Book Reviews

Hungry.Ghosts is the first full account of what is arguably the worst famine in all of human history. Jasper Becker, a BBC jour nalist who lived for several years in China, spent years in painstaking detective work to· piece together both the cause of this tragedy, .an<l its final cost inhuman ·lives. Although he strays from the truth in ascrib ing the famine, in part, to a .lack of popu lation control, his book is an otherwise solid indictment of central planning and Maoist hubris .. As soon as·· the People's Republic of China was established in October 1949, Mao Zedong wanted to move as quickly as PQssible to create agricultural collectives. This culminated in 1958 with the formation of the "People's Communes," huge, cum bersome agricultural cooperatives with tens of thousands of members. To make matters worse, Mao insisted that the communes adopt agricultural tech niques from the Soviet Union, which was reporting triple-digit increases in food pro duction. Such techniques as deep plowing, close planting, and increased irrigation, based as they were on Marxist-Leninist pseudoscience, turned out to be disasters in practice. Deep plowing, for instance, effectively destroyed the fertility of the soil for years to come, as peasants trenched the ground to depths of four or five feet.

Seedlings planted in extremely high densi ties died, while the irrigation projects~ mostly small reservoirs-were so ill conceived and executed that they were later dismissed by the Ministry of Agriculture as "completely worthless." Mao, in his great vanity, was oblivious to all this. Instead, he believed the reports of sycophantic officials that food production had skyrocketed under the commune system and his other innovations. When Mao vis ited the model commune of Xushui in 1958, he saw piles of vegetables, turnips, cab bages, and carrots strategically placed along the main road. As Becker writes, "Officials told him that the peasants had dumped the vegetables because they had grown so much food they did not know what to do with it." Buoyed by a flood of such false reports, the Beijing regime encouraged peasants to eat grain. It doubled its grain exports, even giving away grain gratis to its friends in' North Korea, North Vietnam, and Albania.

Although no one knew it at the time, every ship that left the docks condemned addi tional thousands' to die. By the winter of 1958-59 the commune granaries were bare, but Mao refused to believe that there was a food shortage. Instead, egged on by officials still boasting of record crops, he became convinced that the peasants were hiding their grain. In places like Henan, where the provincial leadership was fanatically devoted to Mao and his illusions, this led to mass murders that the Party would later describe as "a holocaust. " As Becker writes, "The great terror began in the autumn of 1959 ... when the prefec tural Party committee declared war on the peasants launch[ing] a brutal anti-hiding campaign 'It is not that there is no food [one local official said]. There is plenty of grain, but 90 percent of the people have ideological problems.'" Virtually all of the grain harvested was collected by officials who used arrest and torture to achieve their ends.

"By the start of winter," Becker contin ues, "it was clear that the peasants had nothing to eat but tree bark, wild grass seeds and wild vegetables. [Local officials] de clared that this was merely 'a ruse of rich peasants' and ordered the search for grain to be redoubled. Party cadres were also incited to smash the cooking pots in every household to prevent them from being used at home to cook grass soup." Becker concludes that Mao's famine was "a deliberate act of inhumanity" and asserts that, as a mass murderer, Mao should be ranked higher than Hitler and Stalin. After all, Hitler's concentration camps were re sponsible for 12 million deaths, while Stal in's gulags devoured some 20 million souls. Stalin's own famine, which raged in the Ukraine during the early 1930s, cost only 11 million lives. "Mao," Becker writes, "ex ceeded even these ghastly totals." Far, far exceeded. How could a disaster of this magnitude be hidden from the world for so many decades? The Chinese Communist Party's natural penchant for secrecy offers us part of the answer. During the fifties and sixties, China was off-limits to Western, and espe cially American, writers and journalists.

Visas were forthcoming only for true "friends of China," who could be trusted to check their curiosity at customs, and write only what they were told during their stay. Of that time, China historian Edward Friedman has written that "foreigners were fed a diet of lies to spread outside the country, to the effect that there was no famine in China." Perhaps the leading 755 China apologist of all time, Edgar Snow, who spent five months in China at the height of the famine, flatly denied its existence: "One of the few things I can say with certainty is that mass starvation such as China knew almost annually under former regimes no longer occurs.... I diligently searched, without success, for starving peo ple or beggars to photograph." Although he conceded that some people were suffering from "severe malnutrition," he thought that it had probably not led to any significant number of deaths. The British journalist Felix Greene re turned from a visit to China to announce, in tones reminiscent of Snow, that "the indis putable fact is that the famines that in one area or another constantly ravaged the farmlands of China, and the fear of starva tion, which for so long had haunted the lives of the Chinese peasants, are today things of the past."

