Although the Great Depression engulfed the world economy many years ago, it lives on as a nightmare for individuals old enough to remember and as a frightening specter in the textbooks of our youth.

Some 13 million Americans were unemployed, "not wanted" in the production process. One worker out of every four was walking the streets in want and despair. Thousands of banks, hundreds of thousands of businesses, and millions of farmers fell into bankruptcy or ceased operations entirely.

Nearly everyone suffered painful losses of wealth and income.

Many Americans are convinced that the Great Depression reflected the breakdown of an old economic order built on unhampered markets, unbridled competition, speculation, property rights, and the profit motive. According to them, the Great Depression proved the inevitability of a new order built on government intervention, political and bureaucratic control, human rights, and government welfare. Such persons, under the influence of Keynes, blame businessmen for precipitating depressions by their selfish refusal to spend enough money to maintain or improve the people’s purchasing power. This is why they advocate vast governmental expenditures and deficit spending — resulting in an age of money inflation and credit expansion.

Classical economists learned a different lesson. In their view, the Great Depression consisted of four consecutive depressions rolled into one. The causes of each phase differed, but the consequences were all the same: business stagnation and unemployment.

The Business Cycle

The first phase was a period of boom and bust, like the business cycles that had plagued the American economy in 1819—1820, 1839—1843, 1857—1860, 1873—1878, 1893—1897, and 1920—1921. In each case, government had generated a boom through easy money and credit, which was soon followed by the inevitable bust.

The spectacular crash of 1929 followed five years of reckless credit expansion by the Federal Reserve System under the Coolidge administration. In 1924, after a sharp decline in business, the Reserve banks suddenly created some $500 million in new credit, which led to a bank credit expansion of over $4 billion in less than one year. While the immediate effects of this new powerful expansion of the nation’s money and credit were seemingly beneficial, initiating a new economic boom and effacing the 1924 decline, the ultimate outcome was most disastrous. It was the beginning of a monetary policy that led to the stock-market crash in 1929 and the following depression. In fact, the expansion of Federal Reserve credit in 1924 constituted what Benjamin Anderson in his great treatise on recent economic history (Economics and the Public Welfare, D. Van Nostrand, 1949) called "the beginning of the New Deal."

The Federal Reserve credit expansion in 1924 also was designed to assist the Bank of England in its professed desire to maintain prewar exchange rates. The strong US dollar and the weak British pound were to be readjusted to prewar conditions through a policy of inflation in the United States and deflation in Great Britain.

The Federal Reserve System launched a further burst of inflation in 1927, the result being that total currency outside banks plus demand and time deposits in the United States increased from $44.51 billion at the end of June 1924, to $55.17 billion in 1929. The volume of farm and urban mortgages expanded from $16.8 billion in 1921 to $27.1 billion in 1929. Similar increases occurred in industrial, financial, and state and local government indebtedness. This expansion of money and credit was accompanied by rapidly rising real-estate and stock prices. Prices for industrial securities, according to Standard & Poor’s common stock index, rose from 59.4 in June of 1922 to 195.2 in September of 1929. Railroad stock climbed from 189.2 to 446.0, while public utilities rose from 82.0 to 375.1.

A Series of False Signals

The vast money and credit expansion by the Coolidge administration made 1929 inevitable. Inflation and credit expansion always precipitate business maladjustments and malinvestments that must later be liquidated. The expansion artificially reduces and thus falsifies interest rates, and thereby misguides businessmen in their investment decisions. In the belief that declining rates indicate growing supplies of capital savings, they embark upon new production projects. The creation of money gives rise to an economic boom. It causes prices to rise, especially prices of capital goods used for business expansion. But these prices constitute business costs. They soar until business is no longer profitable, at which time the decline begins. In order to prolong the boom, the monetary authorities may continue to inject new money until finally frightened by the prospects of a runaway inflation. The boom that was built on the quicksand of inflation then comes to a sudden end.

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The ensuing recession is a period of repair and readjustment. Prices and costs adjust anew to consumer choices and preferences.

And above all, interest rates readjust to reflect once more the actual supply of and demand for genuine savings. Poor business investments are abandoned or written down. Business costs, especially labor costs, are reduced through greater labor productivity and managerial efficiency, until business can once more be profitably conducted, capital investments earn interest, and the market economy function smoothly again.

After an abortive attempt at stabilization in the first half of 1928, the Federal Reserve System finally abandoned its easy-money policy at the beginning of 1929. It sold government securities and thereby halted the bank credit expansion. It raised its discount rate to 6 percent in August 1929. Time-money rates rose to 8 percent, commercial paper rates to 6 percent, and call rates to the panic figures of 15 percent and 20 percent. The American economy was beginning to readjust. In June 1929, business activity began to recede. Commodity prices began their retreat in July.

The security market reached its high on September 19 and then, under the pressure of early selling, slowly began to decline. For five more weeks, the public nevertheless bought heavily on the way down. More than 100 million shares were traded at the New York Stock Exchange in September. Finally it dawned upon more and more stockholders that the trend had changed. Beginning with October 24, 1929, thousands stampeded to sell their holdings immediately and at any price. Avalanches of selling by the public swamped the ticker tape. Prices broke spectacularly.

Liquidation and Adjustment

The stock market break signaled the beginning of a readjustment long overdue. It should have been an orderly liquidation and adjustment followed by a normal revival. After all, the financial structure of business was very strong. Fixed costs were low as business had refunded a good many bond issues and had reduced debts to banks with the proceeds of the sale of stock. In the following months, most business earnings made a reasonable showing. Unemployment in 1930 averaged under 4 million, or 7.8 percent of labor force.

In modern terminology, the American economy of 1930 had fallen into a mild recession. In the absence of any new causes for depression, the following year should have brought recovery as in previous depressions. In 1921—1922, the American economy recovered fully in less than a year. What, then, precipitated the abysmal collapse after 1929? What prevented the price and cost adjustments and thus led to the second phase of the Great Depression?

Disintegration of the World Economy

The Hoover administration opposed any readjustment. Under the influence of “the new economics” of government planning, the president urged businessmen not to cut prices and reduce wages, but rather to increase capital outlay, wages, and other spending in order to maintain purchasing power. He embarked upon deficit spending and called upon municipalities to increase their borrowing for more public works. Through the Farm Board, which Hoover had organized in the autumn of 1929, the federal government tried strenuously to uphold the prices of wheat, cotton, and other farm products. The GOP tradition was further invoked to curtail foreign imports.

The Smoot-Hawley Tariff Act of June 1930, raised American tariffs to unprecedented levels, which practically closed our borders to foreign goods. According to most economic historians, this was the crowning folly of the whole period from 1920 to 1933 and the beginning of the real depression. “Once we raised our tariffs,” wrote Benjamin Anderson,

an irresistible movement all over the world to raise tariffs and to erect other trade barriers, including quotas, began. Protectionism ran wild over the world. Markets were cut off. Trade lines were narrowed. Unemployment in the export industries all over the world grew with great rapidity. Farm prices in the United States dropped sharply through the whole of 1930, but the most rapid rate of decline came following the passage of the tariff bill.

When President Hoover announced he would sign the bill into law, industrial stocks broke 20 points in one day. The stock market correctly anticipated the depression.

The protectionists have never learned that curtailment of imports inevitably hampers exports. Even if foreign countries do not immediately retaliate for trade restrictions injuring them, their foreign purchases are circumscribed by their ability to sell abroad. This is why the Smoot-Hawley Tariff Act which closed our borders to foreign products also closed foreign markets to our products. American exports fell from $5.5 billion in 1929 to $1.7 billion in 1932. American agriculture customarily had exported over 20 percent of its wheat, 55 percent of its cotton, 40 percent of its tobacco and lard, and many other products. When international trade and commerce were disrupted, American farming collapsed. In fact, the rapidly growing trade restrictions, including tariffs, quotas, foreign-exchange controls, and other devices were generating a worldwide depression.

Agricultural commodity prices, which had been well above the 1926 base before the crisis, dropped to a low of 47 in the summer of 1932. Such prices as $2.50 a hundredweight for hogs, $3.28 for beef cattle, and 32¢ a bushel for wheat plunged hundreds of thousands of farmers into bankruptcy. Farm mortgages were foreclosed until various states passed moratoria laws, thus shifting the bankruptcy to countless creditors.

Rural Banks in Trouble

The main creditors of American farmers were, of course, the rural banks. When agriculture collapsed, the banks closed their doors. Some 2,000 banks, with deposit liabilities of over $1.5 billion, suspended between August 1931, and February 1932. Those banks that remained open were forced to curtail their operations sharply. They liquidated customers’ loans on securities, contracted real-estate loans, pressed for the payment of old loans, and refused to make new ones. Finally, they dumped their most marketable bond holdings on an already depressed market. The panic that had engulfed American agriculture also gripped the banking system and its millions of customers.

The American banking crisis was aggravated by a series of events involving Europe. When the world economy began to disintegrate and economic nationalism ran rampant, European debtor countries were cast in precarious payment situations. Austria and Germany ceased to make foreign payments and froze large English and American credits; when England finally suspended gold payments in September 1931, the crisis spread to the United States. The fall in foreign bond values set off a collapse of the general bond market, which hit American banks at their weakest point — their investment portfolios.

Depression Compounded

Nineteen Thirty-One was a tragic year. The whole nation, in fact, the whole world, fell into the cataclysm of despair and depression. American unemployment jumped to more than 8 million and continued to rise. The Hoover administration, summarily rejecting the thought that it had caused the disaster, labored diligently to place the blame on American businessmen and speculators. President Hoover called together the nation’s industrial leaders and pledged them to adopt his program to maintain wage rates and expand construction. He sent a telegram to all the governors, urging cooperative expansion of all public-works programs. He expanded federal public works and granted subsidies to ship construction. And for the benefit of the suffering farmers, a host of federal agencies embarked upon price-stabilization policies that generated ever-larger crops and surpluses, which in turn depressed product prices even further. Economic conditions went from bad to worse, and unemployment in 1932 averaged 12.4 million.

In this dark hour of human want and suffering, the federal government struck a final blow. The Revenue Act of 1932 doubled the income tax, the sharpest increase in the federal tax burden in American history. Exemptions were lowered, “earned income credit” was eliminated. Normal tax rates were raised from a range of 11/2 to 5 percent to a range of 4 to 8 percent, surtax rates from 20 percent to a maximum of 55 percent. Corporation tax rates were boosted from 12 percent to 133/4 and 141/2 percent. Estate taxes were raised. Gift taxes were imposed with rates from 3/4 to 331/2 percent. A 10 percent gasoline tax was imposed, a 3 percent automobile tax, a telegraph and telephone tax, a 2¢ check tax, and many other excise taxes. And finally, postal rates were increased substantially.

When state and local governments faced shrinking revenues, they, too, joined the federal government in imposing new levies. The rate schedules of existing taxes on income and business were increased and new taxes imposed on business income, property, sales, tobacco, liquor, and other products.

Murray Rothbard, in his authoritative work on America’s Great Depression (Van Nostrand 1963), estimates that the fiscal burden of federal, state, and local governments nearly doubled during the period, rising from 16 percent of net private product to 29 percent. This blow, alone, would bring any economy to its knees, and shatters the silly contention that the Great Depression was a consequence of economic freedom.

The New Deal of NRA and AAA

One of the great attributes of the private-property market system is its inherent ability to overcome almost any obstacle. Through price and cost readjustment, managerial efficiency and labor productivity, new savings and investments, the market economy tends to regain its equilibrium and resume its service to consumers. It doubtless would have recovered in short order from the Hoover interventions had there been no further tampering.

However, when Franklin Delano Roosevelt assumed the presidency, he, too, fought the economy all the way. In his first 100 days, he swung hard at the profit order. Instead of clearing away the prosperity barriers erected by his predecessor, he built new ones of his own. He struck in every known way at the integrity of the US dollar through quantitative increases and qualitative deterioration. He seized the people’s gold holdings and subsequently devalued the dollar by 40 percent.

With some third of industrial workers unemployed, President Roosevelt embarked upon sweeping industrial reorganization. He persuaded Congress to pass the National Industrial Recovery Act (NIRA), which set up the National Recovery Administration (NRA). Its purpose was to get business to regulate itself, ignoring the antitrust laws and developing fair codes of prices, wages, hours, and working conditions. The president’s Re-employment Agreement called for a minimum wage of 40¢ an hour ($12 to $15 a week in smaller communities), a 35-hour work week for industrial workers and 40 hours for white-collar workers, and a ban on all youth labor.

This was a naïve attempt at “increasing purchasing power” by increasing payrolls. But, the immense increase in business costs through shorter hours and higher wage rates worked naturally as an antirevival measure. After passage of the act, unemployment rose to nearly 13 million. The South, especially, suffered severely from the minimum-wage provisions. The act forced 500,000 Negroes out of work.

Nor did President Roosevelt ignore the disaster that had befallen American agriculture. He attacked the problem by passage of the Farm Relief and Inflation Act, popularly known as the First Agricultural Adjustment Act. The objective was to raise farm income by cutting the acreages planted or destroying the crops in the field, paying the farmers not to plant anything, and organizing marketing agreements to improve distribution. The program soon covered not only cotton, but also all basic cereal and meat production as well as principal cash crops. The expenses of the program were to be covered by a new “processing tax” levied on an already depressed industry.

NRA codes and AAA processing taxes came in July and August of 1933. Again, economic production which had flurried briefly before the deadlines, sharply turned downward. The Federal Reserve index dropped from 100 in July to 72 in November of 1933.

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Pump-Priming Measures

When the economic planners saw their plans go wrong, they simply prescribed additional doses of federal pump priming. In his January 1934 budget message, Mr. Roosevelt promised expenditures of $10 billion while revenues were at $3 billion. Yet the economy failed to revive; the business index rose to 86 in May of 1934, and then turned down again to 71 by September. Furthermore, the spending program caused a panic in the bond market, which cast new doubts on American money and banking.

Revenue legislation in 1933 sharply raised income-tax rates in the higher brackets and imposed a 5 percent withholding tax on corporate dividends. Tax rates were raised again in 1934. Federal estate taxes were brought to the highest levels in the world. In 1935, federal estate and income taxes were raised once more, although the additional revenue yield was insignificant. The rates seemed clearly aimed at the redistribution of wealth.

According to Benjamin Anderson,

the impact of all these multitudinous measures — industrial, agricultural, financial, monetary and other — upon a bewildered industrial and financial community was extraordinarily heavy. We must add the effect of continuing disquieting utterances by the president. He had castigated the bankers in his inaugural speech. He had made a slurring comparison of British and American bankers in a speech in the summer of 1934…. That private enterprise could survive and rally in the midst of so great a disorder is an amazing demonstration of the vitality of private enterprise.

Then came relief from unexpected quarters. The “nine old men” of the Supreme Court, by unanimous decision, outlawed NRA in 1935 and AAA in 1936. The Court maintained that the federal legislative power had been unconstitutionally delegated and states’ rights violated.

These two decisions removed some fearful handicaps under which the economy was laboring. NRA, in particular, was a nightmare with continuously changing rules and regulations by a host of government bureaus. Above all, voidance of the act immediately reduced labor costs and raised productivity as it permitted labor markets to adjust. The death of AAA reduced the tax burden of agriculture and halted the shocking destruction of crops. Unemployment began to decline. In 1935 it dropped to 9.5 million, or 18.4 percent of the labor force, and in 1936 to only 7.6 million, or 14.5 percent.

A New Deal for Labor

The third phase of the Great Depression was thus drawing to a close. But there was little time to rejoice, for the scene was being set for another collapse in 1937 and a lingering depression that lasted until the day of Pearl Harbor. More than 10 million Americans were unemployed in 1938, and more than 9 million in 1939.

The relief granted by the Supreme Court was merely temporary. The Washington planners could not leave the economy alone; they had to earn the support of organized labor, which was vital for reelection.

The Wagner Act of July 5, 1935, earned the lasting gratitude of labor. This law revolutionized American labor relations. It took labor disputes out of the courts of law and brought them under a newly created federal agency, the National Labor Relations Board, which became prosecutor, judge, and jury, all in one. Labor-union sympathizers on the board further perverted the law that already afforded legal immunities and privileges to labor unions. The United States thereby abandoned a great achievement of Western civilization: equality under the law.

The Wagner Act, or National Labor Relations Act, was passed in reaction to the Supreme Court’s voidance of NRA and its labor codes. It aimed at crushing all employer resistance to labor unions. Anything an employer might do in self-defense became an “unfair labor practice” punishable by the board. The law not only obliged employers to deal and bargain with the unions designated as the employees’ representative; later board decisions also made it unlawful to resist the demands of labor-union leaders.

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Following the election of 1936, the labor unions began to make ample use of their new powers. Through threats, boycotts, strikes, seizures of plants, and outright violence committed in legal sanctity, they forced millions of workers into membership. Consequently, labor productivity declined and wages were forced upward. Labor strife and disturbance ran wild. Ugly sit-down strikes idled hundreds of plants. In the ensuing months, economic activity began to decline and unemployment again rose above the ten-million mark.

But the Wagner Act was not the only source of crisis in 1937. President Roosevelt’s shocking attempt at packing the Supreme Court, had it been successful, would have subordinated the judiciary to the executive. In the US Congress, the president’s power was unchallenged. Heavy Democratic majorities in both houses, perplexed and frightened by the Great Depression, blindly followed their leader. But when the president strove to assume control over the judiciary, the American nation rallied against him, and he lost his first political fight in the halls of Congress.

There was also his attempt at controlling the stock market through an ever-increasing number of regulations and investigations by the Securities and Exchange Commission. “Insider” trading was barred, high and inflexible margin requirements imposed and short selling restricted, mainly to prevent repetition of the 1929 stock-market crash. Nevertheless the market fell nearly 50 percent from August of 1937 to March of 1938. The American economy again underwent dreadful punishment.

Other Taxes and Controls

Yet other factors contributed to this new and fastest slump in US history. The Undistributed Profits Tax of 1936 struck a heavy blow at profits retained for use in business. Not content with destroying the wealth of the rich through confiscatory income and estate taxation, the administration meant to force the distribution of corporate savings as dividends subject to the high income-tax rates. Though the top rate finally imposed on undistributed profits was “only” 27 percent, the new tax succeeded in diverting corporate savings from employment and production to dividend income.

Amidst the new stagnation and unemployment, the president and Congress adopted yet another dangerous piece of New Deal legislation: the Wages and Hours Act or Fair Labor Standards Act of 1938. The law raised minimum wages and reduced the work week in stages to 44, 42, and 40 hours. It provided for time-and-a-half pay for all work over 40 hours per week and regulated other labor conditions. Again, the federal government thus reduced labor productivity and increased labor costs — ample grounds for further depression and unemployment.

Throughout this period, the federal government, through its monetary arm, the Federal Reserve System, endeavored to reinflate the economy. Monetary expansion from 1934 to 1941 reached astonishing proportions. The monetary gold of Europe sought refuge from the gathering clouds of political upheaval, boosting American bank reserves to unaccustomed levels. Reserve balances rose from $2.9 billion in January 1934, to $14.4 billion in January of 1941. And with this growth of member-bank reserves, interest rates declined to fantastically low levels. Commercial paper often yielded less than 1 percent, bankers’ acceptances from 1/8 percent to 1/4 percent. Treasury-bill rates fell to 1/10 of 1 percent and Treasury bonds to some 2 percent. Call loans were pegged at 1 percent and prime customers’ loans at 11/2 percent. The money market was flooded and interest rates could hardly go lower.

Deep-Rooted Causes

The American economy simply could not recover from these successive onslaughts by first the Republican and then the Democratic administrations. Individual enterprise, the mainspring of unprecedented income and wealth, didn’t have a chance.

The calamity of the Great Depression finally gave way to the holocaust of World War II. When more than 10 million able-bodied men had been drafted into the armed services, unemployment ceased to be an economic problem. And when the purchasing power of the dollar had been cut in half through vast budget deficits and currency inflation, American business managed to adjust to the oppressive costs of the Hoover-Roosevelt “Deals.” The radical inflation in fact reduced the real costs of labor and thus generated new employment in the postwar period.

Nothing would be more foolish than to single out the men who led us in those baleful years and condemn them for all the evil that befell us. The ultimate roots of the Great Depression were growing in the hearts and minds of the American people. It is true, they abhorred the painful symptoms of the great dilemma. But the large majority favored and voted for the very policies that made the disaster inevitable: inflation and credit expansion, protective tariffs, labor laws that raised wages and farm laws that raised prices, ever higher taxes on the rich and distribution of their wealth. The seeds for the Great Depression were sown by scholars and teachers during the 1920s and earlier when social and economic ideologies that were hostile toward our traditional order of private property and individual enterprise conquered our colleges and universities. The professors of earlier years were as guilty as the political leaders of the 1930s.

