In this short pamphlet, Congressman Ron Paul has written one of the most enlightening explanations of inflation that I have ever read. It is both a history and an analysis. That history goes back further than our Revolutionary War, but as a continuous narrative it begins, as it should, in 1913 and 1914.
In the first of those years the United States passed the Federal Reserve Act, which in addition to providing only a fractional gold cover for Federal Reserve notes and deposits, made it possible for the commercial banks to borrow from the newly created Federal Reserve Banks. They could thus increase their own loans, and therefore the “money supply” they could bring into being. This made inflation possible; but this fact was not generally recognized as long as gold convertibility of the outstanding paper currency was maintained.
What happened in 1914 was more obvious and more dramatic. World War I broke out, and the belligerents instantly suspended gold conversion of their currencies. Each nation did that for “self protec- tion.” Each belligerent knew that other countries would be unlikely to accept its paper currency at par, or would in any case immediately turn it in for gold. So each belligerent kept its gold supply as a final reserve, to be paid out only when other countries would accept no other means of payment.
After World War I, the belligerents eventually returned to a gold standard, but meanwhile they had enormously expanded their paper currency and raised their “price levels,” and so were to suffer the drastic commodity price collapse of 1920 to 1921, and the crisis of 1929 to 1933.
But I do not wish to trench here on Dr. Paul’s excellent account. When he comes to analysis, he shows that inflation is always the result of an increase in the money supply, either encouraged or initiated by government action. He not only points out that this money supply increase must be halted if we are to escape even greater economic devastation, but he makes clear why we are altogether unlikely to halt the increase until we return once more to a real gold standard.
One of the great merits of Congressman Paul’s account is that it avoids all technicalities, and enables the reader to recognize step by step what has happened to us and how we can return to monetary and economic sanity.
Ron Paul is a most unusual politician—in many ways. In the first place, he really knows what he’s talking about. He is not only for the gold stan- dard. He knows why he is for it, and he is familiar with the most advanced and complex economic insights on the true nature of inflation, on how inflation works, and how inflationary credit expansion brings about booms and busts. And yet Ron has the remarkable ability to take these complex and vital insights and to present them in clear, lucid, hard-hitting terms to the non-economist reader. His economics is as sound as a bell.
But, even more important, Ron Paul is an unusual politician because he doesn’t simply pay lip service to moral principles. He believes in moral principles in his mind and heart, and he fights for them passionately and effectively. High on his set of moralprinciples is the vital importance of individual free- dom, of the individual’s natural right to be free of assault and aggression, and of his right to keep the property that he has earned on the free market, and not have it stolen from him by confiscatory taxes and government regulations.
Ron Paul, in short, is that rare American, and still rarer politician, who deeply understands and battles for the principles of liberty that were fought for and established by the Founding Fathers of this country. He understands that sound economics, moral principles, and individual freedom all go together, like a seamless web. They cannot be sepa- rated, and they stand or fall together.
Ron Paul understands that all three parts of this system of liberty have been under grave attack for decades, and that the main problem is the federal government itself. The government has systematically eroded and invaded property rights, has piled on ever higher taxes, ever more onerous regulations, and, most sinister because most hidden, has eroded the value of the dollar and of all of our savings through inflation. Ron Paul is an unusual politician because he is not content to shrug his shoulders, to “go with the flow,” as Californians say, or to go along in order to get along. He is a man of honor as well as a man of principle, and so he has, ever since he got into politics, been doing something about it. He has fought, sometimes single-handedly, for our liberties and for our savings.
Inflation, as Ron Paul points out, is caused by the government’s continual creation of new money, by what amounts to its system of legalized counter- feiting. But, if that is so, why not simply urge the government to stop the creation of money? Why not point out to our rulers the bad consequences of their actions? But Ron Paul realizes that this kind of education, or even pressure, is not going to work by itself. For we are dealing not simply with ignorant or misled people; we are dealing with a pernicious system.
Let us put it this way: give any man or group power, and it will tend to use that power. If the power is inherently abusive, then that power will be abused. Our present system gives to the federal government and its Federal Reserve System the unlimited power to counterfeit. The problem is that if the Fed has the power to counterfeit, it will inevitably use that power. Why? Because the power to counterfeit is too tempting. The power to create money means that it is far more tempting to print it than to work for it. It means that the counterfeiter can pay his debts, spend more money, give more money to his friends and associates. In the case of government, the power to counterfeit means that government’s debts can be paid without levying taxes, that government spending can increase, and that political allies can be purchased and maintained.
