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Thursday, June 04, 2009

On destroying capitalism

The current issue of the Journal of Economic Perspectives has an interesting article titled "Who Said `Debauch the Currency': Keynes or Lenin" (sub required) in which it is argued that Lenin claimed that the quickest and most sure means of destroying capitalism is to debase the currency. The following quote is provided from the April 23, 1919 NYT (and Daily Chronicle of London):
Hundreds of thousands of rouble notes are being issued daily by our treasury. This is done, not in order to fill the coffers of the State with practically worthless paper, but with the deliberate intention of destroying the value of money as a means of payment. There is no justification for the existence of money in the Bolshevik state, where the necessities of life shall be paid for by work alone.

Experience has taught us it is impossible to root out the evils of capitalism merely by confiscation and expropriation, for however ruthlessly such measures may be applied, astute speculators and obstinate survivors of the capitalist classes will always manage to evade them and continue to corrupt the life of the community. The simplest way to exterminate the very spirit of capitalism is therefore to flood the country with notes of a high face-value without financial guarantees of any sort.

Already even a hundred-rouble note is almost valueless in Russia. Soon even the simplest peasant will realise that it is only a scrap of paper, not worth more than the rags from which it is manufactured. Men will cease to covet and hoard it so soon as they discover it will not buy anything, and the great illusion of the value and power of money, on which the capitalist state is based will have been definitely destroyed.

This is the real reason why our presses are printing rouble bills day and night, without rest.
There's something to chew on.

Capitalism is naturally a very optimistic means of economic organization. Those who choose to delay gratification today invest their savings into endeavors they hope will provide a real return in the future. However, when an individual delays gratification today for gratification tomorrow that person is implicitly trusting the government and other, perhaps more informal, institutions to continue playing the game the way the rules are written at the time. When governments start to rewrite the rules, the uncertainty that is introduced essentially freezes the capitalist system as individuals have less faith that what is happening today will also be happening tomorrow.

Lenin is correct that astute investors can typically find ways around government regulation and expropriation. However, inflation is a systemic problem and that is why it cannot be avoided by even the most wealthy. In the process of destroying the currency, however, the "little guy" is squashed just as easily as the "big guy." I am fairly well convinced that most if not all of the hyperinflations we have witnessed over the past century are completely politically motivated. And yes, if a hyperinflation occurs in this country it will have been politically motivated as well.

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