The last time there was talk about this issue was more than 30 years ago, after the devastating inflation of the late 1970s robbed an entire generation of their savings, upended American family life and launched a debt addiction that has destabilized economies all over the world. The Nixon administration promised a rose garden after the paper dollar; the results were very different.

The crisis in our times is not (yet) hyperinflation, but it is just as serious. The problems of the Fed-managed paper dollar system are too many to name, but they can be reduced to three that hit the average person most seriously.

First, it is no longer possible to earn a conventional return on saving money. That reality pretty much undermines the whole practice and ethics that built prosperity as we know it. The reason is directly related to the quality of money: Lacking any independent substance at all, its value and yield is managed by a small group of technocrats in a marble palace. They have used that power to impose the ultimate price control on the relationship between time and money.

Second, the problem of unemployment and the ever-shrinking labor participation rate has hit the young generation in a way that we’ve never seen before. This has terrible economic effects but just as devastating cultural ones. It attacks the core hope that people have for the future. Again, the paper dollar, as the generating force behind the bust and boom, is a cause.

Third, there is a growing movement against the power, secrecy and insider racketeering by the Federal Reserve, which prints and throws around inconceivable volumes of loot to its friends and clients in total disregard for the political process or the fate of the American middle class. This angers people of all political persuasions. The opening up of the records and dealings of the Fed has not calmed people down, but rather has confirmed the worst possible fears.

In the 1970s, writers like Henry Hazlitt struggled mightily to get people to see the connection between monetary policy and the falling value of the dollar. While the Ford and Carter administrations lashed out at business and speculators, Hazlitt and others pointed to the real cause. His message stuck. By 1980, even the Republican platform included a call for a sound dollar. Congress formed a gold commission.

The connection between the Fed’s paper money and our economic plight is even more difficult to make this time around. But the intellectual foundations have been in place for years, and they have been given voice in the relentless hammering away at this issue by Ron Paul in interview after interview. He never misses a chance to talk about this previously unspeakable subject.

A tricky issue for the movement now is dealing with the diverse political coalition coming together against the current monetary system. The biggest critics of the Fed, for example, agree that the current system is a mess but don’t seem to agree about what to do about it.

This week in D.C., I debated Dean Baker of the Center for Economic and Policy Research. The setting was fantastic: a speak-easy environment sponsored by the beautifully named Empire Unplugged. Baker is a strong critic of the Fed for reasons both good and bad. On the good side, he is as appalled as Ron Paul at the insider racketeering of the central bank. On the bad side, he would like to see its powers transferred to a body with more political oversight and democratic influence.

This is the exact opposite of what I argued for: the complete depoliticization of the entire system. We went back and forth for an hour on these topics, agreeing on the great evil, but disagreeing on what should replace it. As is typical of progressive critics of the Fed, he raised fears that market control of money and banking would revive the wildcat banking of the 19th century. This camp conveniently forgets that the age of the gold standard (which was never perfectly adhered to) also happened to produce history’s largest and most-positive economic transformation, propelling the creation and entrenchment of what is called the middle class.

Do these debates matter that much? On the level of theory, yes. In practice, not so much. These mirror the kinds of debates in the middle stages of the collapse of socialism in Eastern Europe. Recall that the movement against Polish central planning began not as a movement for private ownership of capital, but rather as a labor union protest against power and privilege of state-connected oligarchs.

This tendency made the champions of free markets squeamish, for good reason. Replacing a state monopoly with a state-protected labor monopoly does not necessarily look like improvement. But that’s not what ended up happening in Poland. Solidarity was the major vehicle that wrecked the regime as it stood. At one point, the major labor organization Solidarity had 9.5 million members. That mass movement upended history. Today, Solidarity is a normal union like any other, with membership at half a million and declining and no serious power. The result was not a labor monopoly, but a beautifully prosperous market society.

The lesson here: Sometimes you have to topple the system that exists and see what happens. This is why Ron Paul has been tolerant of a wide divergence of views within the anti-Fed movement. He is right to be so. Writers at The Wall Street Journal and elsewhere wring their hands about the dangers of political control of money in the post-Fed age. But history shows that the reform is not so easily managed. Breaking up the current monopoly is the most-important priority right now.

If the Fed were an Eastern European socialist government, the year would be about 1987. If the economy takes another dive after the fake boomlet that Bernanke’s printing presses have manufactured, he should make sure that the helicopter on the roof is in good working order.

Regards,

Jeffrey Tucker

The Great Monetary Debate was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The whole European currency scheme was both brilliant and crazy. It was brilliant because Europe should have a united currency. In fact, the whole world should have a united currency. Once upon a time, it did. It was called the gold standard. National currencies were just another name for the same core thing — a nationalist spin on a global consensus. If some country had waved around an unbacked piece of paper and called it money, no one would have taken it seriously.