The power to counterfeit is the power to abuse. It is not enough to urge the government to use it more moderately. The power must be taken away. Counterfeiting is fraud, and no one should have the right to counterfeit, least of all government, whose record of counterfeiting throughout history is black indeed. Money and banking must be separated from the State, just as Church and State are separated in the American tradition, just as the economy and the State should be separated.
Vital to this necessary reform is the return to a money which is a useful product produced by the free market itself. In every society, people on the market voluntarily arrive at one or two commodities which are the most useful to use as a money. For thousands of years, gold has been selected by countless societies as that money. The only alternative to a market commodity-money is what we unfortunately have now: paper tickets issued by the government and called “money.” Since the paper tickets—dollars, francs, pounds sterling, or what have you—are issued by the government, the government can issue any amount it arbitrarily chooses. Counterfeiting is built into the system, and hence so is inflation and eventual destruction of the currency.
The only genuine solution to the evil of inflation, then, is to separate money from the State, to make money once again a market commodity instead of a fiat ticket issued by the central government. The dollar must once again be what is was originally until it was, in effect, nationalized. The dollar must once again be simply a name for a unit of weight of gold coin. Only this kind of fundamental reform will cure the ravages of inflation. Because Ron Paul is one of the few men in public life who truly understands the problem and is willing to fight to cure it, it is truly a pleasure for me to write the preface to this booklet.
IMPENDING SOCIAL STRIFE?
The greatest threat facing middle and working class Americans is our depreciating paper
At least when the kings of old debased their coinage, by adding copper to the precious metal, there was still some objective value to the resulting money. But as economist David Ricardo observed almost two centuries ago, when money costs noth- ing, it will become worth nothing.
“Government,” said Ludwig von Mises, “is the only agency that can take a useful commodity like paper, slap some ink on it, and make it totally worthless.”
Today, thanks to 67 years of central bank control over the money supply, we face an economic and political crisis greater than any we have faced before.
We probably will see widespread civil disorder in the 1980s, as a direct result of our faltering economic system. The dollar has been damaged by decades of interventionism, and Congress has legitimized depre- ciation of the dollar and forced redistribution of wealth through corporate and social welfare schemes.
THE PEOPLE ARE DEMANDING AND END TO INFLATION
The recent chaos in the money markets is telling us that the world is rejecting the American dollar as a reserve currency, and agreeing with the young man in Martin Gilbert’s story. Tragically, there is probably little future for the dollar, or dollar- denominated assets.
Because all other nations are inflating and therefore destroying their currencies, trading foreign currencies to protect against the ravages of a depreciating currency is also becoming less attractive. The alternative, as it has been throughout history, is to seek and hold real money: gold and silver.
Fifty years of systematic monetary destruction now threaten the existence of our constitutionalrepublic. The American people are frightened by what they see, and they are demanding that the inflation stop. More citizens are realizing that Congress and the Federal Reserve have generated a flood of paper money with no intrinsic value.
It is rare to find anyone today who believes that wealth can come out of a printing press. The corporate bailouts, guaranteed loans, government contracts, and welfare gimmicks all have failed, and the people can no longer be duped.
DEPRECIATION IS NOTHING NEW
In Marco Polo’s great book of travels, he talks about a coin called the bezant circulating in Kublai Khan’s Mongol Chinese empire. The emperor, like the vast majority of politicians, found the lure of paper money irresistible. In his case, however, it was money printed on pieces of mulberry tree bark. The same disastrous effects, seen everywhere else in history, followed. Prices increased, and the gold bezant took on increasing importance for the people as the government debauched the irredeemable fiat currency. Abuse of paper money helped lead, notes Antony Sutton, to the expulsion of the Mongol dynasty from China. Government demands that the people accept printed mulberry bark as equivalent to metallic money had no effect.
The bezant, however, was minted not by the Chinese, but by the Byzantine Empire. For ten centuries Byzantine coins were accepted all over the world, and Byzantium dominated trade for thousands of miles in every direction from Constantinople. Even the royal accounts of medieval England, says Dr. Sutton, were kept in bezants. The Byzantine Empire only declined when it debased the bezant, adding more cheap alloys and removing gold.
NOT WORTH A CONTINENTAL
In more recent times, to finance our Revolutionary War, the Continental Congress issued paper money in great quantities. Over a period of about four and a half years, the Continental currency fell from a value of one paper dollar per one gold dollar, to about 1,000 to one.