Social and economic decline is facilitated by moral decay. Surely, the Great Depression would be inconceivable without the growth of covetousness and envy of great personal wealth and income, the mounting desire for public assistance and favors. It would be inconceivable without an ominous decline of individual independence and self-reliance, and above all, the burning desire to be free from man’s bondage and to be responsible to God alone.

Can it happen again? Inexorable economic law ascertains that it must happen again whenever we repeat the dreadful errors that generated the Great Depression.

This originally appeared at Mises.org.

Dr. Hans F. Sennholz [send him mail] was professor and chairman of the department of economics at Grove City College. See his website.

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This article is excerpted from the book The Age of Inflation.

The German inflation of 1914—1923 had an inconspicuous beginning, a creeping rate of one to two percent. On the first day of the war, the German Reichsbank, like the other central banks of the belligerent powers, suspended redeemability of its notes in order to prevent a run on its gold reserves.

Like all the other banks, it offered assistance to the central government in financing the war effort. Since taxes are always unpopular, the German government preferred to borrow the needed amounts of money rather than raise its taxes substantially. To this end it was readily assisted by the Reichsbank, which discounted most treasury obligations.

A growing percentage of government debt thus found its way into the vaults of the central bank and an equivalent amount of printing press money into people’s cash holdings. In short, the central bank was monetizing the growing government debt.

By the end of the war the amount of money in circulation had risen fourfold and prices some 140 percent. Yet the German mark had suffered no more than the British pound, was somewhat weaker than the American dollar but stronger than the French franc. Five years later, in December 1923, the Reichsbank had issued 496.5 quintillion marks, each of which had fallen to one-trillionth of its 1914 gold value.

How stupendous! Practically every economic good and service was costing trillions of marks. The American dollar was quoted at 4.2 trillion marks, the American penny at 42 billion marks. How could a European nation that prided itself on its high levels of education and scholarly knowledge suffer such a thorough destruction of its money? Who would inflict on a great nation such evil which had ominous economic, social, and political ramifications not only for Germany but for the whole world? Was it the victors of World War I who, in diabolical revenge, devastated the vanquished country through ruinous financial manipulation and plunder? Every mark was printed by Germans and issued by a central bank that was governed by Germans under a government that was purely German. It was German political parties, such as the Socialists, the Catholic Centre Party, and the Democrats, forming various coalition governments, that were solely responsible for the policies they conducted. Of course, admission of responsibility for any calamity cannot be expected from any political party.

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Dr. Hans F. Sennholz [send him mail] was professor and chairman of the department of economics at Grove City College. See his website.

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Central banks live by a simple financial principle: Whenever economic activity stagnates or declines, they quickly lower their interest rates and expand their credits. But when business seems to improve, they hesitate and vacillate in removing the rate cuts. The consequence is a permanent addition to liquidity. According to calculations of the German central bank, between the end of 1997 and September 2006 the stock of world money nearly doubled, but nominal economic production rose only by some 60 percent. Such an imbalance is bound to either cause consumer prices to rise or create price bubbles in stock, loan, or real estate markets. When they finally burst they are likely to inflict many personal losses and force businesses to repair and readjust.

Every week we may hear and read about new corporate mergers and acquisitions. Flush with cash, private equity firms are ever ready for more deal-making, bidding for and acquiring another company. The merger and acquisition boom is buoying stock prices across the board, which is benefitting most investors. Moreover, as some corporations are being taken private and others are engaged in stock buybacks, thereby reducing the overall supply of corporate shares, the stock market is enjoying an extraordinary boom which many investors hope will never end.

Some economists are scoffing at such optimism; they like to point at the bursting of the bubble in 1929 which led to the Great Depression of the 1930s. They also remember the bursting of the Japanese bubble in the early 1990s, which kept the Japanese economy depressed for nearly a decade. And they cannot forget War II and postwar monetary policies which, by the beginning of the 1970s, had flooded the world with U.S. dollars. Some countries finally removed their currency ties to the dollar, and the oil-exporting countries cut their supplies of oil, which caused raw-material prices to soar. In the early 1980s, it took major Federal Reserve restraint to restore some measure of stability and several years for business to repair some damage and allow the American economy to expand again.

At the present, government planners and central bankers are making the same mistakes all over again. They all seem to like low interest rates, thereby rendering capital less expensive. When real interest rates are depressed, as has been the case all over Europe and in the United States early in the present decade, the economy loses a sense of direction, which may allow even unproductive producers to remain in business. In the long run, without the guidance of true market rates of interest, economies lose efficiency and productivity.

In a free economy, interest rates play a role similar to those played by prices and wages. They all spring from the people’s choices and value judgments, giving rise to “demand and supply” and guiding producers in their decisions. The market rate of interest is a gross rate usually consisting of three distinctive components: the pure rate, the depreciation rate, and the debtor’s risk premium. The pure rate is the very core stemming from man’s very nature which forces him to view economic phenomena in the passage of time. He ascribes a lower value to future goods and conditions than to present provisions; the difference is the pure rate. The depreciation component appears whenever government or its central bank inflates, thereby depreciating the currency; the rate of currency depreciation determines the size of the component. The debtor’s risk premium, finally, reflects the reliability and trustworthiness of the debtor.

Central bankers rarely pay attention to the market rate. Their policies are guided by popular doctrines calling for stimulation of national employment and income. They seem to be unaware that all rates other than market rates give false signals to producers and consumers alike; they cause maladjustments. Rates that are lower than market rates promptly increase the demand for credit. With all recent rates below the market rate it cannot be surprising that total American debt has surged by several trillion dollars. Last year, household debt alone rose by more than one trillion dollars. The federal government itself has been adding more than two billion every day. The Federal Reserve System, together with some 7,900 commercial banks, provided the funds; and foreign central banks and commercial banks invested their dollar earnings in nearly one-half of the federal government’s debt.

Such credit expansion, unsupported by genuine savings and capital formation, generates illusionary gains making people believe that they are more prosperous than they actually are. Stock and real estate prices soar, tempting people to spend their gains, improve their homes and build mansions. Actually, they all — businessmen and stockbrokers, executives and workers — may consume their material substance. But no matter how low the Federal Reserve may set its rate, the boom is bound to come to an end as soon as the maladjustments inflict losses on business. As more and more businesses face difficulties or even fail, the readjustment begins, forcing them to respond to the actual conditions of the market.

Today, the Federal Reserve is doggedly ignoring the market rate of interest. It continues to direct the credit expansion, which not only has turned housing into a large bubble and rekindled the stock market but also has given rise to a voluminous foreign trade imbalance. Both domestic and foreign maladjustments are inflicting growing pains on commerce and industry.

Some economists are convinced that central banks may have a ready escape from the dilemma: they may gradually return to higher rates of inflation which forces all fixed-income receivers and bond holders to bear the most losses. Optimists even like to point to the impact of globalization, which seems to limit the inflationary effects to real estate and the booming mergers-and-acquisitions market. But most economists are fearful of a recession which is a normal part of a business cycle. Fear may take hold of the minds of businessmen, production may be curtailed, and unemployment may rise. Government is bound to embark upon employment programs and assume increased public welfare responsibilities. It may even reduce some taxes, increase its budget, and force its central bank to lower interest rates another notch. The rate of inflation is bound to soar.

A few pessimistic economists are convinced that a devastating economic cataclysm lies ahead. They usually point to three threats that may have a serious impact on the American economy. There is the burgeoning tower of public and private debt resting on a foundation of greed and overindulgence. There are a multimillion-dollar list of promises to a retirement system and a vast building of government guarantees and promises that are bound to be unkept. There even is a world of complex derivatives, the value of which depends on something else, such as stocks, bonds, futures, options, loans, and even promises. They all, according to these economists, will be the victims of the coming cataclysm.

This economist, who has observed central bank policies since the 1950s, is in basic accord and feels sympathy for these pessimists. They seem to have a clear view of the principles of money markets and the policies conducted by governments ever since they discarded the natural money order, that is, the gold and silver standards. But these pessimists tend to ignore the countless ruses, devices, and stratagems used by government officials and central bankers to hide the consequences of their policies. Long before there will be a financial Armageddon, there will be a myriad of government regulations, controls, edicts, and rulings that hide the consequences of monetary policies. Policies will be readjusted frequently to cover the actual effects. Given the public confusion and unfamiliarity with monetary policies and their consequences, a large majority of the public is likely to accept official explanations and welcome the regulators and controllers.

After a short period of price and wage controls, the voices of reason, which at the present are barely audible, may be heard again. They may even be allowed to get the American economy moving again, by abolishing the myriad of price and wage controls and allowing wages and prices to readjust to market forces. They may even have to conduct a currency reform, that is, issue new money at various ratios to the old. Most countries all over the globe have suffered currency reforms in recent decades; it would be a new experience for Americans.

We cannot tell what the future will bring, but we must always prepare for it. This economist is bracing for a gradual increase of political controls over economic life, leading to countless maladjustments, distortions, and stagnations. But this trend of policy and its harmful effects is contravened by the world-wide movement toward globalization. As trade doors open all over the globe and business capital is free to move to friendly countries enjoying rapidly rising levels of productivity and living, it will be difficult for American political controllers and regulators to hold on to their powers and move toward a command system. They cannot douse the light of economic freedom shining in so many places.

Dr. Hans F. Sennholz [send him mail] was professor and chairman of the department of economics at Grove City College. See his website.

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This paper was prepared for the Grove City College conference on The Legacy of Ludwig von Mises, February 23—24, 2007.

It is quite a task to talk about teachers who played important roles in our lives. Professor Ludwig von Mises played a decisive role in my life. I met him in 1950 when he was 70 years old, teaching at New York University, and I was 28, seeking a new beginning in the United States. I was aware of the Professor, of the important role he was playing in the fields of economic and social thought. Two years earlier, when I was a student of economics and law at the University of Marburg in Germany, his name had come up again and again among a few interested students. German professors did not mention him, but students readily did; they were keenly aware of the evils of the old socialist order and the importance of a new beginning in individual freedom and a free market order. The University library had one copy of Mises’ book The Theory of Money and Credit. There was a waiting list of several weeks before a student could borrow the copy for a few days. I patiently waited before I had the opportunity to read and enjoy the book.

Having come to the United States in December 1949, I was living with relatives, and soon decided to add an American Ph.D. to my German degrees in order to open American employment doors. Many were closed to my Marburg and Cologne degrees. As a poor immigrant, I had my eyes on Wall Street, which caused me to search for the university that offered the best financial and monetary courses. In January and February 1950, I visited several New York universities, requesting catalogues and application forms. I visited Columbia University, Fordham University, New York University, and several other institutions of learning. To my complete surprise, I found Professor Mises’ name listed in the NYU Graduate School of Business Administration catalogue. I had now found the institution where I would earn my American degree.

Professor Mises had arrived in New York from Switzerland, Spain, and Portugal on August 2, 1940. He immediately resumed his educational efforts by writing two relevant books which Yale University Press readily published. Omnipotent Government appeared in May 1944, a second printing in February 1945 and a third in May 1945. Bureaucracy was first published in September 1944, a second printing in October 1944, and the third in January 1946. Generous grants by the Rockefeller Foundation and the National Bureau of Economic Research supported him in his study and writing.

American universities had no regular academic position for this foremost Austrian scholar. But, in 1945, the Graduate School of Business Administration of New York University accepted him as “Visiting Professor” as long as the Volker Fund in Burlingame, California, and other foundations and funds provided his support. But even when university administrators became conversant with his thought during the 1950s and 1960s, they were not prepared to employ a great mind like Mises. In seventeen years of effective teaching at the University of Vienna, the authorities did not let him go any further in his academic career than to an unsalaried Visiting Professor. In twenty-four years of teaching in the United States (1945—1969) he was never promoted. Among the many institutions of higher learning in Europe and America, both the University of Vienna and New York University distinguished themselves in that they tolerated his teaching, provided it did not cost them a penny.

Professor von Mises’ main teaching effort in Vienna focused on his non-accredited “private seminar” in which as many as forty to fifty young people gathered around him for informal discussions of important economic and philosophical issues. From this small Mises circle in Vienna emerged some of the most eminent scholars of our day — e.g., Friedrich A. von Hayek, Gottfried von Haberler, Fritz Machlup, Oskar Morgenstern, Erich Voegelin, and others. “There was greatness in this unassuming exchange of ideas,” Mises later recalled, “and in it we all found happiness and satisfaction.”

At New York University, Professor von Mises conducted a formal seminar for students interested in writing master’s reports and doctoral dissertations. The weekly meeting attracted not only a few serious degree candidates but also several nonregistered students from the New York City area. The circle was joined by some of Mises’ eminent friends, such as Henry Hazlitt and Lawrence Fertig, and other scholars who happened to be in town.

In the fall of 1950, working in a television factory to earn my living expenses and school tuition, I registered and enrolled in Professor Mises’ basic course on Political Economy. I was impressed by the large size of his class, some 100 to 120 students who listened attentively to his lectures. But talking to a few of his students, I soon found that they were aware of his Austrian accent and background but utterly unaware of an Austrian school of thought and the eminent role Professor Mises played in the history of economic thought. They merely were meeting easy class and credit requirements but were not studying Misesian thought.

I soon introduced myself to the professor and petitioned him to become my tutor and sponsor for a Doctor of Philosophy degree. But I was surprised and actually hurt that he rejected me without hesitation. His reply: “The School has strenuous requirements which most students cannot meet.” Surely, I was aware that the School conferred many Master’s Degrees but only a handful of Ph.D.s every year and that, since his appointment as “visiting professor,” Professor Mises only had one degree candidate — Louis Spadaro, associate professor of economics at Fordham University. Professor Mises’ blunt rejection of me undoubtedly made sense in the light of the school’s stringent policy and tradition; but this student could not be discouraged so easily. When, six weeks later, I petitioned him again, always communicating in German, he surprised me by readily accepting me in a friendly manner, waxing eloquently about his past experience. I never learned whether he treated and tested all his applicants in such a manner or whether he had seen my school application revealing my Cologne University doctorate. I was to become his first Ph.D. at New York University, one of four who passed his and the school’s rigorous requirements. Thereafter, our relationship was always cordial and like colleagues until he passed away in 1973.

I don’t know whether Professor Mises’ lectures and seminar discourses would have made me an Austrian scholar. At that time my eyes were on Wall Street and the fortune I intended to earn there. I was confident that, in the long run, thorough knowledge of money and credit, of the trade cycle, and the effects of government intervention would yield fame and fortune. Toward that end, knowledge of Austrian and especially Misesian theory would be useful and profitable. But I never intended to make such knowledge and teaching my life’s work. Two distinct causes pointed and guided me in this new direction.

Professor von Mises himself provided the first and strongest impetus. Soon after I appeared in his classes and he had accepted me as a candidate, he introduced me to a friend and admirer, an eminent industrialist and the founder of Libertarian Press, Frederick Nymeyer, who was eager to publish great Austrian books not yet available in English. Professor Mises had pointed him toward the scholarly writings of his own great teacher Eugen von Bhm-Bawerk (1857—1914), whose three-volume magnum opus, Capital and Interest, was accessible only to German readers, and recommended the name “Libertarian Press” for the new publishing venture. It needed a translator and publisher who would introduce it to the wide English-speaking world. Frederick Nymeyer was the eager publisher and I was elected to be the translator. As I had never been a translator, I had serious doubts about my linguistic ability to translate some 1200 pages of scholarly text from my mother tongue into a foreign language. Surely, I had had three years of English in high school and had learned more since then, but I surely was no translator of scholarly sentences, half a page long, written by a former Secretary of Finance of the Austro-Hungarian monarchy. But Professor Mises persisted in his advice, which I began to understand only several years later. I conquered the tome, translating two pages a day, earning a $10 fee per page. It made me a lucid English writer and, above all, an Austrian economist — which may have been Professor Mises’ intent all along.

It is noteworthy that, in 1984, the Nymeyer estate sold not only the inventory of Bhm-Bawerk books to our son Robert and daughter-in-law Lyn but also Libertarian Press itself. Its inventory of Austrian titles now is located in a warehouse in Grove City.

Mrs. Mises induced me to translate the Professor’s memoirs many years later, in 1977. He had penned his Notes and Recollections soon after his arrival in the U.S., in August 1940. They read like the last testimony of a resistance fighter who is looking back because there may be no tomorrow. It is a statement of defiance, proud of his efforts, and exalted in his integrity to the end. (Libertarian Press, 1978).

The other force that changed my direction from Wall Street to the world of academe was my wife. Her older sister being happily married to a professor at Penn State University had introduced her to the free and serene lifestyle of a college professor. When she met me in the Mises seminar, she soon saw in me a potential professor and encouraged me to move in that direction. I have never regretted our joint path.

As the promoter of translations of great Austrian books, Professor Mises undoubtedly kept an eye on this translator. The special family relationship that developed probably rested on the words and deeds of Mrs. Margit von Mises. At a social seminar meeting at the Mises residence in Manhattan, she had introduced me to another seminarian who was to become my life partner, Mary Elizabeth Homan. As our “matchmaker,” she later insisted upon becoming our son’s godmother. She carried him during his baptism in front of our Lutheran congregation in Dobbs Ferry while the Professor watched the proceedings sitting in the last pew. He declined an invitation to a congregational reception afterwards, which made us return for lunch to our third floor apartment at 14 South Broadway in Irvington. Throughout her long life (Mrs. Mises followed him in death, eight days before her 103rd birthday) she faithfully observed her godson’s birthdays and holidays with cards, letters, gifts and phone calls.

Another personal bond that allowed us to befriend both the professor and his wife was our 1956 publication of the Mises Festschrift. A few ardent students were keenly aware that the professor’s 50th anniversary of his Dr.jur. degree from the University of Vienna was approaching and that none of his old colleagues and friends was making preparations for a volume of learned articles as a tribute to the 75-year old scholar. Therefore, my wife invited the most famous Mises friends and colleagues to contribute to a volume in his honor. Nineteen responded promptly. There was C. Antoni in Italy, Faustino Ballvé in Mexico, Louis Baudin, Bertrand de Jouvenel, and Jacque Rueff in France, W. H. Hutt and L.M. Lachmann in South Africa, William E. Rappard and Wilhelm Röpke in Switzerland, and Percy L. Greaves, Jr., F. A. Harper, F. A. Hayek, Henry Hazlitt, Fritz Machlup, William H. Peterson, Leonard E. Read, Murray N. Rothbard, Louis M. Spadaro, and this writer in the United States. In March 1956, my wife presented the Festschrift to the professor at a banquet, arranged by Leonard Read, the founder and president of the Foundation for Economic Education. It was a grand evening at the University Club in New York City, with excellent speeches by F. A. Hayek, Leonard Read, Fritz Machlup, and Henry Hazlitt. When, thirty-six years later, I headed the Foundation for Economic Education it re-published a large paper-covered edition in 1994. At that time, most of the authors who in 1955 had collaborated in the preparation of the Festschrift had departed this life.

In 1956 this writer joined the Grove City College faculty. The Chairman of the Board, J. Howard Pew, may have been my sponsor as we had met several times and he had heard me lecture at The Foundation for Economic Education, of which he also had been Chairman. In a conversation with the new College president, J. Stanley Harker, I had mentioned the opportunity to confer an honorary degree on Professor Mises; it would give Grove City College the distinction of being the first to confer such an honor on a great scholar, now 75 years old, author of numerous books and countless articles, and foremost champion and guardian of the free society. President Harker and the Board of Trustees apparently agreed and granted him an honorary Doctor of Laws degree (L.L.D.) at its seventy-seventh commencement on June 8, 1957. As the College was not accustomed nor prepared to give a special reception after the graduation exercise, Mary and I invited the trustees and faculty members to meet the honoree at our house at 200 East Pine Street. Most trustees and faculty members were eager to meet the famous professor and joined us in our living room. J. Howard Pew and his wife led the way.

A few months earlier, the University of Vienna, which had conferred the doctorate on him in 1906, had renewed his title. It was, according to the dean’s correspondence, a special honor granted only to the most meritorious recipients. Despite the University of Vienna’s and Grove City College’s recognition and honors, the professor’s influence continued to be rather negligible in the mainstream of economic thought. Yet he continued to meet his classes at New York University until the spring of 1969 at the age of 87, regularly lectured at the Foundation for Economic Education in Irvington until 1972, at the age of ninety, and went on numerous lecture tours. In 1962 the President of Austria honored him, conferring the Austrian Medal of Honor for Science and Art, which is the highest decoration the Austrian government can bestow on “one of her sons”; the Austrian ambassador bestowed it at a luncheon in Washington with many friends and former students in attendance. A year later, New York University managed to confer on him the honorary degree of Doctor of Laws “for his exposition of the philosophy of the free market and his advocacy of a free society.” And in 1964, the University of Freiburg in Germany, where F. A. Hayek occupied an influential position, granted him the honorary degree of Doctor Rerum Politicarum. On his 90th birthday on September 29, 1971, his old friend, Larry Fertig, at a small party at the New York University Club, presented to him a two-volume Festschrift of seventy-one essays by scholars in eighteen countries, former students and ardent admirers from all over the world.

