Rampant Inflation Destroys the Capital Markets that Sustain Economic Production; Capitalists and Businessmen Learn to Hedge for Financial Survival

The Keynesian commitment to expansionary policies is a commitment to inflation that does not promote full employment. It does not achieve the “miracle . . . of turning a stone into bread,” but generates the business cycle with periods of high unemployment. Continued application of the Keynesian recipe must finally lead to the complete breakdown of the monetary system and to mass unemployment. 

Rampant inflation destroys the capital markets that sustain economic production. The lenders, who sustain staggering losses from currency depreciation, are unable to grant new loans to finance business. Even if some loan funds should survive the destruction, lenders shy away from monetary contracts for  any length of time. Business capital, especially long-term loan capital, becomes very scarce, which causes economic stagnation and decline. To salvage their shrinking wealth, capitalists learn to hedge for financial survival; they invest in durable goods that are expected to remain unaffected by the inflation and depreciation. They buy real estate, objects of art, gold, silver, jewelry, rare books, coins, stamps, and antique grandfather clocks. Surely, this redirection of capital promotes the industries that provide the desired hedge objects. But it also causes other industries to contract. It creates employment opportunities in the former and releases labor in the latter. As the hedge industries are very capital-intensive, working with relatively little labor, and the contracting industries are rather labor-intensive, with a great number of workers, the readjustment entails rising unemployment. Of course, the readjustment process is hampered by labor union rules, generous unemployment compensation, and ample food stamps. 

Similarly, double-digit inflation causes businessmen to hedge for financial survival. They tend to invest their working capital in those real goods they know best, in inventory and capital equipment. Funds that were serving production for the market become fixed investments in durable goods that may escape the monetary depreciation. Economic output, especially for consumers, tend to decline, which raises goods prices and swells the unemployment rolls.

—Hans F. Sennholz, “The Causes of Inflation,” in Age of Inflation (Belmont, MA: Western Islands, 1979), 37.

The Keynesian and Fisherian/Chicagoan Bodies of Monetary Thought Theorize in an “Acatallactic” Fashion

There is, and always has been, wide disagreement among economists on the basic principles that determine the purchasing power of all this money. But in spite of all the disagreements among economists, there are only two basic schools of thought. One endeavors to explain the purchasing power of money on the basis of individual choice and action and to develop the theory of the value of money from a general theory of value. Its monetary doctrines remain an integrated part of general economics, and as such may be called the integrated or catallactic monetary doctrines. The other school embodies all doctrines and theories that are alien to any theory of exchange or system of the market society, and thus deny the principles of individual choice and exchange. Such monetary doctrines may be called segregated or acatallactic, for they do not view money as a market phenomenon.

Most contemporary theories of the value of money must be classified as acatallactic. Presented in mathematical, holistic equations, they either ignore individual choice and valuation, or merely pay lip service to individual action while theorizing about collective wholes. Some writers, especially in government, resemble the medieval schoolmen who ascribed the power to fix the values of coins to their princes. They hold that the value of money is a valor impositus, a value authenticated by the President and enforced through price and wage controls. To them, monetary phenomena, like all the phenomena of social life, are merely manifestations of the exercise of political power and government force. Their monetary explanations are not fallacious theories — they are not theories at all.

Some even deny the very existence of the science of economics. The radical inflationists, for instance, question the natural scarcity of economic goods and services, which is the very object of economic analysis. They blame selfish restraints on credit expansion imposed by bankers and other money lenders as the causes of scarcity and poverty, and therefore recommend unlimited public spending as the panacea. Their monetary pronouncements are built on a denial of economics.

But the two most popular bodies of monetary thought which shape contemporary monetary policies actually pay lip service to subjective economic theory while theorizing in acatallactic fashion. Both the income-expenditure theory of John Maynard Keynes and his numerous followers, and the quantity theory of Irving Fisher and his disciples, especially at the University of Chicago, completely ignore their catallactic premises when they arrive at the value of money. They deal with “price levels,” “national economies as a whole,” “levels of national output, employment, and income,” and other holistic concepts that have no place in subjective economic thought. Such theories are as sterile and futile as their primitive acatallactic predecessors, but they are very popular with governments eager to indulge in deficit spending.

An integrated or catallactic explanation of the value of money starts with the subjective valuations and actions of individuals. It never loses sight of the fact that a complete theory of money must rest on the subjective theory of value. In order to explain the determinants of the purchasing power of money and not only the causes of its changes, it endeavors to analyze the subjective significance or utility money has for individuals. For just as the price of an economic good is ultimately determined by the subjective valuation of buyers and sellers, so is the purchasing power of money.


—Hans F. Sennholz, “The Value of Money,” in Age of Inflation (Belmont, MA: Western Islands, 1979), 11-13.