President Trump has nominated Kevin Warsh  to succeed Jerome Powell, whose term as Federal Reserve Chair expires in May 2026. Trump has made no secret of his desire to influence monetary policy. He has consistently called for “Too Late” Powell to bring rates down and seems to believe the president should have a say in interest rate decisions. But the real problem goes beyond Mr. Trump: the next Fed chair will inherit far too much discretionary power. 

The Fed has spent nearly two decades accumulating emergency authorities that never sunset and expanding its reach beyond its statutory mandate. It operates with little oversight from or accountability to Congress. The Fed’s ever-expanding powers, when combined with political pressure, is a recipe for disaster.

Three areas illustrate the pattern. First, consider the Fed’s standing overnight repurchase agreement (repo) facility. The Fed deployed a repo facility in 2008 and 2019 to deal with market disruption. But, in July 2021, it transformed this crisis tool into permanent market infrastructure. The Fed’s standing repo facility now provides up to $500 billion daily in liquidity. What began as emergency support became a permanent backstop with no sunset clause. 

Second, consider the emergency lending powers authorized under Section 13(3). The Fed rolled out six emergency lending facilities in 2008: Primary Dealer Credit Facility (PDCF), Term Securities Lending Facility (TSLF), Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), Commercial Paper Funding Facility (CPFF), Money Market Investor Funding Facility (MMIFF), and Term Asset-Backed Securities Loan Facility (TALF). 

The Fed’s emergency lending powers were purportedly constrained by Dodd-Frank (section 1101). The 2020 COVID-19 pandemic showed, however, how weak those constraints were. Four facilities (CPFF, PDCF, TALF, and the Money Market Mutual Fund Liquidity Facility (MMLF), which was just a slightly revised AMLF) were revived, and five new facilities were established. 

These new facilities included the Primary Market Corporate Credit Facility (PMCCF), Secondary Market Corporate Credit Facility (SMCCF), Paycheck Protection Program Liquidity Facility (PPPLF), Main Street Lending Program (MSLP), Municipal Liquidity Facility (MLF) New. Whereas the older facilities might generally be reconciled with the Fed’s emergency lending facilities, the newer facilities permitted the Fed to extend credit to entities Congress never authorized it to support. What began as a crisis improvisation in 2008 became standard practice in 2020, with few constraints on what the Fed could do through its lending facilities.

Third, consider the regulatory authority the Fed has asserted in recent years. It has denied master accounts to cryptocurrency-focused institutions like Custodia Bank. A master account provides access to the Fed’s payment rails and has traditionally been granted to regulated depository institutions. Yet, the Fed has repeatedly denied applications from crypto banks. These denials demonstrate how discretionary power enables the Fed to pursue policy goals beyond its statutory remit.

The Fed is not blind to its expanded discretionary powers. Federal Reserve officials have openly acknowledged the institution’s expanded role. Former Chair Ben Bernanke defended the Fed’s crisis interventions as “necessary” to prevent financial collapse because, at the time, “no federal entity could provide capital to stabilize AIG and no federal or state entity outside of a bankruptcy court could wind down AIG.” But perceived necessity doesn’t grant legitimacy.

The accumulation of discretionary power increases the risk of politicization. When the Fed wields significant power and discretion over credit allocation, market functioning, and financial access, the president’s appointments to the Fed’s Board of Governors are all the more important. It is also more tempting to apply political pressure. Politicians will find it difficult to resist if the Fed might be used to improve their re-election odds. The Fed’s independence and credibility suffer as a result.

The accumulation of discretionary power — and trillions of assets on the Fed’s balance sheet — also makes financial institutions more dependent on the Fed. If financial institutions come to expect support from a big, powerful Fed in times of stress, they will be encouraged to take on excessive risk. This moral hazard creates a positive feedback loop, where dependent financial institutions require a bigger, more powerful Fed. The end result is a Fed that continuously increases its regulatory reach.

