Misesean for Life An Interview With Hans F. Sennholz Spring 2002 — Volume 22, Number 1 Front cover: Ludwig von Mises and Alberto Benegas Lynch, Sr. (Photo courtesy of the Mises Archives at Grove City College) THE AUSTRIAN ECONOMICS NEWSLETTER Spring 2002 — Volume 22, Number 1 Copyright © 2002 by the Ludwig von Mises Institute 518 West Magnolia Avenue, Auburn, Alabama 36832-4528 phone (334) 321-2100; fax (334) 321-2119 email [email protected]; website www.mises.org The Austrian Economics Newsletter is published quarterly by the Ludwig von Mises Institute. An Interview With Hans F. Sennholz MISESIAN FOR LIFE AEN: A strength of your writing is how you apply Austrian the- ory to financial crises, whether in interwar Germany or Japan today. SENNHOLZ: As a matter of fact, I am working on a piece about the Japanese recession. It has persisted for some ten years, which is quite incredible. It is erroneous to assert that recessions are caused by insufficient aggregate demand or whatever other explanation may be offered. Only the Austrian trade cycle theory explains the phenomenon and provides important advice. HANS F. SENNHOLZ As Professor Mises explained, the business cycle begins with Born in Brombauer, Westphalia, Germany, in 1922, Hans F. Sennholz the boom phase, when monetary authorities expand fiduciary received degrees from the University credit and lower interest rates. This distorts the pattern of eco- of Marburg (1948) and Cologne nomic production. At first, it generates overinvesment in capi- (Ph.D. 1949) before coming to the tal goods and causes their prices to rise, while the production of United States and receiving a Ph.D. in economics in 1955 from New consumers goods is necessarily neglected. But the investment York University, where he studied boom is bound to come to an end because of lack of real sav- under Ludwig von Mises. ings. When profit margins falter, the capital goods industry He was professor of economics and sinks into recession. This is the period of readjustment when chairman of Grove City College’s malinvestments are liquidated. economics department from 1956 until retiring in 1992, and then AEN: In Japan, then, the story begins with the 1980s boom. served for five years as president of the Foundation for Economic Educa- tion. He has received numerous SENNHOLZ: True. Under the watchful eyes of the govern- awards and holds two honorary doc- ment, the Bank of Japan lowered its interest rates and expanded toral degrees. credit. When the bubble burst in 1990, policymakers faced the He is the author of many books, in choice of allowing the recession to take its own course or English and German, and of more attempting to reflate the system. They chose to prop up the than 500 articles on economics, and system. he has translated several Austrian classics. He serves as an adjunct scholar of the Mises Institute. The Japanese blundered tragically, following Keynesian recipes throughout the 1990s, enacting one stimulus package after His website is www.sennholz.com; his email: [email protected]. another, running up public debt, and refusing to let a readjust- ment run its course. LUDWIG VON MISES INSTITUTE The absence of price inflation in this view, government takes on a contracting its stock of money. The Japan is due to what many econo- magical connotation and color. It is volume of its credit must be frozen mists call “declining money veloc- no longer legislators, regulators, on the day of reform. This ity”—that is, people hold on to and tax collectors but a source of undoubtedly would prompt a finan- their money. Savings have been ris- grace and goodness, virtue and wel- cial crisis and reveal the full magni- ing, but spending has not. It fare. In a sense, it is regarded as God tude of the malinvestment. increases the demand for money on earth. and keeps goods prices lower. In the past, this would have led to a Meanwhile, government spends We achieve greater clarity simply deep depression. But in the vast by changing the terms we use. We global capital market, it need not may speak of tax collectors, police- come to that. Japanese financial CREDIT men, judges, and jailers instead of institutions have ready access to government. People are always world capital markets, which are EXPANSION asking government to do things, ever ready to serve and support but they would not want tax collec- reforms. To be sure, this solution AND INFLATION tors, policemen, judges, and jailers would be denounced by many ARE THIEVERY to have more power over their lives economists and commentators. and property. Using more precise Yet, it is the right path, the only HEY TAKE language helps us refute the viable solution. T notions and theories that govern- PROPERTY ment is responsible for our eco- AEN: So there’s no need for ten or nomic well-being. so years of depression? FROM