Moritz J. Bonn: A Classical Liberal Voice in a Collectivist World

Ninety years ago, the United States and most of the rest of the Western industrial world was in the throes of the Great Depression. Usually demarcated as having begun with the U.S. stock market crash of October 1929, the Depression is most often dated as having reached bottom at the end of 1932 and the early part of 1933.

Unemployment, as measured by the government, reached more than 25 percent of the American labor force; Gross National Product declined by 54 percent. Wholesale prices in the U.S. declined between 1929 and 1933 by 23 percent, while farm prices, alone, went down by 52 percent over the same period. It is not surprising that, given the falls in prices, that the aggregate money supply had contracted by 30 percent during the Great Depression, and more than 8,000 banks closed their doors.

The Great Depression was unique in anyone’s living memory in terms of its severity and duration. While not to the same extent as in the United States, similar decreases in output and rising unemployment, accompanied by declining prices, were experienced in many of the leading European economies, with Germany being next in severity after America.

Coming only a little more than ten years after the disaster and destruction of the First World War, which ended in 1918 after four years of deadly conflict, the leading questions of the day in the 1930s were why and how did this economic collapse come about, and, equally if not more important, what needed to be done to escape from the maelstrom of massive harm to hundreds of millions of ordinary people?

Collectivist dreams of central planning triumphant

Collectivists of many stripes were sure that their day had come. The communist government in Soviet Russia was hailing the end of capitalism and the dawn of socialist revolutions everywhere for humanity’s salvation through a “dictatorship of the proletariat” and central planning. The fascist government in Italy insisted that the Depression showed the bankruptcy of classical liberalism and laissez faire, with the need for the nationalist “totalitarian” state — Mussolini had coined the term — that imposed its own form of corporatist central planning on society for the good of the people as a whole.

In January 1933, Adolf Hitler and his National Socialist (Nazi) Party came to power in Germany, determined to use concentrated, dictatorial power to restore the German people in all their “racial purity” to great power status, with its all being made possible through government spending on grandiose public works, (at first) clandestine military rearmament, and the Nazis’ own version of central planning by subordinating all of German business to the will and commands of the National Socialist leadership. If Stalin had ordered a Soviet five-year central-planning system beginning in 1928, after 1936 the Nazis imposed their own four-year central-planning system on the German people.

It was widely presumed by many that “capitalism” was the cause of the world’s economic disorder and human misery. Governments everywhere were, if not centrally planning as in Soviet Russia, fascist Italy, and Nazi Germany, then imposing regulations and restrictions, prohibitions and protections, deficit spending, and “jobs” programs. Franklin Roosevelt’s New Deal agenda implemented versions of all of them at one time and to one degree or another, including the fascist variation on the central-planning theme.

Political intervention as the base for the Great Depression’s severity

Few were the voices who spoke out against this political and ideological trend. Those who did saw the dilemma that the Western world was in to be due, precisely, to the abandonment of a truly liberal, free-market order. The Great Depression and its magnitude were caused by the forms and degrees to which governments intervened and preempted the normal operation and rebalancing of competitive markets that could have and would have restored economic coordination and “full employment” in a relatively short period of time.

One such classical liberal, free- market–oriented voice, now almost forgotten, yet highly respected and fairly well known at the time, was the German economist Moritz J. Bonn. For instance, just ninety years ago, on April 29, 1931, he delivered the annual Richard Cobden Memorial Lecture in London, England, entitled “The World Crisis and the Teaching of the Manchester School.” He pointed out that the 19th-century ideal of a limited government devoted to securing the personal liberty and economic freedom of each citizen had been replaced in Western democracies by the idea of increasingly unlimited government under which “majorities of all sorts have learned long ago to use their control over Governments as a handy means of dividing the national dividend for their own sectional purposes.”

