In Search of Monetary Stability

Dr. Sennholz heads the Department of Economics at Grove City College and is a noted writer and lecturer on monetary and economic affairs. This article is presented here, by permission, from a paper delivered November 12, 1976 in Boulder, Colorado, at a conference of The Committee for Monetary Research and Education, Inc., P.O. Box 1630 , Greenwich, Connecticut 06830 .

Economic life is a process of perpetual change. Man continually chooses between alternatives, at­taching ever-changing values to economic goods. Therefore, the exchange ratios of his goods are forever adjusting. Nothing is fixed and, therefore, nothing can be measured. The economist searching for stability and measurement is like the music lover who would like to measure his preference for Beethoven’s "Eroica" over Verdi’s "Aida."

Money is no yardstick of prices. It is subject to man’s valuations and actions in the same way as are all other economic goods. 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 is fiat or commodity money. There is no fixed point or relationship in economic exchange.

And yet, despite this inherent market place instability of economic value and purchasing power, the precious metals have served man 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 inasmuch as 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.

The Clamor for Stability

Throughout the long history of money a clamor for this stability always arose when governments engaged in coin debasements and paper money inflation. Certainly the Romans yearned for monetary stability when their emperors resorted to every conceivable device of monetary depreciation. Medieval man longed for stability when his prince clipped, reduced or debased the coins and defrauded him through such devices. And throughout the 17th and 18th cen­turies, the early Americans sought monetary stability when the col­onial governments issued legal tender "bills of credit," regulated the exchange ratios between British and Spanish coins, and imposed wage and price controls. Americans were dreaming of monetary stabili­ty during the Revolution when the Continental Congress emitted vast quantities of "Continental Dollars" until they became utterly worth­less.

Man’s hope for this monetary stability is his quest for govern­ment to abstain from monetary depreciation. This is the only per­missible meaning of our search for stability, which is as old as inflation itself. In our century, it again has gained in intensity and urgency as governments the world over are waging devastating wars and en­gaging in massive redistribution of economic income and wealth. The savings and investments of millions of people are at stake. In the United States alone, the volume of long-term loan capital is estimated at more than 3 trillion dollars. Obviously, such a magnitude of credit lends economic, social and political importance to the quest for monetary stability.

Our high rates of productivity, wages and standards of living are built on an effective capital market. In the U.S., some $40,000 have been invested per worker, which make him highly productive and yield wage rates that are the highest in the world. More than one-half of this capital investment comes from lenders, such as bond holders, banks, and other institutional in­vestors. Obviously, their direct stake in this marvelous apparatus of production depends on the stability of their dollar claims. They comprise what is commonly called "the middle classes" who do not own the facilities of production. They do not directly own the stores and factories, farms and livestock, but merely provide the loan capital that helps to build and improve them.

The savers and investors are not alone in their great concern for monetary stability. Anyone whose income depends on his labor produc­tivity must be vitally interested in the efficient functioning of the capital market that supplies him with tools and equipment. The economic well-being of every manual laborer directly depends on capital investments, as does that of office workers, business executives, physicians, dentists and teachers. In fact, everyone has a stake in monetary stability and economic productivity. Even government itself which likes to issue ever more money in order to facilitate deficit spending, depends on the purchas­ing power of money. After all, money is the only economic good at the disposal of government, permit­ting it to acquire other goods and services and redistribute real in­come and wealth. When money ceases to function as a medium of exchange, government ceases to function in any form.

Accounting Stability


The hope for monetary stability, as we define it, is man’s quest for government to abstain from mone­tary depreciation. The only stable money, in the long run, is the money of the market; it is nonpolitical money. Real stability comes with the removal of government control over money.

Of course, one must recognize that the prospects for a dismantling of the monopolistic power which government now is wielding over money, or even for a total removal of government from the monetary scene, are rather slim. Public opin­ion, as of now, does not permit a reduction of government power. But it may change in the future as the government issues of fiat money continue to depreciate, breeding countless economic and social evils. Be that as it may, the monetary theorist is bound by neither public opinion nor the trend in policy. His thoughts and deliber­ations are free to seek truth and pursue his ideals, even the dis­mantling of government power over money.

To remove government from all monetary affairs is to deny all government prerogatives in monetary matters. Government must have no special rights and privileges in the market place for money. In particular, the following government powers to which our generation has grown accustomed must be rescinded:

1.       The legal tender laws that dic­tate what legal money shall be. There is no need for government to specify the kinds of money in which contracts may be written, or for government in any way to limit the freedom of contract. Surely, no degree of convenience that may come from a single currency system can outweigh the dangers of a monopolistic system that permits government, through legal tender legislation, to force its depreciating money on its people. Legal tender is the very device that prevents an easy escape by inflation victims into other monies and permits infla­tion to rage on until it becomes a fatal social disorder. It permits the massive transfer of income and wealth from hapless creditors to puzzled debtors, generating vast amounts of inflation losses and gains. In fact, legal tender legisla­tion establishes the monopoly par excellence that permits the money monopolist to reap incalculable gains through the gradual deprecia­tion of his product.