And the gold standard was internally policing. If one country debauched the currency, gold would flow out, the thing would lose credibility and capital would flee to places that took sound finance seriously. Governments were restrained, the hands of politicians were tied (they could only spend what they could overtly steal) and markets ruled the day. The politicians hated it, but markets were free, stable and growing.

So yes, there is a case for single currencies in regions, or even the entire world. Truly, why should people and multinational commercial institutions have to go through the ridiculous headache of changing currencies at the border? This is just pointless. Imagine if an inch meant something different in every country, and you had to come to a new understanding of its meaning in order to build on this, versus on that side of the border? Markets don’t like this kind of pointless exercise. The natural market tendency is toward unity in what matters (money) and disunity where it matters (competition and entrepreneurship).

So the European elites who cobbled together the euro after many decades of planning played to that sense, and developed a reasonable expectation of a wonderful Europe united with peace and free trade, all with a single currency. It seemed like a recreation of an older, freer, more-wonderful world. So why not?

Here’s why not: The gold standard no longer exists. It hasn’t existed since the politicians destroyed the last remnants of it in the early 1970s. And it was in 1970 that the idea of a single currency for Europe went from the dream stage to the planning stage. At the end of the gold standard, the idea should have been dropped, but it was not. The planning elites had it in their heads that this was the only way forward, and nothing would stop them.

A single currency seemed like a great idea to the relatively weak economies of Europe. The lira, peseta, escudo, franc and drachma would no longer suffer at the hands of traders who seemed to forever cling to the German mark. They could inflate without consequence. Knowing this to be a problem, the pro-euro planners cobbled together certain safeguards. There would be a single central bank, and sovereign countries would have to give up autonomous control over monetary policy. The same would apply to national finance: no more endless running of deficits, and no more free-spending legislatures.

As a condition of entering the currency union, countries would have to agree to all these terms and more, including harmonized regulatory systems. Governments would have to confess their prior sins and swear on a holy copy of the EU Constitution that they would be good from now on. Well, that didn’t happen, but the planners were so dead set on the notion of a single currency that they decided to look the other way. All these entered the union with debt and broken banking systems, all in a sort of collective hope that the whole could cover the sins of the parts.

Sure enough, the southern countries experienced a wonderful boon following the introduction of the euro. Interest rates on government bonds fell dramatically — not because their citizens were suddenly saving, and the banks were flush with capital. The reason was the new perception that the European Central Bank would operate as a guarantor of the debt of all eurozone countries. In other words, rates fell in Europe for the same reason they fell in the United States: The centralization was creating a moral hazard.

This set off a lovely economic boom that later led to bust, there just as here. The central bank, however, had already promised that it would not be involved in any bailout schemes, that it would only fight inflation. This was a strange repeat of history because this is precisely what the Fed had claimed when it was created too. Central banks always say this at the outset: We will sleep with the money, but we won’t actually do anything. We will resist every temptation!

The problems here are incredibly obvious. Countries had not actually given up all their fiscal authority. Most importantly, their banking systems still had control and, thanks to fractional reserve banking, they still could create money, and in a way that the central bank could not control. This too is a consequence of not being on a gold standard that automatically regulates and restrains the banking systems.

Now, each national banking system, and even each bank, ran its own discretionary policy, with the implicit (but never stated) guarantee from the central bank that it would never let the system fail. Worse, every country in Europe had to accept this money.

Economist Philipp Bagus of Juan Carlos in Madrid observes that the whole system embedded a kind of monetary imperialism from unsound economies to sound economies, dragging down economic structure and poisoning the whole system with the viruses of the worst states. If this story sounds familiar to Americans, it should. This is the same problem that gave rise to the crazy real estate boom in the U.S. and the subsequent meltdown. It’s our old friend Mr. Moral Hazard, but operating across the entire eurozone.

Hans-Hermann Hoppe, the economist who predicted this whole scenario in the early 1990s, observes that this centralization is the inevitable path of paper money regimes, as governments constantly seek higher and higher authorities to expiate their sins. With each step, the money gets qualitatively worse and the imposition of economic controls becomes ever more tyrannical.

What is the way out? Everyone is now talking about the restoration of national currencies, and while that is a better approach than standing by as the entire system collapses and the contagion spreads around the world, it is not as easy as it seems. Every country that wants to reassert its national currency will have to give up its debt addictions and clean up its fiscal house. The banking system will have to be deleveraged. Industries sustained by the euro subsidy will have to go belly up.

If this fantasy actually became true, it would be entirely possible for any one country (hint: Germany) to adopt an authentic gold standard, perhaps inspiring others to do the same. The end result — we are talking about a decade-long process here — could, in fact, be another single European currency, a sound currency rooted in reality and not the hallucinations of politicians and financial elites.