William Gouge, writing in 1833, quotes one member of the Continental Congress: “Do you think, gentlemen, that I will consent to load my constituents with taxes, when we can send to our printer, and get a wagon load of money, (25 sheets) of which will pay for the whole?”
Most of the burden, Mr. Gouge notes, fell on the patriots, “as it was in their hands the paper depreci- ated. The Tories, who had from the beginning no confidence in it, made it a rule to part with it as soon as possible.” Those who trusted the Congress were destroyed; the cynics were not. As a result of this paper money inflation, wrote one of our earliest economists, Pelatiah Webster, “frauds, cheats, and gross dishonesty are introduced, and a thousand idle ways of living attempted in the room of honest industry, economy, and diligence, which have heretofore enriched and blessed the country....
confidence in it, made it a rule to part with it as soon as possible.” Those who trusted the Congress were destroyed; the cynics were not. As a result of this paper money inflation, wrote one of our earliest economists, Pelatiah Webster, “frauds, cheats, and gross dishonesty are introduced, and a thousand idle ways of living attempted in the room of honest industry, economy, and diligence, which have here- tofore enriched and blessed the country. . . .
“While we rejoice in the riches and strengths of our country, we have reason to lament with tears of the deepest regret, the most pernicious shifts of property which the irregularities of our finances introduced, and the many of thousands of fortunes which were ruined by it; the generous, patriotic spirits suffered the injury: the idle and avaricious derived benefit from said confusion.”
THE BEST MEDIUM OF EXCHANGE
During most of the nineteenth century, we had a functioning gold standard. Combined with classical liberal economic policiesand limited government, this set the stage for the greatest economic growth in history.
Although many Americans today see sound money as the exception, and paper as the rule, the opposite is true. Even the American dollar had a connection with gold up until 1971. Since the severing of that tie, the debasement of the dollar has accelerated, with the money supply doubling. Prices have more than doubled in the last ten years, not to mention the economic distortions that accompanied this inflation.
There is no law of economics stating that only gold can be used as money in a free society. But gold has served as the principal medium of exchange throughout history because its value does not depend on a government fulfilling its promises, especially in times of crisis. Gold is scarce; it is portable; it is easily divisible; it is durable; it is desirable for non- monetary purposes; and it is impossible to counterfeit.1
Paper money’s worth depends on the promises of government, and it is all too easy to reproduce. Combine these with the human flaws that seem to be especially common in politicians and central bankers, and you have the fact that no fiat currency can serve as a stable medium of exchange for more than a short time. Until we recognize this, construc- tive monetary reform is impossible.
Once we do recognize it, we can begin to make progress toward a modern gold standard. Refinement of past systems is necessary because—having been monopolized by government—they have suffered from the inevitable expediency of the politicians.
CROSS OF PAPER
"You shall not crucify Mankind upon a cross of gold,” said inflationist William Jennings Bryan. But mankind, especially poorer and more vulnerable people, is oppressed by paper money, not by gold. It was for this reason that Thomas Jefferson and Andrew Jackson—the presidents who were our greatest defenders of the common man—were such unalterable opponents of paper money.
“[Gold] is the most perfect medium,” said Jefferson, “because it will preserve its own level; because, having intrinsic and universal value, it can never die in our hands. . . . [Paper money] is liable to be abused, has been, is, and forever will be abused, in every country in which it is permitted.”
Expansion of the money supply through “spuri- ous paper currency,” noted Jackson, “is always attended by a loss to the laboring classes.”
“Of all the contrivances for cheating the laboring classes of mankind,” added Daniel Webster, “none has been found more effectual than that which deludes them with paper money.”
“The rise of prices that follows an expansion of [paper money],” wrote William Gouge, President Jackson’s Treasury advisor, in 1833, “does not affect all descriptions of labor and commodities, at the same time, to an equal degree. . . . Wages appear to be among the last things that are raised. . . . The working man finds all the articles he uses in his family rising in price, while the money rate of his own wages remains the same.”
During the greenback paper money inflation of the Civil War, prices rose 183 percent, while wages went up only 54 percent. During the World War I inflation, prices rose 135 percent, and wages increased only 88 percent. The same is true today.
Says Dr. Murray Rothbard: “When greenback-dominated prices rose during the Civil War, gold prices (gold still circulating, especially in California) didn’t go up, so that it was obvious to everyone what the cause of inflation was: and it wasn’t speculators, businessmen, slackers, etc., all of whom were involved in gold as well as paper.”
