Book Reviews

BOOKS The Central Banks by Marjorie Deane and Robert Pringle Viking Penguin. 1995 • 369 pages. $29.95 Reviewed by Douglas E. French B elieving that America's central bank, the Fed eral Reserve, has almighty power over interest rates and, in turn, the wellbeing of the country's economy, the financial press constantly focuses its attention on the actions of the Fed. "Fed watching" has become a thriving industry, with insiders like former Fed Governor Wayne Angell commanding $100 per minute for his take on what the Fed will do with interest rates. In The Central Banks, authors Marjorie Deane and Robert Pringle examine whether these central bankers deserve such reverence and whether the institutions are able to accomplish their much touted goal of "price stability." For those readers who don't know how miser able central banks have been at stabilizing prices, none other than ex-Fed Chairman Paul Volcker breaks the news on the first page of the book's foreword: "It is a sobering fact that the prominence of central banks in this century has coincided with a general tendency towards more inflation, not less. [I]f the overriding objective is price stability, we did better with the nineteenth-century gold standard and passive central banks, with currency boards, or even with 'free banking.' The truly unique power of a central bank, after all, is the power to create money, and ultimately the power to create is the power to destroy."

Deane and Pringle take the reader on a central bank history tour, beginning with Sweden's Riks bank, born in 1668. The next stop is the Bank of England, which although not the oldest, is consid ered the "Old Lady" of central banks. They con tinue on to Germany's central banking misadven tures before returning home to the U.S. Congress's century-long quest for a supply of money that could be increased at will. The search culminated in the Federal Reserve Act, signed by Woodrow Wilson on December 23, 1913. After recounting the Bretton Woods era, which Deane and Pringle describe as the "golden age" of central banking, the authors race through the actual mechanics of central banking-monetary policy, supervision, lifeboat operations, and ex841 change rates. The authors also look at the world's newest central banks, in various small countries and parts of the former Soviet Union. Where do all these new central bankers learn their trade? "[L]arge scale training programs for central bankers are offered by a number of central banks, the IMF Institute in Washington, and a special training school, the Joint Vienna Institute."

And what personality types should apply? The authors quote American journalist William Neikirk: "Central bankers are a breed apart from the rest of humanity.... They are aloof, secretive, frugal, independent, public-spirited, responsible and judgmental." But no matter what the training, central bankers no longer control monetary mar kets; "the markets set the pace and it will be a scramble to keep two strides behind. And that may seem undignified. But scramble central banks should do." In their final chapters, the authors examine whether the world needs central banks at all. Unfortunately, Deane and Pringle devote only a page and a half to free banking, mentioning the work of Kevin Dowd and Kurt Schuler as well as Vera Smith's classic The Rationale of Central Banking. They then make the sweeping judgment that "even most theorists of free banking acknowl edge that given present markets and political reality, central banks are necessary, at least for any country that wants to follow an independent mon etary policy." Agreed, for any country that wants to print money for political ends, having a central bank makes the task easier. However, the authors do admit that "societies have managed without central banks in the past," and "several of the greatest economists have been either skeptics or outright opponents of central banking. These in clude Adam Smith, Walter Bagehot, Friedrich von Hayek and Milton Friedman." But Deane and Pringle think they know more than these scholars.

They conclude that the primary task of central banks is "price stability" and that because of the complexity of world markets, central banking "is no world for the amateur." But, with a quick glance at the book's appendix, the reader comes to a different conclusion: that the money business is not a place for government bureaucrats-amateur or professional. All that central banks offer are cur rencies that lose value-the best depreciate quickly (50 percent in 20 years for the German Bundes bank from 1971 to 1991), the worst lose their value virtually overnight. I'll take free banking and a gold standard outside government any time. 0 Mr. French is a vice president in commercial real estate lending for a bank in Las Vegas, Nevada.

842 THE FREEMAN • DECEMBER 1996 Hands Off: Why GovernmentIs a Menace to Economic Health by Susan Lee Simon & Schuster. 1996 • 252 pages. $23.00 Reviewed by Raymond J. Keating E conomist and author Susan Lee possesses a wonderful talent for making economics en joyable to read. She also lays claim to a rather healthy skepticism of government economic activ ism. These two gifts combine to make Hands Off: Why Government Is a Menace to Economic Health worth reading. Two points that Lee makes in the introduction set the tone for the entire book. First, she char acterizes economics as "a way of interpreting the effect of incentives on behavior." Then she explains why government cannot fix economic problems: "Government activism often results in regulatory gridlock, produces unintended consequences, and/or creates an environment of uncertainty ... at best, it can create a congenial climate for us to fix things. Once we get that through our heads and our hearts, economic life will be a lot more tolerable."