How much tolerance is there in the world today for such pain? You need only look at the U.S. situation to get an idea. The technocrats in charge today are completely unlike those of yesteryear. They will not permit wholesale deleveraging. They believe that they have to tools to prevent all pain, and the political systems of the world are structured to punish anyone who thinks about long-term gains over short-term pain. If you doubt that, take off an evening and watch the Republican presidential debates.

Regards,

Jeffrey Tucker

The Euro Crackup was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The present system must end, it will end, it will now certainly end badly. And probably soon. As it is inevitable it doesn’t matter what I wish. To wish that this would not happen would be as sensible as to wish that the present summer would not end, and that the days would not get shorter. I don’t wish it and I don’t fear it. The system must go. Good riddance.

What I do fear, however, are the political consequences and the societal fall-out from the crisis, and I particularly fear the responses it will provoke from governments and state officials.

Of course, the fiat money crisis is not a natural catastrophe. It is entirely man-made. It is the direct consequence of political decisions and political action.

In particular, it is the inevitable consequence of the decision to abandon a gold-based monetary system, a system of essentially inflexible and apolitical money, and to replace it with entirely elastic and constantly expanding paper money. This paper money leads to accumulation of imbalances, to capital misallocations, and to resource mis-pricings. Those must lead, over time, to economic disintegration of banks.

It is the direct consequence of the erroneous belief that low interest rates and additional credit are good regardless of whether they are the outcome of true saving and capital accumulation, or simply the outcome of fiat money creation.

There is the unspoken belief that after all my research on the topic I must have some good policy advice up my sleeves. Often people ask me, so what should be done? If what central bankers and politicians are doing presently is, as you say in your book, counterproductive, what should they do instead? What is the solution?

There is an assumption that one cannot simply predict some unpleasant outcome in the field of economics and not offer at least a bit of hope that things may turn out differently. Suggesting the possibility of a way out that would spare us all the painful consequences of past actions, of decades of misguided policy, of cheap credit and limitless money.

I suspect that since I speak so little about specific policy reforms leads people to believe that I don’t care about where we are going, or I might even look forward to the disaster.

What should be done

There is only one possible way out. Stop the printing of money and the artificial suppression of interest rates. Return to hard money. Allow interest rates and market prices to again reflect the true extent of voluntary savings, and to thus allow the liquidation of the accumulated imbalances from previous money expansion.

But because we had a four-decade long period of unprecedented fiat money creation globally, these imbalances are now so big that the necessary liquidation would be very painful. The political class — which got us into this mess in the first place — would never deem it acceptable.

The overstretched banking industry, the overextended asset markets, insolvent governments are all screaming for a cleansing liquidation and recalibration. A crisis has now become unavoidable.

But politicians still think that the power of the state is unlimited, that what they don’t find acceptable will simply not be allowed to occur. Only in the realm of politics is reality optional…somehow reality can simply be made to conform to the wishes of the political elite.

Of course, policy cannot create a new reality. What policy does at the moment is try to postpone the inevitable correction ever further. “Not on my watch” is the modus operandi. This will make the final crisis even worse.

I quoted Ludwig von Mises on this on a couple of occasions but I will do it again. In his magnum opus of 1949, Human Action, the grand master of Austrian School economics said:

“There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.”

The endgame will be “a final and total catastrophe of the currency system”, and “later” may indeed be soon. Remember, we have been postponing the liquidation for decades and happily piled new debt and new imbalances on top of the old debt and the old imbalances. By not stopping the printing of money and the accumulation of debt and capital misallocations (and by adding to them instead) the policy establishment is making sure that the final crisis will only be worse.

This is why I consider it pointless to come up with policy recommendations. What would be the purpose of presenting a detailed plan of converting to a gold standard, which is what should be done? Mainstream economists, politicians and central bankers will either ridicule or ignore it. They still believe that the answer to all these money-induced imbalances is — more money! They are hell-bent on creating a total currency catastrophe. And they will get it.

A whiff of Weimar Germany

A touch of Weimar? (Chart Greenburger)

Let’s just take a casual look at the events of the past month: While I was hiking in the Dolomites or relaxing in Tuscany, the destroyers of paper money did not rest. The ECB completed a U-turn of embarrassing proportions and switched from exit strategy to buying more PIIGS-bonds funded by the printing press — a policy that continues to this day and that will not end!

And Dartmouth College Professor and ex-Bank of England money-debaser David Blanchflower argues for more quantitative easing from the Fed. When asked how much, the good professor showed his generous side: $ 1 trillion or $ 2 trillion…just print until things look better. We will show this economy who is boss!

British pundit Ambrose Evans-Pritchard argues that real monetary stimulus hasn’t even been tried yet. He recommends some globally co-ordinated monetary blitz — what if all central banks opened their monetary floodgates simultaneously? Surely, that is going to buy us a nice recovery.