HOW OUR MONEY WAS RUINED
Fortunately for us and our children, reform of the monetary system can occur quickly, with minimal turmoil, if we are only willing to accept the fundamentals of a free society, which would permit a new monetary system to function, and a long-abused economy to recover swiftly. Here is a short history of our monetary decline.
THE GOLD COIN STANDARD
THE GOLD BULLION STANDARD
THE GOLD EXCHANGE STANDARD
THE MANAGED FIAT CURRENCY STANDARD
THE STAGE IS SET
With the death of the dollar, the time is ripe for the institution of a trustworthy monetary system. The times demand it, and so does the survival of our economic and political order.
The task is not difficult, if we ignore—for once— the political pressures from the special interests whose demands are fulfilled through inflation of the money supply. Inflation, whether for the benefit of big companies, bankers, bureaucrats, monopoly wages, transfer payments, or political careers, must be ended. And, as Henry Hazlitt points out, the solution is not difficult: “To stop inflation we must stop inflating (the money supply).”
If we expect to reverse the destruction of our economy, we must try to understand the motives of those who promote inflation.Many big business people, bankers, union leaders, politicians, and professors all grew to love inflation, as they saw in it a chance to pursue their goals. Sometimes these were purely materialistic; at other times they embodied the lust for power. In both cases they were immoral.
The political pressure to inflate is the main reason for confirmed expansion of the money supply. Monetization of Federal debt, with the Federal Reserve turning government bonds into money, is a convenient and politically easy way to pay the bills run up by Congress, without resorting to a tax rate that would literally provoke revolt.
Everyone in Congress talks about a balanced budget, but few consistently vote for one. Each Member always hopes that it will be the other man’s projects that will be cut, not his own. Recently, I watched one conservative Congressman vote for a gigantic pork-barrel spending bill. Knowing that the money would either have to be taxed from the people or printed up, I asked him how he could do it. “Oh, I know it’s a terrible thing,” he answered. “But I might need a project for my district someday.” Liberals we expect to be big spenders, but it’s disheartening to see people who should know better voting for business and farm subsidies, while expressing horror—rightly at Comprehensive Employment and Training Act (CETA). Without a far-reaching change of attitude, the budget won’t be balanced, the printing presses will continue to run, the dollar will be further debased, and prices— as a consequence—will continue to rise relentlessly.
Comprehensive Employment and Training Act (CETA). Without a far-reaching change of attitude, the budget won’t be balanced, the printing presses will continue to run, the dollar will be further debased, and prices—as a consequence—will continue to rise relentlessly.
IS BUSINESS TO BLAME?
Some say business profits are the cause of inflation. But profits—in a voluntary market—are only an indication of efficiency and service to consumers. Legitimate profits have nothing whatsoever to do with inflation.
But big business’ demand for “easy money” certainly has been a significant reason for monetary expansion. Alan Greenspan, for example, claims that credit expansion to supply more than $600 billion in Federally guaranteed loans, all of which are for the benefit of business, is the most significant contributing factor to our inflation.
When I studied the amount of inflation since 1970 and the proportion of Federal deficits in those years that needed to be monetized—created out of thin air—I came up with some startling figures. It is possible that only twenty percent of the inflation, the expansion of the money supply, was necessitated by deficit spending. Eighty percent of the inflation, therefore, may have been for “stimulation” of the economy to aid big business and big banking. Whatever the motive, these institutions profit from the depreciation of the dollar.
ARE BANKS TO BLAME
Some of the large banks, which have been prominent promoters of fiat currency, have certainly benefitted from inflation. Their “profits” have been enhanced, since somebody has to broker all the new money created by government, and pass it on to the large corporations. The international bankers are delighted to do so.
The banks also have the privilege of creating checking account money, known as demand deposits. The banks create this money in the process of making loans—loans for which they charge interest. Much of our money consists of bank-created demand deposits.
Inflation bestows benefits, as well as wreaking havoc. Wealth is transferred from one group to another. Although the transfer has haphazard elements, it goes from the middle class and the poor to the government, the bankers, and the large corpora- tions. This is the immoral process that must be stopped.
ARE UNIONS TO BLAME
Unions are accused of causing inflation. But unions cannot create new money and credit, so they cannot be held directly responsible for inflation. But just as business can exert pressure on government to inflate, so can monopoly wage increases. A good example is the credit the government created to bailout the Chrysler Corporation, largely to finance a labor contract that pays the employees twice the average industrial wage. But unions, like businesses, can only persuade government to inflate if the inflation mechanism is in place. A redeemable currency would make this impossible.