The "firsthand" verdict of Snow and oth ers on the famine was widely accepted, even by many American China-watchers, who for years afterwards denied or at least downplayed one of the greatest human tragedies of our century. Snow's views re ceived a respectful hearing at Harvard and elsewhere after his return to the United States. They also found their way into text books, such as John K. Fairbank's introduc tory history of modern China, which devotes to the "three difficult years" precisely one sentence: "Malnutrition was widespread and some starvation occurred." The only point on which Becker and I part company concerns population control. Becker writes that "The Chinese are still suffering from the greatest and most far reaching consequences of Mao's illusions . . . that modern science was the key to a limitless expansion of food supplies .... In the early 1960s, as China was starving, Mao wrote ... 'China's big population is a very good thing.' " Becker is saying, in effect, that Mao erred in trusting science, and erred again in not imposing the one-child poli cy-or its equivalent-on the Chinese peo ple as soon as he took power.

But did either of these beliefs lead to 756 THE FREEMAN • DECEMBER 1997 errors on Mao's part? I think not. The history of the last half-century has been one of astonishing increases in food production. The scientific revolution in food production, the so-called "green revolution," has dou bled crop yields worldwide. At the recent Rome Food Summit, Stein Bie, a researcher for the Food and Agriculture Organization (FAO), commented that "[food] disasters are not taking place," and that the earth can easily support eight to ten billion people double its current population-in the next 25 years. As far as the relationship between pop ulation and hunger is concerned, FAO chief analyst Jacques Verceuil commented at the same conference that, of the ten countries worst off in terms of food supply, nine have suffered serious warfare. Population size and density have nothing to do with it. Now Becker, of course, knows all this.

After all, he has written an entire book proving that China's famine was the result of political decisions and masked by cen sorship. And I am sure that he would be the first to admit that he has offered absolutely no evidence that the famine could have been averted, or even mitigated, had Mao earlier imposed a radical population control pro gram on the Chinese people. So what are we to make of Becker's mental tic when it comes to population control? It may mean nothing more than that he is a creature of this misanthropic age, which in general regards families and children with a kind of light disdain. Still, the point that communist politics and not the Chinese people are the cause of China's problems is important enough to insist upon, not least because the Chinese Com munist Party has it the other way around. There will be no PRC edition of Becker's book, for it would never get past Beijing's ever-vigilant censors. But for those who want the truth about the most disastrous famine in world history, Hungry Ghosts is your book. D Steven Mosher is the president of the Population Research Institute, and is the author ofA Mother's Ordeal: One Woman's Fight Against China's One-Child Policy.

Why the Left Is Not Right The Religious Left: Who They Are and What They Believe by Ronald Nash Zondervan • 1996. 222 pages. $10.99 paperback Reviewed by Doug Bandow W hen it comes to religion and politics, most media attention is focused on the right. And it usually isn't positive cov erage. Religious conservatives are pre sented as threatening America's constitu tional balance, women's right to choose, gays' civil liberties, and much more. Yet religious activism runs both ways. As Ronald Nash, a professor at the Reformed Theological Seminary in Orlando, Florida, notes in Why the Left Is Not Right, there is an active and diverse religious left in the United States. To be sure, these people, who once "proudly proclaimed their liberal or radical connections," now "describe them selves as moderates and centrists," notes Nash. But their policy positions remain un ashamedly left-wing.

Nash divides the religious left into three parts: liberal mainline Protestants, liberal Catholics, and left-wing evangelicals. There's no doubt where Nash stands. He argues that these groups have been used (willingly or unwillingly) by the Democrats for electoral purposes and have helped "demonize politically conservative Chris tians." A prolific author and entertaining speaker, Nash obviously views himself as among the demonized right. In his view, the central argument is not whether people of faith should be con cerned about peace and justice, but what those terms mean. The evangelical left has appeared to have simply assumed the stan dard liberal understanding of the words and then discredited anyone (including their politically conservative brethren) who un derstood the terms differently and who pursued the objectives of peace and justice in a different way. Perhaps the greatest value of Why the Left Is Not Right is that it shows how political activism by people of faith is neither new nor restricted to conservatives. Indeed, even as evangelicals were receiving exag gerated public attention for entering the political process, mainline Protestant de nominations were promoting Democratic political causes domestically and commu nist revolutionary movements abroad. It is a story worth remembering when the media and political establishments pour obloquy on traditionally less active evangelicals and fundamentalists as they seek to protect themselves and their values from govern ment intrusion.

Much the same politics has been on display within the Roman Catholic Church. Catholics were once "thoughtful enemies of secularism, humanism, and the liberal wel fare state," writes Nash. Many still are, but as Nash puts it, "large cracks have appeared in the political and social thinking of many educated Catholics." The 1985 Pastoral Letter on the economy, for example, was as political as anything emanating from the Christian Coalition. Even more radical have been specific segments of the church, such as the Maryknoll Order. However, Nash devotes most of his at tention to the lesser-known left-wing evan gelicalism. He argues that the New Left and "the adversary culture" of the 1960s spawned political liberalism among Protes tants who purport to hold a more conser vative, orthodox theological view. Nash fo cuses on three leading leftish evangelicals: Jim Wallis, editor of Sojourners magazine; Ron Sider, founder of Evangelicals for Social Action and author of Rich Christians in a World of Hunger; and Tony Campolo, sociology professor, well-published author, and presidential confidante.

