DemocracyThe God That Failed

by Hans-Hermann Hoppe

  The monarch was looked on only as judge and not as legislator. He made subjective rights respected and respected them himself; he found these rights in being and did not dispute that they were anterior to his authority.... Subjective rights were not held on the precarious tenure of grant but were freehold possessions. The sovereign's right also was a freehold. It was a subjective right as much as the other rights, though of a more elevated dignity, but it could not take the other rights away.... Indeed, there was a deep-seated feeling that all positive rights stood or fell together; if the king disregarded (a private citizen's) title to his land, so might the king's title to his throne be disregarded. The profound if obscure concept of legitimacy established the solidarity of all rights. No change in these rights could be effected without the consent of their holders.28

  26See Sidney Homer and Richard Sylla, A History of Interest Rates (New Brunswick, N.J.: Rutgers University Press, 1991), pp. 188 and 437.

  27See Jonathan Hughes, American Economic History (Glenview, Ill.: Scott, Foresman, 1990), pp. 432,498, and 589.

  Furthermore, constrained by a commodity money standard, monarchs were unable to "monetize" their debt. When the king sold bonds to private financiers or banks, under the gold standard this had no effect on the total money supply. If the king spent more as a consequence, others would have to spend less. Accordingly, lenders were interested in correctly assessing the risk associated with their loans, and kings typically paid interest rates substantially above those paid by commercial borrowers. See Homer and Sylla, A History of Interest Rates, p. 84 and pp. 5, 99, 106, and 113f. In contrast, under the gold exchange standard with only a very indirect tie of paper money to gold, and especially under a pure fiat money regime with no tie to gold at all, government deficit financing is turned into a mere banking technicality. Currently, by selling its debt to the banking system, governments can in effect create new money to pay for their debt. When the treasury department sells bonds to the commercial banking system, the banks do not pay for these bonds out of their existing money deposits; assisted by open-market purchases by the government owned central bank, they create additional demand deposits out of thin air. The banking system does not spend less as a consequence of the government spending more. Rather, the government spends more, and the banks spend (loan) as much as before. In addition, they earn an interest return on their newly acquired bond holdings. See Murray N. Rothbard, The Mystery of Banking (New York: Richardson and Snyder, 1983), esp. chap. 11. Accordingly, there is little hesitation on the part of banks to purchase government bonds even at below market interest rates, and rising government debt and increased inflation thus goes hand in hand.

  To be sure, the monopolization of law administration led to higher prices and/or lower product quality than those that would have prevailed under competitive conditions, and in the course of time kings employed their monopoly increasingly to their own advantage. For instance, in the course of time kings had increasingly employed their monopoly of law and order for a perversion of the idea of punishment. The primary objective of punishment originally had been the restitution and compensation of the victim of a rights violation by the offender. Under monarchical rule, the objective of punishment had increasingly shifted to compensating the king, instead.29 However, while this practice implied an expansion of government power, it did not involve any redistribution of wealth and income within civil society, nor did it imply that the king himself was exempt from the standard provisions of private law. Private law was still supreme. And indeed, as late as the beginning of the twentieth century, A.V. Dicey could still maintain that as for Great Britain, for instance, legislative law—public law—as distinct from pre-existing law—private law—did not exist. The law governing the relationships between private citizens was still considered fixed and immutable, and government agents in their relationship with private citizens were regarded as bound by the same laws as any private citizen.30

  In striking contrast, under democracy, with the exercise of power shrouded in anonymity, presidents and parliaments quickly came to rise above the law. They became not only judge but legislator, the creator of "new" law.31 Today, notes Jouvenel,

  28De Jouvenel, Sovereignty, pp. 172-73 and 189; see also Fritz Kern, Kingship and Law in the Middle Ages (Oxford: Blackwell 1948), esp. p. 151; Bernhard Rehfeld, Die Wurzeln des Rechts (Berlin, 1951), esp. p. 67.

  29See Bruce L. Benson, "The Development of Criminal Law and Its Enforcement," Journal des Economistes et des Etudes Humaines 3, no. 1 (1992).

  30See Albert V. Dicey, Lectures on the Relation Between Law and Public Opinion in England During the Nineteenth Century (London: Macmillan, 1903); also Friedrich A. Hayek, Law, Legislation, and Liberty (Chicago: University of Chicago Press, 1973), vol. 1, chaps. 4 and 6.

  we are used to having our rights modified by the sovereign decisions of legislators. A landlord no longer feels surprised at being compelled to keep a tenant; an employer is no less used to having to raise the wages of his employees in virtue of the decrees of Power. Nowadays it is understood that our subjective rights are precarious and at the good pleasure of authority.32