INFLATION AND THE BUSINESS CYCLE
The business cycle, which Marx maintained is inherent in capitalism, is actually caused by government inflation. “New money is issued by the banking system, under the aegis of government,” says Dr. Murray Rothbard, “and loaned to business. To businessmen, the new funds seem to be genuine investments. But these do not, like free market investments, arise from voluntary savings. The new money is invested by businessmen in various projects, and paid out to workers and other factors as higher wages and prices. As the new money filters down to the whole economy, the people tend to reestablish their old voluntary consumption/savings proportions. In short, if people wish to save and invest about 20 percent of their income and consume the rest, new bank money loaned to business at first makes the saving proportion look higher. When the new money seeps down to the public, it reestablishes its old 20–80 proportion, and many investments are now revealed to be wasteful. Inflationary credit distorted the market, and misled the businessmen. Liquidation of the wasteful investments of the inflationary boom constitutes the depression phase of the business cycle.”
Expansion of the money supply also temporarily lowers interest rates, which creates malinvestment as well.
Interventionist economists carelessly criticize the spreading of economic growth throughout a free-market society as the “trickle-down theory.” But inflation, by trickling, then rushing, through society, spreads economic misery among the poor, working, and middle classes, while enriching the special interests. It is this “trickling-down” that deserves condemnation from everyone concerned about poverty.
“An increase in the money supply confers no social benefits whatsoever,” says Dr. Hans Sennholz. “It merely redistributes income and wealth, disrupts and misguides economic production, and as such constitutes a powerful weapon in a conflict society.”
Whoever gets the new money first benefits the most. But the favored industry becomes dependent on new injections of government credit, and therefore forms a powerful special interest lobby to argue its viewpoint in Washington. Thus does inflation encourage the breakdown of society into warring factions.
THE GUILT OF THE ECONOMISTS
Another outrage associated with inflation is the endorsement of the process by most economists. It’s bad enough to see the beneficiaries promote wealth transfer through inflation, but to have the majority of twentieth-century economists do so as well is tragic. Some do so because they realize that their power and prestige depends on their giving an intellectual rationale to the acts of the inflation elite. But many do not benefit directly, and their motives may be good. But whether they promote inflation to help the poor, to help the rich, or just believe it is in everyone’s interest, the results are horrendous.
The interventionist economists who endorse inflation fail to accept the subjective theory of value, as formulated by the free-market economists. This theory, without which it is impossible to dispel old economic myths, holds that the value of an economic good exists only in the minds of individuals, and that it can change with circumstances and over time. Prices, and the production decisions which they determine, cannot come from mathematical models in computers.
Even the monetarists endorse sustained inflation, albeit at a lesser rate than is presently the case. The best-known monetarist, Dr. Milton Friedman, says the Fed should expand the money supply at three to five percent a year, the actual figure being less important than the absence of fluctuations.
But even this amount of inflation inevitably introduces malinvestment as those getting the new money put it to uses that only later recessions show to have been unproductive. The Friedman approach may produce milder booms and recessions, and less human suffering, than present policy, but it nevertheless is inflationary and a product of the old, discredited idea that government, rather than the market, should be planning the economy. Worst of all, it establishes the principle of government control of the money supply and would allow an increase in the inflation percentage if “needed.”
The politicians and many bankers, union leaders, businessmen, and bureaucrats who profit from inflation are glad, of course, to have the intellectuals justify their fraud. It’s unfortunate that economists who promote inflation are today called liberals, since a more illiberal and reactionary policy could hardly be imagined. They are also inaccurately called progressives, since inflation is an archaic device.
Although today’s coin clippers and debasers use sophisticated monetary arrangements to legitimatize their acts, this makes no difference. Political, economic, and monetary turmoil still result.
To promote inflation, the well-intended economist must blind himself to the economic dislocations and distortions that occur. Economic calculation becomes increasingly difficult every day, yet the promoters of inflation will not accept their responsibility. Inflation often leads to price and wage controls, which destroy the pricing system, the planning mechanism of the free economy. If these economists understood this, the only reason they could promote inflation would be to destroy freedom.
Nobel prize-winner Friedrich von Hayek wrote in 1959 that “It is no accident that inflationary policies are generally advocated by those who want more government control. . . . The increased dependence of the individual upon government which inflation produces and the demand for more government action to which this leads may for the socialist be an argument in its favor. . . . All who wish to stop the drift toward increasing control should concentrate their efforts on monetary policies.”