Democratized plunder and privilege had become the order of the day. In such a setting, each special-interest group attempts to use political means to restrict competition at home through regulations and limit foreign rivals through tariffs or import quotas. Taxing had become a method for redistributing income and wealth to those able to sway government policies in their direction at the expense of those in voting minority status in the electoral process. That meant that markets were prevented from coordinating supply and demand, and government interventions created imbalances, distortions, and wage and price rigidities that left those countries in persistent economic disarray.

Government interventions made normal economic recovery impossible

As Bonn summarized it,

The free play of economic forces has been replaced everywhere, at least in part, by private monopoly or by government monopoly, by tariffs and by all sorts of price control, from wage fixing by arbitration boards, to valorization by farm boards…. There is intervention now on a big scale, based on forecasting and bent on planning, and there is a crisis much bigger than any crisis the world has seen so far….

The prevalence of manipulation has made the passing of the crisis far more difficult than did the state of affairs which corresponded to the principles of the [free-trade] Manchester School. In those days a crisis cured itself in the long run by the fall of prices, being from one commodity to the other, including labor as well as capital….

The chances of getting over the crisis in this way today are very remote. For in the present situation of the world, half of its institutions are manipulated whilst the other half are supposed to be free. The prices subject to the play of free competition, have fallen all over the world…. Other prices have remained fairly rigid. They are maintained by economic and political coercion, by combines of labor and capital, supported by tariffs and other manipulatory legislation…. If selected prices and sheltered wages can be maintained whilst all other prices are declining, a new satisfactory level cannot be attained…. The conflict between the free play of economic forces and the manipulation of Governments and monopolies is the main cause of the long continuation of the crisis.

Moritz went on to argue in an article that he wrote later in 1931 for The Bankers Magazine entitled “Some Causes and Some Problems of the Present Crisis” that those who proposed monetary expansion and government budget deficits as the “cure” for the Great Depression failed to fully appreciate that only a real rebalancing of markets, through appropriate relative price and wage and production adjustments, could bring sustainable full employment. All monetary inflation would do was threaten a new series of distortions, because the inescapable deleterious effects from any monetary expansion is that they affect different prices and wages in different ways at different times that throw the pattern of relative prices and the uses of labor and capital in misdirected and unsustainable directions, which becomes visible once an inflation comes to an end.

Moritz J. Bonn, the wandering scholar

Moritz Julius Bonn was born in Frankfurt, Germany, in June 1873. He earned his PhD in economics from the University of Munich in 1892; before completing his degree, he spent a term at the University of Vienna studying with Carl Menger, the founder of the Austrian school of economics, and another term at the University of Freiberg as a student under the famous sociologist and historian Max Weber. He traveled widely in Europe and the United States both before and after the First World War, and in 1930 published The American Adventure, offering an insightful analysis of American culture and society in the 1920s.

Appointed the rector of a Berlin university in 1931, he was removed from that position by the Nazis in early 1933, because he was both Jewish and an influential classical liberal. His dismissal caused an uproar in the British and American press because of his public reputation as an expert on European and U.S. economic policy and political affairs. Fortunately, he was offered a teaching position at the London School of Economics, which he held until 1938, when he moved to the United States. He held various visiting professorships at American universities until he returned to England in 1948, where he lived until his death in 1965.

His autobiography, Wandering Scholar (1949), which, among many other insights and interpretations of the places he traveled to over the decades, contains his recollections of how disastrous was the great German hyperinflation that finally led to virtual economic ruin for the entire country in 1923. In it, also, are shown the various statist trends of the late nineteenth and early twentieth centuries that led to the political and economic catastrophes of the First World War and the interwar period of the 1920s and 1930s that culminated in the Second World War.

The cultural value of capitalist profit-making

Throughout this period Bonn was often a great debunker of myths and fallacies about the supposed evils of capitalism. For instance, in 1931, he wrote in a German newspaper “Capitalism and Literature.” Critics of the market economy charged capitalism for the poor taste and topics of mass publications, whether books or magazines. In the pursuit of profits, businessmen foster the worst in people through increasing sales by pushing cheap detective stories and low-class sensationalism.