  In a development similar to the democratization of money—the substitution of government paper money for private commodity money and the resulting inflation and increased financial uncertainty—the democratization of law and law administration has led to a steadily growing flood of legislation. Presently, the number of legislative acts and regulations passed by parliaments in the course of a single year is in the tens of thousands, filling hundreds of thousands of pages, affecting all aspects of civil and commercial life, and resulting in a steady depreciation of all law and heightened legal uncertainty. As a typical example, the 1994 edition of the Code of Federal Regulations (CFR), the annual compendium of all U.S. federal government regulations currently in effect, consists of a total of 201 books, occupying about 26 feet of library shelf space. The Code's index alone is 754 pages. The Code contains regulations concerning the production and distribution of almost everything imaginable: from celery, mushrooms, watermelons, watchbands, the labeling of incandescent light bulbs, hosiery, parachute jumping, iron and steel manufacturing, sexual offenses on college campuses to the cooking of onion rings made out of diced onions, revealing the almost totalitarian power of a democratic government.33

  Indicators of Present-Orientedness

  The phenomenon of social time preference is somewhat more elusive than that of expropriation and exploitation, and it is more complicated to identify suitable indicators of present-orientation. Moreover, some indicators are less direct—"softer"—than those of exploitation. But all of them point in the same direction and together provide as clear an illustration of the second theoretical prediction: that democratic rule also promotes short-sightedness (present-orientation) within civil society.34

  31See Robert Nisbet, Community and Power (New York: Oxford University Press, 1962), pp. 110-11.

  32Bertrand de Jouvenel, Sovereignty, p. 189; see also Nisbet, Community and Power, chap. 5:

  The king may have ruled at times with a degree of irresponsibility that few modern governmental officials can enjoy, but it is doubtful whether, in terms of effective powers and services, any king of even the seventeenth-century "absolute monarchies" wielded the kind of authority that now inheres in the office of many a high-ranking official in the democracies, (p. 103)

  33See Donald Boudreaux, "The World's Biggest Government," Free Market (November 1994).

  The most direct indicator of social time preference is the rate of interest. The interest rate is the ratio of the valuation of present goods as compared to future goods. More specifically, it indicates the premium at which present money is traded against future money. A high interest rate implies more "present-orientedness" and a low rate of interest implies more "future-orientation." Under normal conditions—that is under the assumption of increasing standards of living and real money incomes—the interest rate can be expected to fall and ultimately approach, yet ne
ver quite reach, zero, for with rising real incomes, the marginal utility of present money falls relative to that of future money, and hence under the ceteris paribus assumption of a given time preference schedule the interest rate must fall. Consequently, savings and investment will increase, future real incomes will be still higher, and so on.

  In fact, a tendency toward falling interest rates characterizes mankind's suprasecular trend of development. Minimum interest rates on 'normal safe loans' were around 16 percent at the beginning of Greek financial history in the sixth century B.C., and fell to 6 percent during the Hellenistic period. In Rome, minimum interest rates fell from more than 8 percent during the earliest period of the Republic to 4 percent during the first century of the Empire. In thirteenth-century Europe, the lowest interest rates on 'safe' loans were 8 percent. In the fourteenth century they came down to about 5 percent. In the fifteenth century they fell to 4 percent. In the seventeenth century they went down to 3 percent. And at the end of the nineteenth century minimum interest rates had further declined to less than 2.5 percent.35

  This trend was by no means smooth. It was frequently interrupted by periods, sometimes as long as centuries, of rising interest rates. However, such periods were associated with major wars and revolutions such as the Hundred Years' War during the fourteenth century, the Wars of Religion from the late sixteenth to the early seventeenth century, the American and French Revolutions and the Napoleonic Wars from the late eighteenth to the early nineteenth century, and the two World Wars in the twentieth century. Furthermore, whereas high or rising minimum interest rates indicate periods of generally low or declining living standards, the overriding opposite tendency toward low and falling interest rates reflects mankind's overall progress—its advance from barbarism to civilization. Specifically, the trend toward lower interest rates reflects the rise of the Western World, its peoples' increasing prosperity, farsightedness, intelligence, and moral strength, and the unparalleled height of nineteenth-century European civilization.

  34See also T. Alexander Smith, Time and Public Policy (Knoxville: University of Tennessee Press, 1988).

  35See Homer and Sylla, A History of Interest Rates, pp. 557-58.

  With this historical backdrop and in accordance with economic theory, then, it should be expected that twentieth-century interest rates would be still lower than nineteenth-century rates. Indeed, only two possible explanations exist why this is not so. The first possibility is that twentieth century real incomes did not exceed, or even fell below, nineteenth-century incomes. However, this explanation can be ruled out on empirical grounds, for it seems fairly uncontroversial that twentiethcentury incomes are in fact higher. Then only the second explanation remains. If real incomes are higher but interest rates are not lower, then the ceteris paribus clause can no longer be assumed true. Rather, the social time preference schedule must have shifted upward. That is, the character of the population must have changed. People on the average must have lost in moral and intellectual strength and become more presentoriented. Indeed, this appears to be the case.

