DemocracyThe God That Failed

by Hans-Hermann Hoppe

  10On the aristocratic (undemocratic) character of the early U.S., see Lord Acton, "Political Causes of the American Revolution" in idem, The Liberal Interpretation of History (Chicago: University of Chicago Press, 1967); also, Chris Woltermann, "Federalism, Democracy and the People," Telos 26, no. 1 (1993).

  11On the U.S. war involvement see John EC. Fuller, The Conduct of War (New York: Da Capo, 1992), chap. 9; on the role of Woodrow Wilson, and his policy of wanting to "make the world safe for democracy," see Murray N. Rothbard, "World War I as Fulfillment: Power and the Intellectuals," Journal of Libertarian Studies 9, no. 1 (1989); Paul Gottfried,"Wilsonianism: The Legacy that Won't Die," Journal of Libertarian Studies 9, no. 2 (1990); Kuehnelt-Leddihn, Leftism Revisited, chap. 15.

  Evidence And Illustrations-.

  Exploitation And Present-orientedness Under Monarchy And Democratic Republicanism

  From the viewpoint of economic theory, the end of World War I can be identified as the point in time at which private government ownership was completely replaced by public government ownership, and whence a systematic tendency toward increased exploitation—government growth—and rising degrees of social time preference—presentorientedness—can be expected to take off. Indeed, such has been the grand, underlying theme of post-World War I Western history: With some forebodings in the last third of the nineteenth century in conjunction with an increased emasculation of the ancien regimes, from 1918 onward practically all indicators of governmental exploitation and of rising time preferences have exhibited a systematic upward tendency.

  Indicators of Exploitation

  There is no doubt that the amount of taxes imposed on civil society increased during the monarchical age.13 However, throughout the entire period, the share of government revenue remained remarkably stable and low. Economic historian Carlo M. Cipolla concludes,

  All in all, one must admit that the portion of income drawn by the public sector most certainly increased from the eleventh century onward all over Europe, but it is difficult to imagine that, apart from particular times and places, the public power ever managed to draw more than 5 to 8 percent of national income.

  And he then goes on to note that this portion was not systematically exceeded until the second half of the nineteenth century.14 In feudal times, observes Bertrand de Jouvenel,

  12Interestingly, the Swiss Republic, which had been the first country to establish universal male suffrage (in 1848), was the last to expand suffrage also to women (in 1971). Similarly, the French Republic, where universal male suffrage had existed since 1848, extended the franchise to women only in 1945.

  13See Hans Joachim Schoeps, Preussen. Geschichte eines Staates (Frankfurt/M.: Ullstein, 1981), p. 405 on data for England, Prussia, and Austria.

  14Carlo M. Cipolla, Before the Industrial Revolution: European Society and Economy, 1000-1700 (New York: W.W. Norton, 1980), p. 48.

  state expenditures, as we now call them, were thought of... as the king's own expenditures, which he incurred by virtue of his station. When he came into his station, he simultaneously came into an "estate" [in the modern sense of the word]; i.e., he found himself endowed with property rights ensuring an income adequate to "the king's needs." It is somewhat as if a government of our own times were expected to cover its ordinary expenditures from the proceeds of state-owned industries.15

  In the course of the political centralization during the sixteenth and seventeenth centuries, additional sources of government revenue had been opened up: customs, excise duties, and land taxes. However, up until the mid-nineteenth century of all Western European countries only the United Kingdom, for instance, had an income tax (from 1843 on). France first introduced some form of income tax in 1873, Italy in 1877, Norway in 1892, the Netherlands in 1894, Austria in 1898, Sweden in 1903, the U.S. in 1913, Switzerland in 1916, Denmark and Finland in 1917, Ireland and Belgium in 1922, and Germany in 1924.16 Yet even at the time of the outbreak of World War I, total government expenditure as a percentage of Gross Domestic Product (GDP) typically had not risen above 10 percent and only rarely, as in the case of Germany, exceeded 15 percent. In striking contrast, with the onset of the democratic republican age, total government expenditures as a percentage of GDP typically increased to 20 to 30 percent in the course of the 1920s and 1930s, and by the mid1970s had generally reached 50 percent.17