If you thought that this lunacy is being greeted with derision, as it should, think again. As I write this, the Swiss government has declared that international cooperation in monetary debasement is a splendid idea — and has just pegged the Swiss franc, formerly the gold-rimmed version of paper money, to the PIIGS. Congratulations!

Make no mistake: They will all get what they are asking for. But to expect anyone who sees the writing on the wall to engage with a policy establishment beholden to the myth that prosperity and jobs can be had through constant monetary manipulation, through artificially low rates, money printing and asset bubbles — that is asking a bit too much. And let’s face it: it is not as if any of them would even want to listen to what I have to say. I put my case out there — it is for others to decide what to do with it.

Here is another, less well-known quote from the great man, Mises:

“Political ideas that have dominated the public mind for decades cannot be refuted through rational arguments. They must run their course in life and cannot collapse otherwise than in great catastrophes…”

We are approaching such a catastrophe with full force. Rather than coming up with a monetary reform (and there is only one true reform: a return to gold) that will certainly be rejected by the powers that be, I think the most sensible thing one can try and do is to protect oneself, one’s family and one’s wealth as best as one can from the ensuing fall-out.

My recommendation has been and still is to reduce exposure to banks and to governments – the two grotesquely bloated entities that have for decades benefited from their privilege to be unconstrained paper money producers and who are now close to OD’-ing on that privilege. Hold gold (and maybe silver) instead of paper money, bank deposits and fixed income securities. Real assets, not paper assets.

The coming monetary meltdown will wipe out vast amounts of paper wealth, and it will facilitate one of the largest transfers of real wealth in human history. Many people will lose a lot.

Sadly, it will be mainly those who produce more than they consume and who save the difference — and then save it in the form of cash, bank deposits and bonds.

All paper money collapses decimate the middle class. No, I certainly don’t wish for this but the chance of this being avoided is practically zero.

Short of the century — coming soon!

As always, some will win, and there is no shame in trying to be among them. Apart from the rise in the gold price and certain other commodities, I think that there is another money-making (no pun intended!) opportunity: fixed income markets will soon be the short of the century.

Those out there who think the world will be just like Japan for the next twenty years are wrong, in my view. Japan’s present state is not stable and it doesn’t constitute an endgame. It is collapse in super-slow-motion.

The ongoing fiscal deterioration and the mind-boggling accumulation of public debt mean that the ultimate endgame there will be inflation and paper money collapse, too. And I doubt that the U.S. and Europe will manage to stretch this out for quite as long as Japan has.

But here is what I fear.

I am very concerned about the political fall-out from the crisis. Although it will ultimately mark the end of state paper money, of politically controlled interest rates, and government-manipulated asset markets, don’t expect the state to leave the economic stage without a fight.

For the immediate future at least, I expect more interference with markets, more regulation, more confiscation via taxation, capital controls and curtailment of property rights and individual freedom. In a crisis, many will demand more government and more state action, not more freedom and markets.

When I spoke to a libertarian audience in Vulcano I was speaking to friends, to like-minded people. People who, like me, value personal freedom and free markets. I sensed that they, too, would have loved me to give them a bit more of an uplifting message.

Many of these libertarians believe that what they are involved in is simply a battle of ideas, and that they can, if they try hard enough, convince others of the benefits of a free society and of capitalism. I don’t think that this is entirely wrong. But I fear that many of them underestimate the opposing forces that the present crisis may unleash.

In the meantime, the debasement of paper money continues.

Regards,

Detlev Schlechter

Why Policy Advise Is Futile And What You Should Do Instead was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The social and economic pathology of 19th century colonialism is well studied, but the monetary pathology of its successor, the neo-colonial reserve currency system of the dollar, is less transparent. In order to remedy this pathological defect, the United States must rid itself of its enormous Chinese financial colony, whose exports are subsidized by the undervalued yuan in return for Chinese financing of the U.S. twin deficits. Both China and the United States must also free themselves from the increasing malignancy of the dollar reserve currency system, the primary cause of inflation in both China and the United States.

In the end, only monetary reform, including an end to the reserve currency system, can permanently separate the dollar host from its yuan colony. Without monetary reform, the perverse effects of the dollar reserve currency system will surely metastasize into one financial and political crisis after another—even on the scale of the 2007–2009 crisis.

It is, of course, a counter intuitive fact that China has been financially colonized by the United States. But why is this a fact? Simply because China has chained itself to the world dollar standard at a pegged undervalued exchange rate, choosing therefore to hold the exchange value of its trade surplus—that is, its official national savings—in U.S. dollar securities. It is true that the dollar-yuan strategy of America’s Chinese colony has helped to finance a generation of extraordinary Chinese growth. But China now holds more than 3 trillion dollars of official reserves and more than a trillion dollars in U.S. government securities. These Chinese dollar reserves directly finance the deficits of the American colonial center. This arrangement clearly resembles the imperial system of the late 19th century. The value of a British colony’s reserves were often held in the currency of the imperial center, then invested in the London money market. Thus, the colony’s reserves were entirely dependent on the stability of the currency of the colonial center. While China is America’s largest financial colony, most other developing countries are also bound to neo-colonial status within the reserve currency hegemony of the dollarized world trading system.

