by Gary North: Adam
Smith, Meet Oprah Winfrey
a wise Jew have begun making plans to leave Germany? 1933? 1934?
most people would say 1933, the year Hitler was appointed (not elected)
Chancellor by President von Hindenburg. On 30 January, Hitler became
Chancellor. He asked Hindenburg to dissolve the government and schedule
new elections for March 5, which Hindenburg did.
Should a Jew
have begun packing his bags? Maybe not. Maybe after the next election,
the Nazis would have been defeated.
27 February, the Reichstag building burned down. One man did
it, who admitted he had done it. Hitler immediately identified him
as a Communist, although even today, it is not clear that he did
anything but act alone.
this as a propaganda tool. On March 5, the Nazis got 44% of the
popular vote, up from 33%. With an allied party, they had 52% of
the vote in the Reichstag.
Was it time
to pack the bags? Maybe not. The Nazis did not have a majority.
They had only a coalition majority.
On March 23,
the government passed the Enabling Act. It took a two-thirds vote
to do this. Hitler now possessed dictatorial powers. He had attained
these by means of support by rival political parties.
Was it time
to pack the bags? Maybe not. Those powers might not be used.
On April 1,
a one-day boycott of Jewish businesses was staged by the S.A., which
were technically private storm troops. Was it time to pack those
bags. Maybe not. This was not government-directed. It was only symbolic.
1935's Nuremberg Laws on Citizenship and Race? They made it illegal
for Jews to be citizens. But that was only politics. How many votes
did Jews have, anyway? They were only 1% to 2% of the population.
Politics isn't everything.
And so on,
right down to Crystal Night in November 1938, when rioters broke
the plate glass windows of 7,500 Jewish-owned businesses and burned
or damaged 200 synagogues, meaning most synagogues in Germany.
over 100,000 Jews packed their bags and departed. Between 1933 and
1939, about half the Jews in Germany emigrated: 250,000. But half
a series of trigger points, 1933 to 1939. Most Jews sat tight until
Yet in Austria,
Ludwig von Mises saw the handwriting on the wall in 1934. He looked
at the map. He concluded that the Nazis would wind up running Austria.
Hitler was an Austrian, and he would want to control Austria. He
packed his bags and took his first salaried teaching position, a
job in Geneva, Switzerland. He warned Jewish friends to get out.
Economist Gottfried Haberler did, in 1936. Economist Fritz Machlup
already had. He fled in 1933. Well, not quite. He was in the United
States in 1933, and he decided not to return to Austria. Both men
found safe havens in the United States. So did Mises in 1940, when
he left Switzerland, barely escaping German troops in France as
he and his wife rode a bus toward Spain, and from there to Portugal
and the United States.
One might have
thought that a careful reading of Mein Kampf (1926) would
have been a sufficient trigger point in the Summer of 1933. The
gun was loaded. Then the hammer was cocked in March: the
enacted by the Reich government shall be issued by the Chancellor
and announced in the Reich Gazette. They shall take effect on the
day following the announcement, unless they prescribe a different
date. Articles 68 to 77 of the Constitution do not apply to laws
enacted by the Reich government.
to 77 stipulated the procedures for enacting legislation in the
Reichstag. "So what?" This seems to have been a mere technicality.
The language was so procedural. But there was substance to it. As
we read on Wiki, "The Enabling Act allowed the cabinet to enact
legislation, including laws deviating from or altering the constitution,
without the consent of the Reichstag."
It was time
to move out and move on . . . and not just if you were Jewish.
see the signs. Others do not. Some decide to get out while the getting
is good. Others do not.
incident, trigger point by trigger point, people see signs. Most
people ignore them. "It can't happen here." Most times it doesn't.
Sometimes it does.
On April 5,
1933, President Franklin Roosevelt, in office for one month, signed
Order 6102 required U.S. citizens to deliver on or before May 1,
1933, all but a small amount of gold coin, gold bullion, and gold
certificates owned by them to the Federal Reserve, in exchange for
$20.67 per troy ounce. Under the Trading With the Enemy Act of October
6, 1917, as amended on March 9, 1933, violation of the order was
punishable by fine up to $10,000 ($167,700 if adjusted for inflation
as of 2010) or up to ten years in prison, or both.