The remainder of Hands Off fleshes out these points through various means. Lee offers anecdotal accounts of businesses and individuals beaten up by misguided economic policies. For example, real faces and stories underscore the effects of the 1990 luxury tax and later efforts for a government takeover of the healthcare industry. The author wades into economic theory as well, though she leaves the reader wanting more in this particular area. Lee accurately identifies Keynesian economics as the source of our eco nomic woes in the late twentieth century and explains some of the many flaws of Keynesian thought. Indeed, the book excels when Lee ex plains the results of, as she calls it, "big, busy government" -such as inflation, high taxes, budget deficits, and regulation, and their commensurate woes. As for alternatives to Keynesian activism, Lee is generally friendly toward supply-side economics.

Indeed, she criticizes supply-siders for lacking "a coherent theory." Lee continues: "Nor was [sup ply-side] a new way of looking at the world. The importance of incentives in economic behavior was well-trod territory." There is some legitimacy to the idea that supply-side lacks a certain coherency, but as for the incentives aspect, Lee's book illustrates that incentive economics suffered neglect under the Keynesian yoke and needed some impetus for rebirth, which supply-side economics undeniably helped to provide. Lee favors rational expectations, or New Clas sical Economics. Cutting through the mathemati cal haze that normally engulfs rational expecta tions economics, Lee summarizes the central tenets of the rational expectations school: (1) the key principle in microeconomics-that markets work-is no less true for macroeconomics; and (2) that "[p]eople very quickly form expectations about the future that are accurate and are, as well, rapidly updated as new information becomes avail able." According to Lee, the bottom line for rational expectations is that "government could not 'manage' people's behavior in a predictable, con stant fashion."

In a few rare instances, Lee does falter. She needs some clarity on the issue of the welfare state and its ills. For example, while arguing against the evils of big government and high taxes throughout the book, she drops in the following sentence without explanation: "The redistribution of income was a great success, at least in terms of the data: there was a sharp reduction in poverty, from 22 percent of the population in the early 1960s to 12 percent in 1979." However, granting a few instances where the author's reasoning slips, Hands Off is generally sound and highly readable. Lee concludes by arguing that government limit itself to creating "a friendly economic environment for the private sector to be innovative, produce and employ peo ple." How? The model is familiar to all free-market students of the economy, including low marginal tax rates, less regulation, gold-based money, less government spending, and free trade. 0 Mr. Keating serves as chief economist for the Small Business Survival Foundation.

Free Enterprise Moves East: Doing Business from Prague to Vladivostok by Carter Henderson International Center for Economic Growth and ICS Press. 1996 • 288 pages. $24.95 Reviewed by Murray Sabrin T he genie is out of the bottle. From the heart of Central Europe to the easternmost regions of the former Soviet Union, the capitalist revolu tion has taken root-deeply in some areas, less so in others. According to Carter Henderson, former London bureau chief and front-page editor of the Wall Street Journal, "the triumph of capitalism" is transforming the lives of more than 400 million people. Consumption is in, while central planning, shortages, queues, and bureaucracy are on the way out. The remarkable progress in some of the former Soviet satellites is nothing short of breathtaking. "Capitalism is running wild ... several million private businesses have been launched ... and households . . . are getting their first taste of life in a consumer-driven culture." Foreign investment is pouring into Hungary, Poland, and the Czech Republic. The rule of law-one of the essential elements of a market economy-is being created to secure both property rights and contractual obligations. Price controls are being lifted, trade barriers are being dismantled, subsidies are being eliminated, privatization is proceeding at a rapid pace, and monetary inflation is being curtailed. In short, free enterprise is on a roll.

Nevertheless, the progress of the former Soviet "tigers" stands in sharp contrast to the slow pace of reform in Romania, Albania, and Bulgaria. Whether the three laggards can throw offthe legacy of Stalinism remains to be seen. But given the enormous progress in their neighbors' wellbeing in such a short period of time, it would be tragic for the peoples of these nations to suffer more than they already have because of the dilatory actions of their elected officials. After seven decades of a command economy, the people of the former Soviet Union are redis covering the essence of entrepreneurship. Al though some predict that "it will take a minimum of two generations-fifty yearsto bring Russia's economy to where America was in the 1950s," the recent re-election of Boris Yeltsin is a confirmation that the Russian people do not want a return to a command system. However, there are several major challenges ahead for republics newly formed from the re mains of the Soviet empire. The Communist Par ty's influence in the Parliament must be countered and organized crime drastically reduced in Russia and other countries in order for a peaceful market economy to flourish.