  From 1815 onward, throughout Europe and the Western World minimum interest rates steadily declined to a historic low of well below 3 percent on the average at the turn of the century. With the onset of the democratic-republican age this earlier tendency came to a halt and seems to have changed direction, revealing twentieth century Europe and the U.S. as declining civilizations. An inspection of the lowest decennial average interest rates for Britain, France, the Netherlands, Belgium, Germany, Sweden, Switzerland, and the U.S., for instance, shows that during the entire post-World War I era interest rates in Europe were never as low as or lower than they had been during the second half of the nineteenth century. Only in the U.S., in the 1950s, did interest rates ever fall below late nineteenth-century rates. Yet this was only a short-lived phenomenon, and even then U.S. interest rates were not lower than they had been in Britain during the second half of the nineteenth century. Instead, twentieth-century rates were significantly higher than nineteenth century rates universally, and if anything they have exhibited a rising tendency.36 This conclusion does not substantially change, even when it is taken into account that modern interest rates, in particular since the 1970s, include a systematic inflation premium. After adjusting recent nominal interest rates for inflation in order to yield an estimate of real interest rates, contemporary interest rates still appear to be significantly higher than they were one-hundred years ago. On the average, minimum long-term interest rates in Europe and the U.S. nowadays seem to be well above 4 percent and possibly as high as 5 percent—that is above the interest rates of seventeenth-century Europe and as high or higher than fifteenth-century rates. Likewise, current U.S. savings rates of around 5 percent of disposable income are no higher than they were more than three hundred years ago in a much poorer seventeenth-century England.37

  36See ibid., pp. 554-55.

  Parallel to this development and reflecting a more specific aspect of the same underlying phenomenon of high or rising social time preferences, indicators of family disintegration—"dysfunctional families"— have exhibited a systematic increase.

  Until the end of the nineteenth century, the bulk of government spending—typically more than 50 percent—went to financing the military. Assuming government expenditures to be then about 5 percent of the national product, this amounted to military expenditures of 2.5 percent of the national product. The remainder went to government administration. Welfare spending or "public charity" played almost no role. Insurance was considered to be in the province of individual responsibility, and poverty relief seen as the task of voluntary charity. In contrast, as a reflection of the egalitarianism inherent in democracy, from the beginning of the democratization in the late nineteenth century onward came the collectivization of individual responsibility. Military expenditures have typically risen to 5-10 percent of the national product in the course of the twentieth century. But with public expenditures currently making up 50 percent of the national product, military expenditures now only represent 10-20 percent of total government spending. The bulk of public spending—typically more than 50 percent of total expenditures (or 25 percent of the national product)—is now eaten up by public welfare spending: by compulsory government "insurance" against illness, occupational injuries, old age, unemployment, and an ever expanding list of other disabilities.38

  37See Cipolla, Before the Industrial Revolution, p. 39.

  38See ibid., pp. 54-55; Flora, State, Economy, and Society in Western Europe, chap. 8 and p. 454.

  Consequently, by increasingly relieving individuals of the responsibility of having to provide for their own health, safety, and old age, the range and temporal horizon of private provisionary action have been systematically reduced. In particular, the value of marriage, family, and children have fallen, since one can fall back on "public" assistance. Thus, since the onset of the democratic-republican age the number of children has declined, and the size of the endogenous population has stagnated or even fallen. For centuries, until the end of the nineteenth century, the birth rate was almost constant: somewhere between 30 to 40 per 1,000 population (usually somewhat higher in predominantly Catholic and lower in Protestant countries). In sharp contrast, during the twentieth century birthrates all over Europe and the U.S. have experienced a dramatic decline—down to about 15 to 20 per 1,000.39 At the same time, the rates of divorce, illegitimacy, single parenting, singledom, and abortion have steadily increased, while personal savings rates have begun to stagnate or even fall rather than rise proportionally or even over-proportionally with rising incomes.40

  Moreover, as a consequence of the depreciation of law resulting from legislation and the collectivization of responsibility effected in particular by social security legislation, the rate of crimes of a serious nature, such as murder, assault, robbery, and theft, has also shown a systematic upward tendency.

  In the "normal" course of events—that is with rising standards of living—it would be expe
cted that the protection against social disasters such as crime would undergo continual improvement, just as one would expect the protection against natural disasters such as floods, earthquakes and hurricanes to become progressively better. Indeed, throughout the Western world this appears to have been the case by and large—until recently, during the second half of the twentieth century, when crime rates began to climb steadily upward.41

  39See Mitchell, European Historical Statistics 1750-1970, pp. 16ff.

  40See Allan C. Carlson, Family Questions: Reflections on the American Social Crises (New Brunswick, NJ: Transaction Publishers, 1988); idem, The Swedish Experiment in Family Politics (New Brunswick, NJ: Transaction Publishers, 1990); idem, "What Has Government Done to Our Families?" Essays in Political Economy 13 (Auburn, Ala.: Ludwig von Mises Institute, 1991); Charles Murray, Losing Ground (New York: Basic Books, 1984); for an early diagnosis see Joseph A. Schumpeter, Capitalism, Socialism, and Democracy (New York: Harper, 1942), chap. 14.

  4ISee James Q. Wilson and Richard J. Herrnstein, Crime and Human Nature (New York: Simon and Schuster, 1985), pp. 408-09; on the magnitude of the increase in criminal activity brought about by democratic republicanism and welfarism in the course of the last hundred years see also Roger D. McGrath, Gunfighters, Highwaymen, and Vigilantes (Berkeley: University of California Press, 1984), esp. chap. 13; idem, "Treat Them to a Good Dose of Lead," Chronicles (January 1994).