2.          The central banking system that subjects financial institutions to a central authority and redirects their resources toward fiscal uses and economic policies. The central bank is the monetary arm of gov­ernment that facilitates the financ­ing of budgetary deficits through monetary expansion. It serves as a crutch to commercial banks, which it enables to expand credit to the limit of their reserves. And when their reserves are exhausted it pro­vides new excess reserves in ever larger quantities. In short, the cen­tral bank removes all checks on in­flation and coordinates the inflation effort. It must be summarily abol­ished if the freedom of the money market is to be restored and monetary stability attained.

3.     The compulsory monopoly of the mint that permits government to determine what coins shall be used in exchange. The rationale of the mint monopoly as given by governments throughout the ages is the convenience of a uniform coinage system. But no matter how popular this convenience may be, it affords government important sources of revenue: "seigniorage," which is the monopolistic charge for minting coins; and debasement, which secretly or openly dilutes or reduces the weight of the coin. As the mint monopoly was the first step toward government control over money, its removal is essential for the restoration of monetary freedom.

Few economists, if any, are ad­vocating a stabilization of money through such comprehensive re­forms. In the ideological climate of today, any deliberation along such lines, while it may be sagacious economic theory, is out of step with political reality. Therefore, most economists limit their deliberations to the search for monetary stability as it existed a few decades ago. Their inquiries are encompassed by political or historical considerations and colored by the hope of being "practical" and "effective."

We need not here enter a discus­sion of who is more practical and effective: he who uncompromisingly seeks to draw his conclusions and reveals irrefutable truths, or he who permits his deliberations to be col­ored by that which is more popular. In fact, most economists seek to be realistic and, therefore, advocate a limited reform that would restore monetary stability of their national systems as they existed in the re­cent past. American economists who are hoping and working for such a stability would like to restore the quality and integrity of the U.S. dollar.

Balancing the U.S. Government Budget

To stabilize the U.S. dollar, i.e., to safeguard its present purchasing power, obviously requires the im­mediate cessation of the inflation process. The monetary authorities must cease and desist from expand­ing the quantity of money in any form. But before this expansion can be halted the federal government must learn to live within its means and abstain from making further demands on the central banking system.

To the federal government, infla­tion is a convenient device for rais­ing revenue. It easily covers budget deficits which otherwise would deplete the loan market, raise in­terest rates and depress the economy. It turns deficit spending, which normally causes economic depressions, into spending sprees that generate the popular, and yet so pernicious, economic booms. In­flation boosts government revenue as it raises everyone’s tax rates and thus absorbs an increasing share of individual income. It repudiates government debt as it reduces the purchasing power of all debt. In this respect it is a silent tax on all creditors and money holders. With a Federal debt of some $700 billion, an inflation rate of 10 percent reduces the value of the debt by $70 billion, which is taken from the owners of Treasury obligations and transferred to government as the debtor for more spending in the future.

In today’s atmosphere of govern­ment welfare and economic re­distribution, to balance the budget and thus refrain from its infla­tionary financing is no easy political task. An estimated 81.3 million Americans, or 38 per cent of the total population, are now enjoy­ing redistribution dollars from government. (Retirement and Disa­bility 28.6 million, survivor benefits 8.9 million, supplemental income 6.6 million, unemployment compen­sation 6.0 million, active military duty and dependents 3.5 million, civil servants and their dependents 27.7 million.) While the trend con­tinues to favor ever more programs with more redistribution beneficiar­ies, it is difficult to envision a modification of the transfer pro­cess. And yet, the task is urgent; the great budgetary pressures ex­erted by the popular quest for economic transfer must be alle­viated and the budget balanced. Without such a balance, the infla­tion will rage on.

"Rights" to Benefits


We cannot expect many benefi­ciaries readily to vote for a reduc­tion, much less a removal of their benefits. Under the influence of the prevailing social and economic ideology they are convinced that they are morally entitled to their favors. They noisily oppose any modification affecting their innate "rights" to other people’s income and wealth. In fact, their redistri­butive aspirations often induce their political representatives in Congress to authorize and appro­priate even more money than the President is requesting. Such pro­grams as social security, medicare, anti-poverty, housing, aid to educa­tion, environmental improvement, and pay increases for civil servants are so popular that few politicians dare oppose them.