Carter Henderson has presented a clear and comprehensive overview of the spread of free enterprise throughout the former Soviet empire. For academics, business executives, and others who want to learn about the progress and oppor tunities in one of the world's greatest economic transformations, Free Enterprise Moves East would be a good place to start. Unfortunately, Henderson does not acknowl edge the insights of the Austrian school economists BOOKS 843 who predicted the demise of central planning as early as 1922, with the publication of Ludwig von Mises' Socialism. Had Socialism been the bible of the Russian Revolution instead of The Communist Manifesto, the peoples from Prague to Vladivostok would have avoided the pain of the past and the uncertainty of the future. Ideas matter, and Carter Henderson shows unequivocally that the greatest social experiment in the twentieth century was conducted using one of the most fallacious ideas known to the human race-statism. Hopefully, the gallant struggle to eliminate most-if not all-the remnants of stat ism will accelerate in the years ahead. 0 Dr. Sabrin is professor offinance at Ramapo College of New Jersey and author of Tax Free 2000: The Rebirth of American Liberty.

Austrian Economics for Investors Pickering and Chatto • 1996 • 48 pages, paperback. Contact FEE for price information. Economics of a Pure Gold Standard, revised 3rd edition by Mark Skousen Foundation for Economic Education. 1996 • 192 pages. $14.95 Reviewed by Robert Batemarco E arly in his marriage, Ludwig von Mises told his wife that despite writing prolifically about money he was never likely to earn a great deal of it. Mark Skousen makes the case in Austrian Economics for Investors (subtitled Ludwig von Mises Goes to Wall Street) that the ideas of Mises and his confreres do indeed have money-making potential. Showing the importance of subjective elements in forecasting, the impact of government policies on economic growth, the behavior of different types of industries over the course of the business cycle, and the role of gold as an inflation hedge are but a few ways Skousen sees Austrian insights as helping the reader put his capital to work.

While Austrian Economics for Investors touches upon the topic of gold, the role as money of the metal Keynes once dismissed as "a barbarous relic" is discussed thoroughly in Skousen's Economics of a Pure Gold Standard, just reissued by the Foun dation for Economic Education. It goes one better than showing the reader how 100 percent gold 844 THE FREEMAN • DECEMBER 1996 reserve banking might work, by showing how it actually did work in seventeenth-century Amster dam, Hamburg, and Venice. From there, it pro vides some unfamiliar details to the familiar story of how practices once considered criminal came to be venerable standards. Specifically, the author explains how money's fungibility (i.e., particular pieces of money not being specificallyidentifiable) led British courts to construe bank deposits as loans, culminating in the 1833 decision of Pitts v. Glegg, which conferred legal status and has not since been challenged to fractional reserve bank ing.

A thorough rendering of the views of hard money advocates, from the Founding Fathers through the Jacksonians, the British currency school, and Murray Rothbard, serves as prologue to a survey of the issues involved in a pure specie standard, including what the unit of account should be, whether to allow for private provision of coinage, and the role of banks under such a system. Free banking as an alternative to a pure gold standard is discussed here as well. Skousen also covers several perennial critiques of a 100 percent specie system including its purported costliness and violation of the sanctity of private contracts. In so doing, he shows the ease with which hard money proponents turn each of these arguments to the gold standard's advantage. In the first case, they show how the cost of labor and capital expended to mine additional gold is dwarfed by the inflation, business cycles, bank failures, and hidden tax burden incurred under any regime with less than 100 percent reserves. In the second, their arguments hinge on the prohibition of fraud being a defense of private contracts rather than their violation. To the extent that depositors are informed about the banks' use of their money, this case is less than airtight. A stronger argument, conspicuous by its absence, is that any money creation which reduces the reserve ratio is really an act of counterfeiting.

While the economics of the gold standard is clearly this book's long suit, it stands out from mainstream treatments of these issues by dealing forthrightly with some of the ethical and philo sophical issues of alternative monetary systems. Yet, the book ends with the sobering realization that the insights of the 100 percent gold standard advocates are necessary but not sufficient for breathing life into such a system. Or, as the author puts it, "the 100 percent specie standard, advan tageous as it may be portrayed, can be instituted only through drastic reforms and economic dis ruptions. It may have theoretical beauty, but it lacks pedestrian attributes." Lovers of liberty can only hope that Skousen is as wrong about the prospects of returning to sound money as he believed Mises to be about the money-making implications of Austrian economics. Dr. Batemarco, book review editor of The Freeman, is director ofanalytics at a marketing research firm in New York City and teaches economics at Marymount College in Tarrytown, New York.