The scrutiny is warranted, though Nash seems more skeptical of the trio's good intentions than is justified. Wallis, for in stance, lives his beliefs. Two decades ago Wallis moved his magazine to a poor section of Washington, D.C., and formed a com munity of the same name. At the same time, however, he has, as Nash points out, re mained imbued with the leftist Zeitgeist of BOOKS 757 the 1960s. The boat people fleeing commu nist Vietnam, Wallis wrote, were leaving "to support their consumer habit in other lands." Their departure should not be taken to "discredit" Vietnam. Wallis's views to ward Cuba and Nicaragua were similarly skewed. Wallis's economic opinions also were long solidly collectivist. The collapse of socialism abroad seems to have chastened him-he now calls himself centrist and asserts that he is independent of Democrats and Republicans alike-but he remains wedded to interventionist policies. Conser vatives, Wallis charges, retain an "attach ment to institutions of wealth and power, preference for the status quo, and the lack of a strong ethic of social responsibility."

Unfortunately, while Wallis now criticizes abuses by government, he underestimates how the activist state promotes concentra tions of wealth and power, supports the status quo, and undermines social respon sibility. Similar is Nash's case against Ron Sider. Sider is a gentle spirit who has borne substantial liberal criticism for his opposi tion to abortion and gay rights. Unfortu nately, however, on economic policy he has always placed intentions before results. Thus, as Nash documents, Sider has long advocated the sort of government interven tion that has been tried and found wanting throughout this century. While criticism is rife of the Christian Coalition for seemingly attaching itself to the GOP, Nash points out that "Ron Sider, the person who comes closest to being a moderate member of the evangelical Left, has himself spent years trying to elect liberal, typically Democratic, candidates to public office."

Tony Campolo is probably the most pub lic of the three, given his high-profile con tacts with President Bill Clinton. Campolo also criticizes government, but seems com mitted to statist remedies when it comes to solving specific problems. Nash doesn't stop his criticisms here, however; he goes on to question Campolo's evangelical credentials, given the latter's views on such issues as abortion, feminism, and the environment.

758 THE FREEMAN • DECEMBER 1997 Through his analysis, which concludes with chapters on economics and poverty, Nash shows how even the best-intentioned of religious believers can come up with solutions inimical to the interests of those they wish to serve. But Nash, who has been on the receiving end of endless left-wing barbs, puts an unnecessary edge in his own analysis. Perhaps nothing irritates Nash more than the evangelical left's flirtation with Bill Clinton. Yet the opinions of Wallis, Sider, and Campolo reflect ignorance rather than mal ice. I've met and debated all three. All want to help those in need, seem to have been affected by the decline of statism, and were willing to acknowledge contrary arguments. They deserve to be criticized, not demon ized. Why the Left Is Not Right deals seriously with an important subject. Despite the pub lic perception that religious activists gravi tate toward the right, many people of faith have embraced collectivist remedies despite the ill effects on those most in need. In short, Nash's basic thesis is correct: the left is not right. 0 Doug Bandow, a nationally syndicated columnist, is a senior fellow at the Cato Institute and the author of Beyond Good Intentions: A Biblical View of Politics (Crossway).

The USA Tax: A Progressive Consumption Tax by Laurence S. Seidman MIT Press. 1997 • 160 pages. $20.00 Reviewed by Roger W. Garrison H ot dogs, baseball, apple pie, and the USA Tax: What is the relationship among these pieces of Americana? The fourth-listed one imposes a tax on the other three. USA stands for Unlimited Savings Allowance. Taxes are to be imposed only on consumption, as set out in the 1995 USA Tax bill sponsored by Senators Domenici, Nunn, and Kerry. Professor Laurence Seidman of the University of Delaware has written a book to argue the case for this progressive consumption tax and to defend his relatively pure version of it against the version in the actual legislation. The 1995 bill involves a few needless complexities and inequities, but these legislative quirks do not unduly distract Seidman or his readers from the more fundamental issues. Although the transition from an income tax to a consumption tax would involve radical change, the proposed tax system would be the same as the existing one in several important respects. The total tax burden would be the same, the distribution of that burden across the different income classes (or consumption classes) would be about the same, and the computation of the tax liability for each individual and for each firm would be complex-though maybe not as complex as it currently is. Most impor tantly, some of the distinctive features of the proposed system are in serious conflict with the basic principles of liberty. For one example, taxes themselves would be treated as consumption (public rather than private) and thus would be subject to further taxing.

For another, all deposits and withdrawals of cash, the key determinants of consumption tax liabilities, would be reported to the government by financial institutions. The supposed appeal of the USA Tax lies in its favorable treatment of saving and investment and in its "fairness." The favor able treatment of saving and investment is achieved simply by excluding these activities from the tax base; the "fairness" (so judged on the basis of survey results believed to reflect the majority opinion among Ameri cans) is achieved by the progressivity of the marginal tax rates. In comparison with the USA Tax, our current income tax is found inferior because it taxes both consumed income and (with some exceptions) saved income. A national sales tax and the Hall Rabushka Flat Tax are found inferior because they do not allow for enough progressivity. The two main features of the USA Tax (pro-saving and progressivity) are pre sented separately in Seidman's book.