Perhaps worst of all, the accountability mechanisms in place have generally failed to keep up with the Fed’s expanded powers. Congress checks in twice a year. But, unlike other major federal agencies, the Fed lacks an independent inspector general. It has gained abilities to influence corporate and municipal bond markets, but it still operates under an oversight structure designed for a much narrower scope. 

The Fed’s power problem is not limited to a particular chair or administration. It is institutional. Over the last two decades, the Federal Reserve has accumulated vast discretionary powers that enable mission creep and invite political pressure. Whoever follows Powell will inherit this vast discretionary power — and, if history is any guide, will be tempted to expand it further. But the Fed’s credibility and independence will suffer until its discretionary power is reined in.

The answer to the question “Who pays the cost of tariffs?” is obviously important. If the costs of all tariffs were paid exclusively by foreigners, with no negative consequences suffered by citizens of the country that imposes the tariffs, the case for a policy of free trade would be far weaker than if tariffs inflict some damage on the domestic economy. Ethical objections to tariffs would still be available, but the conventional economic case against protective tariffs would be null and void, as that case focuses almost exclusively on the economic welfare of citizens of the home country.

Yet the costs of tariffs are always shared by buyers and sellers of tariffed goods and services. This inevitability springs from the fact that all trade is mutually advantageous. Because tariffs prevent some trades from occurring that would otherwise occur absent the tariffs, both parties to the obstructed trade suffer. In some cases, would-be buyers suffer more than do would-be sellers, and in other cases the bulk of the suffering is inflicted on would-be sellers. But in all cases, tariffs inflict harm on both parties.

The Simple Analytics of the Tax Called “Tariffs”

Whether intended to raise revenue or to protect domestic sellers from foreign competition, tariffs are a tax. In practice, the legal obligation to pay this tax is imposed on importers, who are middlemen between the foreign suppliers and the domestic buyers. If we think in terms of suppliers and buyers – of supply and demand – we can helpfully simplify just a bit by thinking of tariffs as a tax formally obliged to be paid by suppliers. The higher the tariff, the higher the cost to suppliers of supplying any given quantity of the good or service in question. From the suppliers’ perspective, a tariff is simply another cost of doing business – a cost that must be covered no less than does the cost of labor and of other inputs into the production process.

Suppliers, of course, would love to offload the entire cost of the tariffs onto buyers. For example, if the tariff on imported apples is $1 per pound, and the pre-tariff price of apples is $2 per pound, sellers of imported apples would love to raise the price of apples to $3 per pound so that the amount of revenue ($2 per pound) that sellers of imported apples clear with the tariff remains the same as what they cleared before the tariff was imposed. And a naïve person might suppose that this is just what sellers of tariffed apples do.

But the naïve person, unsurprisingly, is mistaken. The apple sellers, although legally allowed to raise the price they charge for a pound of apples from $2 to $3, aren’t economically allowed to do so. The reason is that apple buyers purchase fewer apples as the price of apples rises.

Suppose that before the tariff, with the per-pound price of imported apples being $2, sellers of these apples sold – and, hence, buyers bought – 1,000 pounds each week. If, when a $1 per-pound tariff is imposed, these sellers raise their asking price to $3 per pound, buyers will obviously purchase some amount less than 1,000 pounds. Let’s say that the weekly amount buyers will purchase at $3 per pound is 550 pounds. At $3 per pound, sellers produce and offer for sale 1,000 pounds each week but buyers purchase only 550 pounds.

What are sellers to do in the face of this surplus of apples? The answer is to lower the price in order to entice buyers to purchase more than 550 pounds.

Let’s say that the price falls to $2.60 per pound, and at this price buyers purchase 800 pounds each week. For two reasons, buyers are worse off than before the tariff. First, buyers now pay 60 cents more for each pound of apples that they buy. Second, buyers get and consume 200 fewer pounds of apples each week.