THE ALTERNATIVE TO INFLATION
Inflation destroys the incentive to save, especially when there are government ceilings on interest, as with savings accounts. Our tax system—taxing illusionary income—worsens this, and we can expect to see a smaller and smaller amount saved by Americans. Inflation steals from those who still believe in thrift, and robs pensions and retirement funds. How can any reasonable economist promote inflation with these facts staring him in the face?
We have an opportunity to present to our people an alternative to the old, the failed, the tool of special interests: an alternative that is modern, that works, that benefits everyone. That alternative must be one that rejects inflation and dishonest money. It is a redeemable gold dollar.
MONEY AND THE CONSTITUTION
"It is apparent from the whole context of the Constitution, as well as the history of the times which gave birth to it,” said Andrew Jackson, “that it was the purpose of the Convention to establish a currency consisting of the precious metals.”
“The loss which America has sustained since the peace,” noted James Madison in Federalist Number 44,“from the pestilent effects of paper money on the necessary confidence between man and man, on the necessary confidence in public councils, on the industry and morals of the people, and on the character of republican government, constitutes an enormous debt against the State chargeable with this unadvised measure, which must long remain unsatisfied; or rather an accumulation of guilt, which can be expiated no otherwise than by a voluntary sacrifice on the altar of justice of the power which has been the instrument of it.”
“The emitting of paper money is wisely prohibited to the State Governments,” said Alexander Hamilton, “and the spirit of the prohibition ought not to be disregarded by the United States’ Government.”
Not only is inflation the result of the political demands of special interest groups, the career desires of politicians, and the ill-conceived motives of economists, it is also clearly unconstitutional.
Money of real value, gold or silver, was clearly intended by the Founding Fathers, as evidenced in their writings and in the Constitution. Their abhorrence of paper money stemmed from their experience with the Continental, and irredeemable Colonial paper money. That same abhorrence is becoming evident today as well, which is a healthy sign for those of us interested in developing a sound money system.
MORALITY AND TRANSFER PAYMENTS
Wealth is transferred to the rich, from the hard-working and thrifty to the conniving and foxy.
Inflation should be rejected by any society, but especially by one claiming a Christian-Hebraic heritage. Not only is wealth transferred from one group of citizens to another, in a giant anti-Robin Hood operation, but authority is transferred from citizens to the government.
Monetary and economic decisions are increasingly taken from individuals and transferred to politicians, bureaucrats, and central bankers. To enforce the transfer, government officials accumulate power through legislation and regulation. Coercion becomes commonplace; voluntary decisions are called detrimental to the “whole,” and freedom is gradually destroyed.
Without a moral society, honest money cannot exist. Without morality and honest money, a free society cannot exist. An immoral society and dishonest money go hand in hand.
CITIZEN CONTROL OF MONEY
The repudiation of debt through debasement of the currency is an ancient trick for not paying the bills. Default is at least done in the open. Inflation is much more destructive and dishonest, especially when the largest debtor—the government—controls the money supply.
Adam Smith notes in TheWealthofNationsthat “When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid. The liberation of the public revenue, if it has even been brought about at all, has always been brought about by a bankruptcy; sometimes by an avowed one, but always by a real one, though fre- quently by a pretended payment.”
Over the centuries, governments have used the theft of inflation to finance unpopular endeavors. In a free nation, adventurism at home with massive transfer programs, or abroad with no-win wars, would be impossible, since the people would simply refuse to pay the higher taxes, or loan the govern- ment the necessary money. On the other hand, a popular cause would elicit the necessary funding through loans, donations, or taxes.
DAY OF RECKONING
The day of reckoning is upon us. The people now recognize the inflation hoax for what it is, and are demanding reform. Congress’ responsibility is clear, but the choices are varied.
We can continue down the rutted road of the past half century, which will lead to monetary collapse and perhaps a new currency, as in Israel recently, and hundreds of times in other countries since 1900. But if the new currency is a fiat one, nothing will have been changed.
We could take the monetarists’ advice, and keep on inflating, but at a lower rate. But if 4 percent is good, what’s wrong with 5 percent or 50 percent? If the growth in the money supply is to coincide with economic growth, what if there is a decline? Then the monetarists openly call for massive inflation.
