Growth

Dr. Peterson is Associate Professor of Eco­nomics at New York University and a weekly contributor to the Wall Street Journal.

Antwerp in the sixteenth century—”the queen city of all Christendom” (From a painting in the Steen Museum, Antwerp)

Growth. Economic development. The planned expansion of the world’s poorer economies outside the communist orbit. These are the watchwords of today’s seven major international lending agen­cies with offices in Washington, D. C., in which the United States Government is either the largest or the only shareholder. (Oldest is the Export-Import Bank, founded in 1934, which neither exports nor imports; nor is it, in the usual sense of the word, a bank. Newest, still in the plan­ning stage, is the International Development Association, which will make loans to poor nations that cannot qualify for credit at the World Bank nor the other agencies under existing relatively easy regulations.)

Such fervor to dispense money abroad, to fight communism through upbuilding “under-devel­oped” nations, raises questions: Are government-to-government loans—often gifts in disguise—with their usual accompaniments of exchange control, inflationary schemes, tariff protection, full em­ployment practices, tax gimmicks, Castro-like “agrarian reform,” and so on, the best road to na­tional economic growth? If so, how then did the United States and Britain flower in the nine­teenth century as the two richest nations in all the world? What of Japan which leaped from feudal­ism to industrialism in the late nineteenth and early twentieth centuries? And what of the Nether­lands in the sixteenth and seven­teenth centuries?

For is there not a tested second road to national economic growth, namely, laissez faire?

Before considering the Dutch example, it might be well to note that growth, in underdeveloped and developed economies, has as­sumed a sloganeering function. As Lawrence Fertig, Scripps-Howard financial and economic columnist, observed recently:

“The inflationists’ new device is to wave the banner of ‘growth.’ Of course, they say, we are against inflation. Of course, they assert, we are not in favor of zooming prices. But after all, they quickly ask, isn’t growth the really im­portant thing—shouldn’t we achieve growth (with government in the driver’s seat as planner and spender) even at the expense of some inflation?”¹

A False Correlation

Fertig’s contention that growth­ and-inflation is a false correlation is borne out in a recent study by economists of the New York Fed­eral Reserve Bank covering econ­omic development in 16 countries from 1950 to 1957. These econo­mists found that in countries in which prices advanced only mod­erately or not at all, annual rates of growth were generally close to 6 per cent. In countries where there were heavy inflationary pressures during this period—and where, by and large, U.S. for­eign aid was much greater—rates of growth varied widely, ranging from less than one to more than 7 and averaging around 4 per cent.

So, the thesis that growth de­pends on inflation demands criti­cal examination. It is an old thesis, and though exploded time and again in the past (see, e.g., Andrew Dickson White’s classic Fiat Money Inflation in France‘) it crops up ever anew. The an­tiquity of the thesis can be seen from the following quotation by John Law, who became Controller General of France and initiated the Mississippi Bubble inflation from 1716 to 1720:

“Domestick Trade depends on the Money. A Greater Quantity employes more People than a les­ser Quantity. A limited Sum can only set a number of People to Work proportion’d to it, and ’tis with little success Laws are made, for Employing the Poor or Idle in Countries where money is scarce.”³º

So, when John Law got eco­nomic command in France, he im­plemented his inflationary scheme, inadvertently courting and finally embracing economic ruin for both France and himself.

The Example Was Ignored

The Dutch example was in full display for Law and his em­ployer, Louis XV. But, like so many lessons of history, the ex­ample was ignored. No rich uncles showered the Dutch of the sixteenth and seventeenth centuries with aid. No Point Four teams of technical experts surveyed their lowlands for likely sites for fac­tories, warehouses, harbors, and other projects. No Economic and Social Council issued reports de­crying the Have-nations for fail­ure to share their economic gains with their less fortunate neigh­bors.

How did the Dutch miracle hap­pen? And to many it was a mira­cle. The Dutch were not blessed with natural resources. If any­thing, nature had cheated them with seas which had periodically flooded the lowlands, thus requir­ing expensive dikes. A contem­porary observer, Daniel Defoe, noted that the seventeenth century Dutch had “neither Corn, Hemp, Tar, Timber, Lead, Iron, Arms, Ammunition, woolen Manufacture, or Fish of their own Growth.” For these commodities, the Dutch took to the sea—and hence became known, initially, as the Sea-Beg­gars.

To Max Weber and others, re­ligion was the answer to the Dutch miracle. The Protestant Re­formation, supposedly, opened the floodgates of business prosperity. The Calvinists even had their own regime in Amsterdam for eleven years (1611-22). The keynote of Calvinism, particularly as it was developed by the Dutch Puritans, was complete dedication to one’s calling. Whatever a man’s pursuit, it was his Christian duty to give it his fullest effort. The tradesman in his own shop “could most con­fidently expect the presence and blessing of God.” Thus pursuit of profit, in free and honorable trade, was no longer tainted; quite the contrary, it was Christian virtue. Sloth was the sin.

