Gold is Honest Money; H. Sennholz

HANS F. SENNHOLZ st Money WITH THE APPLAUSE of most Americans, President Ford de clared inflation to be Public En emy Number One. At the present rate of inflation our real incomes will be significantly reduced in this decade, retirement incomes will erode substantially, savings will vanish, fortunes melt away, and the economy stammer and falter in a violent fever of hyperinfla tion. In fact, the present rates of inflation carry with them the most ominous implications for demo cratic institutions and peaceful social cooperation. But this public condemnation of inflation sounds like a public con fession of sins in church on SunDr. Sennholz heads the Department of Eco nomics at Grove City College and is a noted wri ter and lecturer on monetary and economic affairs. This article is published by permission from an address before a November 1974 meeting of the Committee for Monetary Research and Ed ucation.

88 day morning. The preacher in tones the confession, the congre gation accompanies him in loud voices, and then returns home to sin again. The President de nounces inflation on Monday and signs another multi-billion-dollar appropriation bill on Tuesday. Pol iticians who are the noisiest infla tion fighters on Wednesday submit more costly bills for economic wel fare and distribution on Thurs day. The news commentators pub licly enlist in the war on inflation on Friday and bravely endorse an other costly program for political improvement on Saturday. The following week the ritual is chant ed all over again. The federal government is now declaring war on the inflation it initiated and promoted and which it continues to press forward with ever greater force. The same poli ticians who now sound like mili1975 GOLD IS HONEST MONEY 89 tant inflation fighters pushed hard in the past for every dollar of deficit spending. In just ten years, from fiscal year 1965 to 1975, the federal government boosted its spending from $118.4 billion to an estimated $304 billion. Expendi tures on "human resources," i.e., income redistribution, alone rose from $35.4 billion to an estimated $151.5 billion. (Education and manpower from $2.3 billion to $11.5 billion; health care from $1.7 billion to $26.5 billion; in come security, i.e., retirement and disability, unemployment insur ance, public assistance, social serv ices, from $25.7 billion to $100.1 billion; veterans benefits and serv ices from $5.7 billion to $13.6 bil lion.) 1 Such a rapid growth of govern ment, however achieved, would have strained the American econ omy as economic resources were withdrawn from business and in dividual taxpayers. But this proc ess of redistribution was carried out through the most insidious of all possible methods: deficit spend ing and money creation. In those ten years the total federal govern ment deficit amounted to an esti mated $113.5 billion - since 1970 alone to $77.5 billion. 2 Simulta neously, the quantity of Federal 1 Cf. The Budget of the United States Government, Fiscal Year 1975, p. 52.

2 Ibid., p. 331. Reserve credit was inflated from $39.9 billion on January 1, 1965 to $90.8 billion at the present. The total money stock, consisting of demand deposits in commercial banks and 'currency in circulation, rose from $160 billion to $282 billion. The Costs of Inflation This has been the worst moneti zation of Federal debt since World War II. In fact, the 1960's and 1970's have been the longest pe riod of deficit spending and cur rency inflation since the Conti nental Dollar debacle during the American Revolution. And the end is nowhere in sight. If the Fed eral deficit spending merely were to exact economic resources in the amount of the deficit, let us say $20 billion, the economic loss to money holders would be very small indeed, only $20 billion. But the given deficit and its monetization causes goods prices to rise and the purchasing power of the monetary unit to fall, which alters the cred itor-debtor relationship of nearly $3 trillion of long-term debt. If the dollar should fall at the mod est rate of 10 per cent, the credit ors will lose $300 billion and debt ors will gain this very amount. At a more realistic depreciation rate of 15 per cent, American credit ors are losing $450 billion annu ally, which is reaped by the debt90 THE FREEMAN February ors. As the U.S. government is the largest single debtor with an esti mated 1975 debt of $508 billion, it is gaining $76.2 billion annually through debt depreciation. But many millions of American cred itors are losing a total of $450 bil lion. This is why inflation is not only a Federal tax on money hold ers but also a terrible instrument for the redistribution of wealth and income. In fact, the magni tude of this redistribution through Federal inflation, in addition to that through social policy, prob ably exceeds one-half of American disposable income, and as such is the most massive juggling of eco nomic well-being in the history of man.

A free society that willfully em barks upon such a road is suffer ing a terminal case of redistribu tion cancer. It is bound to suffer ever more symptoms of social con flict, ,poverty and tyranny. A dem ocratic society that has thus been led astray by its political leaders may not expect to get off the in flation road until it elects to re turn to integrity and honesty. Fu ture national elections will reveal whether the American people chose self-destruction willfully or were just misguided temporarily. To stabilize the U.S. dollar, the U.S. government must be made to relinquish its monopolistic power over money and banking. As inflation is a Federal policy, the fol lowing restrictions on government are needed if inflation is to be halted: 1. The Federal budget must be balanced each year. 2. The engine of inflation, the Federal Reserve System, must be inactivated, or better yet, abolished.