He reminded his readers that since the beginning of time, people have wanted their everyday amusements and playful ways. Profits are made by giving people what they want. Bonn asked, “Is capitalist mass production guilty of bad taste or is it bad taste that makes the mass production of bad books possible?” Through mass production at increasingly lower costs, books and magazines reflecting a wide diversity of likes and desires are made available to people that previously had not been the case.

Critics of capitalism forget that many books of a more serious and specialized scholarly type would never have been possible and available in relatively inexpensive editions for those interested in reading them, if not for the market economy. And many of the most popular authors of the time could never have had wide readerships if not for private-enterprise publishing. As Bonn puts it, “If a Bavarian chambermaid is able to give a friend a cheap copy of [John] Galsworthy’s [Forsyte Saga] for Christmas” is that not better than when such a thing was impossible, before capitalist publishing?

Bonn also responded to those who accused capitalism of making everything standardized and monotonously the same, just to produce things cheaply in large numbers to earn mass profits. Contrary to this misguided criticism, said Bonn,

Capitalism, in so far as it is real capitalism, is eager for novelty. In an economically planned and thoroughly organized communal life, no Ford automobile would have been invented, not because socialism could not have made an invention but because it would not have wanted to. Bolshevism will be able to cast aspersions on the capitalist world only so long as it can borrow capitalist ideas…. Its bureaucracy, once it has triumphed, would never tolerate the unauthorized development of the inventions of genius….

A world in which every individual has the same absolutely standardized private bathroom is a more individualistic world than one in which there are no private bathrooms at all, but only a great socialist tank. Is it more far-sighted to destroy the private bathrooms because not everyone yet enjoys one?

Anti-market cartels and the medieval imposed just price

Another myth that Bonn attempted to challenge was the notion that the problems of monopoly and price fixing by coalitions of large enterprises in the form of cartels were part of a free-market system. In his article “Medieval Economic Theory in Modern Business Life” (1929), he argued that what had arisen out of the wartime circumstances was a belief that every market price should cover its costs of production plus a fair and reasonable margin of profit; that had been part of the policy implemented by belligerent governments in the form of price controls, especially in Imperial Germany during the First World War, to entice manufacturers to produce the goods and services needed for the military as well as for the civilian population on the home front.

This mindset was reinforced, Bonn explained, by the experience of the great German hyperinflation of the early 1920s. What seemed as a profit-earning price when some finished consumer good was brought to market and sold often was shown to be a loss when the inflation-driven costs of the factors of production had the result that those earned profits were not enough to repeat the manufacturing process, since input prices were found to be increasing more than the just-earned output price from previous production. As Bonn put it, “Notwithstanding huge paper profits, trade as a whole and the banks as well lost most of their capital.”

What German businessmen and bureaucrats came to see as the rational ideal was stable or rising prices through government regulations, subsidies, protections, and supports that guaranteed profit margins. Free markets could not be trusted to ensure an earned net return over production expenses. “So the comfortable creed of falling prices being beneficial to mankind was replaced by the belief that rising prices by giving a [government] stimulus to production, are the true engines of social progress…. The conception at the bottom of this theory of stabilization of prices … is closely related to the medieval view of maintaining a given social order and a fixed individual income…. This can only be justified,” argued Bonn, “on the medieval theory of the ‘just price’; that the price paid by the consumer must compensate the producer for his actual outlay and the cost of his customary standard of living, to which he is entitled.”

And since such “just price” profit-margin guarantees cannot be certain on an open and free market, less-productive and more-inefficient producers turned to those in political power to ensure them of that which they could not always gain in the competitive arena. Hence, the long-established rationale for government-mandated and -supported cartels in Germany, which had already begun in the late nineteenth century. The profit-and-loss system was essential for economic betterment and market coordination, said Bonn:

I am inclined to think that as a method of industrial progress the weeding out of backward concerns by competition, leading to substantial writing down of overcapitalized plants, is a more efficient method than … cartelized industries…. I am convinced that real economic progress in a capitalist world is impossible without ever-recurring writing off, and I see in the [government-supported] cartels a well-thought-out system of maintaining inflated capital values.

