The Inflation Crisis, and How to Resolve It, by Henry Hazlitt, New Rochelle, N.Y.: Arlington House, 1978, 192 pp., $8.95.
There is a presidential ritual conducted once every four years that calls for a declaration of war on inflation. Predictably, President Carter issued a decree that is to bring stability to the US dollar. His is the eighth war on inflation by the eighth occupant of the White House since 1940. And yet the dollar has lost at least 80 percent of its purchasing power and continues to lose more every day.
In The Inflation Crisis, and How to Resolve It Henry Hazlitt explains why the presidential battles are lost to inflation and why it advances with ever greater force. He set out to update his 1960 primer, What You Should Know about Inflation, but proceeded to write a wider and deeper analysis that became a brand-new book. It is a faithful mirror reflecting the great mind of Henry Hazlitt.
We may return to this book again and again, for it never fails to instruct us. The author is an inflation-survival counselor as well as a preacher of sound economics. In a simple yet eloquent style he makes economic thought accessible and attractive to his readers. He talks to us all—not only in his discussion of the rudimentary fallacies that are responsible for the chronic inflation, but also in his sagacious analysis of the most recent variations of old errors, such as proposals for currency indexation or fixed-purchasing-power standards.
We have been living in an age of worldwide inflation that is eroding national currencies ever since the outbreak of World War II. It started, according to Hazlitt, when the belligerent governments increased their budget expenditures in order to prosecute the war. After the war, they did not return to their previous levels of expenditures, but with greatly increased tax revenues, they added all sorts of "welfare" measures. And once these measures were established, it became politically suicidal to abolish them or even merely to reduce them.
The Bretton Woods Agreement of 1944 gave explicit sanction to currency devaluations. It encouraged most countries to engage in competitive devaluations in order to promote their exports and discourage imports. In reaction to one country's devaluation, other countries would resort to "protective" devaluations, which led to a rapid succession of more than 1,000 devaluations by 1971.
But on top of all these reasons for worldwide inflation, there is the fixed idea that inflation is necessary to prevent or reduce unemployment. Lord Keynes gets too much credit—or blame—as the inventor of this myth. The US government was practicing deficit spending for six fiscal years before John Maynard Keynes published the gospel of the new economics, his General Theory of Employment, Interest, and Money. Keynes merely added his authority and prestige to the popularity of a pernicious doctrine.
How can we resolve the inflation crisis? We must overcome the almost universal superstition that our monetary system ought to be the prerogative of the State. This notion, according to Hazlitt, "is tantamount to agreeing that a monetary system should be made a plaything of the politicians in power." The real solution to the inflation crisis "is to get government out of the monetary sphere. And the first step we should insist on is to get our government and the courts not only to permit, but to enforce, voluntary private contracts providing for payment in gold or in terms of gold value."
Hazlitt takes issue with Prof. F.A. Hayek's recent publications that embody similar proposals but carry them further in two important respects. First, Hayek favors a demonopolization of money and competition in currency supplied by private issuers. Hazlitt harbors grave doubts about the effects of unrestricted private-note issue. He points to the great variety of private currencies that circulated in the United States during the 1830s and '40s, usually with disastrous results. Second, Hayek seems to favor a "commodity reserve," or "market basket," standard in which money would consist of "different abstract units." Hazlitt wonders how a currency can be made convertible into an index number. To him, such a standard would provide a mere token money, redeemable in nothing and convertible to nothing. Indexed money is a "dream world currency."
I find myself in full agreement with Hazlitt on the latter point and with Hayek on the former. To the libertarian reader, the controversy is bound to make for exciting reading.
Hans Sennholz teaches economics at Grove City College.
This article originally appeared in print under the headline "The Inflation Crisis, and How to Resolve It".