They still cling to the idea that wealth and productivity are somehow created by an increase in the number of monetary units. Some otherwise excellent friends of freedom promote this theory, but it offers nothing but economic and intellectual confusion. Whether the Federal Reserve, the Congress, or the bankers control the money system makes no difference. All inevitably abuse this control, which is why we need a money controlled only by the people.
The only moral, constitutional, and economically productive alternative is the 100 percent redeemable gold coin standard, which puts the citizen in control.
Some monetarists answer that gold has been abused in the past by government. But this is hardly an argument for a paper standard, since paper is infinitely more abusable. This is no different from arguing that since government has abused the right of freedom of speech, we should have no First Amendment.
FREE MARKET MONEY
Perhaps in the future we need to consider free market money, allowing consumers to decide about their money the way they decide about everything else. Hans Sennholz and Friedrich von Hayek argue for this system. And it existed at one time in
In California, during the 1840s and 1850s, many privately minted gold coins circulated. The practice was outlawed in 1864, “but as late as 1914,” points out Antony Sutton, “the U.S. Treasury was still trying to halt circulation of private gold pieces in San Francisco.” Why were such coins still circulating? Because the private mints maintained higher standards than the government mint. Often, points out Dr. Sutton, they were one percent heavier than Federal issues, “to protect the user from metal loss by abrasion while the coin was in circulation.” Private mints held to a higher standard because they were protected only by their reputation. They could not force consumers to take substandard money by the force of law, as government can.
The North financed the Civil War with hundreds of millions of dollars of irredeemable Greenback notes, and as a result, prices more than doubled from 1861 to 1865.
During the Greenback inflation, people in California continued to use gold as their money. “In California, as in other states,” points out Frank Taussig, “paper was legal tender. . .” that is, people could be forced to accept it. Although there was no antipathy towards the Federal government, people believed strongly in gold. “Every debtor had the legal right to pay off his debts in depreciated paper. But if he did so, he was a marked man (the creditor was likely to post him publicly in the newspapers) and he was virtually boycotted. Throughout the period, paper was not used in California.”
LEGAL TENDER LAWS
At the very least, we must repeal the legal tender laws that force people to accept the government’s money, and set up a gold coin standard impossible for the politicians and bankers to debase. We should also end the legal monopoly on banking, allow free entry, and make it an open, competitive business like any other.
Legal tender laws tell people what they must accept as payment. If government issues only sound money, such laws are unnecessary. But they become oppressive when government debases the money. When this happens, legal tender laws favor debtors over creditors. But only present debtors are benefitted. Future would-be borrowers are penalized by the scarcity of credit, created by inflation and legal tender laws.
The central bank never set out to protect the integrity of our money. In fact, the Fed set out to destroy it by institutionalizing inflation. The gold coin standard was doomed and today’s inflation made inevitable the day the Federal Reserve was created.
If government is to exercise monetary responsi- bility, it must be in establishing a 100 percent gold redeemable currency. And, notes William Rees-Mogg, “the prize is very great. . . . Good money (gold) restores reality to the payment for work and to saving. It permits not only the businessman but every citizen to plan his economic life ahead, and fulfill his own plans. It gives a real target not only to great ambitions but also to humble ones. It provides a solid platform for democratic government. It brings inflation to an end. Above all, good money would restore the sanity, the limited and proportionate character, of economic life. It would rid the world not only of inflation, but of the economic hubris which is worse than inflation itself.”
A HISTORICAL PRECEDENT
Congress made the Greenback notes redeemable in gold in 1879, and the effect of this action
By the end of the Civil War, a Greenback dollar was worth less than 50 cents in gold. But as it became obvious that Congress would redeem them in Constitutional money, gold, they became worth more. The government also stopped inflating. By 1868 it only took $138 in Greenbacks to buy $100 in gold, and by 1874, $111.
Late in 1875, Congress passed a law saying that on January 1, 1879, Greenbacks would be redeemable in gold on a one-to-one basis. And the notes were to be retired gradually.
As the date approached, says Dr. Donald Kemmerer, “the price of $100 in gold in greenbacks declined from $111.50 in 1876 to $104.70 in 1877 and $101.10 in 1878. On December 17, 1878, two weeks before the official specie resumption day, the price of $100 in gold reached $100 in Greenbacks.”
Dr. Kemmerer summarized the rather placid experience:
THE END OR THE BEGINNING
Government’s only legitimate reason for existence is to protect innocent life and property from aggression, foreign or domestic. When it deliberately destroys the money, government is acting perversely, by harming innocent life and property.