Weighing strongly against this tax scheme, however, is the conflict between these fea tures-a conflict that Seidman does not notice (or, at least, does not mention). The steeply progressive tax schedule may well discourage saving and/or encourage bor rowing. A simple example can make use of the tax schedule to be applicable for the year 2000 and beyond, together with an assumed interest rate of 10 percent. The marginal tax rates for the four consumption brackets are °percent, 8 percent, 19 percent, and 40 percent, the top rate applying to consump tion levels of $24,000 and higher. Suppose our taxpayer is in a position to consume $24,000 worth annually. He could, instead, spend only $23,000 this year so as to be able to spend $25,000 (plus some interest) next year. This year's $1,000 reduction in con sumption allows our taxpayer to take ad vantage of the tax-free status of savings. He would pay $190 less in taxes this year (19 percent of $1,000). Next year, after collect ing $100 in interest, he can spend $25,100.

But the taxes he owes on that last $1,100 worth of consumption is $440 (40 percent of $1,100). For the twoyear period, his initial saving has allowed consumption to go up by $100, but his corresponding tax liability goes up by $250! In this example (and in others where consumption levels are close to the bracket breaks) the antisaving effect of the "fairness" feature swamps the direct effect of the pro-saving feature. This net anti saving bias is even stronger when incomes (and levels of consumption) are increasing over time-as they generally are. A tempo ral smoothing of consumption to avoid high marginal rates requires borrowing-dis saving-in the lean years. If considerations of fairness keep people from saving this year in order to consume next, maybe the more farsighted among us can take advantage of tax-exempt saving by waiting until retirement to consume. But this is the one component of saving that is exempt even under the existing system.

Further, retirement years are low-income years, not necessarily low-consumption years. Many people in their 60s and 70s travel extensively as they never could be fore. They consume. Many in their 80s and BOOKS 759 90s pay dearly for their daily keep in a retirement center. Should these people pay even more dearly on April15? Our hapless taxpayer may once again be foiled by fairness. In comparing income and consumption as alternative tax bases, there seems to be no clinching argument that allows for an un ambiguous preference. Each is deficient when judged by the standard set by the other. If we take consumption as the ap propriate base, we see that an income tax is applied to some of it twice. If we take income as the appropriate base, we see that a consumption tax lets some of it go un taxed. Ultimately, Seidman's case for the pro-saving feature of the USA Tax is itself based on considerations of fairness: "[I]t seems fairer to tax a person according to what that person subtracts from, rather than adds to, the economic pie." It is true--and seems eminently fair-that when we "sub tract from the economic pie," we pay, and when we "add to the economic pie," we get paid. But this truth, which reflects the ordinary working of the market system, leaves unanswered-and unasked-the question about how much each of us should pay for government and about how much government we should have. The holistic notion of the "economic pie" provides little or no scope for claims about fairness. The size of the pie is a consequence of the various preferences of market partici pants-for enjoying leisure rather than sup plying labor and for consuming now rather than consuming later. What seems fair is that each of us should make his or her own choices in this regard. The notion of fair ness, however, provides no clear link be tween changes in the size of the pie and obligations to pay for government.

Opponents of the current tax system who base their criticism on the tenets of classical liberalism will be equally critical, if not more so, of the USA Tax. For the classical liberal, meaningful reform is better aimed at reducing taxes and, more generally, in reducing government. 0 Roger Ga"ison is a professor of economics at Auburn University,Auburn, Alabama.

760 THE FREEMAN • DECEMBER 1997 The Future of Money in the Information Age edited by James Dorn Cato Institute. 1997 • 171 pages. $12.95 paperback Reviewed by Steven Horwitz I f there's one lesson that we've learned in the computer age, it's that George Orwell was wrong: technology is not the enemy of liberty, but its friend. It was the personal computer, the fax machine and the telecom munications satellite that were central to the liberation of Eastern Europe and the Soviet Union (and China, to an extent) because they broke down the information barriers that enabled those regimes to con tinue to lie to their citizens. Because of their economic implications, the latest technolo gies, advanced personal computers, and the Internet, offer new, and perhaps greater, promises for human freedom, as the papers in this collection make clear. All but two of the papers in the book were part of the Cato Institute's annual monetary conference in 1996. They represent a wide range of expertise and perspectives on the set of issues surrounding the implications that modern information and communica tion technology have for money and its associated institutions. The contributors in clude academics, traditi9nal bank execu tives, computer experts, electronic money entrepreneurs, policy analysts, and central bankers. The papers are mostly short and accessible, and the book would make a good supplement for an undergraduate course on money and banking.