And yet, the situation is not hope­less as long as only 38 per cent of the population are transfer benefi­ciaries and 62 per cent the primary victims. It is true, many victims do not realize that they are victimized by the redistribution process. With low personal incomes, their tax liabilities may be insignificant. And without money in the bank or in a pension fund, the inflation may be of no concern to them. But they do not realize, unfortunately, that the price of every product or service they buy has been boosted greatly by the taxes imposed on the pro­ducer. It is the consumers who ultimately pay the corporation taxes and other levies on business. And consumers suffer diminutions of income and wealth when inflation raises their income-tax rates and boosts goods prices faster than in­comes.

Other victims may be uncon­cerned because they themselves derive some clearly visible benefits from the political transfer process while their losses are hidden in a maze of taxes and prices. The parents of children in government schools or universities are counting their transfer blessings that hopefully exceed the transfer lasses. This is why millions of mid­dle class victims continue to favor the growing role of government as a transfer agency. They mistakenly conclude from the visible benefits they receive that their benefits ex­ceed the losses, and therefore are led to approve the basic principles and objectives of the whole transfer system.

To reverse the trend and reduce the role of government in our lives, and thus alleviate the government deficit and inflation pressures, is a giant educational task. The social and economic ideas that gave birth to the transfer system must be discredited and replaced with the old values of individual in­dependence and self-reliance. The social philosophy of individual freedom and unhampered private property must again be our guiding light.


Facing the Depression


Any stabilization program must make preparations for the in­evitable depression. After all, the present system embodies at least two powerful depressive forces which a monetary stabilization would unleash. This is why the acid test of every stabilization attempt is the depression that soon appears in its trail.

A powerful depressive force is the very burden of government. With­out monetary expansion that helps to finance the transfer programs, the high costs of government on all its levels would soon depress eco­nomic activity. A sixty-five billion dollar deficit like that suffered in fiscal year 1976, would simply crush the capital market and precipitate a devastating depression. But even if the government budgets were balanced, the combined load of federal, state and local govern­ments, which is estimated to exceed 40 per cent of national income, could not be carried by the "private sector." As a result of monetary stabilization, there would no longer be any inflation victims helping to finance government spending and public debt; government would have to rely exclusively on tax­payers and lenders. But this massive shift of burden from money holders and inflation victims to the latter would have the same depres­sive effects as a new deficit that consumes loan capital and invites additional taxation. This is why any attempt at monetary stabilization must be accompanied by reductions in government spending.


If our money were stable, busi­ness would soon be threatened by the scissor effects of stable prices and rising costs. When business taxes are raised, business must curtail its operations. When powerful labor unions raise business costs through higher wages or lower labor productivity, while goods prices are stable, business may suffer eco­nomic stagnation and losses. There­fore, any attempt at monetary stabilization must be accompanied by a reduction in business taxes, which in turn must be preceded by a reduction in government spending. Without this spending cut, a mere reduction in taxation that leads to budget deficits and a shift of the costs of government to the loan market would bring no relief to business.

Withdrawal Pains

Another powerful depressive force, at the time of monetary stabilization, is the economic distor­tion and maladjustment which pre­vious inflation and credit expansion are leaving behind. After many years of inflation the economy is so badly disarranged that a return to normalcy would be marred by pain­ful withdrawal symptoms. When monetary authorities expand the quantity of money and credit, they cause interest rates at first to fall. Business is then tempted to embark upon new expansion and moderniza­tion projects, taking advantage of the lower interest costs.

But the feverish activity that follows is falsely induced by newly-created money and credit, unsup­ported by genuine savings. The feverish bidding for land, labor, and capital goods raises their prices. That is, business costs soar, and now render many projects unprofit­able. Many may have to be aban­doned or written down as business failures—unless new money and credit are made available to support the malinvestments. During many years of inflation, countless economic undertakings were spawned by easy money considera­tions and sustained by even more inflation. This is why any attempt at monetary stabilization would reveal a shocking extent of disar­rangement and maladjustment and should prepare to cope with the en­suing depression.

The monetary reformer faces a choice between two possibilities. He may rely completely on the flexibili­ty and ingenuity of business to achieve new profitability through cost-cutting readjustment. He may do so with confidence in the in­dividual enterprise system and in the knowledge that throughout the U.S. economic history, prior to the radical interventionism of the Great Depression, American business always rebounded quickly from oc­casional stagnations and depres­sions. Or, the reformer may want to give business recovery a boost through tax reductions. Of course, such a reduction must again be accompanied by cuts in government spending lest its burden merely be shifted to the loan market. In any case, during the trying weeks and months of the stabilization crisis, it is essential for the success of any stabilization program to resist ar­duously and successfully any temp­tation and public pressure to return to deficit spending and easy money.

