Free Money; H. Sennholz

Free Money HANS F. SENNHOLZ RECENT ECONOMIC. DEVELOPMENTS reflect and portend the painful convulsions of our fiat money sys tem. The federal government is projecting a budget deficit of $34.7 billion for fiscal 1975 and a deficit of $51.9 billion for fiscal 1976. The U.S. Congress can be expected to boost federal spending even furth er which, together with the grow ing deficits of such "off-budget" agencies as the Postal Service and the Environmental Protection Agency, may raise the total fed eral deficit to more than $100 bil lion. State and local government deficits are making additional de mands for economic resources. To finance such deficits out of the Dr. Sennholz heads the Department of Eco nomics at Grove City College and is a noted writer and lecturer on monetary and economic affairs. This article is published by permission from a paper before a meeting of the Committee for Monetary Research and Education, March 22, 1975.

338 savings of the American people is well-nigh impossible. Therefore, the federal government 'may be expected to rely increasingly upon its monetary arm, the Federal Re serve System. Only hyperinflation can finance super deficits. A budgetary deficit is not just a temporary shortage of money that is readily covered by a loan. It is not primarily a monetary phenom enon that is efficiently handled by monetary authorities and bankers. Instead, a federal deficit means consumption of economic resources - real goods and services - beyond those taken directly from tax payers. It consumes the real wealth and substance of savers who di dectly or indirectly buy the new Treasury obligations. The con1ing $100 billion deficit, in fact, greatly exceeds the annual savings of the American people, which were esti mated to be $74.4 billion in 1973 1975 FREE MONEY IS SOUND MONEY 339 and $76.7 billion in 1974. (Fed eral Reserve Bulletin, February, 1975, p. 57).

Redistributing Wealth VVhenever our savings are con sumed by government, they obvi ously can no longer be used by in dividuals who would build or buy homes, household appliances, or make some other improvements. More facilities of production are used to serve government demand, fewer are left· to cater to private demand. As the U~S. Treasury en ters the capital market to sell its bills,notes and bonds, it absorbs and consumes the very substance of economic productivity. Its capi tal demand is felt as a chronic lack of capital for industry and com merce, for public utilities, for de velopment of more energy, mod ernization and renovation and new production facilities. It is felt as a universal "shortage of funds" which, in reality, is a shortage of real savings and economic resourc es. Plagued by such shortages and enmeshed in serious economic dif ficulties and crises, the federal gov ernment then calls on the Federal Reserve System to alleviate the shortages through credit expan sion and money creation. Tons of new paper money are thus to take the place of real goods that are consumed by our political organi zations.

The inevitable rise in prices of goods, commonly called inflation, then serves to withdraw the re sources from certain individuals and redirects them to the spender with the newly created purchasing power, the federal government. In flation acts as a federal tax on all holders of money and claims to money. It silently and efficiently transfers real income and wealth from millions of individuals to the inflating government. Nor do most of the victims understand the na ture of this taxing process. After all, rising prices can be blamed on merchants and industrialists, thus exculpating the government that is withdrawing and consuming the economic resources. The very ad ministration that is conducting such policies may even blame busi nessmen for the inflation and pro ceed to impose price and wage con trols on its victims. A Tool 01 Politics In the coming years of galloping inflation the American people may come to understand the true na ture of the fiat system that makes government the creator and guard ian of money. They may learn what the defenders of gold as money knew all along, that fiat money is political money - an effective tool for the financial aspirations of political parties and administra tions. Fiat money serves as an im340 THE FREEMAN June portant implement, not only for such policies as "full employment"