Credit expansion and inflation are SENNHOLZ: Not at all. As a MILLIONS OF thievery. They take property from matter of fact, the United States millions of unsuspecting individu- suffered a depression from 1920 to UNSUSPECTING als and enrich politicians. They do 1921, but it recovered in just not lead to economic recovery. The twelve months. Of course, this INDIVIDUALS inevitable consequences are rising occurred long before Keynesian prices and economic dislocations. economics, deficit spending, or AND ENRICH But when they become visible, other policies designed to counter- POLITICIANS government officials refuse to act depression. This was the last . accept responsibility; instead, they depression when genuine market pose as fighters of the problems adjustments were allowed. the savings of the people by fund- they created. ing public works projects and run- Today, the United States is fighting ning up deficits. AEN: And the problems persist. the present recession with new spending and interest rate cuts. AEN: During the U.S. recession, SENNHOLZ: Of course. Fidu- Fortunately, a real adjustment is economists have recommended the ciary credit expansion—that is, taking place despite all such poli- same. unbacked credit creation—does not cies. We see the highflyers failing provide an answer. Japan is a good nearly every day. SENNHOLZ: Yes, many econo- example. It reveals the failure of mists are acclaiming the praises Keynesian economics. What Japan While federal policies create new of government spending. Since needs is a period of honest readjust- maladjustments, corporate losses Keynes, they have unquestioningly ment with many financial institu- signal the recession and force the accepted that public works promote tions facing the consequences of readjustment. Both forces work employment, impart stability, and their mistakes. The Bank of Japan their way at the same time. We’ll raise national income. According to must be barred from expanding or see which will prevail in the end. 4 AUSTRIAN ECONOMICS NEWSLETTER LUDWIG VON MISES INSTITUTE boom phase with easy money and credit, a readjustment cannot be avoided. AEN: Why did the boom hit the high-tech industry so heavily in the U.S.? SENNHOLZ: The money just followed investments that seemed most exciting at the time. It was a bubble of enthusiasm supported by easy money. There were pro- moters, bankers, and speculators with wild expectations of future profits that could not be sup- ported over the long run. The Fed played an important role, but we should not overlook the place of bank lending and even the policies of nonbanks that were AEN: What about the Argentina The banking system accepted dol- just taking too many risks. These case? lar deposits and extended loans based on them. But the dollars that SENNHOLZ: I have a special were supposed to back the peso interest in Argentina because were spent and the deposits IN ARGENTINA, some two dozen former students blocked by the government. Ever of mine live there. Some are pro- unable to balance its budgets, the THE fessors; one is a congressman. government turned to printing They studied with me at Grove pesos, which soon fell some 50 per- GOVERNMENT City College. I spoke in Argentina cent in the open market. Govern- twice, once as a commencement ment policies are going from bad DESTROYED THE speaker and once as a public to worse. speaker on the floor of the Buenos CURRENCY Aires stock exchange. I am sure AEN: In August of 2000, writing SYSTEM BY that my former students there con- for the Mises Institute website, you stitute a tiny intellectual minority said that large readjustments were CONSUMING in an ocean of collectivism; I am needed in stocks, and you also saw sure they are saddened by the that vulnerability of U.S. corpora- THE DOLLAR decline of their country. tions holding billions and trillions in derivatives. RESERVES. In Argentina, the government obviously destroyed the currency SENNHOLZ: Just looking at the system. Although it had a stable fundamentals, it was clear that the institutions were expanding credit currency for a short while, the gov- bubble could not last. A readjust- beyond that which the market ernment sabotaged it by running ment was unavoidable. The Fed is could support in reality. All it large deficits that consumed the always convinced that it has the took was a small shift in market dollar reserves. It led to stagnation power to prevent a painful reces- conditions, and the boom unrav- and unemployment. sion. But having generated the eled. VOLUME 22, NO. 1 — SPRING 2002 5 LUDWIG VON MISES INSTITUTE As for Greenspan’s response, he place despite the Fed’s attempts to did exactly what you might expect. forestall them. Every Fed chairman since 1924 ADDITIONAL has tried to prevent recession by AEN: Given the bust, it is lowering interest rates.