What about the sellers of the imported apples? After handing to the customs agents $1 for each pound of apples that they import and sell, sellers are left with $1.60 for each pound of apples sold, which is 40 cents per pound less than they cleared before the tariff. It’s because they earn less per-pound sold with the tariff than without the tariff that suppliers of imported apples are willing now to supply only 800 pounds per week instead of the 1,000 pounds they willingly supplied before the tariff was imposed.

And so the apple sellers, like the apple buyers, are worse off because of the tariff in two ways. The sellers receive 40 cents less for each pound sold, and they sell 200 fewer pounds of apples each week, missing out on the profits they obviously earned on the pre-tariff sale of those 200 pounds.

The government, however, now rakes in weekly customs revenue of $800: 800 pounds of apples are imported each week with a $1 tariff charge collected on each pound.

Two Different Manifestations of Tariffs’ Costs

Discussions of who pays the tariffs too often focus exclusively on how much of the customs revenue is paid by buyers (in the form of paying more out of pocket for the imports) and how much of this revenue is paid by sellers (in the form of clearing less money on each unit imported and sold). In the above hypothetical example, analysts would conclude that 60 percent of the tariffs’ costs are paid by buyers while 40 percent of these costs are paid by importers. Of the weekly customs revenue of $800, buyers pay a total of $480 ($0.60 X 800) and importers pay $320 ($0.40 X 800).

The detailed distribution of this cost of the tariff between domestic citizens (buyers) and foreigners (sellers) is determined, as we economists say, by the relative elasticities of demand and supply. The less responsive are domestic buyers to increases in the prices of tariffed imports, the greater is the ability of foreign suppliers of tariffed goods to offload onto these buyers, in the form of higher prices, some of the costs of the tariffs. It follows that the less responsive are domestic buyers to increases in the prices of tariffed imports (relative to the responsiveness of foreign suppliers to their receipt of less revenue per unit sold), the greater is the share of the customs revenue paid by domestic citizens and the lesser is the share paid by foreigners.

If the above jargony paragraph is indecipherable, no worries. The larger point is that customs revenues are always paid in part by foreign suppliers and in part by domestic citizens.

But to focus exclusively on what portion of the customs revenue is paid by domestic citizens and what portion is paid by foreigners is to lose sight of the losses suffered by both groups as a result of selling and purchasing fewer units of tariffed goods.

This oversight is significant. To see why, consider the extreme case in which foreign suppliers ‘eat’ the entire dollar cost of the tariffs. Foreign apple growers, hit with a $1 per-pound apple tariff, absorb this entire tariff amount by lowering the pre-tariff per-pound price they charge from $2 to $1. One dollar per pound is paid to the customs house by foreign apple suppliers, leaving only $1 being cleared by these suppliers. Every cent of the customs revenue is paid by foreigners. “Hooray!” cheer American economic nationalists. “The tariffs cost us nothing!”

But the economic-nationalists are mistaken. Because foreign apple sellers now clear, for each pound of apples sold in the US, only $1 instead of the $2 they cleared before imposition of the tariff, the amount of apples these sellers will supply to Americans will not only fall, it will fall by more than if some of the tariff costs were paid by Americans.

The resulting decrease in the supply of apples in the US will raise the price charged by the apple importers, as well as by domestic apple growers. Despite the dramatic fall in the price charged by foreign apple growers, Americans will purchase and consume fewer apples than they would have purchased and consumed absent the tariff. The resulting loss in consumer welfare is real despite not showing up in any accounting statement. The books at the customs house will show that every cent of the customs revenue is paid by foreigners, leading pundits and politicians to wrongly conclude that the tariffs cost Americans nothing. Yet the diminished consumption of apples, as well as the diversion of more American resources into apple growing and away from other, more-productive uses, are very real costs of this tariff.

Another point: Even if every cent of the US customs revenue is paid by Americans, with none being paid by foreigners, the dollar value of what Americans pay to the customs house is still less than the full cost to Americans of the tariffs, for this dollar amount doesn’t include the value to Americans of the apples that the tariffs prevent them from consuming.