Throughout the 1960s we remained in close touch with Professor and Mrs. von Mises. Whenever we went to New York we would be invited for tea in their apartment at 777 West End Avenue. I would have to report about my academic activity and especially about my current research and writing. Mrs. Mises always wanted to know about the growth of her godson. In November 1970, when he was 89 years old, they returned to Grove City College. I had invited the Professor upon the urging of my students who were most eager to see the famous author. Unfortunately, the octogenarian failed to impress and persuade many twenty-year olds. He had been more vigorous and persuasive on a few earlier speaking tours on which I was fortunate to accompany him. When, in 1964, no other young economist could be found to travel with the master and his spouse, I, together with my spouse, was chosen to join them and add my lectures. The Miseses and Sennholzes toured Costa Rica and Guatemala together, giving lectures and seminars at several universities. I always knew my place and deportment in the presence of the teacher and his spouse.

The Mises spent their last summer (1973) at a health resort near Lucerne, Switzerland, enjoying the view of beautiful lakes and snow-covered mountains. Our son Robert, at the young age of seventeen, attending summer school in Germany, did not miss the opportunity to visit the Mises. With a bouquet of flowers in hand, he greeted his godmother and her husband. He spent the day with them, returning to his school the following morning. It is not difficult to imagine the communication between a boy of seventeen and his hosts in their eighties and nineties. The Mises returned to New York in August. The professor promptly entered the hospital, which he never left.

Although a great man may die, his thought and deeds may survive and leave an indelible stamp on his fellow men. Ludwig von Mises left the stage of life but lives on in many books and hundreds of articles he published and in thousands of publications about his ideas. He wrote originally in German but continued in English soon after his arrival in the United States; some of his books were translated into more than a dozen foreign languages. His influence is felt as an effective intellectual force of economic, social, and political reform all over the world.

This writer has observed three generations of Mises colleagues and students who were inspired and guided by the master. The first undoubtedly consisted of some of his contemporaries in Austria, Germany, France, Italy, England, and the United States. In 1947 some forty of them, economists, historians, philosophers, and journalists, led by F. A. Hayek, Ludwig von Mises, and Wilhelm Röpke, organized the Mont Pelerin Society. Members met every year in a different country, discussing pertinent issues of the time. There were Jacques Rueff, Louis Baudin, and Bertrand de Jouvenel of France, William E. Rappard of Switzerland, Carlo Antoni and Bruno Leoni of Italy, Faustino Ballvé of Mexico, and Henry Hazlitt, F. A. Harper, Fritz Machlup, and Leonard E. Read of the United States. All of them were aware of the force and intransigence of Professor Mises’ position, which encouraged them to reconstruct the market order wherever it had been crushed. He greatly influenced Wilhelm Röpke who gave guidance and support to the recovery of West Germany from the ashes of totalitarian socialism. In France, Jacques Rueff urged General De Gaulle to stabilize the currency and return to the gold standard. In Italy, President Luigi Einaudi, a life-long friend and colleague of Professor Mises, managed to stem the tide of inflationism and socialism. In many other countries, in Japan and Guatemala, Argentina and Spain, Mises admirers labored to restore the market order.

Some members of the second generation of Mises admirers and disciples actually had the opportunity to sit in his classes or listen to his lectures on his many tours. Countless members undoubtedly acquired economic knowledge by studying his books and articles. Some even pleased the professor by passing his tests and examinations. At New York University, a few managed to earn their doctors degrees and then share their newly acquired knowledge with their students. There were Louis Spadaro of Fordham University, Israel Kirzner of New York University, George Reisman at St. John’s University in Brooklyn, N.Y. and later Pepperdine University in Los Angeles, California. This writer graduated in 1955 and then taught at Grove City College in Grove City, Pa. for thirty-six years.

At New York University, thousands of students had the opportunity to attend the professor’s classes and hundreds to come to his weekly seminar. Some became well-known as writers and teachers in their professions and occupations. An illustrious Mises student who reached out to millions of readers was Murray N. Rothbard who taught for many years at the Polytechnic Institute in Brooklyn, New York, and at the University of Nevada in Las Vegas. Although he earned his B.A., M.A., and Ph.D. degrees at Columbia University, he also studied with Professor Mises at New York University. He became the author of many important works in Austrian economics and, until his death in 1995, was editor of the Mises Institute’s scholarly Journal of Austrian Economics.

Two other eminent economists who faithfully attended the Mises seminar and became good friends of the professor were Percy L. Greaves, Jr. and his wife, Bettina Bien Greaves. Greaves reached many readers as economic adviser to the Christian Freedom Foundation and columnist for its publication, Christian Economics. He later served as Professor of Economics at the University of Plano, Texas. His wife was a senior member of the staff of Leonard Read’s Foundation for Economic Education in Irvington, New York. She often served as Professor Mises’ assistant and secretary and created his bibliography, a definitive listing of his work and articles about him.

Teachers and writers undoubtedly affect the thoughts and actions of their students and readers. They may reach out to hundreds or even thousands of individuals who are interested in their thoughts and policies. But in order to reach millions of readers and affect public opinion, the teachers and writers may depend on entrepreneurs who know how to promote and spread the ideas. They may place their trust in the founders and managers of schools, foundations, publications, and other media of communication.

Llewellyn H. Rockwell is such an entrepreneur. He is the founder and president of the Ludwig von Mises Institute in Auburn, Alabama, which is the educational center of the Austrian School of Economics. Ever since 1982, it has been reaching out with a large array of publications, programs, and fellowships that seek to move the educational climate toward individual freedom and the market order. This writer is a proud member of the faculty of 250 who undoubtedly reach millions of readers on all levels of understanding.

The Foundation for Economic Education (FEE) created by Leonard E. Read in 1946 is the oldest educational organization dedicated to the preservation of individual freedom and the private property order. Given direction by its advisor, Professor von Mises, it publishes The Freeman, an award-winning monthly journal which reaches many thousands of readers. It conducts a wide variety of seminars at the FEE site in Irvington, New York as well as all over the country. This writer headed FEE from 1992 to 1997 and continues to serve as President Emeritus of the institution.

A few other foundations took a great interest in Professor Mises’ ideas and writings. There was the Volker Fund of California which was managed by H. W. Luhnow. It provided the funds for the Mises seminar at New York University along with others in California, at Wabash College in Indiana and at Chapel Hill in North Carolina. There was Antony Fisher of England who founded economic institutes in London, Vancouver, Los Angeles, Amsterdam, and New York. His Atlas Foundation, now capably managed by Alejandro Chafuen, reaches out to all corners of the world. There were Pierre Hamilius in Luxembourg, Ludwig M. Lachmann in South Africa, Toshio Murata in Japan, Alberto Benegas-Lynch in Argentina, Manuel Ayau in Guatemala, and several others who founded Austrian schools and institutions. Their dedication and loyalty to Misesian ideals made them an ideological force that was felt throughout the free world.

The third generation of Mises followers and admirers never met the master but was introduced to his thought and deeds by some of his students. Llewellyn Rockwell’s Mises Institute, for instance, is reaching millions of students at all levels, assisting thousands of students at hundreds of colleges, and conducting summer schools all over the world. This writer, in thirty-seven years of teaching, reached some ten thousand college students and, in a dozen books and nearly one thousand essays and articles published in opinion journals and on the internet, probably touched many more readers. The same may be true with many other Mises disciples and followers, such as Walter Block and Thomas DiLorenzo of Loyola University in New Orleans, Peter Klein of the University of Missouri, Joseph Salerno of Pace University, Guido Hülsmann of the University of Angers, Jeffrey Herbener of Grove City College, and, last but not least, Thomas Woods, Mark Thornton, and David Gordon of the Mises Institute. They all are contributing in their ways to spreading the words and teachings of Ludwig von Mises.

Dr. Hans F. Sennholz [send him mail] was professor and chairman of the department of economics at Grove City College. See his website.

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Few American economists have wielded as much influence on economic thought and policy as the late Milton Friedman. He was an articulate and ardent advocate of free markets and personal liberty. In 1962, his Capitalism and Freedom, which continues to be in print with nearly one million copies sold, pointed the way not only to economic but also political freedom. A year later his Monetary History of the United States, 1867—1960, co-authored with Anna Schwartz, cast a new light on the Great Depression and the policies that caused it. He was a passionate critic of all versions of socialism and a fervent censor of Keynesian economics which stands as the most influential economic formulation of the 20th century. One of the most prolific writers of his time, Professor Friedman wrote many pertinent economic columns in Newsweek. His outstanding achievements earned him the Nobel Prize in 1976.

It may be folly to criticize and censure a famous author whom all the world admires. Yet this economist has been at odds with Professor Friedman ever since he advanced his monetarist thought. It is strange that Professor Friedman and his fellow monetarists, who are such defenders of the market order, should call on politicians and bureaucrats to provide the most important economic good — money. Granted, monetarists do not trust them with discretionary powers, which led Friedman to write a detailed prescription, a Constitutional Amendment; however, the Constitution is supreme force, backed by courts and police. The amendment is a political formula to be adopted by political authorities and, when enacted, a constitutional prohibition of monetary freedom.

The Amendment calls for issue of government money in the form of non-interest bearing obligations which would not alter the nature of currency expansion, it merely would change its technique. The stock of these obligations is supposed to grow, year after year, without any obligation to repay, which changes their nature from being “obligations” to being mere government paper. The Friedman proposal would merely simplify the technique of money issue; instead of the Federal Reserve creating and lending its funds to the U.S. Treasury, earning an interest thereon and then returning the interest to the Treasury as “miscellaneous receipts,” Friedman would have the Treasury issue non-interest bearing U.S. notes. This would save the U.S. Treasury the interest it is now paying, and eliminate the “miscellaneous receipts” the Treasury is now receiving.

In its search for stability, the Friedman amendment, unfortunately, proceeds on the old road to nowhere. There is no absolute monetary stability, never has been, and never can be. Economic life is a process of perpetual change. People continually choose among alternatives, attaching ever-changing values to economic goods; therefore, the exchange ratios of their goods are forever adjusting. Economists searching for absolute stability and measurement are searching in vain, and they become disruptive and potentially harmful to the economic well-being of society when they call upon government to apply its force to achieve the unattainable.

Money is no yardstick of prices. It is subject to man’s valuations and actions in the same way that all other economic goods are. Its subjective, as well as objective, exchange values continually fluctuate and, in turn, affect the exchange ratios of other goods at different times and to different extents. There is no true stability of money, whether it is fiat or commodity money. There is no fixed point or relationship in economic exchange. Yet, despite this inherent instability of economic value and purchasing power, man is forever searching for a dependable medium of exchange.

The precious metals have served him well throughout the ages. Because of their natural qualities and their relative scarcity, both gold and silver were dependable media of exchange. They were marketable goods that gradually gained universal acceptance and employment in exchanges. They even could be used to serve as tools of economic calculation because their quantities changed very slowly over time. This kept changes in their purchasing power at rates that could be disregarded in business accounting and bookkeeping. In this sense, we may speak of an accounting stability that permits acting man to compare the countless objects of his economic concern.

Contrary to monetarist doctrine, an expansion of the money stock of three to five percent suffices to generate the business cycle. Economic booms and busts occur in every case of fiat expansion, whether the expansion is one percent or hundreds of percents. The magnitude of expansion does not negate its effects; it merely determines the severity of the maladjustment and necessary readjustment.

Monetarists are quick to proclaim that business recessions in general, and the Great Depression in particular, are the result of monetary contraction. Mistaking symptoms for causes, they prescribe policies that treat the symptoms; however, the prescription, which is reinflation, tends to aggravate the maladjustments and delay the necessary readjustment.

The Friedman amendment, unfortunately, would cause the same economic and social conflicts as the present fiat system. It would create income and wealth with the stroke of a pen, and then distribute the booty to a long line of eager beneficiaries. The amendment would fix the quantity of issue, but the mode of its distribution, which confers favors and assigns losses, would be left to the discretion of the monetary authorities. It would enmesh them in ugly political battles about “credit redistribution,” which soon would spill over to the halls of Congress, just as it does today.

The monetarists actually have no business cycle theory, merely a prescription for government to “hold it steady.” From Irving Fisher to Milton Friedman the antidote for depressions has always been the same: reinflation. The central banker who permits credit contraction is the culprit of it all. If there is a recession, he must issue more money, and if there is inflation, that is, rising price levels, he must slow the increase in the supply of money, but increase it nevertheless.

Professor Friedman himself seems to have been aware of his lack of business cycle theory when he admitted “little confidence in our knowledge of the transmission mechanism.” He had no “engineering blueprint,” but merely an “impressionistic representation” that monetary changes are “the key to major movements in money income.” His “gap hypothesis,” therefore, is designed to fill the gap of theory and allow for the time it takes for all adjustments to be corrected. He seeks to time the recession without explaining it.

The increasing importance of government obligations as bank assets gives great confidence to monetarists; however, it creates anxiety because government obligations merely are receipts for money spent and savings consumed. Every budgetary deficit that creates more government obligations consumes productive capital and thereby hampers economic production. The growing importance of government obligations in bank portfolios actually signals government consumption of economic substance and wealth. To commercial banks, it means the loss of real property securing the loans, and the addition of yet more government promises to tax, print and pay. A banking system built primarily on government IOUs is in a precarious condition.

What Professor Friedman called the “dethroning” of gold was, in truth, the default of central banks to make good on their legal and contractual obligations. Following the example set by the United States on August 15, 1971, central banks all defaulted in their duty to redeem their currencies in gold. The default, unfortunately, did not bring stability and prosperity; it opened the gates for world-wide inflation. It made the U.S. dollar the world currency, elevated the Federal Reserve System to the world central bank, and inundated the world with U.S. dollars. (Cf. My Money and Freedom, Libertarian Press, 1985.)

Dr. Hans F. Sennholz [send him mail] was professor and chairman of the department of economics at Grove City College. See his website.

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Medical expenses are rising faster than the costs of any other service. They are climbing at rates that exceed not only those of inflation and dollar depreciation but even the Federal government itself. In fact, they are consuming an ever-larger share of personal and national incomes. Some 40 years ago American medical spending was estimated at 5 percent of national income; today it is calculated at some 16.5 percent and rising continually. Several reform proposals in Congress would boost the share ever higher.

Many observers offer lucid explanations of the medical-spending explosion. Some are convinced that the present generation of Americans, which enjoys a level of income and living standard higher than that of its forebears, is more mindful of health and wholesome living and, therefore, is spending a larger share of income on health care. But critics prefer to point to the ever-growing number of Americans who are overweight or even obese, which may breed physical disorders and afflictions and finally acquire medical attention. Other observers hold the endless stream of medical innovations responsible for rapidly rising health-care costs, such as new drugs and delicate tools for microsurgery. They lay most of the expense explosion at the feet of technology. But these writers never explain why new drugs and new tools should raise medical costs threefold and consume an ever-larger share of national income. Technical innovations usually lower the costs of production.

A few writers believe that the primary reason for rapidly rising costs of health care is a massive expansion of medical insurance which foots doctors and hospital bills. They like to use an inordinate terminology that diverts the reader from the actual causes. They broaden the concept of insurance to encompass Medicare and Medicaid, which are government programs providing medical care for the aged and needy, and then hint at insurance as the driving cost factor. In reality, the number of Americans with health insurance actually is declining; rising health-care costs and a declining number of employer-sponsored benefits are steadily reducing the number of insured Americans. At the present, some 47 million Americans are bereft of any coverage.

Few observers dare to state that spiraling health-care costs are the inevitable consequence of a 1965 Social Security amendment molding Medicare and Medicaid. It provided a basic welfare program that covers most persons aged 65 and older as well as all needy individuals. Soon after its passage some four million patients rushed to seek treatment and some 18 million Americans registered to have 80 percent of doctor and surgeon bills paid by the new system. By now, in 2006, Medicare provides health benefits for 41 million elderly and disabled persons, and Medicaid, a joint federal-state program, serves some 50 million poor beneficiaries. It is the fastest-growing item in most state budgets and accounts for some 20 percent of total state spending.

The program undoubtedly has saved lives as it has enabled elderly and poor people to receive medical treatment they were not able to afford on their own. It has raised the quality of living for many. But its sponsors completely ignore some undesirable consequences such as the soaring costs and the rising number of people who therefore choose to forego any health insurance coverage. Surely, it has saved some lives but also may have cost some. It has doubled, tripled, and quadrupled many phases of the health-care industry but also kept other service industries smaller than they would have been in a free service economy. It has helped administrators of hospitals and extended-care facilities to embark upon substantial expansion and has stimulated development of many home-care services. But there cannot be any doubt that the massive injection of political funds and the growing role of legislators and regulators have radically changed the very nature and structure of the health-care industry.

Medicare and Medicaid are political handiwork forged by legislators and regulators, fashioned by politicians who recast it in every national election. It is a very popular political issue passed and argued about without ever being settled. Politicians representing the beneficiaries are demanding ever more outlays, others speaking and acting for the people who are forced to cover the deficits are opposing the charges. Facing ever-rising costs, some want to reduce the cost-of-living increases in benefits, others plan to increase the wages subject to payroll taxation. In 2005 the benefit-politicians raised the maximum earnings subject to Social Security tax exactions to $ 90,000 with the tax rate at 12.4 percent, borne equally by employer and employee. In 2006 they raised the maximum to $94,200; in coming years they will boost it to $100,000 and more.

Medicare and Medicaid stand in the center of attention in every national election as both parties may seek to outbid each other in promising more benefits. In 2003 Congress was persuaded to add prescription drug coverage to Medicare, starting in 2006. Most of its costs, estimated at some $700 billion over the next 10 years, are to be paid by taxpayers. But soaring costs are the least portentous consequences of the transformation of the health-care industry. This academic observer is dismayed and disheartened by the role played by politics in such an important industry.

In a free and unhampered economy businessmen always seek to adjust their production to anticipated consumer demand; the wishes and choices of consumers are paramount. When government takes special interest in an industry, political judgments and motives take preference to the people’s choices. When government on all its levels enters health care, the industry has to adjust to every dollar spent and every order given. Surely, there are pains of readjustment but no particular economic crises. People readily accommodate. While they are not free to choose in the market place, they may plead and supplicate in the halls of politics. Some courageous observers may even point to needless expenditures and waste as every health-care administrator may want to expand and improve his facilities. After all, they no longer are limited by market orders but only by political considerations and favors.

Politics is likely to shape the future of medical care as far as the eye can see. It builds upon popular political ideas, on old habits and predispositions, even resentment and envy. It inflicts pain without end.

Dr. Hans F. Sennholz [send him mail] was professor and chairman of the department of economics at Grove City College. See his website.

The official Federal minimum presently stands at $5.15 an hour; the actual minimum is much higher. No employer can overlook the mandated fringe benefits which he is forced to pay above the minimum. There are employer Social Security taxes, unemployment and workers’ compensation levies, and paid holidays. In some industries the workers’ compensation levy alone may amount to more than one-half of the wages paid. And if the employer should carry his workers’ health insurance costs, employment costs may be double the minimum rate. If eager members of Congress should be successful in raising the minimum by two or three dollars an hour, many young people may be condemned to permanent unemployment.

The rate of unemployment tends to be directly proportional to the excess of labor costs over productivity. In many European countries with official minimum wages of more than $10 an hour, the rate of unemployment is measured in double-digit rates although governments spend massive amounts on make-work projects. Some victims readily submit to their fate and endure a life of idleness and bare subsistence. Many learn to labor in black markets where goods are produced and services are rendered in violation of minimum wage edicts and other regulations and controls. But most victims are young people with little training and know-how who tend to react angrily and violently. Their rate of unemployment actually amounts to multiples of the official rate. And if society should be divided ethnically, youth training and productivity may be lower yet and its rate of unemployment may approach 100 percent. Such a labor situation is laden with anger and fury which not only breeds high crime rates but also, at any time, may turn to violence by mobs of unemployed youth. The recent riots of French youth clearly resembled the riots of unemployed Americans in Watts in 1965, in San Francisco in 1966, Detroit and Baltimore in 1967, Chicago and Cleveland in 1968, and in Los Angeles in 1992.

