Age of Inflation; G. Koether

That is the main lesson to be learned from Sennholz's latest book, Age of Inflation. This book deals with fundamen tals: what is money, how was it created, what determines its value, how does it operate in an economy, what happens when money is u man aged" by government, what alternaGeorge Koether Is a businessman, economist, au thor, journalist, lecturer, consultant, and longtime advocate of free market principles and practices. tives are there for present monetary mismanagement? With an engaging mixture of logic and history thoroughly grounded on the rock of Austrian monetary theory and his own personal experience with infla tion in Germany-Sennholz serves up a feast of good reading upon the economic problem that has become the curse of the world. Each chapter can be enjoyed separately on its own. This is a book one can pick up, lay down and come back to many times-all with profit.

In the tangled labyrinth of economic myth no truth seems harder to find than the truth about money. Happily, Sennholz knows his way well as he thoroughly ex poses the major monetary myths: that money was created by the State, that a growing economy re quires a growing money Usupply," that unemployment can be cured by sufficient doses of inflation and that 53 54 THE FREEMAN January business cycles are an inevitable characteristic of a free market. Especially timely are his treatment of the Chicago School ((monetarists" and his strictures on the Federal Reserve System. Monetary Policy He challenges the Chicago School's Nobel-prize winner, Milton Friedman, with a frontal attack on Friedman's monetary theory. Senn holz generously credits Friedman and the ((monetarists" for the ((analytical depth, scientific preci sion and overwhelming empirical evidence" with which they ((re emphasized the importance of monetary policy." He applauds their ((levelling devastating criticisms at official monetary managers for hav ing generated feverish booms and disastrous recessions."

But Sennholz scorns Friedman's recommendation for a slow but steady, planned and controlled in crease in currency and bank depos its of three to five per cent per year. This lessened rate of inflation, Senn holz points out, still has deleteri ous effects upon the economy lead ing to recurring depressions. His summary coup de grace for Chicago School monetary theory is brief and to the point: ((It is built on the quick sand of macroeconomic analysis, it misinterprets the business cycles and therefore is bound to fail as a policy guide for economic stability; and it is inherently inflationary be cause it makes government the guardian of our money .... After all, it puts government in charge of economic stability and then pre scribes monetary policies that will continue to generate business cy cles." Age of Inflation by Hans F. Sennholz. Published by Western Islands, Belmont, Massachusetts 02178, 1979.

214 pages, $8.95 cloth. The book also is available from The Foundation for Econom ic Education, Irvington-on Hudson, New York 10533. In a short discussion of Keynes, Samuelson, Hansen, Lerner and other ((fine-tuners" of the economy who seem to think they can H man age" the destinies of 200 million Americans with push buttons from Washington, Sennholz points out the inherent conflict between their ((macroeconomic" point of view with its Phillips Curves, its compu ter models, its equations and projec tions-and the ((microeconomic" principles of Austrian economics that begin with the action of individuals-action no person can predict or measure. Sennholz's castigation of the Fed eral Reserve System is unreserved and devastating. He calls it ((the most important tool in the armory of economic interventionism." Oper1980 AGE OF INFLATION 55 ated ((with all the planners' usual assumption of benevolent omni science .... It provides the govern ment with the money the planners think they should have, beyond the amount they dare take directly in taxes" and Hit does all this by wreck ing the purchasing power of the dol lar . . . through a process exactly on a par with the coin-clipping of an cient kings-but much more diabol ical because so much less visible."

Citing Emergency Banking Regu lation No.1 which, he says, empow ers the instant seizure of most bank deposits ((in the event of an attack on the United States" and Hprohibits the transfer of credit sought for any unauthorized purpose," Sennholz describes the government's monopo ly over money via the Treasury and the Federal Reserve as a ((ready instrument of tyranny." He recom~ mends that the Federal Reserve System be inactivated or abolished. His other recommendations to bring the United States out of the Age of Inflation are: 1. the Federal Budget must be balanced now, next year and every year thereafter 2. Federal Reserve money now in circulation must stay in circulation and be made fully redeemable in gold 3. legal tender laws should be re pealed 4. private coinage should be al lowed 5. business taxes must be lowered considerably, and 6. the numerous legal im munities and privileges of labor unions must be abolished.