While some tariffs hit foreigners harder than do other tariffs, there’s no tariff that will not impose real costs on domestic citizens. And this reality holds regardless of the portion of customs revenue paid by foreigners relative to the portion paid by domestic citizens.

Donald Trump wants lower interest rates. He has said so openly and has pressured the Federal Reserve accordingly. The political logic seems obvious: easier money boosts asset prices, juices consumer spending, and appears to support headline growth. With midterms approaching, that sugar high is tempting.

But it’s also a mistake — economically, politically, and strategically.

Lower rates at this point in the cycle would almost certainly reignite inflation. And except in the very short run, they would not make capital more affordable in real terms. Instead, they would worsen the affordability crisis (which voters are already upset about) and undermine the GOP’s reputation as the party of economic responsibility.

Inflation is still a major concern. After peaking above 9 percent in 2022, it has come down meaningfully. But core inflation remains sticky, especially in services and housing. Shelter costs are still rising around 3 percent annually. Since shelter comprises a large share of price indices, it is a major contributor to average price growth exceeding the Fed’s two percent target. Insurance, medical services, childcare, and rents continue to climb faster than incomes. The last thing this economy needs is a renewed inflationary surge driven by easier monetary conditions.

Trump’s implicit bet is that lower rates will bring down borrowing costs and make life more affordable. That misunderstands how inflation and interest rates interact.

Nominal rates are not the same as real affordability. If the Fed cuts prematurely and inflation expectations rise, long-term yields will rise with them. That is exactly what happened in 2021–22: loose financial conditions and fiscal excess pushed inflation higher, and mortgage rates ultimately doubled anyway. The average 30-year mortgage rate went from under 3 percent in 2021 to over 7 percent in 2023 — even as the Fed initially insisted inflation was “transitory.” Once inflation expectations shift, credit does not stay cheap.

Inflation makes affordability worse, not better. It raises rents. It pushes up home prices. It increases insurance premiums, service costs, and replacement costs for everything from cars to appliances. Any short-term relief from lower nominal rates is quickly eaten by a higher price level, and since wages tend to lag, American workers pay with reduced purchasing power.

In macro terms, this is the Fisher effect in action: expected inflation gets embedded into nominal interest rates. You don’t get sustainably cheaper capital by eroding the purchasing power of money.

The political consequences are just as bad as the economic ones.

Voters are not angry about GDP growth rates or S&P multiples. They are angry about grocery prices, rent, childcare costs, and insurance premiums. Affordability is the dominant economic issue in polling. A policy that visibly worsens price stability in exchange for a few quarters of rosy headlines will look reckless to a public that already feels economically insecure.

A cheap-money policy would erode Republicans’ hard-earned reputation for supporting sound economic policy. For decades, the GOP has championed lower inflation, fiscal restraint, and respect for market price signals. If Republicans start openly pressuring the Fed to run the economy hot for electoral reasons, they surrender that brand. They blur the distinction between themselves and the inflationary populism that voters have traditionally associated with progressive Democrats.

Excessive pandemic-era spending, burdensome tax policy, regulatory overreach, and energy policy malpractice have done enough damage to long-term price stability already. The Congressional Budget Office now projects persistent trillion-dollar deficits as far as the eye can see. Federal debt held by the public is on track to exceed 100 percent of GDP this decade. That is a textbook setup for fiscal dominance, whereby monetary policy becomes subordinate to the government’s financing needs.

If Republicans now join the inflationary chorus, voters will be left with no serious economic option at all.

A genuine affordability agenda would seek to restore price stability on the demand side while easing regulations and restrictions on the supply side. We need housing abundance, energy production, and infrastructure renewal. Ultimately, affordability comes from productivity growth, not monetary theatrics.

Trump’s preferred monetary policy, by contrast, pursues uncertain short-term political gains at the expense of certain long-term political damage. It risks discrediting the GOP as the party voters trust with the economy at a time when public trust is already fragile.

If Republicans want to be taken seriously as an economic alternative, they should be defending price stability, not flirting with inflationary populism. First and foremost, they should be offering a supply-side reform agenda. There’s nothing wrong with holding misbehaving central bankers accountable. But that shouldn’t translate into reckless inflationism.