The situation is most dangerous and explosive in cities and states with state minimums even higher than those set by the Federal government. Minimum wage legislation had its beginning in states long before there was a New Deal that made the Federal government the primary labor legislator and regulator. State governments continue to lead the way in raising labor costs; state rates of unemployment tend to indicate the political strength of the minimum wage movement.

Few economists have the courage to point to labor legislation and regulation as the very cause of mass unemployment. A few who muster the courage may emphasize the infinite demand for labor but are ever mindful that its costs set limits to the demand. Few employers, if any, knowingly buy labor that costs more than it produces, just as few workers are likely to purchase consumer goods which, in their judgment, cost more than they are worth. Yet, economists who dare to point to labor legislation and regulation as important causes of mass unemployment are criticized, denounced, condemned, and vilified as callous and ruthless agents and spokesmen of greedy employers.

Politicians may draw applause and win an election with numerous wage promises and other assurances no matter how unrealistic they may be. Some politicians undoubtedly are Machiavellians who are fully aware of the evil consequences of such policies but continue to promise them in the hope of garnering the votes. They may point to new employment programs such as public works, neighborhood youth corps, job corps, and other benefit corps. Some politicians may be candid and sincere but cannot be reached with economic reasoning. They are utterly unaware of inexorable economic principles but very eloquent in all matters of politics and law. With their eyes glued on the wants and needs of workers and their families subsisting on minimum wages, they place their trust in political edicts and in the power of the police to enforce them.

To alleviate minimum-wage unemployment is to restore freedom in the labor market; it would permit the cost of labor to readjust to labor productivity and offer employment to every young man and woman willing and ready to work. A free labor market would welcome young people, which not only would exhort and restore the spirit of work but also improve labor skill and know-how. The labor productivity of American youth soon would rise and exceed the ominous minimum levels that presently condemn millions to idleness. Freedom has a thousand charms even in the labor market.

Dr. Hans F. Sennholz [send him mail] was professor and chairman of the department of economics at Grove City College. See his website.

Its intellectual roots are very old, growing in Europe during the 17th and 18th centuries and serving as guiding principles of state policy. They produced strong central governments with monetary powers as a means of economic well-being and with central banks to control the money of the country. The Bank of England, which was founded in 1694, set the example for all others. Most European countries followed suit during the 19th century. The United States established the Federal Reserve System in 1913. Today, nearly every country has a central bank or is a member of a central bank system.

Paper money first appeared some three hundred years ago, but it usually was backed by gold or silver into which it was convertible on demand. Even during its early history governments often made it inconvertible, that is they made it “fiat.” Gold and silver were used as standard money and coined without any limit set by legislation. But the ratio between gold and silver was fixed by law without close relation to the market value of the metal. It always activated Gresham’s Law according to which “bad money drives out good money.” Whenever the ratio between two kinds of money, for example gold and silver, was fixed by law without relation to the market value of the metal, people used the metal whose market value was less than the other and hoarded the more valuable one. The common failure of the bimetallic standard tended to give rise to a de facto monometallic currency, usually silver coins. In England it led to a gold standard.

The monetary system of the United States was based on bimetallism during most of its history. A full gold standard was in effect from 1900 to 1933. The Legal Tender Act of 1933 made all American coins and paper money “legal tender” which must be accepted at face value by creditors in payment of any debt, public or private. The Gold Reserve Act of 1934 stipulated that gold could no longer be used as medium of domestic exchange, making paper money the only lawful medium of exchange. During the early 1970s the U.S. dollar became fiat money also in international money markets.

Inflationomics sprang from the old roots of central banking and fiat money. The most influential mastermind undoubtedly was John Maynard Keynes who made “expansionism” the essence of his teaching. The “Keynesian Revolution” made credit expansion a powerful method for stimulating business and creating employment. Cloaking his reasoning in the sophisticated language of mathematical economics, he swayed public opinion and most politicians with the urgent need for currency devaluation, inflation and credit expansion, unbalanced budgets, and deficit spending. In short, Lord Keynes provided a new justification for old policies.

Keynes viewed most problems of the business cycle as symptoms of “underconsumption,” which has been a popular explanation of depression ever since. If economic recessions and depressions are caused by low demand for money and goods, an increase in spending is bound to revive economic activity and increase employment. Keynes therefore considered government control an economic necessity in order to restore and maintain desirable levels of spending. In this respect he resembled the Mercantilists of old. But in contrast to the economists of the 17th and 18th centuries he also injected popular notions of social conflict. Passages from his General Theory of Employment, Interest, and Money (1935) clearly make this point.

The richer the community, the wider will tend to be the gap between its actual and potential production; and therefore the more obvious and outrageous the defects of the economic system. For a poor community will be prone to consume by far the greater part of its output, so that a very modest measure of investment will be sufficient to provide full employment; whereas a wealthy community will have to discover much ampler opportunities for investment if the saving propensities of its wealthier members are to be compatible with the employment of its poorer members. If in a potentially wealthy community the inducement to invest is weak, then, in spite of its potential wealth, the working of the principle of effective demand will compel it to reduce its actual output, until, in spite of its potential wealth, it has become so poor that its surplus over its consumption is sufficiently diminished to correspond to the weakness of the inducement to invest.(p. 31.)

In Keynesian tradition most American professors and media commentators favor credit expansion and deficit spending whenever a recession comes in sight. And most elected representatives call and vote for more government spending that promises more employment and higher incomes for their constituents. But whatever government may do to increase spending and whatever the central bank may devise in order to avert a recession, they inflate and depreciate the currency, aggravate the maladjustment, and prolong the pains of readjustment.

Ours is an age of inflationomics. It dawned with the sway of Keynesian economics in Europe as well as America and commenced visibly in 1971 when President Nixon abolished the last vestiges of the gold standard and repudiated all international obligations to make payments in gold. The U.S. dollar has depreciated at various rates ever since, at double-digit rates during the 1970s and early 1980s and at single-digit rates ever since. The present dollar is worth some 10 cents of the 1970 dollar and is bound to lose ever more in the future. Moreover, inflation misleads businessmen in their investment decisions, which is the root cause of the business cycle. Indeed, inflation breeds many evils and haunts many Americans who are rather unenlightened about its causes.

A cursory look at presidential policies since 1971 corroborates the point. When wages and prices soared, President Nixon, with Congressional approval, imposed a four-phase program of wage and price controls which immediately led to shortages in many areas. A serious “energy crisis” reduced home heating-oil supplies and led to gasoline shortages. A recession gripped the United States together with other Western industrialized countries and Japan; while the rates of inflation exceeded 10 percent a year, production declined and the levels of unemployment rose sharply. This new combination of high rates of inflation and high rates of unemployment, which was aptly called stagflation, caught all Keynesian economists by surprise.

The Carter Administration’s chief economic affliction was rampant inflation and the decline of the dollar’s value in relation to that of other major currencies. No matter what it did to assist the dollar, including “massive intervention” in international currency markets, a quintupling of gold sales, and an increase in the discount rate, inflation rose in each year of the Carter Administration.

The Reagan Administration (1981—1989) reversed long-standing Keynesian trends by pursuing a supply-side economic program of tax and non-defense budget cuts. The program built on the thought that high tax rates and government regulation discourage private investment in areas that fuel economic expansion, and that more capital in the hands of private investors will benefit the rest of the population. Facing the deepest recession since World War II with unemployment reaching a rate of 10.8 percent in 1982, it soon suffered huge budget deficits which more than doubled the size of the national debt. Although the economy picked up between 1983 and 1986, the budget deficits consumed most of the capital released by the tax reduction and thus thwarted possible supply-side benefits. Economic expansion remained relatively modest although the rate of inflation fell below 4 percent during President Reagan’s tenure. It allowed the dollar to expand internationally and strengthen its acceptability as a world reserve currency.

President George Herbert Walker Bush resolutely returned to Keynesian formulas of spending and happily continued the budget deficits. During his first year in office (1989) his administration enjoyed a $152 billion deficit, in its last year (1993)a $255 billion shortage. After a prolonged battle with the Democratic Congress he agreed to a deficit reduction bill that raised business taxes. He thereby broke his 1988 campaign pledge not to raise taxes, which irritated many Republicans. His presidency was marked by a stagnant economy, rising levels of unemployment, and a prolonged international recession. His inability to institute a program of economic recovery other than deficit spending made him vulnerable in the 1992 presidential election. Arkansas governor Bill Clinton won by a comfortable margin.

As president, Bill Clinton managed to obtain Congressional approval of a North American Free Trade Agreement which was designed to make the United states, Canada, and Mexico more competitive in the world marketplace. But he failed to realize his campaign promise to reform the nation’s health-care system, which critics likened to socialized medicine. In the 1994 midterm election his rash proposals not only led to Republican majorities in both the Senate and the House but also provided Republicans with an ambitious agenda for social, economic, and institutional change which they dubbed “Contract with America.” It influenced and colored the Clinton presidency and surprised the world as it gave rise to the “great expansion of the 1990s.” Emerging from recession in 1991, the economy expanded throughout the 1990s. Wages, which had been stagnant throughout the 1980s, rose again; unemployment reached a 30-year low. The rise of individual and corporate tax payments pushed the Federal budget into an extraordinary surplus for four years, beginning in 1998. But the trade deficits with foreign countries continued to grow as Americans continued to import far more than they exported. Foreign central banks readily invested their surplus dollars in U.S. Treasury securities and foreign corporations used their dollars to expand their operations in the U.S. The Federal Reserve supplied them at bargain rates.

By the end of 2000 many maladjustments were clearly visible, causing the economy to sink into recession for the first time in 10 years. Other industrial economies slumped as well and were jolted by the September 11 terrorist attacks on the United States. When economic productions fell to recession levels the Federal Reserve cut interest rates eleven times. Prodded by President George Walker Bush, Congress passed a large multiyear tax cut, and the U.S. Treasury sent out tax rebates to boost consumer spending. Thereafter, the economy seemed to shake off national disasters and soaring energy prices. Labor productivity apparently rose and the nation’s unemployment rate declined again. All along, the Federal government embarked upon massive deficit spending which increased its debt from $3.314 trillion at the beginning of the new administration to more than $8 trillion today (May 15, 2006). U.S. trade deficits, too, hit record highs of $618 billion in 2004 and topped $700 billion in 2005. As the deficits widened, the Federal Reserve began to nudge short-term interest rates higher, 0.25% at a time from its base rate of just one percent. The nudging prudently remained far below unhampered market rates which would have called an instant halt to the pleasures of debts and deficits.

All in all, this writer does not have much confidence that inflation will remain moderate. Inflationomics is still in vogue. The Fed is unlikely to raise its rates to a level that would call a halt to the currency and credit expansion and thus reinforce the world-wide trust in the U.S. dollar. Instead, the Fed is likely to limp after the rising market rate and continue its expansion policies until an international dollar crisis calls for drastic emergency measures. In crisis and bedlam, Washington politicos are likely to add their controls and regulations, conditions and restrictions, prohibitions and penalties to the structure they created. In the footsteps of President Herbert Hoover, President Bush may even call for more trade barriers, which would turn the recession into a depression and breed much international conflict.

Dr. Hans F. Sennholz [send him mail] was professor and chairman of the department of economics at Grove City College. See his website.

In their vivid descriptions of the industrial beginning, most historians rarely allude to the ideological and political changes that actually paved the way for the revolution. They admire the early development of the cotton industry and view with approval the iron and steel industry which sought to meet a growing demand for all kinds of construction. But they may not even mention the writings of the Classical economists, of Adam Smith and his numerous teachers and forerunners, such as Frances Hutcheson, David Hume, Josiah Tucker, and many others. They wrote numerous essays on commerce and taxation, and developed new insight into basic principles of a market order. They succeeded in persuading their government to remove age-old restrictions and allow the people to pursue their economic interests.

Economic historians also speak of a second Industrial Revolution that left its mark on the 20th century and is spreading to other parts of the industrial world. They are referring to the powerful shift from manufacturing toward services. Throughout the old industrial world the number of industrial jobs has declined slowly while the number of service positions has risen continuously. By now, only one-sixth of U.S. non-farming jobs are in goods-producing industries while five-sixths render services.

Many historians rarely ever mention the market order that impelled and facilitated the change. It built on the protection of private property in production; it emboldened entrepreneurship and facilitated large capital investments that raised labor productivity. Wage rates rose and standards of living soared, which enabled workers to use ever larger shares of their incomes for services such as healthcare, entertainment, and education. Moreover, the New Deal and Fair Deal introduced labor legislation that hastened the expansion of the service industry. It enabled and encouraged industrial labor unions to raise the cost of labor above its productivity, which has given rise to an unnatural economic phenomenon: mass unemployment. Unemployed factory labor has been seeking productive employment in the service industry ever since; it functions like a large net, legal and illegal, that can put all willing labor to productive use.

A third Industrial Revolution is now making its appearance in the United States and other industrial countries. And just like the first two, it is bound to introduce many changes and force millions of people to make painful adjustments. It is an “information revolution” that greatly expands the scope of tradable services and tends to move many service jobs offshore to India, China, and other industrial newcomers where labor is much cheaper. Defined by its consequences, it may also be called the “offshoring revolution.”

The term “offshore” was first used in the United States for any financial organization with its headquarters outside the country. A mutual fund with its domicile in the Bahamas is an offshore fund. The term then broadened to cover the movement of industrial jobs from high-cost countries to places where costs are lower. By now, in the “third revolution,” ever more service jobs are likely to go offshore. Surely, jobs that render personal services cannot go ashore; my barber shop cannot go to China. But new technology has made many jobs marketable which therefore may go where labor costs are lower. The services of accountants and computer programmers are suitable for electronic delivery and, therefore, may go offshore. According to a recent McKinsey study, 11 percent of U.S. jobs are at risk of being sent offshore, which is likely to become a major political concern in the future.

An unhampered market system would readily facilitate the needed readjustments. Under the pressure of foreign low-cost competition, American wages for many impersonal offshorable services undoubtedly would stagnate or even decline, which would cause some workers to move into the personal-service market and depress its wage rates. The computer programmer may have to become a computer repairman or barber. Yet his income may not decline as long as the amount of capital invested per head of population in the country continues to rise; personal services may expand as fast or even faster than impersonal services contract.

Economists are ever fearful that politicians are likely to interfere with needed economic adjustments. In the United States the forces of old-fashioned protectionism not only may find ways to limit imports but also hamper American capital working abroad. The forces of political intervention, in order to shield and benefit labor, are likely to increase labor costs, which invariably causes unemployment. After all, every penny of labor cost that exceeds labor productivity is bound to create unemployment. The countries with the most fervent labor-protection laws, such as France, Germany, and Italy, already suffer official unemployment rates of 10 percent and higher. In years to come, the third Industrial Revolution will require many painful adjustments. The rates of national unemployment and economic stagnation are likely to be proportional to the political powers of defiance and control.

The process of industrial change and labor adjustment is made ever more complex and painful by yet another political factor: the propensity of welfare governments to suffer huge budget deficits that consume the lion’s share of the people’s savings. All the governments mentioned above are busily consuming savings that otherwise would become capital investments creating jobs and paying wages. Surely, the American labor market is more flexible and vibrant than European markets, which is rendering it more adaptable to the changes to come. On the other hand, the U.S. government budget deficit is the largest by far in volume and relative size. Debt always is the worst kind of poverty. The third Industrial Revolution may confirm it in years and decades to come.

Dr. Hans F. Sennholz [send him mail] was professor and chairman of the department of economics at Grove City College. See his website.

It behooves us to speak softly and respectfully of a president of the United States, probably the most influential and powerful individual on earth. After all, he managed to rise to this illustrious position with great ability, sagacity, and courage. Mr. Carter rose to the presidency at a time when the American people wanted new faces and new talent in Washington. He was a newcomer, a new sort of Democrat, a kind of “religious liberal” who was concerned about poverty, unemployment, and other social issues. There is no voice louder on such matters than that of the President of the United States, no voice that reaches farther than his; everything he says is heard around the world and everything he does has consequences. But there cannot be any doubt that loud voices, too, may be mistaken and that the results of good intentions may be evil if they build on misinformation, misunderstanding, and misconception. When committed by a president, even a retired president, the consequences may be extraordinarily harmful.

In nearly all his writings, Mr. Carter touches upon economic issues, yet he seems to be rather unaware of the inexorable economic principles that direct and determine economic life. He seems to be unknowing of the natural regularity of the sequence and interdependence of market phenomena. Viewing individual action as good or bad, fair or unfair, just or unjust, he does not see the principles to which one must adjust in order to succeed. Always the censor who approves or disapproves of other people’s actions, he pays no heed to the basic principles of prices and wages that affect individual wealth and poverty. Pointing to the Republican leadership in Washington, for instance, he lodges these charges: ”Despite touting concern for working Americans and private home ownership, key political leaders in Washington have successfully blocked any increase in the minimum wage, which has been held at only $5.15 per hour for eight years and not indexed to accommodate inflation. (In comparison, in U.S. dollars and based on currency values in April 2005, the minimum wage in Australia is $8.66, in France $8.88, in Italy $9.18, in England $9.20, and in Germany $12.74.)” (p. 195)

Mr. Carter undoubtedly would like to see the U.S. government lift its minimum wage at least to French, Italian, English, or even German levels. He obviously is convinced that it is the function and duty of government to set satisfactory wage rates and regulate employment conditions. He seems to be unaware that, in a free society and free economy, wage rates are determined by the value of the services rendered. Consumers determine not only the prices of consumer goods but also those of the factors of production, that is, land, labor, and capital. They determine and pay the wages of every worker.

At free market wages all workers eager to earn wages can find jobs; there is what commonly is called “full employment.” But whenever government or labor unions raise wages above the rates which consumers are willing to pay, institutional unemployment emerges. Minimum wage legislation obviously condemns all workers with personal productivity lower than the minimum to instant unemployment. If the federal government were to raise the minimum wage to French, Italian, or German levels, it soon would boost the rate of unemployment to European levels: in France to 12.1 percent, Italy 9.6 percent, and Germany 10 percent. The actual rates of unemployment of unskilled and uneducated labor, the very class of labor which the minimum wage is supposed to benefit, are much higher; they usually reach 30 to 40 percent. If the class should also differ ethnically, that is, in its religious, racial, national, or cultural characteristics, labor productivity may be lower yet, and the rates of unemployment may be twice as high again. At this very moment, unemployed youths are rioting, burning cars, and battling the police in the suburbs of Paris and across France. Although many rioters are unemployed Muslims who feel discriminated against, many non-Muslims have joined their ranks. Throughout it all, the French president, Mr. Jacques Chirac, proudly defends the French labor market with its $8.88 minimum wage, the 35-hour work week, tough hiring and firing rules, and other throttling labor restrictions. He promptly announced more government spending programs to improve housing, education, employment, and a special training for 50,000 underprivileged teens by 2007.

The French riots remind us of the riots that paralyzed some American cities in the past. Surely, it was unemployed black youths rather than Muslim youths that rampaged and ran amok in Watts in 1965, leaving 34 people dead, more than 1000 people injured, more than 4000 arrested, hundreds of buildings destroyed, and more than 200 million dollars in destruction of property. The same pattern of rioting was seen in New York in 1964 and 1968, in Detroit in 1967, San Francisco in 1966, Washington, D.C. in 1968, Baltimore in 1967 and 1968, and Chicago and Cleveland in 1968. In the Los Angeles riots in 1992, some 50 to 60 unemployed youths were killed. Surely, the nation grieves for the dead and sympathizes with the unemployed. Yet politicians never tire of erecting new employment barriers.

We respect and esteem President Carter’s concern for the poor and underprivileged, and we applaud The Carter Center, a nonprofit organization that seeks to resolve international conflicts and improve public health around the world. It does not surprise us that, since Mr. Carter left the presidency in 1981, he earned a Nobel Peace Prize for his humanitarian work. Yet we cannot ignore his want of perception of the inexorable principles of human action and cooperation and his amazing faith in his particular brand of political action.

President Carter never tires of expounding his displeasure and irritability about the income and wealth of many capitalists and about government policies that seem to favor the rich. “Almost every decision made in Washington since 2000,” he laments, “has favored the wealthy, often at the expense of middle-class working families and the needy, and fundamental legislation on taxation and expenditures has been designed to perpetuate those trends.” (p. 191) And further below, “our unprecedented deficits mean that there will be fewer funds for maintaining — much less increasing — existing levels for health, education, welfare, housing, environmental quality, or the creation of jobs.” “Conservative true believers,” he charges, are squeezing domestic programs from Social Security to Medicaid, Medicare, Head Start, and other humanitarian programs for the purpose of “another massive reduction in the tax burden for the richest families in America.”

