Stop the Presses
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

One of our favorite stories about economists is told about Ludwig Von Mises and his midnight rendezvous with the government economists. The founder of the Austrian economic school, known in the 1920s chiefly for its insights on money, credit, and inflation, had been approached one afternoon by a group of government-employed economists who asked him what he would do to end rampant inflation in the country. He told them to meet him that evening at a certain well-known intersection in the business district of Vienna. Mystified, the government economists agreed.
Later that evening, they arrived at the assigned rendezvous point, and the great Von Mises asked them whether they heard a sound. There was a low, rhythmic humming noise coming from a nearby building. Von Mises told them that if they end that humming noise, they would end the inflation as well. The building was the central bank, and the humming noise emanated from the big high-speed presses, which had been operating after hours, printing endless supplies of new currency.
We found ourselves thinking of that story last week, when Chairman Greenspan addressed the European Banking Congress in Frankfurt. Mr. Greenspan’s remarks were widely interpreted as meaning that America’s large trade deficits would lead to a weakening dollar. For Von Mises’s lesson applies as much today to our central banker as it did then to theirs. There is no longer a humming sound. These days, currency is created when the Fed credits the reserve accounts of its member banks with money that did not exist the moment before it was entered.
In our current financial parlance, the Fed does not describe its activities as the creation and destruction of money supply, but rather as the setting of interest rates. Although the Fed has recently begun to address the problem through a series of “measured” increases in the target rate, so long as the Fed sets its discount and Fed Funds rates at something lower than market-determined interest rates, it is creating money. This is the root cause of inflation.
This point is illuminated by the chart appearing herewith. During the times in recent history when the central bank attempted to print its way out of economic trouble, the price of gold rose. Generally, price currencies rose as well except when they were also attempting to print their way out of economic trouble, sometimes even more quickly than we were. It is, in any event, clear that it was not trade that was weakening the purchasing power of the greenback. The late 1970s were a time of incredibly high gold prices and low trade deficits. The Reagan Era, inaugurated by a tax cut that took effect in 1982, saw what were at that time the highest trade deficits in American history and also saw generally declining gold prices.
The era of free trade after the signing of NAFTA at the end of 1993 has been characterized by large increases in all forms of trade, but with imports outstripping exports by ever-larger numbers. Nevertheless, the late 1990s saw large drops in gold prices, deflation, and a weakening of other currencies against the dollar. This includes the German mark and its replacement currency, the euro. It is true that in the recent past trade deficits have soared and the dollar has weakened. What is in dispute is whether the dollar’s value is weakened by free trade, or by something else.
Our chart shows numerous times in recent history when high trade deficits corresponded with a stable or even a deflationary dollar. Clearly, it’s not trade that causes inflation. If anything, free trade is counter inflationary. Free trade increases market competition, and market competition drives down prices. The current ideological war on Wal-Mart is based on the complaint that American producers cannot compete with low-cost foreign made goods. How in the world could anyone at all, let alone America’s chief central banker, walk through a Wal-Mart and believe that free-trade is inflationary? Mr. Greenspan could end the weakening of the purchasing power of the dollar were he to stop the presses.