Restoring the Labor Market

The inevitable stabilization depression must be expected to be especially painful because the U.S. labor market, after more than fifty years of government intervention, has lost its viability and flexibility to cope with necessary labor adjustments. Even without the spe­cial strains of a stabilization de­pression, the U.S. unemployment rate presently stands at 7.8 per cent. A policy of monetary stabiliz­ation that would deny government the right to launch new deficit spen­ding and easy money policies would soon encounter intolerable multi­ples of this unemployment rate—unless the labor market is restored to cope with the expected increase in unemployment. Without a labor market vitalization, any attempt at monetary stabilization is bound to run aground on unbearable rates of unemployment.

To vitalize the labor market is to rescind the government interven­tions of half a century. According to the late Roscoe Pound, one of the most eminent legal philosophers of our time, the labor leaders and labor unions are enjoying legal privileges and immunities which only kings and princes enjoyed during the Mid­dle Ages. In the 1930′s the U.S. Congress granted labor unions and their members the legal right "to commit wrongs to person and pro­perty, to interfere with the use of highways, to break contracts, to deprive individuals of the means of earning a livelihood, to control the activities of the individual workers and their local organizations by na­tional organizations centrally and arbitrarily administered beyond the reach of state laws—things which no one else can do with impunity."

Two statutes, the Norris-LaGuardia Act of 1932 and the Wagner Act of 1935 radically changed the nature of labor rela­tions.

The Norris-LaGuardia Act dras­tically limited the jurisdiction of the Federal courts in labor disputes and especially prohibited the courts from enjoining coercive labor union activities. Before the Act, the Federal courts had been enjoin­ing violent, intimidatory, coercive activities of the unions, although peaceful strikes were sanctioned. The Norris-LaGuardia Act made practically all union conduct un­touchable by the courts.

The National Labor Relations Act (Wagner Act) placed one-sided emphasis upon "unfair practices" by employers and eliminated all possibilities of direct access to the Federal courts. It made it an "un­fair practice" for an employer to in­terfere with, restrain, or coerce employees in the exercise of their rights to form a union and to par­ticipate in union activities. It for­bade employers to interfere with the formation and administration of any labor organization. But above all, the Wagner Act took all labor cases out of the courts of law and transferred them to the new Na­tional Labor Relations Board. This Board is a quasi-judicial adminis­trative tribunal whose members are appointed by the President. They have often been accused of corrupt­ing the law that is already biased in favor of the unions.

Minimum Wage Laws

Federal labor laws have been set­ting minimum wage rates ever since 1933. The present rate is $2.30 an hour, to which we must add the legal fringe benefits amounting to approximately twenty-five to thirty-five percent, so that the minimum costs of employment of every American worker, even the least productive, may exceed $3 per hour. It is estimated that at least 3 million idle Americans owe their unemployment to this labor law. Teenagers and uneducated, un­skilled minority workers are its primary victims. In a stabilization crisis, the minimum wage law may deny employment to several addi­tional millions.

The Davis-Bacon Act as amended in 1961 authorizes the Secretary of Labor to set minimum wages in con­struction that is financed, sub­sidized, insured, or underwritten by Federal agencies. The Secretary usually sets a minimum that coin­cides with the going labor union pay scale. In most trades the pay for construction apprentices, for in­stance, stands at $7.50 per hour, which readily explains why there are no young people at work on con­struction sites.

The system of unemployment compensation in its present form is a powerful force for unemployment. It provides for compensation up to $125 per week for 65 weeks, in addi­tion to some family allowances. It is supplemented by a generous food stamp program, and, in many cases, by various employer and union benefits. Altogether, the system paralyzes the market for unskilled labor through offering benefits for unemployment that may approach or even equal the pay for actual work performed. It leaves a tiny margin of financial incentive which for millions of workers does not off­set the disutility of labor. In short, to many people, a week’s leisure may be worth more than the small income increment that may be earned from a week’s work.

All such handicaps to productivity need to be removed, or at least reduced, when the national curren­cy is stabilized. Surely, it is very simple to halt inflation by ordering the central bank to cease and desist from any further money creation. But it is extremely painful, after many years of government intervention, to suffer the withdrawal symptoms. They point up not only the economic difficulties’ of any stabilization policy, but also its ideological and educational com­plications. In fact, they raise the ultimate reform question: are the people prepared to suffer the withdrawal pains that will be all the more excruciating the more they obstruct and restrict the labor market? In the pains of a stabiliza­tion crisis, will the people succumb, once again, to the temptations of easy money and deficit spending’? Or will they see it through, all the way, to stable money?  

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