Although there are some significant points of disagreement among the authors, two beliefs seem to represent a consensus. First, as more transactions take place over the Internet and as money itself becomes increasingly "digital," it will be harder for governments across the world to monitor and control both money and the. exchanges made with it. Second, this change in the nature of money is more evolutionary than revolutionary. The history of money is the story of the substitution of more abstract forms of money for more concrete ones. In this way, the use of so-called "electronic money" is not fundamentally different from the substitution of paper for commodity money, or checks for currency. The papers in this book explore a variety of different forms that electronic money might take. The simplest is what is known as "smart cards," or "stored-value" cards. We can already see an early version of these in the form of prepaid phone cards. Imagine, however, that you had such a card that contained a bank balance and that you could spend it anywhere by swiping it through a store's or vending machine's card reader.

Imagine further that you could "reload" that balance by inserting the card into an ATM, or your personal computer linked via the Internet to your bank, or through a card reader located at a place of business, or even by a direct hookup with another card user. Such a card could replace currency for almost all uses and would be far safer, as it would require a PIN or an even more advanced security device. More sophisticated versions of electronic money would include money both created and stored in electronic form over the Internet, and used for transactions made there. Internet banks could give loans in the form of encrypted strings of digits that other computers would recognize as a money balance created by the bank. So to "spend" this money, one could simply send the string of digits to the seller of the product, who would then pass that string on to his bank, who would pass it on to the issuer, who would then verify it and credit the mer chant's bank for the amount. This kind of money would have no physical form (unlike the smart card) and could be quite useful for the booming. world of Internet commerce.

If the encryption procedures are secure enough, this kind of digital money would be safer than using a standard credit card over the Internet, which is the way most business is done there now. Aside from the obvious conveniences for consumers, these innovations have signifi cant implications for monetary policy and central banking. Most important, the more these electronic forms of money displace central bank-created currency, the larger will be the proportion of the money supply that is privately created. Smart cards and digital currency are liabilities of the banks that created them, not the Fed. In the extreme, should paper or "analog" currency disappear, the Fed will then only control the supply of bank reserves. That power would still give the Fed the ability to create much mischief, but it would have a few benefits. As George Selgin's paper argues, if paper currency disappears, the Fed would no longer have to worry about the degree to which the public wishes to convert its bank deposits into currency. Right now, the Fed needs to estimate that magnitude in order to correctly predict the effects on the money supply when it conducts open-market oper ations. In a paperless world, the Fed would have much more control over the supply of bank reserves and, as Selgin argues, could much more successfully implement a Fried man-like monetary rule. Even given the existence of a central bank, the advent of electronic currency might usher in a new era of relative monetary stability by making rule-based policies easier to implement.

The move away from paper could also lead to the even more desirable outcome of the eventual fading away of the central bank. Electronic money opens up the mar ket for "hand-to-hand" money by putting the equivalent of a printing press in every bank's computer. Private banks will likely outcompete the Fed in such a market, further undermining the argument for hav ing a central bank in the first place. As the sophistication of the technology increases, so will the ability of banks to manage their portfolios and so will the ease with which consumers can use progressively more ab stract forms of money. One can easily imagine a world where banks offer balances on the basis of assets such as private-sector bonds and stocks (as mutual funds do now) and customers take those balances in the form of smart cards that can be used in place of currency, checks, and credit cards. In such a world BOOKS 761 there is no need for a central bank, only a network of institutions that enable the in dividual banks to clear their balances among themselves. The need for a central source of reserves would disappear, as would the Fed's lender-of-Iast-resort function, as mu tual funds cannot be "run" on the way banks can. The progress of electronic money is rendering both central banks and the na tional borders within which they operate increasingly obsolete.

Lest we get too heady about all of this change, it is important to realize that it is evolutionary not revolutionary. First of all, money already exists in electronic form through wire transfers, and secondly, money has been evolving away from the concrete toward the abstract since it was first used. As Larry White's paper notes, the first time balances were transferred by bookkeeping entries, money was separated from the physical world. That is, in principle, not fundamentally different from the various forms of electronic money this collection explores. The leap from paper· to encoded digits is the equivalent of the leap from gold coins to paper. In addition, there is a certain sense of going back to the future here. As several of the papers in this volume point out, the banking system we will likely end up with in the electronic future will look an awful lot like the U.S. banking system did before the Fed was created. In particular, hand-to hand money issued by individual banks was commonplace in the nineteenth century, and remains the primary currency in a few countries even today. The natural response to this point is to wonder whether the electronic money future might fall victim to the same problems as the past. After all, the pre-Fed banking system is no longer with us, so it must have ended for a reason.

And this brings up the key issue facing the future: what sorts of regulations, if any, should there be on the production of elec tronic money? As the papers by Alan Greenspan and R. Alton Gilbert rightly note, recent scholarship on nineteenth century banking in America and elsewhere has argued that the failures of those systems 762 THE FREEMAN • DECEMBER 1997 were largely due to poorly chosen regula tions, such as limits on branch banking and the requirement that banks buy bonds as collateral for their currency issues. The history of banking is littered with such examples of often well-intentioned attempts at regulation that wind up creating unin tended problems, and create a demand for further intervention. It is just such a process that has brought us the Fed and the numer ous problems banks have faced in this century. Perhaps with the advent of a new century, and new mechanisms for delivering mone tary services, we will finally heed the lessons of the past and give these new technologies and institutions the freedom to develop in response to the needs of the market. The Internet and other computer technologies hold open the promise of an era of unimag inable wealth and progress. The question so well addressed by this collection is whether we can learn those lessons of the past and resist the temptation to regulate new forms of money and thereby destroy their enor mous promise. 0 Steven Horwitz is Eggleston Associate Professor of Economics at St. Lawrence University in Canton, New York.

