Age of Inflation


George Koether is a businessman, economist, author, Journalist, lecturer, consultant, and long-time advocate of free market principles and practices.

Ludwig von Mises said it almost seventy years ago: “State regulation . . . in the sphere of banking, as everywhere else . . . has been a failure.”

Now one of Mises’ most eminent and articulate disciples, Professor Hans Sennholz of Grove City College, has restated that principle much more forcefully: “money is inflated, depreciated and ultimately destroyed whenever government holds monopolistic power over it.” That is the main lesson to be learned from Sennholz’s latest book, Age of Inflation.

This book deals with fundamentals: what is money, how was it created, what determines its value, how does it operate in an economy, what happens when money is “managed” by government, what alternatives 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 inflation 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 exposes the major monetary myths: that money was created by the State, that a growing economy requires a growing money “supply,” that unemployment can be cured by sufficient doses of inflation and that 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. Sennholz generously credits Friedman and the “monetarists” for the “analytical depth, scientific precision 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 having generated feverish booms and disastrous recessions.”

But Sennholz scorns Friedman’s recommendation for a slow but steady, planned and controlled increase in currency and bank deposits of three to five per cent per year. This lessened rate of inflation, Sennholz points out, still has deleterious effects upon the economy leading to recurring depressions. His summary coup de grace for Chicago School monetary theory is brief and to the point: “It is built on the quicksand 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 because it makes government the guardian of our money . . . . After all, it puts government in charge of economic stability and then prescribes monetary policies that will continue to generate business cycles.”

In a short discussion of Keynes, Samuelson, Hansen, Lerner and other “fine-tuners” of the economy who seem to think they can “manage” 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 computer models, its equations and projections—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 Federal Reserve System is unreserved and devastating. He calls it “the most important tool in the armory of economic interventionism.” Operated “with all the planners’ usual assumption of benevolent omniscience . . . . It provides the government with the money the planners think they should have, beyond the amount they dare take directly in taxes” and “it does all this by wrecking the purchasing power of the dollar . . . through a process exactly on a par with the coin-clipping of ancient kings—but much more diabolical because so much less visible.”

Citing Emergency Banking Regulation No. 1 which, he says, empowers the instant seizure of most bank deposits “in the event of an attack on the United States” and “prohibits the transfer of credit sought for any unauthorized purpose,” Sennholz describes the government’s monopoly over money via the Treasury and the Federal Reserve as a “ready instrument of tyranny.” He recommends 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 repealed

4. private coinage should be allowed

5. business taxes must be lowered considerably, and

6. the numerous legal immunities 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. “It 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 unemployment. So labor leaders “become 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 reform requiring a government agency established specifically for this task.

“This proposal,” says Sennholz, “assumed a state of economic and political enlightenment that surpasses by far the present state of economic and political thought.” Thus, reasons Sennholz, we may have to find our way back to monetary soundness via monetary freedom which will give the new gold standard “birth and meaning through inexorable economic law.” So sound money should be restored without the “aid” of government—aid which, as he has shown, has always been disastrous, not beneficent. “That is why we seek no reform, no restoration law, no conversion or parity, no government cooperation, merely freedom.”

In that freedom Sennholz envisions the development of “parallel” monies: Government’s paper money, and gold money, operating through free gold markets, free private coinage, enforceable gold contracts and a market-established (not government- established) exchange ratio between gold money and the government’s legal tender paper. People would be free to use whichever money they preferred. Hopefully, some day, an enlightened (or chastened?) 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 “will 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 “underground” or “other” economy which has developed as a sort of shunpike around the heavily-taxed toll road of our over-regulated 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 chosen by the market—i, e., gold or silver. And if the government, in order to finance 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 currency and the German mark.

This raises the intriguing image of Gresham’s Law being turned upside 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, competition among traders will displace bad money with good money—just as competition displaces poor products and services with better products and services.

Professor Sennholz does not say what might happen if the government 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 Byzantine 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: “Depending on the resistance offered by popular ignorance 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 propensity 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 dedication to the “giant educational task” before us. []

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.


January 1980

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