Mr. Carter seems to be unaware that most rich people are investors and builders of facilities of production, creating jobs and increasing labor productivity. The lion’s share of great family wealth usually consists of certificates of ownership of means of transportation, communication, and many kinds of manufacture. Workers do not create jobs nor contribute to the improvement of the apparatus of production. Yet American wage rates and standards of living are substantially higher than many others in the world because of the capital accumulation and investment by farsighted wealthy entrepreneurs.

Mr. Carter deplores the thought of any reduction in inheritance taxation which in the past consumed as much as 77 percent of a rich man’s estate. Surely, the tax does not immediately and visibly destroy capital equipment such as steel mills, railroads, or refineries, but it forces owners or their heirs to sell all or part of the taxed estate in order to raise the cash needed for tax payment. The loss in productive investments — the factories and stores not built, the oil wells not drilled — will never be seen, but consumers must pay higher prices for fewer goods and workers earn less for their efforts. All lose but the beneficiaries of the transfer process.

The victims of painful estate taxation tend to redirect their efforts toward less productive pursuits or create wealth that is less visible to estate tax collectors. The tax may induce them to join the rapidly growing “underground economy,” where personal wealth takes the form of jewelry, precious metals, art objects, collector’s items, etc. They may shift their wealth to safer shores abroad and accumulate income and wealth in foreign places. Or they may just cease to be productive and instead openly embark upon consumption of their accumulated wealth. Their reaction may explain the rapid growth of the luxury industries that cater to ostentatious consumption. It may also illustrate why many old corporations that were founded by eminent entrepreneurs are now owned by many thousands of small stockholders who wield little control over their corporations. These are managed by attorneys with political knowledge and legal and regulatory expertise; there are no ownership requirements or interests, which readily explains why, in recent years, conglomerates have been the rage, and reckless mergers and acquisitions have made the news. These corporate executives engage in empire-building, their pay rockets beyond sight, and multimillion-dollar severance packages provide golden parachutes. Mr. Carter heavy-heartedly observes the conditions and calls on legislators, regulators, and tax collectors to implement new policies that reinforce the causes.

As the 39th president of the United States Mr. Carter had an unprecedented opportunity to improve the situation and guide the nation out of political and economic disarray. With Presidents Nixon and Ford in the White House the economy had plunged from one crisis to another. Most troublesome of all were the soaring inflation, a deepening recession, and a painful energy crisis. With President Carter in the White House the rate of inflation unfortunately accelerated. The purchasing power of the American dollar, computed in 1967 dollars, was worth 55 cents in 1977; by 1980 it had shrunk to 41 cents. In 1977 the index of consumer prices, according to Department of Labor Bureau of Labor Statistics, stood at 181.5; it hovered at 246.8 in 1980. In 1977 the average unemployment amounted to 6.991 million; in 1980 it stood at 7.637 million. During the same period, Federal unemployment insurance taxes which obviously increase the cost of labor, according to Treasury Department statistics, rose from $92.61 billion to $139.27 billion. The number of Americans living in poverty, according to Department of Commerce, Bureau of the Census statistics, amounted to 24.7 million in 1977 and to 29.27 million in 1980. Federal outlays, according to the Office of Management and Budget and Treasury Department, soared from $409 billion in 1977 to $590.9 billion in 1980, budget deficits from $53.6 billion to $73.8 billion, and the Federal debt from $709 billion to $914 billion. And in matters of energy crisis, the President strongly urged Congress to continue price controls on natural gas, impose heavy taxes on crude oil and fuels used by industry, and rebate energy-tax revenue to consumers.

Economists may ponder about the prime author and mover of such policies. Yet, politicians are not troubled by such reflections; they are guided by public opinion and sentiment. But whatever they may do, ye shall know them by the fruits of their policies.

Dr. Hans F. Sennholz [send him mail] was professor and chairman of the department of economics at Grove City College. See his website.

One man’s debt is another man’s asset; the American deficit of some $700 billion signals foreign credits of the same amount. Americans obviously spend more abroad than they earn, consuming more than they are producing and ever increasing their indebtedness to the rest of the world. Only two other countries, Australia and the United Kingdom, presently suffer minor deficits. All other countries, large and small, rich and poor, finance the deficits with their trade surpluses. Japan is the biggest creditor with claims of some $170 billion. The petroleum exporting countries in the Near East follow with $110 billion, then China, Russia, and Switzerland. This world-wide imbalance of consumption and production obviously calls for an explanation and raises important questions of readjustment.

On first glance the American payment deficit springs from a spending predilection of public as well as private profligacy. All levels of government are suffering budget deficits amounting to some 4.5 percent of gross national product. In less than a decade the Federal government managed to turn a budget surplus into a deficit by way of tax reductions and spending increases. At the same time the American savings rate fell to barely one percent. Consumption accelerated due to extremely low interest rates and rapidly rising real estate prices. Home owners could convert their rising housing value into ready consumption, making their homes convenient bank automats. But some are fearful that such riches have their limits as interest rates are bound to rise and real estate prices soon may stagnate or even decline.

In their foreign dealings many American businessmen are enjoying the present situation. Virtually all their international liabilities are denominated in U.S. dollars while some 70 percent of their foreign assets are reckoned in foreign currencies. The value of foreign assets and liabilities obviously changes with every change in the exchange rates of the currencies. A fall of the U.S. dollar immediately trims the value of virtually all American liabilities while it raises the value of American assets owned abroad; a rise of the dollar effects the opposite. The visible fall of the U.S. dollar since 2002 explains why the total current-account deficit of $1.7 trillion merely added some $200 billion in external liabilities and why the 2004 current-account deficit of $668 billion merely raised external liabilities by $170 billion. Every penny of dollar depreciation benefits many American businessmen either by depreciating their debt to foreigners or appreciates their foreign investments, or both. The Federal government with rapidly rising debt of more than $8 trillion is by far the biggest beneficiary.

American officials and their academic friends are quick to reject such analyses and conclusions. They dismiss all thought of responsibility for the situation and instead point to an acute savings predisposition on the part of creditor countries. Ben Bernanke, former governor of the Federal Reserve and now chairman of the Council of Economic Advisers, insists that much of the world is suffering from an acute disorder of “savings glut ”; the United States has no choice but to increase consumption. Fortunately, it is willing and ready to act as the “consumer of last resort.” This valiant consumer also contravenes and offsets the savings glut of commerce and industry, in particular the entrepreneurial sector, which in many countries has begun to save more than it invests. It usually is the investor of the people’s savings, building plants, shops, mills, foundries, and other enterprises, ever eager to raise labor productivity. At this time many prefer to become creditors rather than entrepreneurial debtors, causing much stagnation throughout the industrial world. Even in the United States where economic expansion continues at modest rates, many corporations now prefer to invest in government securities rather than embark upon new production ventures. They are improving their balance sheets and getting ready for any conceivable readjustment.

Economists who observe such behavior may find no fault with their preparations nor with the “savings predilection” of foreigners, the official scapegoats of the international imbalance. They may even sympathize with people who are enjoying the rising value of their homes. But these economists lay the blame for the ominous imbalance of trade relations on the Federal Reserve System which, in the service of Federal deficit financing, managed to cause unprecedented maladjustments. In order to finance huge Federal budget deficits and prevent painful economic readjustments, it lowered interest rates far below market rates and glutted credit markets, which deceived and misled millions of people all over the globe. No other central bank possesses such powers; any attempt to emulate the Fed’s policies would cause its currency to crash.

Even the European Central Bank, which appeared on the scene in 1999, probably could not follow in Federal Reserve footsteps; it soon would damage the euro. Only the Federal Reserve still seems to have the capability to glut credit markets. Until the creation of the euro the U.S. dollar was the sole reserve currency of the world, held and used not only by every other central bank but also by thousands of commercial banks and countless public and private corporations. It had replaced gold as the universal medium of exchange during the early 1970s and has functioned as world money ever since. This world-wide function obviously has given and continues to give it exceptional strength that affords its issuer an extraordinary leeway for monetary expansion. It receives further support and strength from the reputation of the United States as a safe harbor for foreign investments. A reputation for principle and rectitude is itself a fortune. But how long can the dollar withstand false interest rates and massive budget deficits?

Many countries, rich and poor, now are supporting the richest country on earth. This odd situation raises serious questions of consequences if the creditor countries should suddenly tire of their chore and call a halt to the burden. What would happen if, for instance, the Asian central banks should suddenly refuse to add to their dollar holdings or even reduce them and instead decide to invest their surpluses in euros? Surely, such a reaction would lead to much international turbulence and severe economic crisis.

Economists who remember the past may point to the dollar crisis of 1979 and 1980 when the dollar was under persistent pressure from abroad, when its value was falling rapidly in relation to the currencies of other trading nations and to gold which was deemed to be a safer repository for reserves. Fueled by rising oil prices, the consumer price index soared nearly one percent every month and interest rates climbed to the highest level of the century. With markets for currencies, metals, and other commodities thrown into disarray and the rate of unemployment higher than seven percent, the Federal Reserve under the direction of chairman Paul Volcker finally “took away the punch bowl“ by raising the member bank discount rate to twelve percent and boosting marginal reserve requirements for member banks. A degree of hope was restored as many Americans realized that their government had to balance its budget and that people must live within their means, produce more efficiently, and conserve, save, and build for the future.

What we look for may not come to pass; yet we must not let the future frighten us. The present situation of American deficits and foreign credits may continue as far as the eye can see. After all, an old monetary order which had been created at the 1944 Bretton Woods Conference withstood much international disorder for more than thirty years. Some economists and their friends in government like to note the similarities of that order with the new. But this economist does not see the semblance. With his eyes on huge trade deficits and foreign debts and on grave international conflict and strife he braces for more commotion and crises to come.

Dr. Hans F. Sennholz [send him mail] was professor and chairman of the department of economics at Grove City College. See his website.

The connection between economics and politics is clearly visible. Economic production sustains human life which, for most people, is the most important concern in life. The prestige of democratic government, its rise and fall, usually depend on its economic performance. Economic policies must please the greatest number of people who decide democratic elections and reelections. But voters, as well as the representatives they elect, may also be guided by economic notions and doctrines that are popular rather than fitting and exact. Public opinion may be swayed by appeals to emotion and preconception rather than reason and common sense. Political writers and speakers may dwell on controversy and conflict rather than on theoretical correctness; periodicals, newspapers, broadcasts on radio, television, and other forms of communication may follow suit. Articulate politicians usually add their explanations and interpretations. They may prefer to be popular rather than correct.

The supply of economic goods is naturally limited, which obviously creates a conflict of interest. But human cooperation and division of labor greatly increase productivity and the supply of goods, which removes the natural conflict. Large-scale production by scores of workers reduces the unit costs of production and lowers goods prices. It makes for harmony of interests of all members of society. Similarly, implements of production increase productivity. Simple labor produces little unless it is aided by the employment of tools and machines. They are provided by savers and entrepreneurs who are no less indispensable than the workers who are using the tools and operating the machines. Surely, it may be more popular to ascribe all productivity to the laborers, but it is incorrect to ignore the contributions made by the providers of tools and the directors of production.

The most influential political writer of the 19th century undoubtedly was Karl Marx whose writings popularized doctrines of societal conflict and class warfare. His Communist Manifesto [1848] and Das Kapital [1867] became the foundation of international socialism. He did not create the conflict ideology, but it owes its fame mainly to his writings and those of his followers. It permeates public thought and policy even today, some 150 years after he first expounded it. Although Marx did not favor labor legislation, countless laws and regulations now seek to protect employees from the avarice of their employers. Every administration, whether Democratic or Republican, seeks to improve their protection and add new healthcare and retirement benefits. Most political debates about economic matters dwell on notions of conflict; just listen to loud debates on the floor of Congress, and you may wonder how the speakers manage to live together in peace.

The value of an economic good, according to Marx, is determined by the amount of labor required for its manufacture. Any price higher than the cost of labor, that is, any surplus value represents a profit of the capitalists. It is gross exploitation of the laborer! To call a halt to such injustice, Marx believed, all instruments of production should be concentrated in the hands of the state. Government should either own them outright or at least control them. Socialistic governments all over the globe now own them, social-democratic administrations usually regulate them.

Economists summarily deny that labor is the yardstick of all value and that “surplus value” is gross exploitation of a workingman. The ultimate determinant of value is the value judgment of consumers; their buying or not buying determines the formation of the market price of all economic goods, including that of labor. Wage rates themselves are the resultant of the value judgments of the buyers of labor. It does not matter whether employers and capitalists are softhearted or hardhearted, they are subject to the commands of the consumers, most of whom are earners of wages and salaries. Employers must pay the market wage. If they should dare to offer lower rates, they may lose their workers. If they are forced to pay higher rates, their customers may force them to discharge the labor. Employers as well as employees are guided by market wages which offer employment to all willing workers.

The Marxian doctrine of class conflict found ready acceptance in many European countries. By the time of Marx’s death (1883) his teaching had spread throughout Europe and given rise to a political mass movement. In Germany it caused the government to react with the introduction of the Social Security System (1884), beginning with compulsory accident insurance followed by sickness insurance and old-age pensions. Taxpayers were to subsidize all. It led the workers to believe that Marx was right and that the government sought to ameliorate the exploitation.

In the United States Karl Marx undoubtedly paved the way for several schools of conflict-thought that interpreted American conditions. Institutional Economics was essentially an American movement in academic thought which for a time (1933—1937) had great influence on U.S. Government policies. The central figure was Thorstein Veblen whose books The Theory of the Leisure Class [1899], The Theory of Business Enterprise [1904], The Engineers and the Price System [1921], and Absentee Ownership and Business Enterprise in Recent Times [1923], dwelled on the conflict between those who produce economic goods, that is, workers, foremen, and managers, and those who own the firms. Businessmen seek pecuniary gain which may not be beneficial to society. They may indulge in “conspicuous consumption,” “conspicuous leisure,” and “conspicuous waste.” They may enjoy monopoly powers — competition does not restrain them.

Other critics of the enterprise system made monopolistic and imperfect competition their focal points. There was the English economist Alfred Marshall who exerted great influence on economic thought in all English-speaking countries. His Principles of Economics [1890] was for many years the standard textbook at American colleges and universities. Other English economists followed suit. In The Economics of Imperfect Competition [1933] Joan Violet Robinson was especially outspoken in her criticism of social and economic injustices against developing nations. In the same year Edward Chamberlin published The Theory of Monopolistic Competition which suggested that most economic situations are composites of both, monopoly and competition. The emphasis on monopolistic tendencies and imperfection in competition and the charges of waste and exploitation obviously lend support to demands for government control.

Since Veblen, the most vocal American critic of the market order, has been John Kenneth Galbraith. Building on Veblen’s analysis of conspicuous consumption, Galbraith in The Affluent Society [1958] argued that there are economic and social imbalances. Competition has been superceded by countervailing powers. The growth of large corporations has led to the growth of powerful labor unions. Moreover, we now produce and consume large quantities of high quality consumer goods but are content with quantities of inferior public goods. American society enjoys conspicuous private consumption but silently suffers decaying public facilities.

During the Great Depression the conflict doctrine was bolstered and buttressed by Keynesian thought which holds that the unhampered market order breeds mass unemployment and that maintenance of full employment is the proper and feasible objective of government. The grievous defects of capitalism, according to John Maynard Keynes, “are its failure to provide for full employment and wealth and incomes.” [The General Theory, 1936, p. 372.] Keynes apparently maintained his faith in the capitalist economy; he called on government to stimulate it, not eliminate it. Most politicians and officials undoubtedly embrace this train of thought and joyfully engage in deficit spending. In fact, Keynesian economics stands as the most influential economic formulation of the 20th century, appealing to both politicians and academicians. It has ushered in an age of inflation the end of which is not yet in sight.

Political popularity now builds on Keynesian thought and policy. It allows governments to manipulate their policies in such a way that economic conditions are especially favorable before election day. They may create “political business cycles” by accelerating their deficit spending and credit expansion well in advance of an election. A feverish boom may clinch the reelection. Afterwards they will have to cope with the undesirable consequences of the tactic, such as soaring goods prices and declining real wages. They may even reduce the deficits and refrain from further credit expansion — until a new election comes in sight.

The doctrine of societal conflict has invited formation of “interest groups” that seek to handle the protection of their members. Eager to promote their economic interests, the groups may influence the political parties and even general public opinion. Their major target and area of concentration usually is the U.S. Congress. Promising financial support for friendly members of Congress or assuring votes by interest-group members at the next election, they hope to persuade legislators, especially committee chairmen, to sponsor and endorse favorable legislation. Much pressure is exerted also on government officials who manage independent regulatory agencies, e.g. the Federal Communications Commission, the Securities Exchange Commission, and the Interstate Commerce Commission. Their executives are very vulnerable to the influence of the people they regulate.

There are a great many categories of interest groups that seek to mold public opinion: some are patriotic, others racial, occupational, and professional. Some use the public communication media and embark upon open mailing campaigns; others may seek to hide their influence from the public at large. Well-known pressure groups use both approaches. There are The National Association of Manufacturers, the American Legion, the American Farm Bureau Federation, the American Federation of Labor (AFL), the Congress of Industrial Organizations (CIO), and many others.

There is always some basic principle that keeps an interest group together. That principle is the promotion of its special interests, to sustain the privileges it acquired in the past, to win new favors, and to shield it against other groups bent on depriving them of the favors and on snatching their income and wealth. Politicians seek to lead the groups by placating and flattering their constituents and promising ever more benefits in the future.

Politics is the activity of common men. When they succeed they become important leaders in the eyes of their followers. But most of them merely echo public opinion which was molded and fashioned by eminent authors, such as those mentioned above. Politicians may recount the teaching of their college professors of political science and economics, or relate to the lessons and stories told by famous authors and commentators. Public opinion and public policy are shaped by authors and teachers of thought. They created and disseminated the conflict doctrine that is guiding our politicians and government officials. They are ultimately responsible for the economic war in which the triumphs of some groups are the defeats of others.

Since economic conflict begins in the minds of men, it is in the minds of men that peace must be restored. Authors and teachers must again analyze the economic consequences of human action and enlighten the public about the basic harmony of interest in a free economy. Unfortunately, there are only a few who are teaching harmony and pointing toward peace. They can barely be heard in the clatter of the conflict doctrine.

Dr. Hans F. Sennholz [send him mail] was professor and chairman of the department of economics at Grove City College. See his website.

In the United States, offshoring – the business practice of
moving operations overseas, usually to less developed countries
with lower labor costs in Asia – has become a major political
controversy. It played a major role in the 2004 presidential election
in which Senator John Kerry, the Democratic Party’s candidate,
denounced corporate executives who were offshoring American jobs
as traitorous “Benedict Arnolds.” He and many of his colleagues
proposed legislation to eliminate all tax breaks to corporations
that export jobs. Offshoring undoubtedly will play an even bigger
role in future elections when many more jobs will have gone abroad.

Loud voices of protectionism were heard already in 1992 when the
North American Free Trade Agreement was to lower trade barriers
and make the United States, Mexico, and Canada more competitive
in the world market. It raised loud fears that it would lead to
ever greater expatriation of U.S. jobs to Mexico where labor is
less expensive (see Myths
booklet). The same voices now are sounding the alarm about American
jobs going to China and other Asian countries. Moreover, they are
greatly upset about the nature of the work being exported. In the
past, American companies had concentrated on transplanting low-skilled
jobs which minimum-wage legislation and benefit regulation had made
unlawful (see The
Politics of Unemployment). More recently, the voices have
focused on professional jobs going to China, India, the Philippines,
and Malaysia where university-trained technologists are engaged
in software engineering, computer chip designs, and code writing.
After all, many thousands of engineers in those countries studied
at American universities and acquired such expertise. General Electric
Corporation has sent most of its technology services to graduates
in China; Aetna is sending them to India.

Many legislators are eager to call a halt to such exports of American
jobs. They are ready to levy steep fines, raise taxes, or imprison
the violators of their laws and regulations. But they are not willing
to lower the benefit costs which they imposed. In their private
lives many were attorneys, counselors-at-law, civil servants, educators,
or heirs to family fortunes before they embarked upon political
pursuits. Few are knowledgeable economists familiar with basic principles
of economics. Instead, they usually are enamored by their own position
and especially by their great legislative powers. The only limit
they may recognize is the political clout and vote of other legislators.