Bank Deregulation and Monetary Order by George Selgin Routledge. 1996 • 288 pages. $69.95 Reviewed by Parth J. Shah T he classical gold standard is generally considered to be the only monetary system consistent with the principles of laissez faire. In that system, the currency issued by the government is convertible on demand into a specified amount of gold. The government's ability to issue currency is limited by the amount of gold it possesses; there is less room for the hidden tax of inflation. The government, however, retains a monopoly on the issue of currency. F. A. Hayek's pioneering essay, "Choice in Currency" (1976), offered an alternative of laissez-faire banking-a system of privately issued competing currencies. Since then, the novel alternative of free banking has at tracted considerable attention from young Austrians. George Selgin's Bank Deregulation and Monetary Order reprints 12 of his recent articles (two coauthored with Larry White) that further support the proposition that money is not unlike other goods and can be best supplied by the market. Though the articles were written for an academic audi ence, they are accessible, with some effort, to any interested individua1. They exemplify Selgin's ability to write for academic and nonacademic audiences simultaneously.

The conventional view maintains that banking systems are inherently unstable and prone to crises, and therefore government regulation and control are essential. Selgin demonstrates that the conventional view is false, both theoretically and empirically. Historical evidence from several countries over a period of about 200 years suggests that "genuine banking crises have been rare in most well-studied fractional-reserve banking systems and entirely absent in sev era1." What explains, then, the conventional view of banking? This view, like most eco nomic theQries, is largely due to British and American economists whose judgments are colored by the banking histories of their own countries .. Among the countries stud ied, "banking crises appear to have been a U.S. specialty, with England earning second place. A global historical perspective on banking, however, indicates a generally ac ceptable performance."

For the period of 1793-1933, Selgin cat egorizes banking systems as relatively "un free" (United States, England, France, Ger many, and Italy) and relatively "free" (Canada, Scotland, Sweden, Australia, China, and South Africa). The "unfree" systems had "privileged" banks and/or re strictions on bank charters and currency issue. The "free" banking systems had mul tiple private issuers of currency convertible into specie. "Of forty-eight record.ed crises, all but seven occurred in unfree systems." "[B]anking crises," Selgin concludes, "have been more frequent in heavily regulated banking systems than in relatively unregu lated ones." Government regulation of banking through monopoly issue of currency, lender of last resort, deposit insurance, branching and asset restrictions, interestrate ceilings, and other means has made this system less, not more, stable. Inherent instability of banking systems is used to justify restric tions, but their presence is actually respon sible for the instability. The restrictions, then, are self-fulfilling-they create insta bility which in turn justifies their existence and even expansion. In opposition to the conventional "market failure" theory, Sel gin proposes a "legal restrictions" theory of banking crises and instability. Even bank lending manias are usually caused and sus tained by restrictions on banking and not by excessive "confidence" or "optimism" or "animal spirits" as the folklore alleges.

Selgin supports this contention theoreti cally by showing the effectiveness of the clearing mechanism under free banking, and historically by examining several al leged episodes of financial "bubbles." The infamous banking crisis of the 1930s, the cause of the Great Depression, corrob orates Selgin's legal-restrictions theory. In the first two years of the crisis, most of the failures were of "small-unit banks in agri cultural regions." Their failure, as those of 6,000 banks in the 1920s, was due to the fall in the relative price of agricultural products. If the United States had allowed nationwide branch banking, most of these "relative price-induced" bank failures might have been avoided. Canada, which suffered the decline in agricultural prices but had branch banking, did not have a single bank failure in those two decades, except for one failure in 1923 involving fraud. Moreover, in re sponse to the public's increased demand for currency, Canadian banks were able to issue more notes in exchange for deposits, but the American banks could not increase their note supply without relaxation of the re strictions by the Fed. The troubles of agriBOOKS 763 cultural banks could have been largely con tained if only the United States had branch banking and freedom in note issue.

Banks' inability to issue more notes prompted clearinghouses to seek permis sion of the Treasury "to issue clearinghouse certificates as substitutes for bank notes, as they had done during earlier crises. But they were refused permission on the grounds that such a private response was no longer needed: the Fed was capable of issuing 'plenty of money that looks like real money.' In the event, of course, the Fed's response proved far from adequate." The crisis of agricultural banks did not turn into a wide spread panic until February 1933, when states began declaring bank holidays (Mich igan on February 14, which led to the national bank holiday on March 6), and when rumors spread about the govern ment's plan to devalue the dollar. On top of it all, in mid-1932, a two-cent tax on checks was imposed, which further encouraged the public to withdraw currency from the bank ing system. A restrictionless banking system would surely have mitigated, if not pre vented completely, the Great Depression.

