Understanding the Dollar Crisis, by Percy L. Greaves, Jr., Belmont, Mass: Western Islands, 1973, 302 pp., $7.00.
Inflation runs rampant through most of the world. Numerous books are being published on the subject. Professional tipsters are offering pet schemes for hedging against inflation and avoiding personal disaster. Yet most of these "how-to-do-it" tipsters furnish little help in understanding the dollar crisis. And it is this lack of understanding that lies at the root of the problem.
Politicians heatedly discuss and deplore the precarious state of the dollar. But, for lack of understanding, they fail to propose realistic solutions. In the first place, they define "inflation" incorrectly. "Inflation" is correctly defined as an increase in the quantity of money. But almost everyone today defines "inflation" as one of the consequences of an increased quantity of money—higher prices. Secondly, many people believe that an increase in the quantity of money is actually desirable—even necessary—to produce and maintain prosperity. Thus, in one breath, politicians condemn inflation, and in the second breath they advocate it. One result of their first error—having their eyes on the consequence rather than the cause—is an attempt to hold down prices through "jawboning" and/or imposing controls. At the same time, their second error leads them to advocate further inflation, i.e., additional increases in the quantity of money, which only results in still higher prices.
The only hope for an end to inflation is an increase in economic understanding. Short run panaceas may permit a few individuals to save some of their personal wealth for a limited time. But to preserve social cooperation, the market, and modern civilization, people in general—taxpayers, voters, workers, savers, all—must come to realize that the government itself is to be blamed for inflation. And such a realization can only come from a comprehension of economic principles.
These principles are set forth by the "Austrian School of Economics," so named because of its founding in Austria in the latter third of the 19th century. "Austrian" economists base their science, not on statistics and mathematics, but on the study of human action itself. For more than half a century Ludwig von Mises was the leading spokesman of the Austrian School. We are fortunate now to have available, in Understanding the Dollar Crisis, an excellent summary of Professor Mises' most important teachings, especially as they relate to money.
Professor Greaves, for more than 20 years a devoted student of Dr. Mises, begins with fundamental assumptions, goes on to explain the principles of elementary economics, and concludes by applying these principles to the current monetary crisis. The entire approach is straightforward, with each point being firmly established before it, in turn, is built upon.
The book consists of seven lectures delivered in Argentina in June 1969. The first five lectures are theoretical in nature. They assume no prior knowledge of economics and fully prepare the reader for the remaining two lectures dealing with 20th century monetary policy.
The theory section is an excellent introduction to Austrian economics. With a constant eye on how individuals act in given circumstances, Professor Greaves demonstrates that people choose those actions that they think will better their situations from their points of view. In particular, people act according to their subjective valuations. The subjective theory of value, explained in 1871 by Carl Menger, founder of the Austrian School, is a cornerstone of modern free market economics. It also, significantly, gives the lie to the labor theory of value that forms the basis of Marxist economic doctrine.
From the subjective theory of value, the author proceeds to the inevitable conclusion: an individual engages in a transaction only when he places a higher value on what he receives than what he gives up. In free trade, both parties are winners.
MONEY AND PRICES
The third lecture, "How Prices Are Determined," merits particularly careful study. In this era of economic controls, it is important that people understand how prices are determined in an unhampered market. Free market pricing tends to maximize human satisfaction, make the most efficient use of scarce resources, and ensure that there will be no lengthy shortages of surpluses.
Having established how free market prices are determined, the author turns his attention to the price of labor, namely, wages. In "The Effect of Wage Rate Interventions" he demonstrates that the only way to raise the real wages of all workers is through capital investment. Government interventions in the wage market can only raise the wages of some workers at the expense of others. In particular, minimum wage laws and union monopoly privileges, by raising some wage rates above free market rates, inevitably result in a surplus of workers, i.e., unemployment.
In the fifth lecture, "The Theory of Money," Professor Greaves presents the Miseasean quantity theory of money. Contemporary economic conditions render this lecture particularly important, for it explains in simple terms what our present inflation is: a government expansion of the quantity of money. Such an expansion, Mises shows, produces an uneven rise in wages and prices. Inflation is thus a system of redistribution of wealth, with those whose incomes stay ahead of spiraling living costs benefitting at the expense of those whose earnings lag behind, particularly those who live on fixed incomes.
In the last two lectures, the author applies economic principles to economic history. In "The Cause of the 1929 Depression," he chronicles the political manipulations of money and credit that made the crash inevitable. Particularly noteworthy is his documentation of secret deals with foreign powers and election year "pump-priming." So revealing is this documentation that it is difficult to finish the lecture without an apprehension of politically controlled money and banking.
This apprehension is strengthened in the concluding lecture, "The Evolution of the Present Monetary Crisis." Rather than realizing that political intervention had caused the 1929 debacle, politicians looked to further interventions as a cure. These interventions, and their dire consequences, continue to this day. At the rate we are going, the dollar soon will not be worth the paper it is printed on. One wonders what the future will hold.
As Professor Greaves so ably shows, economics is not a matter of opinion and not a matter of good or bad intentions. It is, rather, a science. The immutable laws of human action were not invented by Percy L. Greaves, his great predecessors, or anyone else. They are, rather, the discoveries of men and women dedicated to the search for truth. When we live in accordance with these laws, we prosper. When, either through ignorance or arrogance, we violate these laws, economic ruin is the inevitable result. It is thus in the interest of every intelligent individual to understand, as best he can, the laws of human action. This book, written in the language of the average American, is an excellent place to begin, refine, and extend such an understanding.
Thus, the lessons of economic theory and history come through loud and clear. As the author explains, hedging against inflation is at best a short-term solution. The future of every one of us, even of civilization itself, depends on economic understanding and respect for individual rights and property. For as Percy Greaves points out:
"So if you find a way to profit from this inflation, or even to save what wealth you have, you can be sure you will be considered a public enemy by all the suffering people around you. If you have wealth while those around you are starving, your life will not be worth much. It will not be worth any more than the lives of the Jews in Germany during the final days of Hitler."
Mr. Summers is a member of the staff of the Foundation for Economic Education, Irvington-on-Hudson, New York.
This article originally appeared in print under the headline "Understanding the Dollar Crisis".
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