Liberal free trade brought prosperity and peace

Moritz Bonn was also fiercely opposed to political and economic nationalism. He railed against the imposition of trade barriers and other forms of restrictions on the free movement of goods, capital, and people. With the coming of the Great Depression, all the major countries of the world attempted to protect their domestic markets from foreign competition. That intensified nationalistic resentments, angers, and government-policy plots to undermine the protectionist trade walls of other nations while safeguarding their own.

In “International Economic Interdependence” (1934), Bonn reminded his readers that the older pre–World War I system of relatively open freedom of trade not only increased material and cultural well-being for all participants but helped maintain a world of peace. Said Bonn,

Whenever the spirit of liberalism has prevailed in the economic sphere, international cooperation worked fairly well notwithstanding political nationalistic frictions…. Wherever international economic exchange was operated in its [liberal] spirit, international economic interdependence made for peace in the political field and for the reduction of friction in the economic field…. International interdependence of this sort was real cooperation. It raised the standard of living in all the countries concerned. It drew them together economically, and in doing so, made political friction far less likely

European imperialism and the rebirth of political paternalism

At the same time, he was no apologist for the global empires of countries such as Great Britain or France. Imperialism required a dangerous contradiction between the ideas and policies of the Western imperial powers at home and those followed abroad. Great Britain and France hailed themselves as nations grounded in the principles of personal freedom, self-government, and parliamentary democracy. It was presumed that every person should be considered to have an inherent right to his individual liberty and to freely determine and participate in the political system under which he lived.

But in conquering vast areas of the Earth and imposing without the consent of the subjugated peoples the political authority of those ruling over them in a faraway imperial capital, they were denying the very justification of their own domestic systems of government. Bonn explained this in a published series of lectures, The Crisis of European Democracy (1925):

But from a political point of view the populations of the colonial territories inhabited by colored peoples were subject races, whose consent to the rule of their white masters had never been asked for. They did not participate in the shaping of any policy affecting their fates.

Thus, a curious antithesis arose: As parliamentary institutions based on the principles of government conference were spreading slowly all over Europe, government by force was gaining ground afresh in all the territories newly acquired…. The authority for using force emanated in many cases from the same bodies — the parliamentary governments of the world — whose own existence was based on the denial of force, as a method of government

What was a central part of the rationale for these subject colonial peoples to be governed without their consent? That they had not developed the cultural and political prerequisites for self-rule, and needed to be tutored in those matters by their imperial masters before they could be fully free citizens. But Bonn said that this reawakened ideology of political paternalism by imperial force easily could be brought home to the imperial country’s own population:

If the colored races were fit subjects for an autocratic, though, benevolent, form of government, because they had not yet developed the capacity of governing themselves, it might be assumed without much questioning that there were large masses of people at home whose economic and intellectual status had not given them much chance to prove their fitness for self-government…. The acquisition and the developing of colonies thus gave a new strength to the old established theories of government by force.

This was a theme that he developed further in his later book, The Crumbling of Empire (1938). The practice and mindset of empire, he argued, served as part of the entrée into the twentieth century’s rationales for dictatorship in some European countries and welfare states in others. Say to a man that he does not know his own true interests or lacks the intelligence to fully make his own decisions, and it is not a far step in politics to conclude that peaceful persuasion needs to be replaced with paternalism by force.

Moritz J. Bonn was one of those classical-liberal voices of the twentieth century who understood how and why the world had turned away from its earlier roots in a philosophy, a politics, and an economics of freedom. He, like others from those middle decades of the last century, still has something of value to say and share with us. We should not allow them to be completely forgotten.

By Richard M. Ebeling Via https://www.aier.org/article/mortiz-j-bonn-a-classical-liberal-voice-in-a-collectivist-world/