Another Round in the Gold Debate

Money and Freedom, by Hans Sennholz, Spring Mills, Penna.: Libertarian Press, 90 pages, $4.95 paper

Money is the area of economics that most fascinates the general public but also calls forth the most confusion and befuddlement. At this moment, countless visionaries long known as "money cranks" are churning out tracts, filled with charts and occult symbols, devoted to schemes for curing all economic ills by the creation of boundless heaps of money. In this welter of mystification, there are very few economists who are sound and perceptive on the money question and also able to convey their wisdom clearly to the general public.

In this rare group, Hans Sennholz, one of the leading American students of the renowned Austrian economist Ludwig von Mises, has long been outstanding. Among advocates of "hard money," Sennholz can always be trusted to be sound, knowledgeable, and free-market to the core.

In Money and Freedom, Sennholz provides an admirable tour of the theory, history, and politics of money. He provides an excellent explanation of our inflationary monetary and banking system. He favors not only a genuine gold standard but also competitive private minting of gold coin. A genuine gold standard means that the "dollar" (or "franc" or "mark" or whatever) is defined as a given weight of gold coin and is redeemable at any time in gold coin at that weight. Sennholz sees no reason why the Treasury must be a monopoly issuer of gold coin or why private individuals and firms should not be able to compete in the minting business.

Without naming it, Sennholz also provides a gem of an explanation of Mises's "regression theorem," which demonstrated that money can only arise out of a previously valuable nonmonetary commodity on the market and cannot be created by government fiat or arrived at by some formal social contract. In addition, he illuminates the ways in which the US government uses the current international monetary system to export inflation abroad.

Sennholz is at his best when criticizing the "monetarist" views of Milton Friedman:

Rejecting a gold or silver standard, [Friedman] favors a fiat standard with a given percentage rate of monetary growth.…

The Friedman proposal rests on a number of notions that are utterly alien to many economists. It calls on politicians and bureaucrats to provide the most important economic good, money. However, Professor Friedman does not trust them with discretionary powers, which leads him to write a detailed prescription. It is a political formula for political authorities to adopt, and, when enacted, a constitutional prohibition of monetary freedom.

This proposal would, as Sennholz shows,

disturb money markets just as Federal Reserve expansion disrupts them now. In this sense, it would not alter the nature of currency expansion, merely its technique.…As Federal Reserve credit expansion does now, it would bring forth the maladjustment that necessitates the readjustment, that is, the depression.

In his analysis and history of our monetary mess, Sennholz is unexceptionable. The problem comes in his prescription for what to do about this mess. Apparently, he has now despaired of achieving gold redeemability of the dollar. He offers two criticisms of the idea of returning to (or advancing toward) the redemption of dollars into gold: that such a program is "rather unrealistic today" and that it is somehow coercive. Thus, he writes that he would rather "seek the deregulation of money and credit, that is, to seek freedom,…than to invoke the political process and call on government to create a sound monetary order."

In this vein, Sennholz proposes that we establish the absolute freedom of individuals to own and use gold, abolish all legal-tender laws and permit enforceable contracts made in gold, permit banks to receive deposits in gold, and allow for the private minting of gold and issuance of gold certificates. Sennholz thinks these admirable and radical measures would be more realistic than returning to a gold standard, even though there is more historical precedent in America and the rest of the world for the latter.

Curiously, Sennholz thinks of the gold standard almost as an afterthought to his program: "To safeguard its own currency from the competition of private issues, government may want to make its own issues freely convertible into gold.…This step, which does not materially enhance monetary freedom, would give strength and support to government money and confirm the gold standard."

Sennholz seems to regard government money as somehow irrelevant, money that can easily be ignored in a future sea of private gold coins and note issues. The trouble with this "parallel standard" notion, and similar plans put forth by Austrian economist F.A. Hayek and by economic writer Joe Cobb, is that it ignores the very Mises regression theorem that Sennholz expounds in his book. In short, his policy prescription ignores the fact that Americans are wedded to the dollar, which began as a unit of weight in silver and gold and now subsists on monetary momentum as a money-thing in its own right. The dollar is and will be the currency unit of Americans. They will simply ignore Cobb's gold ounces, Hayek's "ducats" redeemable for a market basket of commodities, or Sennholz's private issues.

The only policy program that will arrive at the goal of all these writers—the separation of money from the state—is one that will privatize and denationalize both the dollar and the gold stock at the same time: namely, a policy that will reestablish the "gold standard." The Hayek, Cobb, or Sennholz proposals would denationalize money by allowing individuals to issue what they hope will be used as currencies but would leave what everyone considers to be money—the dollar—totally in the hands of government.

To denationalize or deregulate money without also denationalizing the dollar is hopelessly utopian. Worst of all, the proposal ignores the fundamental monetary issue of our time: how to denationalize the dollar and get gold-dollars back into private hands. Anything else is whistling in the wind.

It is true that denationalizing gold and dollars requires government action. But to say that such a policy is therefore coercive is a curious use of language. Government confiscated gold and the dollar; to call for government to disgorge its booty and to privatize these assets is no more coercive than to insist that a thief return his loot, though such insistence requires the thief to do something.

Since Ludwig von Mises was the common mentor of Sennholz and myself, I would point out that Mises consistently advocated a return to a genuine gold standard. Moreover, Mises, after lecturing on laissez faire to economists at Columbia University, was once asked the following question:

"Professor Mises, by advocating repeal of these various laws, aren't you too advocating 'intervention' by government?"

To which Mises responded: "In the same way you could say that a physician, rushing to save a man who has just been run over by a car, is intervening in the body of the man in the same way as the car that ran over him."

Though Sennholz falters on policy recommendations, this should not obscure the great merits of this admirable and lucid work. If enough people read and heed Money and Freedom, sound money proposals could more easily be enacted.

Murray Rothbard is professor of economics at Brooklyn Polytechnic Institute and the author of The Mystery of Banking.