  15Bertrand de Jouvenel, Sovereignty: An Inquiry into the Political Good (Chicago: University of Chicago Press, 1957), p. 178. "The king," de Jouvenel goes on to explain,

  could not exact contributions, he could only solicit "subsidies." It was stressed that his loyal subjects granted him help of their own free will, and they often seized this occasion to stipulate conditions. For instance, they granted subsidies to John the Good [of France], subject to the condition that he should henceforth refrain from minting money that was defective in weight In order to replenish his Treasury, the king might go on a begging tour from town to town, expounding his requirements and obtaining local grants, as was done on the eve of the Hundred Years' War; or he might assemble from all parts of the country those whose financial support he craved. It is a serious mistake to confuse such an assembly with a modern sitting parliament, though the latter phenomenon has arisen from the former. The Parliament is sovereign and may exact contributions. The older assemblies should rather be thought of as a gathering of modern company directors agreeing to turn over to the Exchequer a part of their profits, with some trade union leaders present agreeing to part with some of their unions' dues for public purposes. Each group was called on for a grant, and each was thus well placed to make conditions. A modern parliament could not be treated like that, but would impose its will by majority vote. (pp. 178-79) 16See Flora, State, Economy, and Society in Western Europe, vol. 1, pp. 258-59.

  There is also no doubt that total government employment increased during the monarchical age. But until the very end of the nineteenth century, government employment rarely exceeded 3 percent of the total labor force. Royal ministers and parliamentarians typically did not receive publicly funded salaries but were expected to support themselves out of their private incomes. In contrast, with the advances of the process of democratization, they became salaried officials; and since then government employment has continually increased. In Austria, for instance, government employment as a percentage of the labor force increased from less than 3 percent in 1900 to more than 8 percent in the 1920s and almost 15 percent by the mid-1970s. In France it rose from 3 percent in 1900 to 4 percent in 1920 and about 15 percent in the mid1970s. In Germany it grew from 5 percent in 1900 to close to 10 percent by the mid-1920s to close to 15 percent in the mid-1970s. In the United Kingdom it increased from less than 3 percent in 1900 to more than 6 percent in the 1920s and again close to 15 percent by the mid-1970s. The trend in Italy and almost everywhere else was similar, and by the mid1970s only in small Switzerland was government employment still somewhat less than 10 percent of the labor force.18

  A similar pattern emerges from an inspection of inflation and data on the money supply. The monarchical world was generally characterized by the existence of a commodity money—typically silver or gold—and at long last, after the establishment of a single integrated world market in the course of the seventeenth and eighteenth centuries, by an international gold standard. A commodity money standard makes it difficult, if not impossible, for a government to inflate the money supply. In monopolizing the mint and engaging in "coin-clipping," kings did their best to enrich themselves at the expense of the public. There also had been attempts to introduce an irredeemable fiat currency. Indeed, the history of the Bank of England, for instance, from its inception in 1694 onward was one of the periodic suspension of specie payment—in 1696,1720,1745, and from 1797 until 1821. But these fiat money experiments, associated in particular with the Bank of Amsterdam, the Bank of England, and John Law and the Banque Royale of France, had been regional curiosities which ended quickly in financial disasters such as the collapse of the Dutch "Tuli
p Mania" in 1637 and the "Mississippi Bubble" and the "South Sea Bubble" in 1720. As hard as they tried, monarchical rulers did not succeed in establishing monopolies of pure fiat currencies, i.e., of irredeemable government paper monies, which can be created virtually out of thin air, at practically no cost. No particular individual, not even a king, could be trusted with an extraordinary monopoly such as this

  17Ibid, chap. 8. Predictably, government expenditures typically rose during war times. However, the pattern described above applies to war times as well. In Great Britain, for instance, during the height of the Napoleonic Wars government expenditures as a percentage of GDP climbed to almost 25 percent. In contrast, during World War I it reached almost 50 percent, and during World War II it rose to well above 60 percent. See ibid., pp. 440-41.