China’s dollarized monetary system reminds us of nothing so much as the historic colonial financial arrangements imposed by the later British Empire on India before World War I—India actually remaining a financial colony of England long after its independence in 1947. How did the sterling financial empire work? The imperial colony of India, beginning in the late 19th century, held its official Indian currency reserves (savings) in British pounds deposited in the English money market; independent developed nations at that time, like France and Germany, held their reserves in gold. That is, France, Germany, and the United States settled their international payment imbalances in gold—a non-national, common, monetary standard—holding their official reserves, too, in gold. But the London-based reserves of colonial India were held not primarily in gold, but in British currency, helping to finance not only the imperial economic system, but also the imperial banking system, imperial debts, imperial wars, and British welfare programs. Eventually, as we know, both the debt-burdened British Empire and its official reserve currency system collapsed.

For more than a generation now, a similar process has been at work in China. China is America’s chief colonial appendage. The Chinese work hard and produce goods. Subsidized by an undervalued yuan, they export much of their surplus production to America. But, like the Indians who were paid in sterling, the exports of Chinese colonials are substantially paid in dollars, not yuan—because bilateral and world trade, and the world commodities market,

have been dollarized. And thus it may be said that the world financial system is today an unstable neocolonial appendage of the unstable dollar.

China, like its predecessor the British colony of India, has chosen to hold a significant fraction of what it is paid in the form of official dollar reserves (or savings). These dollars are promptly redeposited in the U.S. dollar market, where they are used to finance U.S. deficits. Every Thursday night, the Federal Reserve publishes its balance sheet, and there we now read that more than $2.5 trillion of U.S. government securities are held in custody for foreign monetary authorities, 40 percent of which is held for the account of America’s chief financial colony, Communist China. It is clear that without financial colonies to finance and sustain the immense U.S. balance of payments and budget deficits, the U.S. paper dollar standard and the growth of U.S. government spending would be unsustainable.

It is often overlooked that these enormous official dollar reserves held by China are a massive mortgage on the work and income of present and future American private citizens. This Chinese

mortgage on the American economy has grown rapidly since the suspension of dollar convertibility to gold in 1971. China—poor and undeveloped in 1971—was at that time very jealous of its sovereign independence, sufficiently so to reject its alliance with the Soviet Union—even earlier to attack U.S. armies on the Chinese border during the Korean War. In an

ironic twist of fate, China surrendered its former independence and, as a U.S. financial colony, joined the dollar-dominated world financial system. China’s monetary policy is anything but independent. It is determined primarily by the Federal Reserve Board in America, the pegged yuan-dollar exchange rate serving as the transmission mechanism of Fed-created excess dollars pouring into the Chinese economic system. Perennial U.S. balance of payments deficits

send the dollar flood not only into China but also into all emerging countries. The Chinese central bank buys up these excess dollars by issuing new yuan, thereby holding up the overvalued dollar, and holding down the undervalued yuan. Much of these Chinese official dollar purchases are then invested in U.S. government debt securities. So even though America exports excess dollars to China, China sends them back to finance the U.S. budget deficit—much like marionettes walking off one side of the stage, merely to reappear unchanged on the other side.

This is the little-understood arbitrage mechanism of the pegged exchange rate system by which Fed-created excess dollars are bought and held as reserves by the Chinese central bank, in exchange for which newly created yuan are issued, thereby supercharging inflation in China. The Chinese dollar reserves, which are reinvested in the United States, help to ignite inflation in the United States. It is clear that the workings of the official dollar reserve currency system cause purchasing power to be multiplied, or at least doubled, in both countries. But these central bank issues of new money are unassociated with the production of new goods and services during the same market period. Thus total spending, or purchasing power, exceeds the total value of goods and services at prevailing prices. When total demand exceeds total supply, the price level must rise.

But just as the subservient, colonial Indians were constrained not to sell their sterling reserves too quickly, so the Chinese are constrained—by politics, diplomacy, and self-interest—not to dump their depreciating American dollars. The Indians had to consult their imperial bankers, even though the English were debtors to their Indian colony, because the Indians did not wish to anger the colonial center, nor to precipitate a sterling crisis. From time immemorial, creditors with too large a stake in an over-sized debtor often beg leave of their debtor to get their money back.