The labor union privileges, of course, must be removed in order to restore freedom and flexibility to the labor market. HIt is true," says Sennholz, ((that labor unions do· not directly increase the quantity of money and credit and thus cause the depreciation." But their policy of using their power and privileges to force wage rates above what a free market would make economically possible continually creates un employment. So labor leaders ((be come advocates of all schemes for easy money and credit that promise to alleviate unemployment." In other words, labor's political power has given it money power and now its money power enlarges and enhances its political power. (Labor is not only pushing for inflation, it is now pushing for nationalization of the nation's petroleum industry.) ((Gold is Money," as Sennholz wrote in the book of that title, so, naturally, his restoration of a sound money requires the use of gold. In this he agrees with his mentor Mises. But he differs from Mises in the methodology of his reform.

Mises had prescribed a currency re form requiring a government agency established specifically for this task.

56 THE FREEMAN January «This proposal," says Sennholz, uassumed a state of economic and political enlightenment that sur passes by far the present state of economic and political thought." Thus, reasons Sennholz, we may have to find our way back to mone tary soundness via rrwnetary freedom which will give the new gold stan dard ((birth and meaning through inexorable economic law." So sound money should be restored without the uaid" of government-aid which, as he has shown, has always been disastrous, not beneficent. uThat is why we seek no reform,no restora tion law, no conversion or parity, no government cooperation, merely freedom." In that freedom Sennholz envi sions the development of «parallel" monies: Government's paper money, and gold money, operating through free gold markets, free private coin age, enforceable gold contracts and a market-established (not govern ment-established) exchange ratio between gold money and the gov ernment's legal tender paper. Peo ple would be free to use whichever money they preferred. Hopefully, some day, an enlightened (or chas tened?) government might see the wisdom of making its money fully convertible into gold.

This proposal opens a Pandora's box for supporters or critics who will present a myriad of arguments on ((why it will" or uwill not" work. A private «parallel" money implies an unregulated, private-enterprise banking system. That idea will be anathema to those who cannot be weaned from the fallacy that money is a creature of the State and must be controlled by the· State. A Market Money Yet the existence of today's ((un derground" or ((other" economy which has developed as a sort of shun pike around the heavily-taxed toll road of our overregulated enterprise, suggests the very real possibility for an ((other" money as well as an ((other" economy. After all, even the man on the street is beginning to see that the only real money is that cho sen by the market -i. e., gold or silver. And if the government, in order to fi nance deficit after deficit, keeps on printing more and more paper and calling it (legal tender" money, that paper will some day become as worthless as did the Continental cur rency and the German mark.

This raises the intriguing image of Gresham's Law being turned up side down: good money driving out bad money instead of the reverse. Gresham's Law-((bad money drives out good money"-only applies when government controls the price of both parallel monies, i. e., their ratio of exchange. Under freedom of choice in the market place, competi tion among traders will displace bad money with good money-just as 1980 AGE OF INFLATION 57 competition displaces poor products and services with better products and services. Professor Sennholz does not say what might happen if the govern ment forced its paper on the public in payment for public debts while requiring, at the same time, that taxes must be paid in gold (or gold redeemable certificates). That stratagem, resorted to by the Byzan tine Emperor Alexius Comenus (AD 1081-1118) led to the decline and fall of the Byzantine Empire. In any case, no solution of our monetary crisis is possible without a total reformation of our political, social and economic understanding.

Says Sennholz: HDepending on the resistance offered by popular igno rance and prejudice, by government greed and lust for power, it may take us many years" to restore a sound money system in our country. He emphasizes that government's pro pensity to inflate the currency can only end if pressure group voters stop asking government for favors at the expense of all other taxpayers. And he ends his book with a fervent call for renunciation of government subsidies, tariffs, favors and other gifts by all of us, and a return to self-reliance and a renewed dedica tion to the cCgiant educational task" before us. Ii The Sennholz Creed of Public Morality No matter how the transfer state may victimize me, I shall seek no transfer payments, nor accept any. I shall seek no government grants, loans, or other redistributive favors, nor accept any. I shall seek no government orders on behalf of redistribution, nor accept any.

I shall seek no employment in the government apparatus of redistribution, nor accept any. I shall seek no favors from the regulatory agencies of government, nor accept any. I shall seek no protection from tariff barriers or any other institutional restrictions on trade and commerce. I shall seek no services from, nor lend support to, institutions that are creatures of redistribution. I shall seek no support from, nor give support to, associations that advocate or practice coercion and restraint.