There is no durable prosperity built on cheap money and political shortcuts. And there is no political upside, either, to unleashing the next inflation spike. Trump should rethink his rate gambit. If he doesn’t, his legacy will be the first casualty.

Political scientists contend that a defining characteristic of the state is its monopoly on the use of force (or violence). Meanwhile, economists are quick to emphasize that monopolies are slow and reluctant to innovate, and they charge higher prices for lower quality goods and services than they would under more competitive conditions. Thus, it is no surprise that we get very little innovation in governance. 

However, with cheap commercial flights to almost anywhere on the planet and with the internet allowing for individuals to work and manage their assets remotely, there are geo-arbitrage opportunities in terms of governance. A North American or European can maintain dollar or euro sources of income, while residing in a country with relatively low cost yet high standard of living, lower taxes, and access to beaches. This same person may hold assets in yet another country and bank in another still. 

The late Harry Schultz coined the term “flag theory,” which is the idea that a person can maximize personal freedoms by:

• building a portfolio of citizenships and residence visas (or at least one, outside one’s nation of birth)
• holding assets in jurisdictions that offer a combination of the most secure property rights and privacy
• holding tax residency in a low (or no) tax country
• incorporating companies in jurisdictions that have low or no corporate tax
• finding the “playgrounds” where you actually want to spend much of your time. 

In sum, flag theory refers to arranging your affairs to optimize for a combination of the best governance (with favorable tax rates playing an important part of that) and lifestyle. 

We might add to Schultz’s flag theory by emphasizing the importance of owning assets that are highly portable and outside the traditional banking system (Bitcoin, for example), hosting any websites on servers within countries that are committed to free speech, and communicating – whenever possible – over encrypted and decentralized means. (The Signal app, for example, is encrypted-by-default, yet centralized. The XMPP protocol enables communications that can easily be encrypted and is decentralized, meaning the protocol does not rely on any single app or entity to coordinate users). All of these factors combined work together to describe what authors William Rees-Mogg and James Dale Davidson called “the sovereign individual” in their 1997 book by that title. 

Inspiration from Academic Literature

Charles M. Tiebout argued in his 1956 paper “A Pure Theory of Local Expenditures” that mobile “consumer-voters” are able to “[pick] that community which best satisfies his preference pattern for public goods.” Tiebout argued that competition exists on local levels of governance that does not on the national level. These local communities, Tiebout wrote, are forced to compete against one another to attract new residents. In his own words, “The greater the number of communities and the greater the variance between them, the closer the consumer will come to fully realizing his preference position.” 

In 1970, Albert O. Hirschman’s book Exit, Voice, and Loyalty explored how “member-customers” seek to resolve problems caused by the decline of firms, organizations, and states. Hirschman wrote that member-customers have the option to either vocalize disagreement (“voice”) in an effort “to change… an objectionable state of affairs” or to abandon one organization for another (“exit”). He argued that while political scientists tend to emphasize the power of voice and economists the power of exit, both undervalue the other’s favorite. However, Hirschman stressed repeatedly that the voice option without a plausible threat to exit (and without the existence of a competing alternative to exit to) is “handicapped.” But beyond exit merely improving the state of affairs for the member-customer, he also believed that “exit has an essential role to play in restoring quality performance of government” itself. 

James M. Buchanan’s 1954 paper “Individual Choice in Voting and the Market” outlines key differences between ballot box voting and voting in the market. (In Hirschman’s terminology, ballot box voting would be one way of manifesting “voice”, and voting in the market often involves “exit”). Among the key differences identified by Buchanan is the greater uncertainty with ballot box voting. In the market, a voter can choose between a variety of existing alternatives; in ballot-box voting, he chooses between potential alternatives and “he is never secure in his belief that his vote will count positively.” 