The legalized counterfeiting which is inflation must be ended—now.
The road to monetary destruction has been long and circuitous, but we are coming to the end of it. Sixty-seven years of central banking have brought us to the edge of depression and hyperinflation.
But the foundations have been laid for a new monetary order. The spirit of freedom, and the desire for honest money, still run strongly among our people. In 1974 we reversed the unconstitutional 1934 law that barred private ownership of gold. In 1977, gold clause contracts were legalized. In 1979, a bill to repeal the Treasury’s power to seize privately held gold was passed by the House.
The minting of U.S. gold medallions has emphasized the importance of the people’s right to own gold.
Historic Congressional hearings have been held on the gold standard, and an amendment to establish a gold commission passed both Houses unanimously. The commission, composed of public and private sector representatives, will specifically study the role of gold in the domestic and international monetary systems.
We must also work on halting massive gold sales at below market prices to European central bankers and Arab sheiks. If the administration is still intent on “demonetizing” gold with gold sales, let’s at least sell it only in sizes that Americans can afford—one, one half, and one quarter ounce coins.
Eventually, we must repeal the legal tender laws, which work only to the benefit of the government and other large debtors, by forcing creditors to accept depreciated currency, and permit free banking.
Federal Reserve notes must be made 100 percent redeemable in gold as of a fixed date, and at a rate determined by the market price on that date. We also must balance the budget and pledge never again to expand the money supply. The argument that there’s not enough gold to do this is false. With a gold dollar, a car might cost $600 instead of $6,000, but the exact amount of the medium of exchange used wouldn’t matter.
“In a free market economy,” points out Dr. Hans Sennholz, “it is utterly irrelevant what the total stock of money should be. Any given quantity renders the full services and yields the maximum utility of a medium of exchange. No additional utility can be derived from additions to the money quantity. When the stock is relatively large, the purchasing power of the individual units of money will be relatively small. Conversely, when the stock is small, the purchasing power of the individual units will be relatively large. No wealth can be created and no economic growth can be achieved by changing the quantity of the medium of exchange. It is so obvious and yet so obscured by the specious reasoning of special interest spokesmen that the printing of another ton of paper money does not create new wealth.”
“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens,” says John Maynard Keynes. “As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.
“Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose."2
The consequences of monetary destruction are complex, but the solution is not.
Without a moral foundation, a free society cannot survive. The same is true for our money. We will ensure a safe, secure, free, and productive America for ourselves and our descendants only by accepting both a moral defense of the free society and sound money.
“We may amuse ourselves,” wrote William Gouge, Treasury advisor to President Andrew Jackson, “by contriving new modes of paper banking. We may suppose that kind of money which has been tried, in various forms, in China, Persia, Hindostan, Tartary, Japan, Russia, Sweden, Denmark, Austria, France, Portugal, England, Scotland, Ireland, Canada, the United States, Brazil, and Buenos Aires, and which has everywhere produced mischief, would if we had control of it, be productive of great good. We may say, it is true that paper money has always produced evil, but it is because it has not been properly managed. But, if there is not something essentially bad in fictitious money, there seems to be something in human nature which prevents it from being properly managed. No new experiments are wanted to convince mankind of this truth.” Since Mr. Gouge wrote this in 1833, we have had many melancholy examples to add to his list.
Barter and the underground economy, which have already appeared in the U.S., are not the answers. Free people must not accept a retreat into primitive conditions. We must confront the enemies of freedom and honest money with superior ideas and superior determination.
We can prevent the calamity only with the concerted efforts of many dedicated, well-informed citizens willing to put forth a herculean effort—starting today.
The alternative to today’s monetary fraud and tomorrow’s chaos is readily available to us.
The calamities that accompany monetary chaos have brought dictators to power in other countries. We must prevent this from happening here.
“People fight the gold standard,” said Ludwig von Mises, “because they want to substitute national autarky for free trade, war for peace, totalitarian government omnipotence for liberty.” It is no coincidence that the nineteenth century, a time of gold coin standards for the most part, was an era of peace. Nor is it a coincidence that the twentieth century combines wars with paper money.
Everyone who believes in freedom must work diligently for sound money, fully redeemable. Nothing else is compatible with the humanitarian goals of peace and prosperity.
2 N.B.: “Many people have combed through every word of Lenin, to no avail,” writes Dr. Rothbard. “He simply never said it. (To do so he would have to be a lot more familiar with sound economics than he was.) Just another case where Keynes goofed.”