Most members of Congress are unaware of the inexorable principles
of foreign trade and international cooperation. One of the great
19th century economists, David Ricardo, clearly elaborated and stated
them. He propounded the Law of Comparative Cost, better known as
Ricardo’s Law of Association, which applies to the common situation
in which economic goods move readily across national borders but
governments prevent capital and labor from moving freely. Under
such conditions, people everywhere benefit most if they concentrate
on the production of those goods in which conditions are most favorable,
leaving all other production to others. The case is similar to that
of a surgeon who concentrates on surgery and leaves all supportive
work to his assistants although he also excels in their simple tasks.
And it is similar to that of a master mechanic who relies on his
apprentices and assistants for ordinary work, although he could
outdo them readily, but chooses to concentrate on the work requiring
greater skill. Cooperation and division of labor benefit all (see
The Politics of Unemployment).

In Ricardo’s time the mobility of both capital and labor was
limited rather severely. Later in the 19th century, under the influence
of classical economic thought, both capital and labor became rather
mobile (see On
Liberty). They created the “world market” with
rapidly rising productivity and standards of living. During the
20th century, unfortunately, economic nationalism and rampant socialism
closed many borders and precipitated not only ugly trade wars but
also numerous armed conflicts. After World War II the “cold
war” between the Soviet and American blocs of nations divided
the world, creating political tension and military rivalry short
of actual war. Yet the comparative differences in production cost
allowed both sides to benefit from peaceful trade.

Ever since the disintegration of the Soviet bloc the market order
has gradually expanded to most corners of the world and business
capital has assumed new mobility, seeking employment wherever production
conditions are favorable. But no matter how mobile capital now may
become, it cannot nullify Ricardo’s Law of Association as long
as labor lacks the mobility to move freely and expeditiously from
country to country. The great differences in religious, racial,
national, and cultural characteristics as well as the notable differences
in birth rates and mortality rates will never allow man to spread
evenly around the globe, but they may encourage him to engage in
peaceful cooperation and international trade.

There cannot be any doubt that the problems of offshoring will be
with us as long as economic conditions change and business is free
to move. American business may move abroad, and it may come back
again. Guided primarily by cost and yield comparisons many American
companies are known to have canceled outsourcing projects in Asia,
citing poor employee training and performance, inadequate support,
personal and property security concerns, and political arbitrariness,
hostility, and corruption. They must cope with anti-offshoring legislation
and political malice wherever they would like to leave and with
unfair competition laws and regulations where they like to settle.
After all, construction of a modern plant undoubtedly leads to the
closure of many old shops and relocation and training of their employees.
Surely, closure of shops and relocation of workers are painful also
in Asia.

Economists
like to reflect on all the effects of a business move to places
and countries where it is more productive. They are ever mindful
of Ricardo’s Law of Association which affirms that trade benefits
both countries. And they are elated when foreign competition persuades
legislators and regulators to reduce their obstacles and restraints,
trim mandated labor costs, and remove employment barriers. But they
are saddened by the rising mood of protectionism in Europe as well
as in the United States. The voices of nationalism and socialism
are rather persuasive; they speak of interest, not of reason. They
pay no heed to the old precept: What you do to others, they will
do unto you.

August
23, 2005

Dr.
Hans F. Sennholz [send him mail]
was professor and chairman of the department of economics at Grove
City College. See his website.

The reasons and explanations given for this loss may change over time, but the
consequences are always the same. Inflation covertly transfers income and wealth
from all creditors to all debtors. It dispossessed present creditors of nine-tenths
of their 1980 savings and enriched debtors by the same amount. The dollar savings
accumulated since then have shrunk at lesser rates but are fading away notwithstanding.
No wonder, many victims readily conclude that thrift and self-reliance are useless
and even injurious and that spending and debt are preferable by far. They may
join the multitudes of spenders who prefer to consume today and pay tomorrow,
and they may call on government demanding compensation, aid, and care in many
forms. Surely, the hurt and harm inflicted by inflation are a mighty driving force
for government programs and benefits.

In their discussions and analyses of various problems, economists usually avoid
the use of moral terms dealing with ultimate principles that should govern human
conduct. Ever fearful of being embroiled in ethical controversies they seek to
remain neutral and “value-free.” They do counsel legislators and regulators
on the cost-efficiency of a policy but not on its moral implications. They may
offer professional advice on the efficiency of money management but not on the
morality or immorality of inflationary policies. They dare not state that inflation
is a pernicious form of taxation which most people do not recognize as such. Authorities
of money and banking rather than taxing authorities redistribute income and wealth
under cover of ignorance. Placed on every person in the form of higher goods prices,
the application does not fall equally and simultaneously on every buyer. The people
who receive the newly created money first may actually benefit, as goods prices
readjust rather slowly. Others who receive it later or not at all will have to
tighten their belts. Above all, inflation ravishes the savings of countless Americans
and turns many into prodigal spenders and debtors.

The biggest debtor also is the biggest inflation profiteer. With some eight trillion
dollars in debt, the Federal Government is by far the biggest winner. In fact,
it gains not only from debt depreciation, which at just three percent amounts
to some $240 billion every year, but also from Federal Reserve money and credit
creation that enables the U.S. Treasury to suffer annual budget deficits of some
$500 billion a year. Without the power to inflate and depreciate the dollar at
will, the U.S. Government would be a different institution, like that which the
Founding Fathers had envisioned. But endowed with the power of inflation it has
become an almighty organization that redistributes income and wealth and refashions
the social and economic order.

The primary beneficiaries of the new order are its own managers: legislators,
regulators, and a huge army of civil servants. They are first in power, prestige,
and benefits. Many U.S. Senators and Congressmen are the admired and esteemed
benefactors of countless petitioners for handouts and favors. They are revered
for every benefit they bestow. And there are the officials of the Department of
Commerce with 7 benefit programs, the Department of Education with 34 programs,
the Department of Energy with 6, the Department of Health and Human Services with
8, the Department of Housing and Urban Development with 14, the Department of
the Interior with 3, the Department of Labor with 9, the Department of Transportation
with 9, and various government commissions and authorities with another 10 programs.
Federal politicians and agents are the wise and virtuous judges and juries of
benefits amounting to more than $1 trillion every year. How “honorable”
would they be, pray tell, without Federal Reserve assistance in financing the
deficits and its power to print more money?

Evil acts tend to breed more evil acts. Inflationary policies conducted for long
periods of time not only foster the growth of government but also depress economic
activity. Standards of living may stagnate or even decline as growing budget deficits
thwart capital accumulation and investment that are sustaining the standards.
Inflation misleads businessmen in their investment decisions, which causes much
waste and many bankruptcies. In fact, it is the root cause of the boom-and-bust
cycle which wreaks havoc on economic activity. Indeed, inflation breeds many evils
of which most Americans are unaware.

Since 1971 when President Nixon abolished the last vestiges of the gold standard
and repudiated all obligations to meet international obligations with payments
in gold, the U.S. dollar has been the dominant world currency. It enables Americans
to buy massive quantities of foreign goods and services, suffering annual trade
deficits of more than half a trillion dollars now, and making payment in ever-depreciating
dollars. Foreign central and commercial banks as well as many foreign individuals
are using their dollars with the hope that they will retain their purchasing power
in the long run. Asian creditors are holding more than $2 trillion in claims,
Japan and China alone an estimated $1.5 trillion between them. A dollar depreciation
rate of just 3 percent strips Japan and China of some $45 billion in purchasing
power every year. They undoubtedly are suffering such losses in silence because
they are mindful of the many benefits they are receiving from amicable relations
with the United States. American capital is rushing into China, building many
plants and introducing modern technology while some 20,000 young Chinese are studying
at American colleges and universities. At the same time Japanese and Chinese companies
are investing surplus dollars in the United States, assuming control over American
corporations. If the United States government should ever disrupt this peaceful
relationship with discriminatory trade restrictions and painful barriers, the
Asian creditors may dump some dollar holdings. The dollar crash would be heard
around the globe.

There
is no conscience in politics. Economic policies may be changed, reformed, and
readjusted because they are ineffective, unproductive, and unpopular, but rarely
ever because they are immoral. Debt may be a grievous bondage to an honorable
man, but it may be a “national bond” which, in President Roosevelt’s
words, u201Cis owed not only by the nation but also to the nation.” Surely, politicians
have a code of laws to observe and obey, but honesty in matters of debt and money
is not one of them.

If it is true that we cannot do wrong without suffering wrong, we must brace for
more grief to come.

June
24, 2005

Dr.
Hans F. Sennholz [send him mail] was professor
and chairman of the department of economics at Grove City College. See his
website.

Leading
French and German politicians never tire proclaiming "European
solidarity" by which they mean a feeling of unity of social
and economic standards. They orate on union and harmony that bind
all Europeans and on responsibility and compromise between employers
and workers. Unfortunately, their real world is rather different;
it is deeply divided into large classes of economic beneficiaries
and victims. Millions of workers are condemned to chronic unemployment
while other millions benefit from their rejection. In France, the
present rate of unemployment is given at 12.1 percent, in Germany
at 10 percent, and in Italy at 9.6 percent. In the French-speaking
part of Belgium it is 19 percent, and in the European Union capital
city of Brussels an astonishing 22 percent. If we were to add the
underemployed and de facto-unemployed in public make-work schemes,
the rates would be even higher.

Most
European politicians refuse to pay heed to market principles of
employment and economic growth. They are woefully ignorant of unhampered
market wages that assure not only full employment but also equitable
wage rates reflecting the value judgments of consumers. They are
enamored with doctrines of conflict, relying on compromise, adjusting
the differences, and meeting halfway. Economists who observe the
European scene may draw the conclusion that exploitation and class-conflict
doctrines continue to shape European thought and policies some 150
years after Karl Marx first expounded them.

Labor
law and regulation condemn workers to a life of idleness and waste
yet Western Europe needs an influx of immigrants simply to fill
basic service jobs. It needs "guest workers"
who take the places of native workers on welfare and unemployment
doles. It needs immigrants whose numbers are rising steadily
while the native population is shrinking with birth rates below
replacement levels. Longevity continues to rise, which places increasing
care burdens on the young. It cannot be surprising that young immigrants
are welcome throughout Western Europe.

It
is ironic and yet so plausible that the EU countries with the highest
rates of unemployment also attract most immigrants who render the
services which the natives do not choose or are prevented from performing.
Since the fall of the Berlin Wall and the disintegration of the
Soviet Union, many nationals of the former satellite countries managed
to find their way to the West. In 2004 the European Union consisting
of a club of 15 Western European countries opened its doors to 10
new members eight of which had been parts of the former Eastern
European communist bloc (the Czech Republic, Estonia, Hungary, Latvia,
Lithuania, Poland, Slovakia, and Slovenia). The new members increased
the number of EU citizens from 370 million to 455 million. But the
number of migrants from the east to the west is minuscule when compared
with the millions who streamed into Western Europe before the breakup
of the Soviet Union. More than 20 million people from North Africa
and the Middle East managed to settle in Western Europe. Most of
them are Muslims believing in the teachings of the Prophet Mohammed.
Five to six million are estimated to live in France alone, three
to four million in Germany, two million in Britain, one million
apiece in Holland and Italy, and half a million in Spain and Austria
each.

The
European Union is in the process of basic transformation and modification.
The old welfare states that are attracting the immigrants are declining
in economic position and political preeminence while new members
are rising in economic productivity and political position. Some
actually are reducing their tax burdens and business restrictions
while the old members basically distrust unregulated markets and
favor government intervention to equalize incomes and maintain living
standards. Some newcomers prefer to look to Washington for guidance
and support rather than to Paris, Berlin, and Rome, which is bound
to strain and weaken the Union. In fact, the basic differences between
"old Europe" and the new members searching for new ways
to the light cast a dark cloud on the future of the European political
union.

While
labor law and regulation give rise to mass unemployment of native
labor and to extensive influx of foreign labor, they also prompt
business capital to seek more hospitable conditions abroad. Massive
amounts of French and German capital have found their way to friendlier
climes not only in other EU member states but also in East Asia
and the United States. It raises labor productivity and wage rates
wherever it goes and lowers them wherever it leaves. In coming years
French and German capital can be expected to move to new EU members
in the east, in particular to Lithuania, Poland, the Czech Republic,
Slovakia, Hungary, Slovenia, Croatia, and wherever it is welcome.
Of course, French and German politicians can be expected to explain
the outflow of capital in terms of employer greed and labor exploitation.

In
coming months European voters will be asked to accept an 800-page
constitution that will have superior sanction to the ordinary laws
of the member states. If accepted by the voters of all 25 countries,
it will enlarge and strengthen both the EU bureaucracy in Brussels
and the European Court of Justice in Luxembourg. But it is highly
unlikely that the voters of all member states are ready to surrender
their legal systems and submit to a superior law contrived by foreign
politicians and interpreted by foreign judges. French voters who
are asked to approve the constitution on May 29 may be the first
to reject it. They may be followed by the voters in the Netherlands
and surely the United Kingdom. If any one country should vote "no,"
the constitution will not become law.

It
is doubtful that 455 million Europeans are ready for a meaningful
constitution that may gradually equalize the benefits and privileges
currently bestowed by national laws and regulations. Most voters
happily partake of their social benefits but are loath to share
them with foreigners no matter how destitute they may be. Surely,
French and German politicians would not dare to suggest that their
voters share their benefits with the people of Estonia, Slovakia,
or Poland who earn one-seventh to one-sixth of their incomes. And
even if they would and the 800-page European constitution should
become the basic law of Europe, most member governments would pay
little heed to its provisions – as many European governments
have done to their constitutions throughout the 19th and 20th centuries.

Monetary
Union

The
political world is failing to realize the hopes and aspirations
of many Europeans. In contrast, the world of money is promising
much and may actually deliver some benefits. At a meeting in Maastricht,
the Netherlands, in December 1991, the members of the European Union
agreed to adopt a common currency to be issued and managed by a
central bank. The treaty, which subsequently was ratified by twelve
countries either by parliament or by popular referendum, stipulates
certain membership criteria – namely, a budget deficit of
no more than 3% of gross national product (GDP) and public debt
of no more than 60% of GDP. To enforce these basic conditions a
Stability and Growth Pact of 1997 gave the European Commission the
power to levy fines on member states that violate the agreement.

It
is interesting to reflect on the monetary thought that guided European
policy makers who created the supercentral bank. They obviously
are convinced that they must issue and manage money because the
people are unfit to manage their own, that government must mint
coins, issue notes, define "legal tender," establish
central banks, conduct monetary policy, and then manipulate the
price level. In short, money is a political issue which is a domain
of government. Monetary freedom is a faint memory of the distant
past.

The
European Central Bank, which is located in Frankfurt, Germany, is
a quaint structure of political control and command. It is headed
by a president who is elected by EU heads of state. He is assisted
by two governing bodies, the Executive Board which implements
the monetary policy, and the Governing Council which is
composed of the Executive Board and the presidents of all
member national banks. It is to shape monetary policy by majority
vote, holding the rate of inflation to 2% or less. Another committee
consisting of the finance ministers of the Union is in charge of
the euro’s international exchange rates. In short, the Council
shapes monetary policy but EU finance ministers may fix euro
exchange rates toward the U.S. dollar, the Japanese yen, the Chinese
yuan, and others. One committee manages the causes, another may
dictate the effects. The finance ministers obviously are unaware
of the laws of the market that ultimately determine the effects.

The
euro, the single European currency, came into being at the beginning
of 1999; it was readily accepted by 12 member states but rejected
by Denmark, Sweden, and the United Kingdom. Since then, the three
biggest members, France, Germany, and Italy have consistently violated
the conditions of the treaty and managed to avoid the fines. Their
governments continue to suffer large budget deficits which drain
European capital markets and thus keep productive investments and
labor productivity lower than they otherwise would be. The average
euro area growth rate barely reaches 0.2 percent. The French, German,
and Italian disregard of the Stability and Growth Pact obviously
annoys and troubles all other members of the currency union. They
are fearful that they would be held to higher standards if they
would dare to violate the treaty. But, sooner or later, they may
dare to imitate the violators and join them in the pleasures of
deficit spending, which undoubtedly would turn the 0.2 percent growth
rate into a 0.2 percent decline rate. There are countries which,
by their policies, lead other countries; France, Germany, and Italy
surely do not lead the way.

Most Europeans nevertheless welcomed the euro; it simplifies inter-European
transactions, increases competition, encourages the flow of capital,
and opens many markets. Internationally, it may even challenge the
U.S. dollar’s preeminence in world trade and finance. The Monetary
Union is likely to continue to expand and exert its helpful effects
on European economic conditions. Estonia, Lithuania, and Slovenia
are scheduled to join in 2007, followed by Latvia and Cyprus in
2009. In time, other member states may get their financial houses
in order and qualify for membership.

No
matter what we may think of national central banks, that is, monopolies
in which there is only one provider of legal-tender money, the combination
of several into one superbank actually checks their power. It confines
their propensity to inflate and depreciate the currency within average
bounds. And the European ambition to compete with the United States
limits the temptation to inflate and depreciate the euro to the
inflation and depreciation rate of the U.S. dollar.

Demographic
Changes

What
we look for may not come to pass. But we always live under the shadow
of future events. Europeans live under the cloud of economic stagnation
and mass immigration that may affect their future. More than 20
million immigrants from North Africa and the Middle East who are
likely to multiply in coming decades may, in time, affect economic,
social, cultural, and religious conditions. Most of them are Muslim.
A half-century ago, there were but a few mosques in Europe, today
nearly every country has a thousand, with five to six thousand each
in France and Germany. At the present rate of growth, there may
be tens of thousands by the end of the century.

Most Muslim immigrants undoubtedly come with hope for gainful employment
and a better life. Per-capita annual income in Morocco, Algeria,
and Tunisia, all former French territorial possessions that are
launching the flood of immigrants, is a fraction of French per-capita
income, $1,320 in Morocco, $1,890 in Algeria, $2,240 in Tunisia,
and $24,770 in France. Similarly, Germany with per-capita income
of $25,250 attracts millions of Muslim immigrants from Turkey with
per-capita income of $2,790. Surely, the economic incentives for
migration are considerable. They came legally and illegally. And
thanks to their high birth rate and the sub-replacement birthrate
that is the norm among native Europeans, the demographic fact points
toward great changes to come.

Economists
explain the glaring differences in incomes as an inevitable consequence
of different economic thinking, social and political mores, and
religious beliefs. They are convinced that man is productive wherever
he is free to pursue his own ends and where the fruits of his labors
are safe and secure. Most Europeans have enjoyed variations of such
an order for more than 200 years. Most countries of the Muslim world,
in contrast, are lingering in deep want and poverty because people
are severely limited in their freedom to pursue economic ends. They
are poor because their governments limit them in their economic
activity. Governments administer law and conduct policies in accordance
with the teachings of the Koran which limits all believers to just
two types of income: wages and charity dole. In Europe where most
people profess a Christian faith the population may be free to pursue
all four conceivable types of income: wages, interest, profits,
and the dole. Wages are payment for services rendered. Interest
is payment for the use of property in the passage of time. Entrepreneurial
profit is the return of business that meets a need hitherto unknown
and uncovered. Dole is charity income distributed by government
or individuals.

The
Koran limits all believers to just one form of earned income, to
payment for services rendered. It prohibits interest payment (riba)
over and above the account of principal. "Believers, do not
live on usury, doubling your wealth many times over. Have fear of
God, that you may prosper, guard yourselves against the Fire prepared
for unbelievers." (Koran, Sura 3:131). Similarly, it prohibits
any economic activity that involves uncertainty, risk, or a speculation
(ghara). Option and futures contracts that may yield entrepreneurial
profits are prohibited as are foreign exchange transactions that
aim at profits.

Any
society that limits economic activity to just one form of earned
income is condemned to eternal poverty with all its despondent symptoms
and consequences. In Muslim countries such as Afghanistan, Pakistan,
Indonesia, Iraq, Mali, Niger, Chad, and Sudan, national income per
capita is estimated at less than $1,000 a year, which compares with
some $44,000 in Luxembourg, $40,000 in Switzerland, and $37,000
in the United States. In Kuwait and the United Arab Emirates, the
two wealthiest Muslim countries, per-capita income is less than
one-half of average American income despite bountiful oil resources.
And even this amount does not consider the lofty emoluments of government
officials, the emirs, sultans, and princes, whose shares obviously
reduce the average income of the common populace.

High
birthrates and low investment rates may aggravate the poverty. After
all, levels of income and standards of living are determined by
labor productivity which is a primary function of the amount of
capital invested per capita. An increase in investment per head
increases productivity and income; a decline lowers them. High birthrates
and stagnant investment rates obviously lower the investment per
head and depress the levels of living. They are eating away at living
conditions throughout the Muslim world and increasing the pressure
to emigrate. Sunni Somalia with a population of some 8 million is
estimated to grow at an annual rate of 4.2 percent; by the middle
of the century it may be bigger than Italy whose population is shrinking
continually. Yemen with a population of 20 million is growing at
a 4.1 percent rate; it may surpass Germany by the end of the century.
Iraq with a population of some 25 million is growing at a 3 percent
rate and soon may exceed the number of native Frenchmen.