There was no
public outcry. There was no sense of loss. Violation of gold contracts,
which had been legal ever since 1879, had taken place, but few people
That was a
trigger point. There were many others. The journalist Garet
Garrett wrote of the New Deal in 1938, "the revolution was."
It continued. It was, in his words, a revolution within the form.
are those who still think they are holding the pass against a revolution
that may be coming up the road. But they are gazing in the wrong
direction. The revolution is behind them. It went by in the Night
of Depression, singing songs to freedom.
those who have never ceased to say very earnestly, "Something
is going to happen to the American form of government if we don't
watch out." These were the innocent disarmers. Their trust was
in words. They had forgotten their Aristotle. More than 2,000
years ago he wrote of what can happen within the form, when "one
thing takes the place of another, so that the ancient laws will
remain, while the power will be in the hands of those who have
brought about revolution in the state."
trigger point was Nixon's unilateral decision on August 15, 1971,
to cancel all gold contracts with foreign central banks to pay an
ounce of gold for $35. Again, there was no sense of outrage.
that declaration, he froze wages and prices. There was widespread
cheering in the business elite. That was a popular decision. The
resulting shortages, losses due to bottlenecks, and lines in front
of gasoline stations were not blamed on the controls, at least not
by the average voter.
Over the next
decade, the United States suffered the worst price inflation in
its peacetime history. Gold went from $35 an ounce to over $800
an ounce in January 1980, falling only because Paul Volcker's Federal
Reserve policy of tighter money (1979-82) reversed the inflationary
was a pair of trigger points, both having to do with the violation
counter-indications: safeties, to stick with the analogy of triggers.
The main ones were the reduction in top marginal income tax brackets,
first by Kennedy and then by Reagan. Under Carter, price floors
imposed by Federal regulatory agencies were reduced or eliminated.
In transportation these changes produced rapid economic growth and
innovation, along with price cutting. A decade earlier, the Federal
Communications Commission's Carterfone decision began to break the
back of AT&T's monopoly, which led to enormous innovation in telecommunications.
of the Patriot Act of 2001 was a blow to liberty. The development
of the Internet since 1995 has been a much greater advancement of
To shift the
analogy, we are now in a "two steps forward, one step back" scenario.
I think we have been since the end of the Vietnam War. The defeat
of the United States was visible. The government has sought to reclaim
the old trust, but it has failed to do so. The public accepts inconclusive,
drawn-out wars in the Middle East only because it has no commitment
to victory. Voters assume that there will be no victory. That is
not the basis of strong political commitment. That is not the basis
of that crucial form of political capital: legitimacy.
support of the Federal government has been reduced to the Valley
Girl's shrug: "Whatever." As long as the public gets access to its
entertainment and does not suffer immediate pain, it ignores the
Federal government. Bureaucrats prosper, but the tax resistance
is forever. The Federal government has been unable to collect taxes
in excess of 20% of GDP since 1946, and it has never collected more
than 23%. The pubic loves increased spending, but only if it is
So, money is
borrowed. That borrowing is now facing resistance. The Federal Reserve
is creating money to buy the deficit. China isn't. Japan isn't.
PIMCO isn't. Interest rates are low because only the Federal government
is borrowing heavily.
debt climbs relentlessly. The public does not care enough to accept
cuts in spending, but it will not tolerate tax increases. The debate
over the deficit is gridlocked. That means more debt. It also means
default. Today's "no pain, big deficit" will become "big pain, big
default." The only question is this: By what arrangement? Hyperinflation?
Outright default? Piecemeal default?
WINDOWS, BROKEN BUDGET
Bastiat's story of the broken window, the public sees spending as
a way to get the economy going. The broken window produces economic
growth. The story points to the truth: it takes resources to repair
windows. That is the thing not seen. The lesson: look for the thing
The thing not
seen today is the cost of communication. Digits keep getting cheaper.