Many advocates of free markets (Milton Friedman, for example) consider the central bank as generally evil but absolutely neces sary for smooth and efficient working of the financial system. Surprisingly though, hardly any systematic, scholarly case has been offered to support the assumed neces sity of the central bank. Its desirability is simply taken for granted. Charles Good hart's The Evolution of Central Banks, at tempts a defense of central banks. Selgin provides a detailed and persuasive critique of Goodhart's rationale for central banks as well as his interpretation of the theory and history of free banking. Selgin points out, among other things, that central banks of the world did not evolve "naturally" because of the econo mies of scale in reserve holding and the need for a lender of last resort in fractional reserve banking. They were contrived by the fiscal necessities of states and by "advan tages endowed by legislation." The econo mies of scale in reserve holding can other764 THE FREEMAN • DECEMBER 1997 wise be achieved by branch banking and non-bank clearinghouses. The need for a lender of last resort is actually created by the privileges (of note issue, access to capital and such) granted to particular banks, which weakened the other banks in the system and made them unnaturally dependent on the "privileged banks."

Chapters 1, 2, 4, and 6 explain how, without state interventions, the banking system would have evolved by using Carl Menger's theory of the evolution of money and his "conjectural historical" approach; how free banking adjusts the supply of money to its demand; and how it provides a substantially more stable monetary environ ment and less room for "money mischief." For nonspecialists, these chapters offer a quick but thorough understanding of the workings of a free banking system and its advantagesover central banking. Selgin addresses an important ongoing debate among economists on "productivity norm" versus "price level stability norm" (Chapters 7 and 8). This debate applies to both free banks and central banks-how free banks would behave and how central banks should conduct their monetary policy. The central bank of New Zealand is now required by law to maintain stable prices or zero inflation. Stability of prices has become a dominant concern of many a central bank.

The productivity norm, which Selgin pre fers, suggests that prices be allowed to fall in response to increases in productivity of the economy. Selgin contends that as the supply of goods and services increases, the downward pressure on their prices should not be countered by expanding the money supply to keep them stable. Suppose unexpected technological im provements in the production of some goods lowers their cost of production. That would, under competition, lead to a decline in the prices of those goods relative to other goods. Which norm requires changes in more prices? Under the productivity norm, prices of only those goods whose produc 'tivity has increased must fall; all other prices remain the same. Under the price level stability norm-which is identical to keeping a consumer price index constant-prices of all other goods must be raised relative to the prices of goods whose productivity has increased. Thus, the productivity norm, Sel gin maintains, is superior to its commonly advocated alternative.

I am sure that this book will encourage the reader to further explore the crucial field of free banking-crucial to the evolu tion of a laissez-faire society. 0 Parth Shah is an economics professor and presi dent of Center for Civil Society, New Delhi, India. The Origins of Virtue by Matt Ridley Viking. 1997 • 295 pages. $24.95 Reviewed by George C. Leef I t is not uncommon for those who have been trained in economics or philosophy to arrive at the conclusion that big govern ment is a dangerous menace, but it is an event worth noting when a scientist comes to that conclusion. The event becomes even more noteworthy if the scientist has done us the favor of putting his thoughts into a delightfully readable book. Matt Ridley has done just that. Ridley is an Englishman, trained in zo ology and equipped with an excellent grasp of many other disciplines-the book romps through anthropology, history, game the ory, economics, genetics, and more. The Origins of Virtue is a search for answers to these questions: "If life is a competitive struggle, why is there so much cooperation about? And why, in particular, are people such eager cooperators? Is humankind in stinctively an antisocial or a pro-social animal?" His answers echo the teachings of Adam Smith, David Ricardo, F. A. Hayek, and other defenders of freedom.

Cooperation rather than aggression, Rid ley argues, is in the long-run interest of those individuals and groups that practice it. Cooperators fare much better in the strug gle for survival than. do aggressors or those that attempt self-sufficiency. Among the evidence Ridley marshals for this conclu sion are the many "prisoner's dilemma" computer tournaments that have been run, wherein the winning strategy turns out to be one of reciprocity: "Cooperate with me and I'll cooperate with you; cheat and I'll retal iate." He maintains that this predisposition has become deeply ingrained in the human brain (most of them, anyway). "[T]his in stinctive cooperativeness is the very hall mark of humanity and what sets us apart from other animals." Other animal species can cooperate to some extent within small groups, but we humans have figured out how to cooperate on a vast scale. One of our most important kinds of cooperation is, of course, trade.