China is frustrated by circumstances similar to those of a colony of imperial Britain. Hostility has arisen in the debtor—the United States. Fear of setting off a dollar slide haunts the hostile creditor, China. The difficulty of finding a suitable portfolio of alternatives for a trillion dollars in U.S. government debt annoys the outspoken Chinese financial colony, as it calls for a new world monetary system. But there seems to be no genuine alternative to the very liquid dollar market. De facto illiquidity of official Chinese dollar reserves is enforced by political sensitivities, not by market salability. The debtor, as the saying goes, is “too big to fail.” Thus arises an unstable stalemate, a yuan-dollar pegged exchange rate regime constantly on the edge of a crisis.

The “exorbitant privilege” of the dollar is matched by the insupportable burden of America’s overvalued reserve currency role, which has tended to deindustrialize the colonizer, gradually increasing social inequality by reducing the standard of living of lower- and middle-income American families. The reserve currency country then feels compelled, as the Fed does today, to depreciate the dollar in the vain hope of eliminating the trade deficit and the balance of payments deficit—by becoming more competitive abroad as it becomes poorer at home.

The perversity of the official reserve currency system is endless as China now endures high inflation engendered by its colonial status in the world dollar system.

The floating, pegged exchange rate system based on the dollar has been slowly decaying since the end of World War II. But the dollar-based reserve currency system, because of the unmatched scale and liquidity of the dollar markets, could last another generation. When it will collapse cannot be predicted. That it will collapse, without systemic reform, I think inevitable. Few predicted the timing of the collapse of the pegged dollar system of Bretton Woods. But it did collapse in August of 1971, followed by America’s worst decade since the Great Depression.

Ultimately America, the leader of the unstable world financial system, must choose bet ween two options.

1. The United States can wait for the eventual demise of the world dollar standard under chaotic

conditions, similar to the final sterling collapse and the subsequent collapse of Bretton Woods in 1971. This option is analogous to the intrepid daredevil who leaps from his 10th floor window, secure in the fact that he is still unhurt two floors from the street level.

2. Or, America could take the lead in reforming the official reserve currency system based on the dollar. Such a monetary reform program would entail a careful windup, by agreement, of the world dollar standard. At the same time America would reestablish by statute a dollar convertible to gold, i.e., a dollar defined in law as a weight unit of gold. Gold would replace the dollar as the world’s reserve currency.

The reform would, first and foremost, establish a tested, non-national, neutral monetary standard as the basis of a stable dollar—one which reasonable sovereign trading partners could accept. Gold would become the international settlements currency and thus would replace the dollar as the basis of world trade and finance. Inasmuch as monetary history shows that no unstable national currency can permanently serve as the crucial world reserve currency, it follows that neither can an unstable basket of national currencies, nor can a fiction such as the SDR—the reserve asset created by the International Monetary Fund to supplement member countries’reserves.

But we are left with the question: what does the evidence of American history suggest as the basis for a stable dollar?

The stability of the U.S. dollar has varied widely in its history. This variation is explained by two factors: the monetary standard chosen for the dollar, and whether other countries have simultaneously used cash and securities payable in dollars as their own reserves, even as their monetary standard itself (i.e., official reserve currencies in place of gold).

The United States has alternated between two kinds of standard money: inconvertible paper money and some precious metal (first silver, then gold). The dollar was an inconvertible paper money during and after the Revolutionary War (1776–92), the War of 1812 (1812–17), the Civil War and Reconstruction (1862–79), and again from 1971 to present. The dollar was effectively defined as a weight of silver (and gold) in 1792–1812 and 1817–34, and as a weight of gold in 1834–61 and 1879–1971. The minted gold eagle, set equal to 10 dollars, and subsidiaries thereof, was provided for in the Coinage Act of 1792. The dollar was not used by foreign monetary authorities as an official monetary reserve asset before 1913, but the dollar has been an official “reserve currency” for many countries since World War I (along with the pound sterling). The dollar has been the primary official reserve currency for most countries since 1944.

Applying two criteria divides the monetary history of the United States into distinct phases. We

can compare the stability of these monetary regimes by examining the variation in the Consumer Price Index (as reconstructed back to 1800) by two simple measures: long-term CPI stability (measured by the annual average change from beginning to end of the period of each monetary standard) and short-term CPI volatility (measured by the standard deviation of annual CPI changes during the period).

Weighting these criteria equally, the classical gold standard from 1879–1914 was the most stable of all U.S. monetary regimes (as the table shows).

After the failures of several generations of unhinged paper currencies, pegged and floating exchange rates, America should embrace a stable monetary system tested in the laboratory of human history—the cornerstone of which the elites have rejected for a century. It is now time to restore that cornerstone—the true gold standard, shorn of the economic pathology of official reserve currencies. Now is the time to restore the American monetary standard authorized by the Founders in the Constitution—Article I, Sections 8 and 10. Now is the historical moment for America to take the lead and again give the world a real money, the Founders’ gold dollar of the Coinage Act of 1792. What the Founders learned from the paper money inflation of the Revolution, the recent past has taught us again. America and the world need a monetary standard which, unlike the paper-credit dollar, cannot be created at zero marginal cost with which to dispossess the  prudent and to subsidize the U.S. government and insolvent financial institutions at near zero interest rates.