Some
20 million Muslims already have settled in Europe. At a 4% growth
and immigration rate there will be 140 million by the middle of
the century and several hundred millions by the end of the century.
Christian conversion to the Nation of Islam would further increase
the number. Thousands of Christians in Europe marry into Muslim
families and join the Nation each year, but the number of Muslims
turning Christian is rather small. It takes extreme courage and
stoutheartedness to renounce the world of Islam. Converts stand
accused of apostasy, a transgression against Islam, the consequences
of which may even be deadly. Apostasy is punishable by death in
Afghanistan, Iran, Mauritania, Pakistan, Saudi Arabia, Sudan, and
Yemen. It is merely illegal in Jordan, Kuwait, Malaysia, the Maldives,
Oman, and Qatar. In Christian countries converts enjoy the protection
of the law but face common dangers. They are ostracized and rejected
by their own families and threatened by Islamic fundamentalists.
After all, Muslims everywhere and at all times are under the obligation
to enforce the "integrity of Islam" of which the punishment
of apostates is an important part. Individuals all over the world
are killed for deserting Islam, many more are abused and assaulted,
and many are driven underground in their new faith. It is safer
by far to leave Islam for atheism or agnosticism than to turn Christian.

Large
numbers of Muslim immigrants readily assimilate and become French-Muslim,
German-Muslim, and Italian-Muslim. Muslim religious life flourishes
in Europe as is visible in the rapidly growing number of Mosques.
But there also are immigrants who reject the very idea of integration
into mainstream European life and instead strive toward Islamic
separation. Muslim pressure groups, political lobbies, and religious
charities cooperate effectively everywhere in Europe. They readily
confront any group, party, or government that ignores or questions
Islamic values and standards.

Many
Europeans who are clinging to the old creed of "passive tolerance"
toward all newcomers are frightened by the political activism of
some Muslim immigrants. Appalled by the savage attacks on the World
Trade Center and the Pentagon on September 11, 2001, by the bombings
of four packed commuter trains in Spain on the morning of March
11, 2004, and the assassination of several critics of Islam, they
are sensing a deepening conflict between the West and East, even
a "clash of civilizations." The pacifists in their midst
who watch the trend and count the numbers are ready to yield and
surrender. In their eyes, Europe is being Islamized; by the end
of the century Europe will be Muslim.

Economists
who cannot take their eyes off economic income, economic productivity,
and standards of living strongly disagree with such deductions and
conclusions. Surely, the ethnic and religious trends may favor the
world of Islam, but human nature and the inexorable economic principles
of economic life do not. For obvious reasons mentioned above, the
economic limitations imposed by the Koran condemn most faithful
believers to dismal poverty and hardship. Their levels of labor
productivity and standards of living are significantly lower than
those in Christian Europe as are average life spans and functions;
they would soon fall to Muslim levels if European nations were to
labor and live by Muslim rules. It is rather unlikely that many
Europeans will readily and peacefully suffer such reductions in
the name of Allah.

Many more millions of Muslims may stream into Europe and make their
voices be heard before EU politicians will recognize the economic
dangers of Islamization. Many are socialists who favor their particular
brands of an economic command system. After all, socialistic or
social democratic parties presently lead or participate in 13 of
the old 15 EU member governments. All 10 new members that joined
in 2004 are quasi-socialistic, having emerged from decades of communistic
or socialistic domain. European socialism and the realm of Islam
undoubtedly bear many similarities but differ significantly on the
very nature of their command systems. Will it be secular or religious?
And who will be in command? These very differences are rarely ever
solved amicably and peacefully.

Fireworks were lighting the skies of Europe when, on May 1, 2004,
the old east-west division of Europe came to an end. Eight new states
from the former communist bloc together with Malta and Cyprus joined
the European Union. The president of the European Commission, the
Italian Romano Prodi, expressed a common joy of fulfilment: "Five
decades after our great project of European integration began, the
divisions of the Cold War are gone once and for all …. The new
members bring to the Union the cultures and diversity of 10 countries
with distinct historical roots stretching back through the centuries."

What
the joy of fulfilment is to some Europeans is an affliction to many
others. Jubilant Europeans hail the removal of all restrictions
on the movement of economic goods, services, business capital, workers,
and tourists. They welcome the fresh air of individual freedom and
all the benefits it may bring. Many Europeans, however, have feelings
of fear and distress. They bewail and oppose the removal of political
restrictions that have given them not only much protection from
foreign competition but also special boons and favors. And finally,
a few economists who would like to join the jubilation are alarmed
by the growing encounter between the West and the world of Islam.
They are mindful of the demographic facts as well as the religious
and ideological fervor that suggests a continent ripe for Islamic
advances. They now brood and wonder whether the ancient conflict
between Europe and militant Islam will flare up again.

May
23, 2005

Dr.
Hans F. Sennholz [send him mail]
was professor and chairman of the department of economics at Grove
City College. See his website.

Some social critics explain the income differential in terms of
injustice and exploitation. They are ever eager to lay blame on
someone, on corporations and employers, chauvinistic man, or even
the capitalistic system. They see exploitation and conflict in most
social relations and, therefore, favor more laws and regulations.
Economists, on the other hand, explain the differential in terms
of personal productivity. They deny the possibility of exploitation
wherever there is freedom of choice and unhampered competition.
There can be no conflict, they contend, as long as government does
not restrict competition through licenses and franchises and does
not pass laws that benefit some people at the expense of others.

The messengers of conflict rely on laws and regulations that prescribe
and enforce social relations. They can be found in the courts of
law filing their complaints and charges, and in the halls of Congress
clamoring for more laws and stricter enforcement. In contrast, the
believers in harmony and freedom shudder at such appeals to coercion
and force. They oppose any and all political intervention in social
relations, favor open and honest competition, and advocate voluntary
cooperation among all members of society, regardless of differences
in race, color, creed, or gender.

Cooperation is most advantageous among people with unequal productivities.
Male physique usually embodies more physical strength than women
can muster. It permits men to offer more physical labor than women
can offer, and causes income differentials wherever physical labor
is required. Throughout the ages this difference assigned heavy
outdoor tasks to men and lighter housework to women, giving rise
to a “natural” division of labor.

There are few women who devote their whole lives to income production,
but many who dedicate their lives to their families. Rightly or
wrongly, many employers are living in constant fear of losing their
female workers to home and family. As one may put it: “There
are many jobs we may teach a woman; but it does not seem worth the
effort and expense to teach her because the brighter she is, the
more likely she is to go off and get married, just when she is beginning
to be of some use.” Or, she may leave because she is pregnant,
or her husband is transferred. Or she may refuse to be transferred
for reasons of family. In fact, she may not even want to shop around
in the labor market in order to sell her labor at the highest price.
Family considerations may be more important to her. Therefore, she
must expect to earn less than an equally capable male worker.

Most women merely spend a few years of their lives in economic pursuits.
The common age at marriage being 21 to 25, they may spend a few
years before they are married and again later when the children
have left the nest. The amount of work a wife may supply to the
market may depend not only on her wage rate but also on the total
income of the family. Observers and researchers have found that
female market labor responds negatively to husbands’ incomes;
the more husbands earn, the less wives are likely to work. But there
is a positive response of a woman’s ability to earn income
to her inclination to work; the more she can earn the more she is
likely to work.

In recent decades women throughout the capitalistic world have flocked
from home to office or factory. In the United States, more than
forty percent of married women now are estimated to be earning extra
incomes. This shift from home to market must be explained not only
by the phenomenal reduction in physical exertion as a result of
modern technology and application of capital, but also by the growing
opportunities of office work. As American industry provided an ever
increasing variety of goods at lower prices, it became more advantageous
to buy them in a store than to make them at home. In other words,
an hour’s work in the office became more productive in providing
goods for the home than an hour’s work at home, which persuaded
millions of married women to seek market employment. But even then
they may want to limit their labor to times and places that allow
for family chores. The office hours should not conflict with family
hours, the place of work should not be too far from home, and above
all, the office demands should not be overly exhausting, depriving
her of the strength needed at home.

It is in the interest of all members of society that woman should
develop her ego and join man as equal, freeborn companion and partner.
She should develop her personality in accordance with her inclinations,
desires and economic circumstances. But the basic differences in
sexual character and physique cannot be outlawed any more than other
inequalities of the human race. She cannot escape the burden of
motherhood, of childbearing and child-rearing that consume her energies
and tend to remove her from the labor market. Pregnancy and the
nursing of children take many years of her life and deprive her
of the opportunity to be active professionally. While man may be
pursuing ambitious goals, woman is a child-bearer and nurse, carrying
the burden of human reproduction. In order to compete with man and
develop her abilities in economic life she may have to renounce
her womanly functions and deny herself the greatest joy, the joy
of motherhood. A few extraordinarily gifted women manage to achieve
both, perform great deeds in spite of motherhood.

Affirmative-action judges are blind to the obvious. They actually
find employers guilty for considering sexual limitations and situations.
Oblivious to human nature, they issue court orders that seek to
suppress it. They are actually hurting the very individuals they
seek to benefit. By raising the cost of female labor they are reducing
its demand which, in simple economic language, is tantamount to
creating unemployment. The “marginal” employees, whose
productivity was barely covering their employment costs before the
judge’s order, are rendered “submarginal” by the
order, that is, they are made to inflict losses on their employers
and thus, for purposes of employment, are made unproductive. In
short, they are rendered unemployable. A Supreme Court decision
that interprets the law in such an “affirmative” fashion
may condemn many thousands of American women to long years of unemployment.

Society
cannot rest for long on a judge’s order and the power of the
police to enforce it. It must build on the solid foundation of freedom
and morality, which are the principal elements of social peace and
the guarantors of its prosperity.

April
19, 2005

Dr.
Hans F. Sennholz [send him mail]
was professor and chairman of the department of economics at Grove
City College. See his website.

The Bureau of Labor Statistics of the United States Department of
Labor keeps careful watch of unemployment and diligently counts
the numbers. But in its long history the Bureau has never prepared
a systematic collection, organization, and analysis of the unemployment
created by labor laws and regulations. Yet this kind of unemployment
is more important by far than seasonality or industrial and technological
change to which labor markets readily adjust. It is chronic and
lamentable as it creates large armies of unemployed, impoverishes
many people, breeds discontent, indignation, anger, and, worst of
all, being interpreted erroneously, may turn public opinion against
the enterprise order itself. In the end, it may even deliver the
economy into the very hands that cause the unemployment.

Whenever government forcibly raises employment costs it causes marginal
labor, that is, labor that barely covers its costs, to become submarginal.
It does not matter whether government orders wage rates to rise
or benefits to be improved, the workday to be shortened, overtime
pay to be raised, funds to be set aside for sickness and old age,
or any other benefit to be granted. A small boost renders few workers
submarginal, a large boost affects many. In matters of employment
they now are “unproductive” and cannot be used economically.

It is obvious to all but politicians that any worker, male or female,
old or young, Yank or Chinaman, whose service is worth only $10
an hour but must be paid $20 or more cannot be employed profitably.
He would inflict clear losses on anyone who would hire him, which
condemns him to a life of idleness, uselessness, and emptiness.
Unaware of the very cause of his affliction, he is likely to take
umbrage at society that apparently sentenced him to lifelong unemployment.

American labor laws evoke such feelings every day. At this time
they enforce a minimum wage of $5.15 an hour, plus 7.65% payable
into a Social Security account, plus 2% to 10% into an unemployment
compensation account, plus 10% to 100% for workmen’s compensation
which is a fund that pays an employee who is injured in the course
of his work. The compensation assessments vary from state to state,
but the levies together readily double the employment costs in many
occupations.

The Bureau calculates total fringe costs of $5.80 an hour for service
workers and $8.73 an hour for construction workers. Skilled and
trained workers surely are able to cover their fringe costs by way
of takehome-pay adjustment; instead of earning $18.73 an hour they
receive only $10. But how can an unskilled service worker who is
to earn $5.15 an hour to cover additional fringe costs of $5.80
an hour? He obviously must render services worth at least $10.95
an hour to cover his employment costs. Anyone unable to render $10.95-services
cannot be employed productively.

Competition forces many employers to grant additional fringe benefits
such as paid vacations, sick days, holidays, health and life insurance,
pensions, and other gratuities. Employers may even boast of the
benefits which nevertheless are covered by employee productivity,
just like the legally required benefits. Highly productive workers
may soon cover them, but unskilled minimum-wage workers who expect
the same company benefits obviously would be unable to earn them.
If there is no demand for their services at $10.95 an hour there
will be none at any higher rate.

Chronic unemployment obviously is a political disease that springs
from the primitive notion that government can improve everyone’s
income and working conditions by legislation and regulation. It
is an affliction that stems from misinterpretation and misinformation
about work and income and from an undaunted faith in collective
force and coercion. It clearly reflects the spirit and mentality
of our age. Unless they soon will give way to the spirit of individual
freedom and enterprise the rate of unemployment is likely to rise.
It may even reach the levels of the old European welfare states,
such as France, Germany, and Italy, where unemployment rates usually
exceed 10 percent.

There is no ready escape from the consequences of such labor laws.
Surely, most young workers are willing and ready to accept employment
at honest market rates; they are even prepared to ignore the labor
laws and work under market conditions. But most employers do not
dare to violate the laws. The penalties leveled at them always are
onerous and degrading no matter what their motives may be. Nevertheless
economists estimate that some 30 percent of unskilled youths find
ready employment in the “underground economy” where wages
are paid according to productivity. Many small family enterprises
employ and train millions of young people.

In
the coming years the rate of unemployment probably will rise as
Congress raises the minimum wage, boosts Social Security taxes,
and increases the benefits, that is, the costs of labor. But times
change; we may learn anew that labor laws that ignore basic economic
principles and build on brute force have hurtful consequences.

April
18, 2005

Dr.
Hans F. Sennholz [send him mail]
was professor and chairman of the department of economics at Grove
City College. See his website.

We may readily agree with the media as long as the great chasm of
income and wealth stems from great differences in economic productivity.
Surely, we cannot fault the great American entrepreneurs who in
ages past built famous enterprises employing thousands of workers
and serving millions of consumers. They discovered new methods of
production, opened new markets, and developed new sources of raw
materials throughout the world. They succeeded by serving and pleasing
consumers. Their talents of enterprise actually raised American
standards of living to one of the highest in the world. And their
labors bridged the wide legal, social, and economic gulf that separated
the social classes throughout the ages.

The economic order that developed gradually during the 20th century
gave life to yet another economic and social elite which does not
seek new methods of production and does not give employment to thousands
of workers; it shrewdly speculates on the effects of various government
policies, such as inflation, credit expansion, and new regulations
and controls. An economist who visits the new elite may actually
discern three distinct branches that cooperate as readily as they
feud with each other.

A large branch does not create new enterprises nor give employment
to a single worker. It opens no markets nor develops new products.
Its members thrive on boom-and-bust cycles which afford great opportunities
to traders who observe and understand the portentous policies of
the Federal Reserve and the U.S. Treasury. They may manage investment
trusts holding corporate stock worth billions of dollars or merely
look after their own accounts. They weigh and appraise political
intention and government intervention, always gauging the consequences,
acting in anticipation, and profiting immensely from political moves.
While many businessmen suffer painful losses during a business cycle,
they succeed in increasing their funds throughout it all.

These speculators actually render an important service. The Federal
Reserve and the U.S. Treasury frequently intrude on and disrupt
the smooth performance of markets, which then must readjust; they
actually facilitate the adjustment. They anticipate future price
movements, assume market price risk, and add liquidity and capital
to the markets. Theirs is a necessary and productive activity.

A remarkable feature of this new elite is its frequent disagreements
and altercations with the other branches of the business elite.
Its members may find frequent fault with and cast aspersions on
the elite that actually manages the production. They prefer to support
and consort with the political powers that shape the economic policies,
seeking the company of well-known politicians who in turn feel at
ease with generous nouveaux riches.

Another branch of the new elite consists of chief executives whose
compensation usually comprises a base salary and incentive options.
They earn million-dollar lucre whenever the Federal Reserve blows
stock market bubbles and corporate share prices soar to lofty price-earnings
ratios. During the 1990s-bubble they pocketed hundred-million-dollar
profits without any particular efforts of their own. They created
no new industries and opened no new markets. The corporations they
managed did not grow and corporate profits stagnated or even declined.
But stock prices soared and CEOs reaped much lucre at the expense
of their own stock holders. For every bubble profit taken is total
worth consumed. It waters the stock and diminishes the property
of all other stockholders. To remedy the situation, the corporation
must henceforth increase its assets without increasing its outstanding
shares or reduce outstanding shares without reducing assets. CEOs
probably are aware of these implications, but few, if any, have
ever returned their bubble lucre to losing stockholders.

The most powerful elite is yet another; it springs from political
power that holds authority over the body politic. It is the natural
extension of the new economic order known by various labels such
as the New Deal, the Great Society, and other Democratic and Republican
Deals. They made politics an important vocation and elevated politicians
to positions of importance and eminence. Surely, politicians have
to be ever mindful of public opinion which is shaped by the elite
of education and communication. Many master the art of political
communication and thus manage to perpetuate themselves in office.
In their footsteps their children are laboring to forge a self-perpetuating
political elite.

This
country is not about to degenerate into a class-based society led
by a ruling elite. Competition is a time-honored practice, a cultural
custom followed from generation to generation. But, under the influence
of collectivist ideologies, many politicians and journalists are
ever eager to strike at successful entrepreneurs who earn much more
than they do. It is difficult to ascertain their motives; it can
be simple envy which consumes many men, or it can be economic ignorance.
After all, market economics is barred from most universities and
is unknown to leading politicians and journalists. It may explain
why most politicians are ever eager to regulate industrial and commercial
activity and strike at the economic elite with confiscatory taxation.
Unfortunately, regulation and taxation tend to hamper economic activity,
inhibit productivity, and depress levels of living. But they create
ever-new profit opportunities for the new economic elite.

February
3, 2005

Dr.
Hans F. Sennholz [send him mail]
was professor and chairman of the department of economics at Grove
City College. See his website.

A
few economists are sounding the alarm about the decline of the U.S.
dollar. In recent months it fell visibly toward the euro and Japanese
yen and is likely to fall even lower. But most Americans refuse
to be alarmed as they are unaware of exchange rates and foreign
exchange markets. Why should they be troubled about the financial
affairs of money traders and dealers?

We
may not be able to see the future but always can learn from the
past. Looking at the recent history of the dollar, this economist
perceives three distinct stages with various characteristics, causes,
and consequences. In the first stage from the end of World War II
to 1971 the U.S. dollar was tied to a small anchor of gold. President
Nixon cut its ties and embarked on a wholly new road of fiat dollar
management. Many other countries readily accepted the new system
acclaiming its flexibility and manageability. At this time, in 2004,
the world is still traveling this road, but several countries are
making preparations for leaving it and proceeding toward a multiple
standard system. It is not clear whether they will depart in an
orderly fashion or in crisis and contention.

The
U.S. dollar has been the dominant world currency for some 60 years.
At the Bretton Woods international conference in 1944 it was elevated
together with the British pound sterling to the position of “reserve”
currency in which international payments could be made. It was to
be backed by gold and redeemable at $35 an ounce and sterling be
made readily convertible at $4.03 to the pound. With the Labour
Party in power pursuing a vigorous program of nationalization of
industry and extension of social services, the pound soon suffered
frequent bouts of confidence; it was devalued to $2.80 in 1949 and
to $2.40 in 1967. Issued in ever larger quantities and fettered
by stringent regulations and controls it gradually lost its position
as reserve currency.

The
U.S. dollar, in contrast, displayed great strength and was traded
at parity with gold. The recovery of European and Japanese economies
from the ravages of war increased their demand for a reserve currency,
the U.S. dollar. But soon after sterling had lost its reserve position,
the integrity of the dollar opened to doubt and controversy. In
the footsteps of the British Labour Party, the Kennedy and Johnson
administrations pursued policies of economic and social reform,
incurring growing budget outlays. President Johnson not only declared
“war on poverty” in order to create a “Great Society” but also escalated
American participation in the Vietnam War. His policy of both “guns
and butter” built on deficit spending and abundant credit by the
Federal Reserve.