Ridley's Chapter 10, "The Gains from Trade," is an excellent discussion (if you teach principles of economics, you'll find some good material for lectures or exams there), but it leads to an even more impor tant point. Trading requires trust. Main taining a reputation for honesty therefore is extremely important and that is why, the author concludes, people generally forbear from dishonesty and aggression. Even if, on a cold utilitarian calculus, such behavior would appear to payoff, most people resist. Ridley attributes this to millennia of human social development that has made us very reputation-conscious. Alas, we also have our bad instincts, especially a tribalistic "us versus them" proclivity that demagogues have been ex ploiting since time out of mind. So, what can we do to maximize the good that comes out of our cooperative side and minimize the damage that can be done by our aggres sive side? Answer: minimize the power of the state. Contemplating the behemoth states of the current time and of the past, Ridley writes, "I do believe that there have been glimpses of a better way, of a society built upon voluntary exchange of goods, information, fortune and power be tween free individuals in small enough communities for trust to be built. I believe such a society could be more equitable, as well as more prosperous, than one built BOOKS 765 upon bureaucratic statism." Give Mr. Rid ley an A.

Big government opens up a new means for people to get what they want, namely politics. Politics ultimately reduces to the use of force, however. The more we polit icize society, the more we lure people away from voluntary, cooperative action. Ridley's discussion of the effects of the British welfare state is illuminating: "Because of its mandatory nature the welfare state encour aged in its donors a reluctance and resent ment, and in its clients not gratitude but apathy, anger or an entrepreneurial drive to exploit the system. Heavy government makes people more selfish, not less." And there is much to praise in this book besides the author's sensible conclusion about the proper role of government. Plenty of fashionable notions about man and na ture receive smashing blows, for example the endlessly repeated idea that simple, native peoples· have a built-in environmen tal ethic. There is overwhelming evidence to the contrary. Or, on the subject of wildlife conservation, the "green" penchant for de manding government control takes a knock out punch .. Clear, defendable property rights, Ridley shows, are far more effective.

(If you want to try a sample of this book, start reading Chapter 11, "Ecology as Re ligion" and I'm confident that you'll want to read it all.) Ridley is a talented writer and The Origins of Virtue has a "page-turner" quality to it. I hope that we will be hearing more from him in the future. D GeorgeLeef is book revieweditorofThe Freeman. Pick a Better Country by Ken Hamblin Simon & Schuster. 1997 • 251 pages. $23.00 Reviewed by James A. Woehlke T he plot is now familiar: a youth spent courting liberal utopia morphing into a conservative middle age. Ken Hamblin's 766 THE FREEMAN • DECEMBER 1997 book is a patriotic romp, as he shares his faith in the enduring vibrancy of the Amer ican Dream. Along the way, a lot of leftist myths and cliches crash and burn. Hamblin was raised on welfare by his mother, a first-generation immigrant from Barbados. He didn't relish public assis tance; in fact, he hated it. He hated his mother's need to mooch off relatives, to beg credit from the local grocer, and to move frequently. He especially hated being forced to wear his mother's shoes to school one winter because there wasn't money to get him his own shoes. Unlike so many of today's urban poor, however, Hamblin's mother desperately wanted not to be on welfare and instilled this desperation in her son.

His first escape from poverty was courtesy of 1950sradio. Besides being entertained by "The Lone Ranger" and "The Shadow," Hamblin was moved by Jean Shepherd's inspirational stories of life throughout America. He dreamed of living outside his native Brooklyn. At 17, Hamblin joined the military, and got his first taste of life outside New York-and his first exposure to overt racism. He didn't permit himself to be victimized, but laughed off the racist petti ness and moved on. Hamblin's first jobs after the service were affirmative action opportunities, but he was driven to succeed on his own merits, first as a journalistic photographer, then a docu mentary producer, and ultimately a success ful talk show host and columnist. (Some call him the black Rush Limbaugh.) Readers are cautioned. As an "unassum ing colored guy," Hamblin, who is renowned for his brash approach to social issues, has the luxury of callin' 'em as he sees 'em. He has little patience for people of color who claim to purvey authentic black culture while espousing hatred, disrespect for women, and glorification of the drug cul ture. Harsh epithets are also reserved for those who make welfare their lifestyle and those who reap huge political benefit from championing the welfare dependency of others.

He saves the strongest vitriol, however, for the white intelligentsia who collaborate to preserve the "Myth of the Hobbled Black," the idea that inner-city social con ditions hobble poor people of color the way chains hobbled black slaves 150 years ago. He accuses them of waging a "War on Prosperity." Modern liberals, Hamblin maintains, needed proof that America doesn't work, so they actively acculturated people of color to see themselves as victims of an evil capitalist system. The liberals' social experimentation and their unwilling ness to hold inner-city sociopaths respon sible for antisocial behavior have left a bloody trail of murdered and maimed, in ner-city victims. This is a racism of the most insidious kind! Hamblin's message, for black, whites, everyone, is that in a free environment, each of us must decide if we will be winners or losers. "Once they decide they're not going to be losers, nothing-not the KKK, not the white citizens council, not any group of bigots, not the old laws of apartheid in South Africa-nothing can stop them be cause they will be able to dig deep in their souls to acquire the strength to carry on.

Welfare and liberal indulgence can never offer that kind of can-do attitude." May we all take these words to heart. D James Woehlke is a CPA and freelance writer.

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