3. The Federal Reserve money now in circulation must be made fully redeemable in gold. Balance the Budget Balancing the Federal budget does not necessarily spell the end of economic and social policy by the federal government. But it would mean open redistribution from taxpayers to beneficiaries. Every new expenditure would have to be met with new tax revenue. Both the U.S. Congress and the Administration would have to re gain the lost virtues of fiscal dis cipline and honesty. They would have to cut programs and alloca tions now in order to avoid large deficits next year. A balanced budget would great ly reduce the pressures for debt monetization and currency infla tion. But it would not guarantee dollar stabilization. The Federal Reserve System as it is now con stituted has independent powers of currency inflation and credit expansion. These powers must be 1975 GOLD IS HONEST MONEY 91 revoked either through inactivat ing the System or abolishing it altogether. Only when the engine of inflation is thus stilled can monetary stability be assured.

Inactivate federal Reserve Under the' influence of the "new economics," which the Full Em ployment Act of 1946 elevated to a government mandate, the Federal Reserve System is conducting monetary policies of full employ ment and economic growth. In pe riods of recession it is expected to stimulate the economy with injec tions of easy money and credit until satisfactory levels of em ployment are restored. In periods of inflation the System is expected to stabilize the situation through credit stringency or even contrac tion. In short, its very raison d' etre is the manipulation of the American economy according to the recipes of the new economics. Experience alone would dictate an. immediate inactivization of this central command post over the economic lives of the Ameri can people. In the sixty years of its existence the Federal Reserve System has presided over unpre cedented economic instability over two depressions of which one was the longest and most severe in American history, over seven booms and recessions, and an in flation that reduced· the American dollar to less than one-fifth of its pre-Federal-Reserve value. This is indeed a long record of money mis management.

Even if the System had been managed by the greatest financial minds of the century its very premise of central management of money and credit is alien to eco nomic freedom and contrary to stability. The very existence of a money monopoly that endows its fiat issues with legal tender force is antithetic to individual choice and freedom. And by its very na ture as a central bank, it must .seek to place its currency in the loan markets, or withdraw it, in order to manage and manipulate those markets. Since neither the expansion nor the contraction of fiat money imparts any social util ity, we mllst conclude that Federal Reserve policies necessarily are disruptive to monetary stability. In particular, its frequent bursts of currency expansion, so popular with government officials, politi cians and their beneficiaries, have given our age the characteristics of unprecedented monetary insta bility.

Notes Remain in Circulation To inactivate the engine of in flation does not mean withdrawal of all its money and credit. For lack of other money, Federal Re serve notes now in the people's 92 THE FREEMAN February cashholdings and member bank re serves -now held by the System, should remain in circulation. After all, deflation, Le., reduction of the money stock, would necessitate corresponding price and wage re ductions, for which neither busi ness nor labor are prepared. When man is free he chooses natural money that is free from all strictures of government and politics. Gold is world money that unites all countries in one mone tary system and facilitates peace ful exchange and division of labor. For more than two thousand years its natural qualities made it man's universal medium of exchange. In contrast to political money, it is honest money that survived the ages and will Iive on long after the political fiats of today have gone the way of all paper.

Redem.ption of the U.S. dollar in gold would be a simple under taking that needs no central bank, no Federal plan or policy, merely payments in gold. At a given mar ket exchange ratio between the paper and gold, the federal gov ernment merely resumes payment of the gold it forcibly seized from the American people in 1933 for the paper it issued since then. People thus would be free again to choose between the paper notes, the quantity of which is rigidly limited, and the gold now hoarded in Fort Knox. Every ounce of gold that is withdrawn would reduce the quantity of paper, which would become a mere substitute for gold, the money proper. Thus, once again, the people of the United States would have hard and hon est money, the golden cornerstone of a truly great society. Political Y5. Natural Money The gold standard functions with the force and inevitability of natural law, for it is the money of freedom and honesty. Society may temporarily depart from it in the vain hope of replacing it with political money that is managed and manipulated for political ends - used and abused as an instru ment of public plunder. So the people must choose between polit ical money, of which they may try another issue or series, and nat ural money. In the end, a society that prefers social peace over con flict, indi vid ual freedom over gov ernment coercion, wealth over pov erty, has no alternative but to use honest money, which is gold.