In
1968 when the budget deficit reached World War II proportions, the
system came within an inch of disintegrating. U.S. balance of payment
deficits and loss of gold cast doubt on U.S. solvency. In 1959 the
U.S. gold stock had still exceeded $20 billion. It fell sharply
to $13 billion in 1965 and 1966, and now touched $12 billion, barely
one-fourth of foreign payment obligations. But President Johnson
managed to buy time with a stopgap arrangement, involving a two-tier
pricing system for gold. The world’s central banks agreed to make
payments at the fixed price of $35 an ounce while all individuals
could trade gold freely at market prices. And in order to enlarge
the world’s currency base, the International Monetary Fund (IMF)
was empowered to issue Special Drawing Rights (S.D.R.s). There was
widespread agreement among monetary authorities that the influence
of gold needed to be diminished.

While
the Federal Reserve was busily increasing the dollar base and the
U.S. government was pursuing both wars, President Johnson decided
to take corrective action at home. In old Mercantilistic fashion,
his administration imposed a new tax on the purchase of foreign
securities by Americans. It hesitated to raise income taxes but
chose to “jawbone” the people. It ordered American businessmen to
reduce their investments in foreign operations and asked American
banks to limit their loans to foreigners. The Federal Reserve even
raised its discount rate from 4 to 4½ percent, which barely
covered the inflation rate.

When
President Nixon took office in 1969 he immediately tried to slow
down the galloping inflation by vetoing much new social legislation
and impounding funds for domestic programs which he opposed. When
the country fell into a recession and unemployment climbed to six
percent of the work force, he responded with new pump priming. In
1971 and 1972 the Federal budget headed for the largest deficits
since the end of World War II. Even the balance of trade fell deep
in debt, and the chronic deficits of the balance of payments filled
the vaults of many foreign central banks with dollars.

The
year 1971 was to be a landmark in monetary history. On August 15,
the United States government removed gold as the foundation stone
of the international monetary order and rescinded the international
agreements that had defined the system since the end of World War
II. In a nationally televised address President Nixon simply
announced that the United States would no longer honor the 36-year-old
commitment to pay international obligations in gold at the rate
of $35 an ounce. He imposed a 10 percent surcharge on imports into
the United States. And above all, he ordered virtually all wages
and prices to stop and freeze. Violators would be fined, imprisoned,
or both. When management of the controls proved to create frustrating
problems, it underwent four “phases” of adjustment to “problem areas”
such as food, health care, and construction.

The
Bretton Woods standard survived neither the Vietnam War nor the
war on poverty. It was born of Keynesian thought and buttressed
with 18th century Mercantilistic beliefs; it died of basic misconception
of human action and behavior. John Maynard Keynes who had helped
to deliver the system at the Bretton Woods conference sought to
promote employment by government spending on public works. Most
governments have applied the Keynesian formula ever since. Old Mercantilistic
notions and doctrines found a ready home in the Keynesian economic
system, pointing toward favorable balances of trade and greater
national productive efficiency through a host of government regulations.

The
new fiat dollar standard was a germane derivative of the Bretton
Woods order without its limitations. Liberated from any gold reserve
requirement or other quantitative restriction, it promised to serve
political needs as well as the Keynesian requirements for employment
and growth. Unfortunately, it proved to be even less stable than
its harbinger, more inflationary and, above all, more divisive and
injurious to American reputation and prestige.

The
fiat dollar standard has profoundly affected the economic lives
of most Americans. Soon after the dollar’s convertibility into gold
was rescinded the Federal Reserve accelerated its money creation.
While stringent controls were preventing goods prices from rising,
the eurodollar, that is, U.S. currency held in banks outside the
United States and commonly used for settling international transactions,
commenced a steep slide and U.S. trade deficits grew very large.
They obviously reacted in anticipation of ever more dollar inflation
and depreciation; money markets tend to anticipate future prices
of goods and services. Mutual exchange ratios between currencies
tend to be determined by their foreseen purchasing power; they always
move toward purchasing-power parity where it no longer makes any
difference whether one uses this or that currency.

Withdrawal
of American troops from Vietnam did not end the price and wage spirals
that were to mark the presidencies of Messrs Nixon, Ford and Carter.
The Federal Reserve duly supplied funds at single-digit discount
rates, bank credit expanded at double-digit rates, the U.S. Treasury
suffered ever larger deficits, and goods prices soared. The Fed
occasionally would “tighten” its reins but “real” interest rates
always remained relatively low or even below the rates of inflation.
U.S. trade deficits increased erratically with dollar funds flowing
to Western Europe and Japan. Their support sustained the U.S. But
the trade monetary authorities in Europe and Japan were determined
to defend the existing dollar parity with substantial purchases
of dollars deficits and their own surpluses, which meant to
bolster and subsidize their own export industries. The abundance
of dollar funds in central banks throughout the world then facilitated
an explosive growth of money and credit in most industrial countries.

In
1974 and 1975 the fever of double-digit inflation was briefly eclipsed
by the chills of recession. Unemployment rose to 8.3 percent, a
33-year-high nationally, and much higher in construction and manufacturing.
It remained high although the chills of recession soon gave way
again to the fever of inflation. Money and credit were made to expand
again at double-digit rates, trade deficits set new records, and
the U.S. dollar deteriorated further in international markets. By
the end of the decade the country fell again in the grip of the
twin economic evils of recession and inflation. Unemployment rose
again while GNP was falling. This time, the Federal Reserve, under
new management, meant to call a halt to the turmoil. It raised its
discount rate to 12 percent, the prime rate rose above 15 percent,
and the eurodollar rate to 20 percent. President Carter even imposed
Federal temperature controls in public and commercial buildings,
setting minimum summer temperature at 78 degrees and maximum winter
temperature at 65 degrees. Many Americans keenly felt the effects
of gasoline rationing, waiting in long lines at gasoline service
stations. Legislators and regulators had a ready explanation for
the crisis: the sheikhs and emirs of OPEC had done it again.

In
1981 President Reagan took the helm of a deeply troubled country.
During his eight years in office he managed to lift the spirits,
changing the course and relaxing the reins of government. He rolled
back the Johnson Great Society but preserved the Roosevelt New Deal.
He rejected Keynesian formulas for managing economic demand and
instead followed “supply-side” prescriptions which aim to stimulate
production and investment by way of tax reduction and removal of
some government controls. Mostly at loggerheads with Congress, he
insisted on rearming the country and confronting Soviet aspirations.
He steadfastly resisted Congressional efforts to boost taxes significantly.
With Congress raising social spending and the President expanding
military outlays, Federal budget deficits soon exceeded two hundred
billion dollars a year; the national debt doubled in seven years.

With
the discount rate at 12 percent the quantity of money and credit
finally stabilized, allowing the economy to readjust to actual market
conditions. A 25 percent Federal tax cut over three years brought
some relief to business but tore big holes in the Federal budget
and capital market. After the removal of price controls the dollar
regained some strength and the American economy became again the
engine of the world economy. It slowed down after a spectacular
Wall Street crash in 1987 which reflected the international concern
about the budget deficits and the chronic trade and current account
deficits of the United States and the surpluses of Japan and West
Germany. In ages past, the creditors would have demanded prompt
payment in gold, which would have forced the debtor to mend his
ways or face insolvency. The fiat dollar standard merely prompted
contentious diplomatic exchanges – the creditors pressing the debtor
to live within his means and the debtor urging his creditors to
relax and stimulate their own economies with easier money, larger
budget deficits, or both.

The
decade of the 1990s was akin to the 1980s. It began with a recession,
saw new acceleration followed by deceleration and a “soft landing”
in 1995. Great concern about the large balance of payments deficits
of the United States led to a sharp decline in the value of the
U.S. dollar, especially versus the Japanese yen and the Deutsche
mark and other European currencies closely tied to it. Coordinated
intervention by foreign central banks was needed to stabilize the
dollar. It rallied for a while when several Asian currencies foundered
in 1997. Large current-account deficits led to sudden declines and
devaluations of the Thai baht, the Malaysian ringgit, the Indonesian
rupiah, the Philippine peso, the Singapore dollar, and the South
Korean won. The International Monetary Fund (IMF), working in cooperation
with industrial countries, kept the Asian crisis from spreading.

Throughout
the 1990s the Federal government suffered massive deficits although
political spokesmen frequently boasted of budget surpluses. In 1998,
1999, and 2000 the Clinton Administration waxed eloquent about its
surpluses which in time would retire the national debt. In reality,
the surpluses were deficits financed with Social Security money
and other government trust funds. They increased the national debt
with Social Security IOUs as much as Treasury bills, notes, and
bonds sold to investors; payment obligations to Social Security
beneficiaries are as binding as those to investors.

Throughout
the decades a few economists always were worried about the magnitude
of the trade deficits and the vulnerability of the American dollar.
But their fears proved to be unfounded because they underestimated
the worldwide demand for dollars and the willingness of foreign
investors and central bankers to trust and hold U.S. dollars. After
all, until recently the deficits never exceeded three percent of
GDP and Americans still were net creditors in their foreign accounts.
By now, in 2004, the dollar standard has reached a stage in which
not only a few economists but also some foreign creditors are beginning
to question its future. The Federal government is swimming in an
ocean of debt. In its first term the Bush administration increased
the Federal debt by $2.2 trillion. Congress raised the Treasury
debt ceiling three times, by $450 billion in 2002, by $984 billion
in 2003, and by another $800 billion on November 19, 2004, to $8
trillion 184 billion. The ready willingness of Congress to finance
such deficits is a clear indication of the political and ideological
mold and make of most members of Congress and the public that elects
them.

Foreign
observers are drawing similar conclusions. The Bank of Japan with
more than $800 billion in dollar obligations already announced its
reluctance to increase its holding. China with dollar reserves exceeding
$500 billion is laboring under “unsustainable U.S. trade deficits.”
Asian banks altogether holding more than $2 trillion in American
obligations are suffering hundred-billion dollar losses in terms
of purchasing power. It is not surprising that the central banks
of India and Russia as well as some Middle East investors have begun
to sell dollar obligations.

According
to some estimates, foreign banks and investors are holding some
$9 trillion of U.S. paper assets. They are owning some 43 percent
of U.S. Treasuries, 25 percent of American corporate bonds, and
12 percent of U.S. corporate equities. They obviously are suffering
losses whenever the dollar falls against their respective currencies;
even if they are pegged to the dollar they are incurring losses
against all others that are rising.

The
dollar standard surely would enter its third and final stage of
disintegration if its holders would panic and start selling their
American paper investments – their U.S. Treasuries, U.S. agencies,
and corporate bonds and shares. The crash would be felt around the
world and neither foreign sellers nor American authorities could
be trusted to react rationally in the fear and noise of the crash.
The scene could be similar to the political bedlam of the early
1930s.

There
always is the hope that the primary creditors will act in concert
and once again bail out the debtor. The European Central Bank, the
Bank of Japan, the Bank of China, and the Bank of England may decide
to avert the unthinkable and support the dollar by mopping up huge
quantities. The mopping would stabilize the situation once again
by inflating and depreciating their own currencies; they would pass
the depreciation losses on to their own nationals. Optimists in
our midst are hoping for this scenario; they are convinced that
the Bush administration will in time save the situation by balancing
its budget and the Federal Reserve will allow interest rates to
seek market levels. Such a policy would avert the dollar dilemma
although it would lead to a painful recession forcing all economic
factors to readjust to market conditions.

Pessimists
in our midst cast doubt on such a scenario. They point not only
to the host of legislators and regulators who cherish their position
and power but also to public opinion and ideology which call for
government favors. They are prepared to proceed on the present road
and brace for the morrow. A few cynics even contend that a government
facing a financial crisis of such magnitude is prone to divert public
attention from its ominous path by embarking upon foreign adventures.

This
economist is ever mindful that debts do not fade or pass away. Individuals
must face them, deal with them, or renege in bankruptcy. Governments
have an additional option: as the issuers of their own currencies
they may inflate and depreciate their debts away. The United States
government has done this ever since it cast aside the gold standard
and imposed the dollar standard. It undoubtedly will continue to
do so as far as the eye can see. It is an iniquitous road which
individuals would soon be barred from traveling but governments
love to take, shedding their debts one percent at a time. It is
a road of the dollar standard designed at Bretton Woods, built by
the U.S. government, managed by the Federal Reserve System, and
financed largely by creditor central banks in Europe and Asia. It
is a road on which the fall in dollar value has inflicted losses
on all foreign dollar holders each in proportion to the amount of
dollars held. It is the political road of debt default the magnitude
of which amounts to trillions of dollars, undoubtedly the largest
in the history of international relations. It will be remembered
for generations to come.

It
is unlikely that the Federal government and the Federal Reserve
will soon mend their ways, but it also is doubtful that foreign
creditors will continue their support indefinitely. The U.S. dollar
is bound to continue to depreciate and gradually surrender its role
as the world’s primary reserve currency to a multiple reserve-currency
system resting on the euro, Japanese yen, Chinese renmenbi, and
the American dollar. The multiple-standard system is likely to perform
more efficiently and equitably than the dollar standard. Competition
would avoid the abuses and inequities of a monopolistic system.
Confining the powers of the Federal Reserve System and constraining
the deficit aptitude of the U.S. Treasury, it would ward off any
further inundation of the world with U.S. dollars.

In
idle reverie of years long past, this economist is tempted to compare
the gold standard with the dollar standard. Throughout the long
history of the gold standard the balance of payments of gold-producing
countries was usually “unfavorable.” Since the birth of the dollar
standard the United States has assumed the position of the gold-producing
countries; its balance of payments usually is unfavorable. Much
capital and labor were spent to find, mine, refine, and market gold;
the United States bears minuscule expense in the production of its
money. The quantity of gold coming to market was limited by market
forces; the quantity of dollars depends on the judgment of Federal
Reserve governors who are appointed by the President. In times of
turmoil and war the quantity of gold mined does decline; in such
times the stock of fiat dollars tends to multiply and its value
depreciates quickly. The quantity of gold is limited by nature and
its value is enhanced by many nonmonetary uses; fiat and fiduciary
moneys have no such uses or limitations. They are the sorry creation
of politics.

January
21, 2005

Dr.
Hans F. Sennholz [send him mail]
was professor and chairman of the department of economics at Grove
City College. See his website.

This much is well known about him. But there are other aspects to his life and career you may not know. Sennholz was the first student in the United States to write a dissertation and receive a PhD under the guidance of Ludwig von Mises. Mises had only recently completed Human Action. Imagine how having such an outstanding student, and a native German speaker no less, must have affected Mises’s life, how it must have encouraged him to know that his work could continue through outstanding thinkers such as this.

When Mises arrived in New York, determined to make a new life for himself after having first fled Austria and then sensing the need to leave Geneva too, he had no academic position waiting for him. He had no students and no prospects for students. But then came Sennholz. Here was living proof that ideas know no national boundaries, that even in the darkest hour there was hope for a new generation of economic scientists who cherished freedom, and were not fooled by the promise of government planning.

And think of the crucial time in which he entered the Austrian picture. Mises was by now carrying the school by himself. Most of his students had moved on to other things, whether Keynesian economics or social theory. For the Austrian School to survive in a profession now fully dominated by interventionists, it needed economists. The School desperately needed the new life that only new faces, names, books, and ideas provide.

When Sennholz began studying with Mises, it would still be another twelve years before Rothbard’s Man, Economy, and State would appear, and nearly a quarter century before Kirzner’s Competition and Entrepreneurship would be published. Sennholz provided exactly what was needed: that crucial bridge from the prewar School to the postwar School in America, where the Austrian School would now make its home.

His dissertation became the book How Can Europe Survive, published in 1955. It remains the best and most complete critique of European political union ever written. Sennholz demonstrated, some fifty years before others even cared, that political union under the interventionist-welfare state was only a prescription for chaos and bureaucrat rule. True union, he demonstrated, comes from free trade and decentralized states that do not attempt to plan their economies.

Europe today has a burgeoning movement of intellectuals who realize this same thing, and are working to curb the power of Brussels even as they attempt to preserve the free-trade zone. But we must remember that Sennholz anticipated this critique and agenda by nearly five decades. By taking a detailed look at all the programs for unification that were then being batted around, he saw precisely what was ahead for Europe: not prosperity and peace, but stagnation and conflict. So it is and will continue to be, so long as Sennholz’s final chapters, which present a blueprint for authentic unity, are not followed.

Sennholz followed up this treatise, which included an account of the Great Depression and the onset of war, with a long string of trenchant writings on monetary theory and history, on employment, on fiscal policy, and even on the moral basis of freedom. Truly he followed in Mises’s footsteps, and, like Mises, he refused to let the ideological hostility of his age and ours deter him from speaking truth to power, using every means at his disposal.

Let me provide one example of just how he carries the torch. During the 1980s, much like today, there were two camps on fiscal policy: the left, which wanted more spending and no tax cuts, and the supply-siders who wanted tax cuts plus spending increases. Sennholz became the voice for sanity: in Misesian terms, he called for tax cuts to be matched by spending cuts.

In doing so, he dismissed the magic fiscal dust called “dynamic scoring” as well as the socialist demand for bigger government, while warning against the dangers of inflationary finance. Here was a hero of fiscal conservatism! During the early eighties, too, he wrote an extended Austrian critique of supply side that anticipated all future trends of the decade.

At Margit von Mises’s request, Sennholz was the translator of Mises’s Notes and Recollections, which is the closest thing we have to an autobiography. It has been this book, above all else, that has shaped the way the generations that never had the chance to meet Mises have come to know the way an economist thinks about science and life amidst personal tragedy. Sennholz and his wife and partner Mary produced the first Mises Festschrift, presented to Mises on February 20, 1956, long before Mises’s fame in the United States would grow. Sennholz alone took the initiative to do Mises this honor.

Sennholz acquired Mises’s paper for Grove City College, where they have been guarded as the treasures they are. He made Grove City stand out among American colleges as one of the few places where economic sense was taught during the heyday of Keynesian orthodoxy.

Sennholz did not only work to promote the Misesian school. He has been the great benefactor to all economists and scholars by being the translator and promoter of the work of Mises’s teacher, Eugen von Boehm-Bawerk. This was an act of great intellectual piety, since the market was not exactly clamoring for hundred-year old books on interest-rate theory. And he did it all on the urging of Mises.

And though an outstanding theoretician, Sennholz placed a strong emphasis on the application of Austrian theory to the timing of business cycle, and to explaining the current state of affairs. This is, by itself, highly unusual in the economics profession. If you know anything about academic economists, you know that they are the last people you want to ask about the state of the economy. But Sennholz made it his job to explain the world around him, a trait which drew many to his thought.

The Mises Institute, for which he serves as an adjunct scholar, is grateful to Professor Sennholz for his early support of our work. He wrote a wonderful paper on Carl Menger, later published in a volume on the gold standard, in which he showed that Menger was not just a theorist, but an activist in the cause of sound money. That paper changed the way we viewed Menger. We came to see him more clearly for what he was: an old-world liberal concerned about the fate of his country in difficult times — much like Sennholz himself.

Finally, I must add that Sennholz has never been shy about insisting on the centrality of ethics in the study of economics. He has decried the welfare state as confiscatory and immoral. He has called inflation a form of theft. He has identified government intervention as coercion contrary to the true spirit of cooperation. He did this at a time when saying such things was taboo in the profession. Here again, he was keeping alive the spirit of Mises, and the spirit of truth.

Nobody can ever gauge the full impact of a great intellectual in the development of culture. His influence spreads like waves in a lake; by the time the waves hit the shore, few are in a position to remember the source. But this much I’m sure of. We are in Hans Sennholz’s debt far more than we know.

Llewellyn H. Rockwell, Jr. [send him mail] is president of the Ludwig von Mises Institute in Auburn, Alabama, and editor of LewRockwell.com.

Lew Rockwell Archives

The Great Depression Hans F. Sennholz on the first one.

Is This What We’re In For? Hans Sennholz on German hyperinflation.

Money Is Flooding World Markets Hans F. Sennholz sees trouble ahead.

Memories of Mises Hans F. Sennholz on the man and his work, and those who support it.

Milton Friedman, 1912–2006 Hans F. Sennholz remembers.

Why Medical Care Is Sick The government, of course.

Inflationomics Hans F. Sennholz on the Fed’s destructive shadow.

Yea! Yippee! Hans F. Sennholz on another industrial revolution.

Raise the Minimum Wage? Instead, abolish the social evil.

The Economics of Jimmy Carter Hans F. Sennholz on the ex-president’s latest book.

Statists Left and Right Hate Economics Hans F. Sennholz explains why.

Oh No! Jobs Are Moving Abroad It’s called freedom, says Hans F. Sennholz.

Inflation Is Theft And that is far from the only thing wrong with it.

Why Do Women Earn Less Than Men? Is it “discrimination”?

Labor Laws Put People Out of Work Thanks unions, thanks politicians.

A New Economic Elite Hans F. Sennholz on one effect of a mixed economy.

Shades of the Dollar Standard Hans F. Sennholz on sorry creations of politics.

Hans Sennholz: Misesian for Life