Bryan Caplan’s book The Myth of the Rational Voter identifies systematic biases that prevent voters from thinking rationally about political matters. Caplan argues that the problem of political ignorance is a demand problem, not a supply problem. That is, political information is rarely in short supply. In the Information Age, the daily human experience is one of information overload. Legal scholar Ilya Somin builds upon the systematic biases identified by Caplan in his own book Democracy and Political Ignorance and makes the case that “foot voting” (meaning physically relocating one’s residence as well as taking one’s business elsewhere) gives citizens “strong incentives to learn about the results and evaluate them objectively.” Both Caplan and Somin have written other books exploring the economic and philosophical implications of the right to move across political borders. 

So how do we consolidate this literature in a way that makes sense for a global market for governance? While Tiebout confined his thinking to the market for public goods provided by competing local levels of government, we can apply it more widely to globally-mobile consumer-voters shopping for the best jurisdictions to be governed in terms of where they physically live, where they incorporate their companies, and where they choose to bank and hold their assets. 

From Hirschman, we understand that voice has value, but a willingness to exit from a jurisdiction (with ourselves and our capital) can bring about swift and meaningful change to our lives in a way that remaining within the country of our birth and vocalizing opposition to decline in governance cannot. 

From Buchanan, we understand that our actions within markets often provide more favorable trade-offs when compared to ballot box voting. But we could bring Buchanan’s analysis a step further by noting that for those willing to move to new jurisdictions, the limited and relatively static state of affairs in governance within a country need not apply so much. There is, in fact, a global marketplace for governance. States may monopolize governance within their own territories, but shopping among those monopolies opens up exciting possibilities. 

Lastly, Somin’s concept of “foot voting” drives home the point that if we move to a new jurisdiction (especially to a new country), our governance often changes drastically and overnight in a way that can be very favorable to us. 

Economists of the Austrian School: Pioneers and Practitioners of Flag Theory

Flag theory is often presented as a late twentieth-century lifestyle strategy: diversify passports, residencies, banks, and assets to reduce exposure to any single state’s policy drift. Yet several of its core intuitions map neatly onto the Austrian tradition, both in its later popularizers and in the real-world choices that economists of the Austrian school of thought made under political stress. 

Harry Schultz, who coined the term “flag theory,” framed his thinking in an explicitly Austrian register, crediting Friedrich Hayek as his main economic inspiration and frequently citing Ludwig von Mises and Mises’s American student Hans Sennholz. The same pattern appears among other popularizers of international diversification such as Jerome Tuccille and WG Hill. In other words, the “flags” idea did not arise in a vacuum. It grew naturally from a worldview that treats institutions as constraints to compare, compete, and, when necessary, exit.

This connection becomes especially vivid when we look back to the Austrian school’s founding generation, where theoretical attention to institutions met an unusually concrete awareness of geopolitical rupture. Carl Menger traveled extensively with Crown Prince Rudolf of Habsburg, an experience that invited comparison across jurisdictions and regimes. As the notes record, Menger anticipated a catastrophic European war years before 1914 and positioned accordingly: he shifted wealth into gold and into securities in neutral Sweden. Mises reports that, around 1910, Menger warned European policy would bring “a terrible war” followed by “horrifying revolutions,” and that, in anticipation, one could recommend little besides hoarded gold and, perhaps, Scandinavian securities. Menger acted on this view by placing savings in Swedish papers, effectively combining a hard-asset hedge with exposure to a comparatively safer jurisdiction.

Menger’s student Felix Somary carried this practical sensibility into high finance and became, in these notes, an unusually clear early example of what we would now call a flag-theory practitioner. Somary helped shape Swiss private banking, and he appears here as someone who married early geopolitical diagnosis with operational decisiveness. Immediately after the assassination of Archduke Franz Ferdinand, he was asked on the phone from Budapest: “Does this mean world war?” Somary’s reply, as he later recalled, was an unambiguous yes, and the message was relayed immediately to business partners in Paris and London. He then described the next step in plain administrative terms: for clients whose wealth he managed, he converted balances and securities into gold and placed that gold in Switzerland and Norway. A few days later, war began. Read as a sequence of actions, this is the “flags” logic in embryo: change the asset (into gold), change the custody location (out of the soon-to-be belligerent sphere), and distribute across relatively safer, neutral settings before constraints tighten.