  18Ibid, chap. 5. In fact, the current share of government employment of about 15 percent of the labor force must be considered systematically underestimated, for apart from excluding all military personnel it also excludes the personnel in hospitals, welfare institutions, social insurance agencies, and nationalized industries.

  It was only under conditions of democratic republicanism—of anonymous and impersonal rule—that this feat was accomplished. During World War I, as during earlier wars, the belligerent governments had gone off the gold standard. Everywhere in Europe, the result was a dramatic increase in the supply of paper money. In defeated Germany, Austria, and Soviet Russia in particular, hyperinflationary conditions ensued in the immediate aftermath of the war. Unlike earlier wars, however, World War I did not conclude with a return to the gold standard. Instead, from the mid-1920s until 1971, and interrupted by a series of international monetary crises, a pseudo gold standard—the gold exchange standard—was implemented. Essentially, only the U.S. would redeem dollars in gold (and from 1933 on, after going off the gold standard domestically, only to foreign central banks). Britain would redeem pounds in dollars (or, rarely, in gold bullion rather than gold coin), and the rest of Europe would redeem their currencies in pounds. Consequently, and as a reflection of the international power hierarchy which had come into existence by the end of World War I, the U.S. government now inflated paper dollars on top of gold, Britain inflated pounds on top of inflating dollars, and the other European countries inflated their paper currencies on top of inflating dollars or pounds (and after 1945 only dollars). Finally, in 1971, with ever larger dollar reserves accumulated in European central banks and the imminent danger of a European "run" on the U.S. gold reserves, even the last remnant of the international gold standard was abolished. Since then, and for the first time in history, the entire world has adopted a pure fiat money system of freely fluctuating government paper currencies.19

  19See also Murray N. Rothbard, What Has Government Done to Our Money? (Auburn, Ala.: Ludwig von Mises Institute, 1990); Henry Hazlitt, From Bretton Woods to World Inflation (Chicago: Regnery, 1984); Hans-Hermann Hoppe, "Banking, Nation States, and International Politics: A Sociological Reconstruction of the Present Economic Order," Review of Austrian Economics 4 (1990); idem, "How is Fiat Money Possible? or, The Devolution of Money and Credit," Review of Austrian Economics 7, no. 2 (1994).

  As a result, from the beginning of the democratic-republican age—initially under a pseudo gold standard and at an accelerated pace since 1971 under a government paper money standard—a seemingly permanent secular tendency toward inflation and currency depreciation has existed.

  During the monarchical age with commodity money largely outside of government control, the "level" of prices had generally fallen and the purchasing power of money increased, except during times of war or new gold discoveries. Various price indices for Britain, for instance, indicate that prices were substantially lower in 1760 than they had been hundred years earlier; and in 1860 they were lower than they had been in 1760.20 Connected by an international gold standard, the development in other countries was similar.21 In sharp contrast, during the democratic-republican age, with the world financial center shifted from Britain to the U.S. and the latter in the role of international monetary trend setter, a very different pattern emerged. Before World War I, the U.S. index of wholesale commodity prices had fallen from 125 shortly after the end of the War between the States, in 1868, to below 80 in 1914. It was then lower than it had been in 1800.22 In contrast, shortly after World War I, in 1921, the U.S. wholesale commodity price index stood at 113. After World War II, in 1948, it had risen to 185. In 1971 it was 255, by 1981 it reached 658, and in 1991 it was near 1,000. During only two decades of irredeemable fiat money, the consumer price index in the U.S. rose from 40 in 1971 to 136 in 1991, in the United Kingdom it climbed from 24 to 157, in France from 30 to 137, and in Germany from 56 toll6.23

  Similarly, during more than seventy years, from 1845 until the end of World War I in 1918, the British money supply had increased about six-fold.24 In distinct contrast, during the seventy-three years from 1918 until 1991, the U.S. money supply increased more than sixty-four-fold

  20See B.R. Mitchell, Abstract of British Historical Statistics (Cambridge: Cambridge University Press, 1962), pp. 468ff.