and "economic growth," but also for massive redistribution of eco nomic wealth from creditors to debtors. Fiat money is the politi cal device ideally suited to achieve the transfer of income and wealth on a gigantic scale. Inflation that gradually erodes the capital substance of the mid dle class can be effective in the fog of political confusion and econom ic ignorance. In a few years of double-digit inflation, the savings bonds, pension funds, life insur ance policies and even corporate stock holdings which constitute the very substance of the middle class, are consumed by government or transferred into the possession of debtors. Massive deficits fi nanced by double-digit inflation thus sustain the redistributive so ciety that heretofore depended mainly on confiscatory taxation of its richer members. The proceeds of inflation as a tax on monetary assets accrue not only to the government that is actively inflating the currency but also to all other debtors, including· corporations and individuals. When the dollar depreciates, all creditors lose while all debtors gain, whether they are political organizations or corporations. Economic property is redistributed universally from a large class of victims, commonly the middle class, to the political in stitutions and a new class of nou ve,aux riches, which is enjoying the fall-out effects of inflation. We need not emphasize here that such policies create new sources of eco nomic conflict and social strife.

Yearning for Stability The yearning of the people of America for "stable money" is a natural reaction to the painful ex perience of unprecedented insta bility. The task of philosophers, jurists, historians, and economists is to explain the alternative to the fiat system, to teach the virtues and advantages of· natural money which is also honest money. If peo ple who work and trade are free to choose between political fiat and gold or silver, they naturally turn to the precious metals. They choose the gold standard as a monetary system in which gold is proper money and all paper .moneys are merely substitutes that are pay able in gold. This makes the U.S. dollar a piece of gold of a certain weight and fineness. But it is a popular mistake that is shared by many historians and economists alike that the gold standard affords monetary stabil ity and that gold coins are en dowed with unchanging purchas ing power. In a changing world of human action, no money can be neutral or stable. Even a 100 per 1975 FREE MONEY IS SOUND MONEY 341 cent hard-money gold standard, in which the currency of each coun try would consist exclusively of gold, cannot afford stability of purchasing power to its gold coins.

Jlist as the price of an economic good is ultimately determined by the subjective valuation of buyers and sellers, so is the purchasing power of money. Individual valua tion of money is subject to the same considerations of demand and supply as that of all other goods and services. People expend labor or forgo the enjoyment of other economic goods in order to acquire money. At times they bid for money, at other times they of fer money, and all this bidding and offering ultimately determines the purchasing power of money in the same way as it determines the mutual exchange ratios of other goods. All plans to make money stable are contradictory to human nature and dangerous to individual free dom, as they would call on govern ment to enforce the impossible. The yearning for "stable money," therefore, is forever futile unless it means· to want honest money that is free from the political processes of public treasuries and central banks. The best we can hope for is monetary freedom that embodies the freedom of contract and choice of money. In freedom, the American people once again could express their preference for gold and silver coins over depreci ating political fiat.

A Crucial Choice Our choice of a monetary sys tem is of crucial importance. Do we want a system in which govern ment creates and manages money through the political process? Or do we prefer to leave that choice to acting people who are exchang ing goods and services on the mar ket? If we rely on government we must be prepared to live with gov ernment fiat, which is ideally suit ed to serve political ends. Fiat money can be expanded or con tracted at will, always accommo dating the national policy of the moment. Above all, it can be in flated at will to supplement gov ernment revenue. On the other hand, if buyers and sellers are free to make the selec tion they may choose a great vari ety of marketable goods as their media of exchange. In the past, in a selective process extending over several thousand years, they chose the precious metals, gold and sil vel", as their money. Are they no longer to be trusted with such freedom of choice?

Government need not establish the gold standard by any conscious or deliberate act. In fact, the gold standard needs neither rules nor regulations, no legislation or gov342 THE FREEMAN June ernment control, merely the indi vidual freedom to own gold. Of course, this freedom of gold owner ship embodies the freedom not only to buy and sell gold for use in industrial production, but also to employ it in exchange. The gold-coin standard means sound money. It is true, it cannot achieve the unattainable ideal of an absolutely stable currency. But it protects the monetary system from the influence of governments. The quantity of gold in existence is utterly independent of the wish es and manipulations of govern ment officials and politicians, par ties and pressure groups. There are no arbitrary "rules of the game," which people must learn to observe. The gold standard is a social institution that is controlled by inexorable economic law.