For America to establish the gold standard would provide the least imperfect monetary solution to the problems of a century of financial disorder—engendered over and over by central bank-manipulated paper money, official reserve currencies, and floating pegged exchange rates. Only a stable dollar, a dollar defined by statute as a weight unit of gold, can pin down the long-term price level, restoring the incentive to save and ruling out extreme inflation and deflation. Such a dollar convertible to gold would reopen the road to confidence in the long-term value of the U.S. monetary standard. This is the durable road to economic growth and prosperity—financed by increased long-term savings, increased long-term investment, and rising demand for labor at rising real wages.

China: American Financial Colony or Mercantilist Predator? was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

Case in point: The July 13, 2011 exchange between the Austrian-schooled Republican who “gets it” Whiskey bar favorite Congressman Ron Paul and the Fed chairman.

What strikes me is not Bernanke’s struggle to explain the monetary function of gold, but something else. It’s something that scares the living bejesus out of me whenever I hear Bernanke testify.

Before I say what it is, let me stress that I don’t much like the widespread demonization of the Fed chairman. I think he was sincere when he said that he never cared about the management or the shareholders of the Wall Street firms he invariably bailed out and is generously subsidizing. He really believes that what he is doing is helping the U.S. economy and the U.S. people.

The problem is not that he is evil or dumb – I think he is neither – the problem is much bigger. You can deal with people who are evil and dumb. Deeply-convinced do-gooders in positions of almost unchecked power, those are the ones we should worry about. The good intentioned can suffer from tunnel-vision, incurably in awe of their own theories and are incapable of even grasping how what they are doing could make things worse.

Market manipulations — keeping rates artificially low and bank reserves expanding – are creating momentous dislocations, vast problems with as-yet incalculable consequences – even if they do not generate instant hyperinflation or intolerable expansion in the wider monetary aggregates.  This only looks deceptively harmless through Bernanke’s narrow prism of national account statistics.

Mr. Bernanke suffers from a blind side: He can’t see that ‘elastic’ money is always destabilizing. In my forthcoming book, Paper Money Collapse, I show how any expansion in the money supply (including bank reserves) distorts relative prices, always and everywhere. Even if some fortuitous rise in money demand cushions some inflationary impact and if inflation measures therefore remain contained.

Every money injection disrupts the market’s setting of interest rates, thus disorienting the process of coordination between true savings and investment and capital formation.

Bottom line: Interest rates are market prices, Mr. Bernanke, and you interfere with them at your peril!

I didn’t discover this, of course. I owe much to Ludwig von Mises and the young F.A. von Hayek. Ron Paul understands them, Bernanke doesn’t.

Bernanke: Man on a Mission – To the Wrong End

Bernanke upholds the original mission of the Federal Reserve: to avert credit contraction and debt deflation at all costs. During the Q&A, he reminded the laissez-faire Congressman Paul of the bank runs of the 19th century. Instability in banking — and in the wider economy as a result of banking — should come as no surprise to anybody who understands the practice of fractional-reserve banking.

Today, banks are money-producers. But here’s the problem: whenever the economy slows, the nervous public ditches deposit money for ‘real’ money. In fact, we want money that is not somebody else’s liability, such as gold or, even, state paper tickets. The banks then have to contract the supply of deposit money — shrinking the supply of what is used as money in the economy — thus exacerbating the recessionary forces in the economy.

The Fed Reserve wanted to avoid recessions — or shorten them –and avoid credit contraction. What they thought was needed is some form of elastic money so that in economically challenging times the banks do not have to contract the supply of credit.

It is almost comical how Mr. Bernanke seems to say, why are you criticizing me? I am spending all this money, but it doesn’t add to the federal deficit. I am printing this myself. I just press a button. Money printing is costless. And I can help the economy.

The Austrians know that such a powerful threat to the banks is brought about by the banks themselves! The lowering of reserve ratios and the creation of deposit money leads to a credit boom which always creates imbalances — in the saving-investment equation — and thus must end in bust.

What the Fed is trying to do is destined to fail. It cannot solve the problem. It must exacerbate the problem. Bernanke believes that with his all-powerful printing press he can always buy another recovery. For him his job appears to require an astute balancing act between the two things his macro-tunnel vision allows him to see: the trade-off between growth and inflation, both — so he believes — neatly observable with macro-statistics (the fetish of the economics profession). He cannot grasp the distortions in prices he creates, the misallocations in capital he furthers, and the accumulation of debt he encourages. None of them register on his statistical radar.

