Another Anti-Inflation Circus; H. Sennholz

So, if public finance is both unfair and infeasible, what are the public policy implications? Expansion of the government's role must be ruled out. Replacement of public by private enterprise seems warranted. The specific means for achieving the privatization of public enter prise must follow in the wake of a more widely spread recognition that such a step would be beneficial. The future viability of our economic sys tem may well depend upon the speed with which such recognition takes place. , AnQther Anti-I n fliltiQn ~ireus Hans F. Sennholz EVERY u.s. President from the time of Franklin D. Roosevelt has been an ttinflation fighter." Some de nounced inflation as ttpublic enemy number one," others even declared war on inflation. And yet, since the first declara·· tion of war by FDR, the American dollar has lost 80 per cent of its purchasing power and is losing more Dr. Sennholz heads the Department of Economics at Grove City College and is a noted writer and lecturelJ' on monetary and economic affairs. This article i!1 reprinted by permission from Private PracticE~ magazine.

every day. Inflation is winning all the battles. For almost 50 years of the anti inflation war the U.S. government has pointed at several culpable par ties. American business, especially big business, has taken the brunt of the blame. One President even used four-letter words to describe the greed of businessmen who raise prices. Some have taken potshots at physicians, attorneys, and other pro fessionals, or pointed at labor unions. All presidents like to flail at speculators who hedge against the 140 THE FREEMAN March U.S. dollar by buying gold and har der currencies. And all have damned foreign governments for ruining the dollar. Recent proposals in the battle against inflation call for restric tions on the production and con sumption of energy and programs to spur U.S. exports, limit imports, sell additional amounts of gold, and en courage West Germany and Japan to buy more from the U.S.

If it were not for the ominous effects of inflation on our lives and our society, the anti-inflation war would be a proper subject for the circus. The clown pompously an nounces he will demonstrate his skill, but 10 and behold, always ac complishes the very opposite. The President formally announces another anti-inflation program, but 10 and behold, the inflation gets worse. The clown's method of fun is de liberate. He labors to violate a sim ple natural law. For instance, he seeks to defy the law of gravity by valiantly supporting an object that wants to fall down. He generates laughter, because young children know the futility of his efforts. For economists familiar with economic laws, the Presidential anti-inflation programs are equally hilarious because they aim to vio late inexorable economic laws. Like the Danish King Canute who or dered the rising tide to come no further, the President of the United States is commanding economic laws to yield.

For example, all governmental ef forts to restrict imports and promote exports tend to reduce the supply of available goods. Every freshman economist who is familiar with the law of supply and demand, knows that this policy must raise goods prices and thus depreciate the cur rency. The administration proposes a Congressional energy package to reduce the importation of foreign oil and gas ttin order to bolster the dol lar." But such a reduction will cause energy prices to rise and the U.S. dollar to depreciate. The world seems to know this, as it continues to dump U.S. dollars on the world money markets. Every time the President speaks of energy and his programs, the dollar falls to a new low. Like the Danish King Canute who ordered the rising tide to come no further, the Presi dent of the United States is commanding economic laws to yield. The U.S. government is selling gold to strengthen the dollar. It of fers foreign bankers and govern ments the opportunity to exchange dollars for gold, which strengthens the international role of gold and 1979 ANOTHER ANTI-INFLATION CIRCUS 141 weakens that of the dollar. The dol lar price of gold may temporarily fall one dollar or two, but the worldwide distribution of gold tends to bolster its importance.

The President lashes out at individuals-especially at foreign ers or those Americans who are not expected to vote for his re election-for causing the inflation through greed. He becomes a judge, and draws applause from those al ways ready to think evil of their fellowmen. An economist watching this is reminded of the scriptural question, ((Why beholdest thou the mote that is in thy brother's eye but considerest not the beam that is in thy own eye?" He may also re·· member the circus scene in which a clown turns on the water sprinkler, thoroughly soaking another clown, and then, with great indignation, assails him for being so wet. Economists frequently wonder about the mentality of politicians. Does the President really believe that God invested him or his admin istration with special powers? Does popular acclaim and high office mis lead him to believe in such powers? Or is he aware of his limitations, but merely acting the role of an omnipo tent leader because the people would like him to be omnipotent? Is the economic ignorance really his own or merely a reflection of the igno rance of the electorate? Does a legis lator actually believe that he and his colleagues, in Congress assem bled and by majority vote, can ne gate economic law? For that matter, did King Canute's entourage, which shouted the King's order in unison, really believe that the rising tide would come no further?

Does a legislator actually be lieve that he and his col leagues, in Congress assem bled and by majority vote, can negate economic law? Ours is an age of inflation because most people believe in the desirabil ity of more money and credit, which is the very essence of inflation. Motivated by this belief, they be stowed the monopolistic right to issue money on their government and urged it to be free and easy with the issue. Governments greatly enjoy the use of this power because it affords an important source of reve nue. Weak administrations, espe cially, readily yield to the tempta tion and create massive quantities of money in order to finance their spending programs. Billion dollar expenditures may generate millions of votes. Issuing new money inescapably produces undesirable effects. Prices rise as recipients of the new money buy more goods and services. Each unit of money depreciates as more units are emitted. People on fixed 142 THE FREEMAN incomes and savers see their pur chasing power reduced, so they com plain about the inflation. The government that is busily emitting massive quantities of new money rushes to the rescue: ((By order of the President, the Congress, the courts and the police, all prices stop!" The order is given to millions of individ uals exchanging goods and services in countless voluntary transactions.

As long as the order agrees with the value judgments of the trading parties, they will continue to ex change as before. But if the order should differ from their judgments, they will react. The seller who is ordered to exchange at a stop price that is lower than his own value judgment, ceases to exchange. In his judgment he would suffer a loss which he can avoid through inac tion. The physician whose fee is offi cially fixed below the rate that causes him to render his service, Inflation Produces Chaos will reduce his efforts. Thus, short ages inevitably result wherever government fixes prices below those people would set in free exchanges. At first, the U.S. government re sorts to inflation in order to cover its deficits. When rising prices sub sequeritly hurt millions of people and cause them to voice their frust rations, the very administration that indulges in the spending spree is quick to point its finger of blame at some innocent bystander. It may impose wage and price controls, which control people and cause their productive efforts to decline. Lower output in tum causes the value of goods and services to rise and that of money to fall.

The U.S. government alone is conducting the inflation and making it worse with Hanti-inflation pro grams." An administration that re ally disapproved of inflation would just stop inflating the currency. @ IDEAS ON UBERTY WHEN the government has the power of dipping into public funds for distribution to various groups under the welfare state theory of govern ment, the pressure put upon it· by the people cannot be resisted. Inevitably, it spends more than its income and not only taxes the people to the point of strangling business but creates enormous deficits in addition. Inflation then produces the chaos which makes necessary the suspension of free government and the institution of dictatorship. HOWARD E. KERSHNER W)rld inthB gIfI?Qfan rde~ Clarence B. Carson 27 The Cold War: ForeignAid THE UNITEDSTATES became the cen ter from which the idea that has the world in its grip, in its evolutionary socialist, gradualist, or democratic socialist formulations, was spread after World War II. The main device for spreading the collectivist prac tices associated with the idea was foreign aid. Foreign aid was ex tended by way of grants and loans from the United States government to governments of other lands around the world. It consisted In this series, Dr. Carson examines the connection between Ideology and the revolutions of our time and traces the Impact on several malor countrlel5 and the spread of the Ideas and practices around the world.