Ideas spread far faster. Networks are created by the millions. And
the government is in control of none of this.
The more oranges
in the air, the harder the juggler's routine. This is the dilemma
of every government on earth. The real economy is growing because
of cost-cutting and innovation. The government wants to control
this process, but it can't.
On all sides,
the politicians are besieged. They cannot balance the budget. They
have no intention of doing so. Yet their failure places them on
the dole. Ben Bernanke is like some modern day J. P. Morgan, providing
money in a crisis, the way Morgan did (briefly) in 1907. But what
will happen when QE2 ceases? If the private sector wants to fund
the Federal government, capital will shift to Washington, where
it will be consumed.
government still parades as the ultimate source of bailouts, the
safety net of the nation. But with whose money? Not the taxpayers'
money. They won't pay. They have kept Federal revenues below 20%
of GDP for two generations.
The Navy sends
its dozen carriers to sweep the oceans, but it can't catch land-based
guerillas. Without boots on the ground, there is no way for the
military to impose its will. The fiscal bloodletting required to
fund the deployed troops is huge. The Taliban is not losing. Iran
is not losing. It is not clear that Qadaffi is losing. Where are
we winning? "Wherever," says the Valley Girl.
is the visible symbol of political futility. There is no resolution.
The Democrats' version of the irresistible force is Medicare. The
Republicans' version of the immovable object is tax resistance.
The solution, so far, has been QE2. But it is scheduled to end on
is defeat. We will run out of money and patience. Stalemate domestically
is defeat. We will run out of money and patience.
is fixing windows. Every time one gets fixed, two more get broken.
Think of North Africa. Think of Pakistan and Afghanistan. Think
of the deficit. Think of unemployment.
was deliberate. It was not metaphorical. But it was surely symbolic.
We are watching the economic equivalent of crystal night. The windows
keep breaking. The policies of fixing the broken glass seem to lead
to more broken glass. The new windows must be paid for. By whom?
For how long? At what rate of interest?
TOLD YOU SO"
At some point,
there will be too much broken glass for the government to conduct
business as usual. Interest rates will rise. Prices will rise. Output
will slow. Unemployment will rise.
shifts to establishing blame for visible failures, the licensed
airwaves and shrinking print media will be filled with versions
of "We told you so." The Establishment will have its explanation,
which will be Paul Krugman's "the Federal government should have
spent more." On that defense, the Keynesian Establishment will bet
will be the Internet, which will be multiple networks of blame-shifting.
But there will be a common theme: "Tax somebody else." Blame will
be handed out to many deserving candidates, but the common theme
will be this: "They bailed out their cronies."
of American politics will be settled by the winning faction in the
blame-shifting enterprise. But the winners will have to be able
to back it up with this: "We told you so."
gurus of the future will have to do the same.
So will the
hedge funds and portfolio managers.
the coming fiscal cataclysm, one must be vocal now. One must also
put his money where his mouth is. And he had better keep more of
his money than the competition.
know little history. Few people today know the central issue of
World War II. The World War I settlement allowed Germany access
to the free city of Danzig, a port city. Beck, the Polish Foreign
Minister, refused to grant this access in 1939. Germany invaded
Poland. So did the Soviet Union three weeks later. Jews caught in
the west got trapped by the German Army. Those in the east were
trapped by the Soviet Army. Germany's invasion of the USSR in June
1941 sealed the fate of Jews in Poland.
paid little attention to German politics in the 1930s. Jews in Poland
were not concerned with these details until 1939. By then it was
too late. They were victims who had no warning.
This is always
the fate of those caught in a crossfire.
citizen has no real understanding of the underlying causes of booms
and busts. He trusts the government. He thinks that those in charge
know what they are doing. Yet the evidence indicates otherwise.
be victims. The Great Default will affect millions of people who
do not understand that they are at risk or why.
I suggest that
you mentally identify some trigger points as indicators. When they
are set off, one by one, increase your commitment to finding and
funding a port in the coming storm.
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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