A further, often overlooked bridge between Austrian economics and flag theory lies with another student of Menger’s who moved from scholarship into statecraft: Richard Schüller. He is considered another of Menger’s favorite students, and pursued a career in diplomacy. His work sharpened Austrian awareness of geopolitics and the strategic value of neutral jurisdictions. He remained in public service and became part of the peace negotiations at Brest-Litovsk and Bucharest (1918) and at Saint-Germain (1919). He then rose to head the Trade and Economic Policy section of the Austrian Foreign Ministry and later served as Austria’s envoy to the League of Nations in Geneva, placing him directly in the institutional machinery that tried to stabilize a shattered Europe. In trade policy, he argued in detail about the costs and benefits of tariffs versus freer trade, and he also worked within League of Nations structures. Schüller’s trajectory highlights that neutrality is not only a private convenience, it is a geopolitical position that can preserve room for maneuver when blocs harden and borders become instruments of coercion.

That line runs straight to Geneva and the institutional ecosystem that, between the wars, became a practical laboratory for internationalism and a refuge for exiled scholars. When Mises left Austria, he did so for neutral Switzerland, taking up a professorship at the Graduate Institute of International Studies in Geneva in 1934 and remaining there until 1940. The Institute itself was created in 1927 in the wake of World War I and the League of Nations’ move to Geneva, aiming to improve diplomatic competence and international understanding. It later distinguished itself in the 1930s and World War II by welcoming exiled researchers while maintaining intellectual independence. This “Geneva base” becomes a key link between Austrian economics and flag theory because it embodies the same principle at the level of institutions: a neutral jurisdiction can function as an intellectual and financial safe harbor, a place where cross-border cooperation and analysis can continue when surrounding regimes polarize.

The Institute was shaped by William E. Rappard, a Swiss academic and diplomat who illustrates, almost biographically, the transnational posture that flag theory later systematized. Rappard was born in New York City (April 22, 1883) to Swiss parents; his father worked in the United States as a representative of Swiss industries. Rappard then moved to Switzerland, graduated from Harvard in 1908, and studied at the University of Vienna in 1908–1909. That personal arc, New York, Harvard, Vienna, Geneva, matters here because it reflects the early twentieth-century version of a “portfolio life”: embedded in multiple jurisdictions, literate in multiple intellectual worlds, and positioned to build institutions that outlast any single political swing.

Within that Geneva milieu, Mises and Hayek were not merely “present.” They anchored a research and teaching emphasis that naturally foregrounded the mobility of goods, capital, and people as a civilizational question, not just a technical one. Mises held a chair in international economic relations. Hayek taught at the Geneva Graduate Institute as well, including a summer course in 1937. And the Institute’s later self-description of its mid-century focus explicitly highlights trade and international monetary economics among its core emphases. Put differently (and this is an interpretation rather than a quotation): once you treat economies as interconnected systems, you are inevitably drawn to the question of how quickly flows can be redirected when governments become predatory. That is the analytical backbone of flag theory, expressed decades earlier as scholarship and institutional design.

Even in peacetime, Austrian economists sometimes engaged in what could be called “micro-flagging,” selecting legal environments for specific life decisions. One small but revealing instance of governance-shopping is Hayek teaching at the University of Arkansas in Fayetteville for a summer to take advantage of Arkansas’s comparatively relaxed divorce laws. 

In modern terms, it is the same logic, applied narrowly: find the jurisdiction whose rules fit the problem at hand, then move (even temporarily) to make use of them. Finally, the Austrian story also contains the darker mirror image of voluntary exit: forced exit. Mises, as a Jew in interwar Europe, ultimately had to “vote with his feet” to escape the Nazi threat, reminding us that mobility is sometimes not optimization but survival.