratic principles, the apparent “democratizing” of the Fed increases the chance the Fed will follow the very ruinous inflationary policies that as a supporter of Austrian economics he so deplores! Perhaps Paul figures that if hyper-inflation someday does come to the United States the supporters of the Austrian School might finally get a chance to implement their policies.
Ultimately, these ironies are just the reflections of the contradictions of capitalist production as reflected in the mirror of bourgeois politics and ideology.
5 The inability of the Ricardians to explain profit on the basis of the exchange of commodities at their values was one of the reasons for the downfall of Ricardian economics. This contradiction, which proved fatal to the classical school, was solved by Marx through his discovery that the workers don’t actually sell their “labor” but their labor power—their ability to work—to the capitalists. Even if the workers sell their labor power, or ability to work, at its full value, they are still forced to perform more labor than it takes to produce and reproduce their ability to work—their labor power. The difference between the total labor that a worker is forced to perform in a given period of time and the labor it takes to produce and reproduce the worker’s ability to work over that period of time is the surplus value.
6 The bourgeois economists were forced to retreat from the labor theory of value by the intensifying struggle between the capitalist class on one side and the working class on the other. Retaining the concept of labor value would inevitably have led to the concept of surplus value as representing the unpaid labor of the working class.
From 1830 onward, the further development of the labor theory of value was left to the representatives of the working class—first the so-called Ricardian socialists and then Marx, Engels and their successors.
7 There is actually a grain of truth in the Austrian arguments in this regard. As regards the production of money material—gold—Marx explained that the commodity that serves as money must be a commodity before it can be money. Or what comes to exactly the same thing—assuming capitalist production prevails in all spheres of production—the commodity that serves as money must be produced by private for-profit industrial capitalists if it is to serve as money. If governments in an attempt to abolish crises were to nationalize the gold industry and submit it to a common plan while retaining capitalism in all other spheres of industry, gold would lose its monetary character and would be replaced by another commodity—probably another precious metal—produced by private for-profit capitalists.
This is why Milton Friedman’s program for a steady growth in the “money supply”—that is, to plan the supply of money under the capitalist system while retaining the capitalist anarchy of production is utopian.
8 Why can’t we call the rate of interest that equalizes the demand and supply of gold the natural rate of interest? The problem is that this “natural rate of interest” can be any rate between just below the rate of profit and zero. Or, as the mathematicians would put it, there is an infinite set of “natural” rates of interests all equally compatible with the continuation of capitalist production.
In contrast, the natural price—price of production— of a given commodity is always a single discrete price at a given point in time through the formation of an average rate of profit, though it of course always varies over time.
9 During a the period of underproduction that follows a crisis proper, the value and therefore the surplus value embodied in commodities cannot be fully realized. While the rate of profit can easily fall below zero, the rate of interest in terms of currency—and in the long run in terms of gold—must be positive.
But once economic recovery takes hold, it becomes possible to once again actually realize the value and surplus value embodied in commodities. At the beginning of prosperity, the rate of interest is always far below the level that it was when the previous crisis broke out. The result is a sharp rise in the profit of enterprise, the incentive to actually produce surplus value. It is this combination of a low rate of interest combined with a rapid rise in the rate of profit that ends the depression and initiates the next period of prosperity.
10 The supporters of paper money—or fiat money—always claim that by freeing the central banks of the need to redeem their currency in a fixed amount of gold, the central banks are free to pursue “expansionary policies” and can lower interest rates to any level that is necessary to bring about economic recovery.
However, the sky-high interest rates of the Volcker shock and years that followed gave the lie to this argument. By increasing the demand for gold, paper money systems generally require higher interest rates to equalize the supply and demand for gold than do gold standards. The more the central bank “abuses” its power to issue unredeemable paper money in an attempt to force down interest rates, the higher the demand for gold at a given interest rate by the capitalists will be and the higher in the long run the rate of interest will be.
By trying to deny this basic economic law, “progressives” just play into the hands of the arch-reactionaries of the Austrian School.
11 The populists wanted the U.S. Treasury to act as the “monetary authority” rather than a central bank. What the old-time American populists didn’t realize is that under capitalism the U.S. Treasury is just as much an instrument of Wall Street as a central bank is.
If the the 19th-century populists had actually won their demand for monetary inflation either in the form of the free coinage of silver or the issuance of paper money “greenbacks” directly by the U.S. Treasury, the resulting inflation would have only raised real interest rates in the long run. Not only would the resulting inflation have raised prices in nominal dollar terms, it would have raised the costs to farmers and small businesses in terms of dollars as well, forcing them to borrow more dollars. The difference would have been that they would have had to pay higher real interest rates—the exact opposite of what the populists were trying to achieve.