Returning to the gold standard, it is true, would precipitate a seri ous economic readj ustment, com monly called a recession. But this is not the fault of gold. The polit ical paper leaves behind a vast array of maladjustments and mal· investments that need to be cor· rected. In fact, they would be corrected in any case, sooner or 1975 GOLD IS HONEST MONEY 93 later, when the creation of paper comes to an end. The economic recession need not be long and severe, provided the federal government does not stand in the way of the necessary readjustment. After so many years of false stimulation through easy money and credit, many mistakes need to be corrected; some proj ects should be abandoned and others initiated. The whole econ omy needs to readj ust to the wishes and commands of the mil lions of sovereign consumers of a free economy. Reduce the Obstruction It is important that the federal government does not intentionally or inadvertently obstruct the re~ turn to hard money. When the re adjustment recession sets in, the federal government must not be allowed to resume deficit spend ing. Like anyone else, it must re duce its spending when its rev enue declines. In particular, it must not be allowed to impose new tax burdens at this critical mo ment of recession and readj ust mente It must not repeat the su preme folly of the Hoover Admin istration which, in 1932, doubled income taxation. Also, the federal government must not be permitted to operate with deficits that are financed with the people's savings.

The U.S. Treasury· entering the loan market at that critical mo ment of painful readj ustment would deprive business of urgent ly needed funds and greatly raise business costs through soaring in terest rates, which again would aggravate the recession and gen erate more unemployment. And what would be blamed for the dilemma? The fiat inflation that caused the maladjustments, the deficit spending that is aggravat ing it, or the gold standard? The deficit spenders would doubtless try to lay the blame on the door steps of gold. An administration that wel comes monetary stability would balance its budget even though its revenue declines. It would avoid placing new burdens on business during the readjustment period. It might even strive to lighten the tax load in order to hasten the recovery. But such a reduction of tax costs must not be negated by new deficits that burden the capi tal markets and raise interest costs. To reduce the costs of gov ernment and facilitate speedy re covery means to reduce govern ment consumption of economic re sources, not merely a change of finance techniques from taxation to borrowing.

Relaxation of Controls A significant reduction of Fed eral spending not only would save 94 THE FREEMAN February funds and resources but would also enhance productive employment. For currency stability, it does not matter which particular expendi tures are reduced as long as the budget is balanced. Of course, it would be beneficial to productivity and quick adjustment if Federal controls were substantially re duced and bureaucratic regulation relaxed or abolished. Many indus tries can be revived through all kinds of deregulation. With dis tressing monotony, Federal regu lation has produced sick and ane mic industries. The ICC's strangu lation of the American transpor tation industry, for instance, has done incalculable harm that ex ceeds by far the budget expendi tures of the controllers. The boost to productivity from a liberation of business energy could not come at a better time.

An administration that wel comes monetary stability would want to facilitate a speedy readDouble Punishment justment through significant cuts of business taxes. A rollback of corporate income taxes, for in stance, would make corporations more profitable, which would boost capital investments, create new jobs, raise output and wage rates, and otherwise smooth the read justment process. The time clearly has come for a public commitment to the preser vation of the U.S. dollar. The ulti mate destination of the present road of political fiat is hyperin flation with all its ominous eco nomic, social and political conse quences. On this road no Federal plan or program, incomes policy, control or .nationalization, no threat, fine, or prison can prevent the continuous erosion and ulti mate destruction of the U.S. dol lar. The only alternative is to abandon this road of political fiat and return on the proven path of our forebears to honest money, which is gold. I) IDEAS ON LIBERTY THE WELFARE STATE is one that robs Peter to pay Paul, and its success lies in the fact that Paul is fully aware and grateful for the benefit received while Peter is bewildered over the identity of the robber. He is apt to blame the tradesman over whose counter he pays his shrunken dollars, and thus private enterprise is doubly punished.

E. C. RIEGEL FoundingFathers CHARLES R. LADow As GLADSTONE SAID, "The Amer ican Constitution is the most won derful work ever struck off at a given time by the brain and pur pose of man." It certainly is a dis tillation of the best of political thought, from Aristotle down to that remarkable collection of hard won traditions which make up the British Constitution. Both Con stitutions possessed the inevitable fault that they were unable to guarantee the persistence of the breed of thinking which produced them. I cannot recall who said: "Marriage is a well-nigh perfect institution; but very few are fitted to practice it." This obser vation applies equally to our Con stitution. Madison and his peers must certainly groan in their graves, if they could but know what their successors have done to the institutions they fDunded. Mr. LaDow, of San Diego, recently retired as a teacher of social studies in high school.