The Free Market 17, no. 7 (July 1999)
On the wall outside my office, the gift of Nelson White, is a framed piece of money: a 500 billion dinar note issued by the government of Yugoslavia. It was printed in 1993, when it would buy about a gallon of milk. And that was before the inflation really got bad. By January 1994, the rate would reach 313 million percent and this note became literally worthless.
But as both Jude Wanniski and Steve Hanke have shown, it was the IMF that bears primary responsibility for this fiasco. It was the agency’s emphasis on regime stability after 1987, and the usual package of devaluations, wage freezes, unlimited credit, and price decontrol in a setting of collectivist ownership, that made a chaotic economic setting even crazier, and set the stage for a wholesale looting of the country by its government.
To those who say economic institutions are irrelevant to the stability of a culture, Yugoslavia should be Exhibit A. Economic chaos nearly always precedes civil and social chaos, and economic chaos is in turn a consequence of bad ideas. In this case, the bad idea is that what this country needed was a new economic plan thrown together with paper money.
Civilization is subverted by inflation. Readers old enough to remember 13 percent inflation remember how it turned life upside down. Savers were considered to be suckers while financial profligacy was considered wise. Plans of a lifetime were gutted, employees were always angry, and businessmen found even the simplest accounting tasks to be maddeningly confusing. And yet 13 percent is hardly high by this century’s egregious standards.
In his 1994 article in The Review of Austrian Economics, Paul Cantor reinterpreted a 1925 short story by Thomas Mann set in Weimar Germany. The story is called “Disorder and Early Sorrow.” It tells of an average day for a professor of history that ends with life gone mad. The children behave like adults and the adults behave like children. All social authority has collapsed and all sense of duty and morality is vanquished. It is difficult to tell the real from the unreal. All coherence and predictability in social life are at an end.
As Cantor shows, Mann’s story is intended to illustrate the way in which hyperinflation brings about a state of what Cantor calls “hyperreality,” whereby the unreal is no longer a fantasy and the real becomes so vivid and intense, all proportion is lost. “If modernity is characterized by a loss of the sense of the real,” writes Cantor, “this fact is connected to what has happened to money in the twentieth century.
Money is what makes complex economies possible. It is the primary means by which we are able to discern the value of our work and our property. It permits businessmen to calculate and to make rational judgments. It allows all of us to plan and prepare for the future. That is why each step towards inflation--the systematic, government-orchestrated watering down of money’s value--takes us towards barbarism.
Reading Cantor and Mann, you sense what life in Yugoslavia must have been like for much of this decade. Western advisers armed with Keynesian and inflationist theories, together with Western governments bearing billions in aid, stymied the free market.
To blame atrocities in Kosovo, real or alleged, on a single head of state, as the US has done, or, even more preposterously, on some evil inherent in the heart of every Serbian, reflects more than just gross ignorance. It indicates a desire to use a complicated tragedy to cover up all the bad advice the US government has given.
And now, after such incredible levels of suffering, the US and its satellites decided to impose on Yugoslavia yet another form of barbarism: war. If anything can bring about more human suffering and social chaos than 313 million percent inflation, it is bombing.
There was no need for hyper-inflation. There was no need for an aggressive war. The influence of bad economics was the precondition for the first, and the ambitions of a war party bent on imperial control was the cause of the second. Inflation and war will not fix Yugoslavia. The means to social peace and prosperity is a free market, a sound currency, and the elimination of government power to destroy people’s lives.