Trade Was the Key

But perhaps the best answer to the Dutch miracle was trade—trade, and its corollaries of free­dom, property, and economic gain (and without the progressive in­come tax!) In the sixteenth cen­tury, Antwerp—then in the Netherlands—was the queen city of all Christendom; in the seven­teenth, it was Amsterdam. Each week some two thousand freight wagons and ten thousand peasant carts passed through Antwerp‘s gates with the manufactures and foodstuffs of the Continent. As many as four hundred ships came in on the same tide, spreading on Antwerp’s docks silks and spices from the East, wool from Eng­land, pitch from Sweden, tallow from Norway, furs from Russia, and fish from the Seven Seas. In­surance became big business in sixteenth century Antwerp—ship and cargo insurance and even life insurance. The Antwerp Bourse, founded in 1531, was the world’s first stock exchange.

Little wonder, then, Defoe said of the Netherlands population:

“The Dutch must be understood to be as they really are, the Carryers of the World, the Middle Persons in Trade, the Factors and Brokers of Europe: That, as is said above, they buy to sell again, take in to send out; and the greatest Part of their vast Com­merce consists in being Supply’d from all Parts of the World, that they may supply all the World again.”

Thrift Also a Factor

But trade is only part of the story, apparently. The Dutch, as may be gathered from the pres­ence of the Antwerp and Amster­dam Exchanges, were investors as well as traders. Frugality and steady trade furnished the sav­ings. Savings, in turn, furnished the capital for their mercantile searchings and trade centers and outposts the world over. Above all, the soundness of the Dutch cur­rency unit, the florin, won world renown and respect as is seen in the volume of Dutch banking and insurance business. The florin of that era knew virtually no depre­ciation—no “planned” inflation. And this was a big reason it at­tracted so much business.

Aspects of the Dutch business behavior can be seen in the ob­servations of Sir William Temple, English ambassador to The Hague in 1668:

“The [Dutch] merchants and tradesmen are of mighty industry. Never has any country traded so much and consumed so little. They buy infinitely, but ’tis to sell again. They are the great masters of Indian spices and Persian silks, but wear plain woolen and feed upon their own fish and roots. They sell the finest of their cloth to France and buy coarse out of England for their own wear. They send abroad the best of their own butter and buy the cheapest out of Ireland for their own use. They furnish infinite luxury which they never practice and traffic in pleas­ures which they never taste.”

Sir William shrewdly pinned down the Dutch secret. “Their common riches,” he wrote, “lie in every man’s spending less than he has coming in.” Self-indulgence was out, for “the general intention every man has is upon his busi­ness…. All appetites and pas­sions seem to run lower and cooler here than in other countries, avarice excepted. Their tempers are not airy enough for joy, nor warm enough for love.”

This observation was shared by the philosopher Descartes who lived in Holland from 1629 to 1640: “Every man thinks only of himself and his business interests and whoever has nothing to do with business and trade… is com­pletely disregarded.”

Art Appreciation

Such comments, while having some measure of truth, are to a degree obviated by the burst of great Dutch art. Art requires patrons, an economic surplus. And a measure of Dutch prosperity can be seen in the parade of the Dutch masters: Brueghel, Ver­meer, Hals, Steen, Rubens, Rem­brandt. If such paintings were for the rich, the middle class home had its appointments. A contem­porary historian noted that “the plainest and most modest burgher had a house full of pictures, and there was nothing unusual about finding from one to two hundred paintings in a modest home.”

To be sure, Dutch business suc­cess in the sixteenth and seven­teenth centuries was not always onward and upward. The Tulip Craze of the early seventeenth century (in 1609, one prize bulb was sold for 13,000 florins) broke in 1638, bringing financial hard­ship to thousands. And in the end, beginning with the Anglo-Dutch wars of 1652-1674, business some­how became inextricably entwined with empire. The Netherlands had become, if temporarily, a “world power.” And the era of the bour­geois man of the lowlands, who had reached Java in the East and the Hudson River in the West, was largely no more.

At any rate, the secret of the Dutch example of economic de­velopment is plain—it was trade, not inflation; growth was natural, not manipulated.

***

Voluntary Action

Voluntary action is the best possible weapon with which to fight statism and prevent the submergence of the individual. It is our nation’s great tool in showing the rest of the world the way to solve problems without throwing ourselves slavishly into the arms of government. Few people elsewhere in the world have any idea how far and how fruitfully voluntary organiza­tion has gone in the United States. Our entire system is radiated and irrigated by a vast network of private voluntary organiza­tion and communication. Vital ideas and concepts flow back and forth in these channels.

ERWIN D. CANHAM, Freedom Begins in the Market Place

Foot Notes

¹See the October 1959 Freeman, pages 58-60.

Andrew Dickson White’s classic Fiat Money Inflation in France‘)

²A new edition with an introduction by Henry Hazlitt is available through the Foundation for Economic Education, Irv­ington-on-Hudson, N. Y.

³Law, John. Money and Trade Con­sidered. Edinburgh, 1705.