The Privatization Process Edited by Terry L. Anderson and Peter J. Hill Rowman & Littlefield. 1996 • 274 pages. $62.65 cloth; $23.95 paperback Reviewed by E. S. Savas T his is an interesting and excellent collection of essays related to privatization. Although a third of the chapters appeared elsewhere in dif ferent versions, the editors deserve credit for including those and commissioning the others. This eclectic group of contributions is dominated by the topic of property rights: half the twelve·chap ters focus on this issue -in Latin America, Mexico, Brazil, China, and post-communist countries. The book might just as well have been titled Prerequisites for Privatization, rather than The Pro cess of Privatization, for that is the emphasis of the readings on property rights. Only the chapters on New Zealand, the Czech Republic, and Mexico, and one on the specialized topic· of spontaneous privatization in post-communist countries, can truly be said to discuss the process of privatization.

The New Zealand case is an upbeat explanation, step by step, of why and how it was possible to carry out such wide-ranging economic reform in a de mocracy, contrary to expectations based on interest group politics. The chapter authors identify ten principles which guided successful economic re structuring there: (1) choose good people to carry out the process; (2) make quantum leaps; (3) do it fast; (4) build and maintain momentum; (5) be consistent and credible, because it builds confi dence; (6) keep the public informed as to what to expect and when; (7) don't sell the public short; (8) maintain political composure to maintain pub lic confidence; (9) get the fundamentals right; (10) stick to your guns. The chapter on the process in Mexico provides a thoughtful and timely analysis of the privatiza tion program carried out under President Salinas, the subsequent peso devaluation, and the resulting economic crisis and public disaffection with eco nomic reform and privatization throughout Latin America. The author argues persuasively that the fatal flaw in the process was that privatization was carried out for financial reasons and not to reform and restructure a closed economy. This confirms my oft-stated observation about Mexico, Argen tina, and other countries that the first thing that has to be privatized is the private sector. That is, existing private firms have no interest in a com petitive economy where they would lose their cozy relationships with state-owned enterprises, and therefore they are as big an obstacle to effective reform as are unions. It would have been interest ing had a comparable chapter on Argentina been included, as that nation seems to be suffering similar problems despite its wholesale privatization program.

Robert Poole, Jr., one of the early pioneers in privatization, presents a good worldwide over view of privatization and its role in economic developmenLThe chapter on China is an absorb ing description of the recent economic history of that nation. The chapter by Megginson, et aI., is a condensation of their well known, important, and exhaustive study of the firm-level effects of privat ization; in summary, there are significant increases in profits, productivity, capital investment, divi dends, and-surprise- employment. There is little structure to the volume; the chapters don't follow any obvious sequence and the writing styles range from academic to journalistic to political. In other words, the sum of the parts is greater than the whole, but each of the parts is well worth reading, in any order. 0 Professor Savas is the director of the Privatization Research Organization, School of Public Affairs, Baruch College, City Universityof New York.

Emancipating Slaves, Enslaving Free Men: A History of the American Civil War by·Jeffrey Rogers Hummel Open Court. 1996 • 421 pages. $39.95 cloth; $19.95 paperback Reviewed by Doug Bandow I s there anything new that could conceivably be written about the Civil War? No other conflict so enthralls U.S. amateur historians. There are no BOOKS 845 World War I re-enactors. The Spanish-American War inspires no nostalgia for the "lost cause." No other episode of American history can match the bibliographic output of that one four-year period more than a century ago. But Jeffrey Rogers Hummel has produced a volume that offers both an accessible history of the war, along with its causes and aftermath, and a thoughtful interpretation that breaks with the usual idolatry of Lincoln and the unified nation state. The book should be read not only by Civil War buffs, but by everyone who has been forcefed the victor's tainted history of a conflict that killed 620,000 people, devastated a large section of the nation, and began the long process of centraliza tion of power in Washington.

Hummel begins his book where the story of the Civil War properly begins-slavery. The hundreds of thousands of blacks kidnapped in Africa and enslaved in the new world were, of course, the glaring exceptions to the founding of a nation of free men. Many Americans understood the con tradiction. Explains Hummel, "the Revolution's liberating spirit induced many white Americans to challenge slavery." But while emancipation spread across the North, it halted in the South. Because large slaveowners, who dominated the South politically, would bear the greatest cost of emancipation, observes Hummel, "the slavocracy was willing to invest considerable political re sources and eventually fight tooth and nail to preserve a system that in the long run benefited very few Americans." Other issues, particularly the tariff, were acrimonious, but only slavery was a union-breaker. Hummel tells the standard story of the war though with less attention to the battles and a greater focus on economics than is customary.

What really sets Emancipating Slaves, Enslaving Free Men apart is not new facts, but invaluable insights usually absent from more mainstream accounts. One is the significance of the South's two waves of secession. The deep seven went out over their fear-exaggerated, but real-about the fu ture of slavery. The outer four, Arkansas, North Carolina, Tennessee, and Virginia, left only after Lincoln called out the troops to coerce the others into submission. Writes Hummel, "Previously un willing to secede over the issue of slavery, these four states were now ready to fight for the ideal of a voluntary Union." Their willingness to do so adds moral complexity to what is normally pre sented as a simple crusade against slavery. Even more important, Hummel asks whether the war was necessary. Hummel rises above the usual Lincoln hagiography to contest the sixteenth 846 THE FREEMAN • DECEMBER 1996 president's claim that the breakup of the union would have been disastrous. Thus, argues Hum mel, "As an excuse for civil war, maintaining the State's territorial integrity is bankrupt and repre hensible." Only the abolition of slavery could conceivably provide such a justification-had that been the purpose, as opposed to the outgrowth, of the war, and had war been the only way to end slavery. Here Hummel is at his informative best.

Of more than a score of slave societies, only America and Haiti used violence to uproot the peculiar institution. Although he does not believe that economics necessarily ensured slavery's ex tinction, he persuasively argues that "slavery was doomed politically even if Lincoln had permitted the small Gulf Coast Confederacy to depart in peace." Finally, Hummel emphasizes the centralization of power that occurred during the Civil War. One aspect was the odious abuse of civil liberties and democratic processes in the North, usually dis missed by Lincoln idolators with what Hummel refers to as the "not as bad as Hitler-Stalin-Mao" excuse. Beyond that, however, he contends that "America's decisive transition" toward "govern ment intervention over the free market and per sonal liberty at every level and in every sphere" started during the Civil War. As Hummel puts it: "In contrast to the whittling away of government that had preceded Fort Sumter, the United States had commenced its halting but inexorable march toward the welfare-warfare State of today."

Believers in freedom have long felt disenfran chised by the typical Civil War history. On the one side are the Lincoln idolators and triumphant nationalists, who view620,000dead as a small price to pay for an indissoluble union. On the other side are the southern traditionalists, who consider sla very to be but a minor blot on Idyllic Antebellum society. With Emancipating Slaves, Enslaving Free Men, Jeffrey Rogers Hummel fills the yawning philosophical gap in between. D Mr. Bandow is a senior fellow at the Cato Institute and columnist for The Freeman. He is the author ofseveral books, most recently, Tripwire: Korea and U.S. Foreign Policy in a Changed World. ~~& Free Banking in Britain Theory,Experienceand Debate1800-1845 LAWRENCE H. WHITE In this second edition of his classic Professor White examines the theory and practice of privately issued currency, which in the age of 'smartcard' cash bal ances has taken on a new relevance. The text of the book has been signifi cantly revised and expanded since the first edition appeared in 1984, and in cludes a detailed reply by the author to his critics in a wholly new chapter.

The book costs $14.95 (inc P&P) and may be ordered from the lEA by creditcard or by check. lEA, 2 Lord North Street, London SW1P 3LB, England. Tel: +44 (0)171 7993745, Fax: +44 (0)171 7992137, E-Mail: iea@iea.org.uk, Web: http://www.iea.org.uk The lEAis a RegisteredCharityNo: 235351 INDEX THE FREEMAN VOLUME 46 JANUARY -DECEMBER 1996 Prepared by Beth A. Hoffman and the editorial staff of The Freeman Note: In page references, the number preceding the colon designates the month, the numbers following refer to the pages. Articles have at least three entries-author, title, and subject, except in a few cases when the title and the appropriate subject coincide. Books reviewed are listed alphabetically by author on pages 854-855. A ACTON (Lord)-political power corrupts (Powell) 6:455-460 ADLER, Jonathan H. See Book reviews (Yandle) AHLSEEN, Mark No, Fred, there is no free enterprise at least not here. 2:83-84 ALLEN, Candace A. and Lee, Dwight R.