Ful/y Redeemable The issuers of money substi tutes keep their currencies at par with gold through unconditional redemption. The issuing bank can buy any amount of gold offered to it at the parity rate, and agrees to sell indiscriminately and on de mand any amount of gold against its notes or deposits. It thereby renders no national service in the sense of "defending" or "protect ing" its currency. It merely ful fills the contract it made when it issued the money substitutes. Under the gold-coin standard, in flationary policies are not rendered impossible, but they are made dif ficult. Redemption requirements and the threat of drains of their gold reserves would restrain the issuers of money substitutes from inflationary expansion. For any such expansion would alarm the owners of substitutes and cause them to demand redemption in gold coin, which would spell ruin to the issuer. As the gold standard makes inflationary policies diffi cult, it avoids the wide fluctuations of economic activity, known as the business cycle. This binds the is suers of money substitutes within very narrow limits, and thus ef ficiently checks the sort of credit expansion that creates great in stability and generates the eco nomic boom and bust cycle. 1 Professor William Graham Sum ner, the great Yale economist of the pre-Federal Reserve era, de scribed the instability of irre deemable paper currency as fol lows: "Scheme after scheme has been proposed and tried for realiz ing the gain which it was believed that cheap money could produce for the public; that is, for those who buy and use currency. This gain has been pursued as the al chemists pursued the philosopher's stone, by trial and failure. Whether 1 Ludwig von Mises, Human Action, Yale University Press, 1949, p. 535et seq.

1975 FREE MONEY IS SOUND MONEY 343 there-be any such gain or not, our attempts to win it have all failed, and they have cost us, in each gen eration, more than a purely specie currency would have cost, if each generation had had to buy it anew. . . . The revulsions to which the system was subject overwhelmed us in every decade. The notions on which the system was based are proved to have been delusion, dis astrous to everybody concerned, in cluding those who tried to profit by them."2 A World Market The international gold standard evolved without intergovernmental treaties and institutions. Noone had to make the gold standard work as an international system. When the leading nations of the world had adopted gold as their currency, the world had an inter national money. It is true, the coins boreditferent names and had different weights. But this hardly mattered as long as they consisted of gold and could be exchanged freely. After all, an ounce of gold is an ounce of gold whether it con sists of eagles or sovereigns.

The gold standard united the world as it overcame the problem of international payments. It fa cilitated international trade and 2 William Graham Sumner, History of Banking in the U.S., New York: The Journal of Commerce and Commercial Bulletin, 1896, p. 472. finance, and thereby promoted a worldwide division of labor. Coun tries specialized in producing those internationally traded commodi ties which afforded them the greatest comparative advantage. But above all, the gold standard encouraged exportation of capital from the industrial countries to the backward areas. Without fear of devaluation losses or transfer restrictions, European capital ea gerly sought profitable employ ment opportunities on all conti nents. It developed commerce and industry and thus improved work ing and living conditions all over the globe. The history of the gold standard heralds the principles and achieve ments of free and honest money.

The history of fiat money is little more than a register of monetary follies and inflations. Current af fairs afford but another' entry in this dismal register . We may hope for an early return of monetary freedom and sound money, but realization is hidden in the dark clouds of the future. Sound money is the most prominent concomitant of economic freedom and moral ity; fiat money is an inevitable symptom of their absence. The duty of each of us is to un derstand and explain as best he can the principles of economic freedom and honest money. Our future depends on it. ~ RALPH BRADFORD The Pursuitof Excellence THE PHRASE has a fine, challenging ring to it - the pursuit of excel lence. Nearly everybody responds to the dare of it. To excel, to ex ceed, to outdistance, to be master of a situation, or of a technique, or of a medium - this urge has been a great stimulus to growth and achievement, and men have re sponded to it as far back as we have any record of their emotions and motivations.