  21 B.R. Mitchell, European Historical Statistics 1750-1970 (New York: Columbia University Press, 1978), pp. 388ff.

  221930 = 100; see Ron Paul and Lewis Lehrmann, The Case for Gold: A Minority Report to the U.S. Gold Commission (Washington, D.C.: Cato Institute, 1982), p. 165f.

  231983 = 100; see Economic Report of the President (Washington DC: Government PrintingOffice,1992).

  In addition to taxation and inflation, a government can resort to debt in order to finance its current expenditures. As with taxation and inflation, there is no doubt that government debt increased in the course of the monarchical age. However, as predicted theoretically, in this field monarchs also showed considerably more moderation and farsightedness than democratic-republican caretakers.

  Throughout the monarchical age, government debts were essentially war debts. While the total debt thereby tended to increase over time, during peacetime at least monarchs characteristically reduced their debts. The British example is fairly representative. In the course of the eighteenth and nineteenth centuries, government debt increased. It was 76 million pounds after the Spanish War in 1748,127 million after the Seven Years' War in 1763, 232 million after the American War of Independence in 1783, and 900 million after the Napoleonic Wars in 1815. Yet during each peacetime period—from 1727-1739, from 1748-1756, and from 1762-1775, total debt actually decreased. From 1815 until 1914, the British national debt fell from a total of 900 to below 700 million pounds.

  In striking contrast, since the onset of the democratic-republican age British debt has only increased, in war and in peace. In 1920 it was 7.9

  24See Mitchell, Abstract of British Historical Statistics, p. 444f.

  25See Milton Friedman and Anna Schwartz, A Monetary History of the United States, 1867-1960 (Princeton, N.J.: Princeton University Press, 1963), pp. 704-22; and Economic Report of the President, 1992.

  A remarkable distinction between the monarchical and the democratic-republican age also exists regarding the development and recognition of monetary theory. The early theoretician of fiat money and credit John Law, having had his turn at monetary reform from 1711-1720, secretly left France and sought refuge in Venice, where he died impoverished and forgotten. In distinct contrast, John Law's twentieth-century successor, John Maynard Keynes, who bore responsibility for the demise of the classical gold standard during the post-World War I era, and who left behind the Bretton Woods system which collapsed in 1971, was honored during his lifetime and is still honored today as the world's foremost economist. (If nothing else, Keynes's personal philosophy of hedonism and present-orientation, which is summarized in his famous dictum that "in the long run we are all dead," indeed sums up the very spirit of the democratic age.) Similarly, Milton Friedman, who bears much responsibility for the post-1971 monetary order and thus for the most inflationary peacetime period in all of human history, is hailed as one of the
great economists. See further on this Joseph T. Salerno, "Two Traditions in Modern Monetary Theory: John Law and A.R.J. Turgot," Journal des Economistes et des Etudes Humaines 2, no. 2/3 (1991).

  billion pounds, in 1938 8.3 billion, in 1945 22.4 billion, in 1970 34 billion, and since then it has skyrocketed to more than 190 billion pounds in 1987.26 Likewise, us government debt has increased through war and peace. Federal government debt after World War I, in 1919, was about 25 billion dollars. In 1940 it was 43 billion, and after World War II, in 1946, it stood at about 270 billion. By 1970 it had risen to 370 billion, and since 1971, under a pure fiat money regime, it has literally exploded. In 1979 it was about 840 billion, and in 1985 more than 1.8 trillion. In 1988 it reached almost 2.5 trillion, by 1992 it exceeded 3 trillion dollars, and presently it stands at approximately 6 trillion dollars.27

  Finally, the same tendency toward increased exploitation and present-orientation emerges upon examination of government legislation and regulation. During the monarchical age, with a clear-cut distinction between the ruler and the ruled, the king and his parliament were held to be under the law. They applied preexisting law as judge or jury. They did not make law. Writes Bertrand de Jouvenel: