What Do You Make of This Graph; M. Skousen

thesis. The graph is printed below. According to these GDP statistics, the American economy has become more stable since World War II. Expansions are longer and slumps are milder. More over, the trend appears to be improving, and some economists are once again pre dicting that recessions will disappear al togther. Big Government: Boom or Bane? So what do we make of this graph? I asked an MIT economist, who immediately re sponded, "Keynesianism works!" Then I asked a Chicago professor, who exclaimed, "Monetarism works!" Can we surmise from this graph that big government, as reflected in activist fiscal and monetary policy, has permanently reSource: Victor Zarnowitz, Business Cycles (NBER and University of Chicago Press, 1995), reprinted in The Economist, Oct. 28, 1995. 180 versed the prewar ups and downs of Amer ica's GDP? Granted, there have been significant in creases in the size and scope of govern ment policy since the 1940s-the introduc tion of so-called automatic stabilizers (un employment compensation, federal deposit insurance, Social Security), the increase in total government spending to over 40 percent of GDP, and a resolve by federal authorities to inflate in the face of any sign of economic downturn or crisis. All these policy changes have created an environ ment that errs on the side of inflation, rather than deflation. And an inflation-biased econ omy is likely to give you more boom than bust over the long term.

Of course, there could be other explana tions for a milder and less frequent postwar business cycle: -no world war since 1945; -expanding free trade and globalization, which tends to ameliorate economic ups and downs; -improved methods of inventory con trol, thus minimizing fluctuations in indus trial output; and -shifts in the economy away from volatile agricultural markets toward more stable manufacturing and service indus tries. 2 The Cost of Artificial Stability: Less Growth But there is no free lunch. Interestingly, greater stability in the business cycle has also coincided with less growth in the post war U.S. economy. There has clearly been a secular decline in the economic growth rate, particularly the late 1960s when the size of government began to explode upDr. Skousen is an economist at Rollins College, Winter Park, Florida 32789, and editor ofFore casts & Strategies, one of the largest investment newsletters in the country. For more information about his newsletter and books, contact Phillips Publishing Inc. at (800) 777-5005.

181 ward. According to real growth rates pro vided by Milton Friedman, the U.S. econ omy grew between 3 and 4 percent a year in inflation-adjusted terms between 1869 and 1969,except during the 1929-39 depression. However, since 1969,the annual real growth rate fell to only 2.4 percent, and lately, in the 1990s,the real growth rate has declined even further. What is the cause of this malaise? A ubiquitous and unproductive state has clearly left a huge and growing burden on society. Government at all levels is stran gling business and individual initiative through excessive taxation and regulation. Not surprisingly, most federal regulatory agencies (EPA, OHSA, FDA, etc.) bur geoned in the late 1960s and early 1970s the same time the growth rate began falling. It was also the time that the government broke the last link to sound money (the gold standard). In sum, we must not fall into the trap of supporting big government because of its allure of economic stability and a safety net. For stability may simply be a camou flage for economic lethargy and a declin ing standard of living. As Ben Franklin remarked, "Those who would give up es sential liberty to purchase a little tempo rary safety, deserve neither liberty nor safety."

Leviathan Is Not Benign Before we join the "business cycle is dead" school, let us not forget that Levia than is not benign. More than likely, it will blunder again in the face of a world crisis-whether it be a financial panic, a natural disaster, or a·war. As Adam Smith once remarked, "There is much ruin in a nation. " According to the Austrian theory of the business cycle, as developed by Ludwig von Mises and Friedrich Hayek, monetary inflation does not simply raise prices, but also de-stahlizes the economy. In a world of fiat money inflation and frac tional reserve banking, business cycles are inevitable.

182 THE FREEMAN • MARCH 1996 Just because we have avoided another Great Depression over the past fifty years does not guarantee that we will avoid it in the next fifty years. The U.S. economy may be Depression-resistant, but it is not Depression-proof. D 1. Quoted in Martin Bronfenbrenner, ed., Is the Business Cycle Obsolete? (New York: Wiley, 1969), p. vi. 2. Some economists, especially Berkeley economist Chris tina Romer, emphasize this point and question whether there has been much improvement in postwar business cycles. See "The Postwar Business Cycle Reconsidered," Journal of Political Economy, Feb. 1989. However, even accepting Romer's revised GDP figures, a huge difference exists between prewar and postwar business cycles. THE LUSTRE OF GOLD W hy is the gold standard viewed with disfavor by many? What is it that causes politicians and economists, such as John Maynard Keynes, to disparage and decry a monetary system which has been man's standard for thousands of years?

The gold standard is a monetary system in which gold is proper money and all paper moneys are merely substitutes payable in gold. It is as old as man's civilization. Throughout the ages it emerged again and again because man needed a dependable medium of exchange and gold was found to be such a medium. The gold standard that builds on freedom does not fail of its own accord. It springs eternally from freedom but succumbs to force and violence. Its implacable enemy is government in search of more revenue. The seventeen essays in this collection examine the rejection of gold, the history of the gold standard and private coinage in the United States, and the prospects for monetary reform. Contributors include Hans F. Sennholz, Mark Skousen, Henry Hazlitt, Elgin Groseclose, Robert G. Anderson, and Lawrence W. Reed. 150 pages + index $14.95 paperback BOOKS Albert Speer: His Battle With Truth by Gitta Sereny Alfred A. Knopf. 1995 • 757 pages. $35.00 Reviewed by Bettina Bien Greaves E ver since the appearance in 1944ofF. A.