The debt-ceiling debate in the U.S. is trivial. What matters is this: as long as there is a Federal Reserve and as long as it is run by men like Mr. Bernanke — dedicated, smart but hopelessly committed to a flawed belief system — the economy will not be a capitalist one, benefiting fully from saving, entrepreneurship and true capital accumulation but will always be addicted to easy money, cheap credit and propped up asset markets.

What Will Happen Next?

Like a little hamster in his hamster wheel, Mr. Bernanke will only run faster and faster. Next, the interest rates that banks get on their deposits at the Fed will be cut to encourage more lending. The Fed will conduct QE3, and then QE4, and so forth. Maybe they will not call it that, but in effect that is what the Fed chairman’s own belief system will force him to do.

The size of the accumulated dislocations is already too gigantic today to allow any politically acceptable correction. Nobody had the stomach for it during Lehman. Nobody has the stomach for it today. In the monetary environment the Fed maintains, deleveraging will never be accomplished. Mr. Bernanke digs himself deeper into a hole that he won’t get out of when the market demands higher interest rates to maintain confidence in the paper dollar.

Paper money systems collapse — and they have all collapsed, throughout history and without exception — not because the money printers don’t understand inflation. They simply always reach a point when they fear the immediate impact of turning off the monetary tab more than the further printing of money. Of course, the disaster in the end is only bigger.

Bernanke is no James Bond villain out for world domination or even a big Wall Street payout. He is more the mad  professor in some sci-fi B-movie, unwittingly in cahoots with the forces of destruction not out of mean-spiritedness but out of intellectual hubris and infatuation with his own theories and technical wizardry.

Utterly convinced that he has worked out all the effects of his manipulation of the money supply and of interest rates, Bernanke can’t see why anybody would not want him to go on manipulating. In the meantime, debasement of paper money continues…

Regards,

Detlev Schlichter

The Bernanke Blind Side was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

The article continues:

Such a move would help to stabilize the value of the dollar, restore confidence among foreign investors in U.S. government bonds, and discourage reckless federal spending, the media mogul and former presidential candidate said.

If the gold standard had been in place in recent years, the value of the U.S. dollar would not have weakened as it has and excessive federal spending would have been curbed, Forbes told HUMAN EVENTS.

[...] the idea “makes too much sense” not to gain popularity as the U.S. economy struggles to create jobs, recover from a housing bubble induced by the Federal Reserve’s easy-money policies, stop rising gasoline prices, and restore fiscal responsibility to U.S. government’s budget, Forbes insisted.

With a stable currency, it is “much harder” for governments to borrow excessively, Forbes said.

That’s all good stuff, Steve. But really? Are you kidding?

In politics, things generally don’t happen because they “help the nation” or “make too much sense”. If we lived in that kind of world, and the 19th century gold standard had so much going for it, then why was it abandoned in favor of the present system?

It was abandoned for political reasons. Factors leading to the demise of the gold standard were the desire of governments to spend in excess of politically tolerable levels of taxation, the desire to finance World War I and other wars, and the wishes for a lender of last resort to bail out over-leveraged banks when they had insufficient reserves to cover their losses.

$7.95

Political reasons have a logic of their own quite different from the kind of logic that Forbes is using in which good things happen for good reasons. In politics, interest groups organize to gain influence over the government and implement policies for their own benefit, at the expense of the rest of society.

But why does political logic defeat common sense? The public choice school of economics has given us an explanation of the insidious process by which the few exploit the many. They point out that concentrated benefits and dispersed costs lead to rational ignorance. Translating, “concentrated benefits” are the large returns earned by the privileged groups through subsidies or bailouts.

For each one of us tax payers, the cost of any individual bailout or welfare program is quite small, hence “dispersed costs”.  In looking at political action to fight the system, the individual taxpayer faces the following set of tradeoffs: the time and effort to understand even one piece of legislation or policy is substantial, and even if opposition to a particular program were effective, it would only save a few dollars per individual in taxes. This leads to “rational ignorance”, the decision by most taxpayers that the return to working harder at your job or just enjoying life is much greater than the return to political organizing.

Given outcomes that are dominated by public choice logic, the monetary system will not be reformed when “it makes too much sense” to do so. It will not be reformed because it would put government finances on a sound footing, nor to restrain war-making. Stabilizing the dollar won’t do it either. The current monetary system (or as James Grant calls it, non-system) will be replaced, eventually, because it will fail, catastrophically.

What will the alternative to the current regime of central banks, floating exchange rates, and unbacked fiat money look like? Here I must reject the wishful thinking that “things need to get worse so people will be really angry and insist on something better”. Things do not necessarily get better when there is a crisis. Things can get worse and stay worse, or get worse and then go even further downhill.

What exactly Steve Forbes has in mind is nebulous because the term “gold standard” is used differently by different people.  The most conventional definition is a system of national currencies exchanging at fixed rates, with central banks, each one having some gold as a reserve asset. In this world, central banks are obligated to provide a form of convertibility, though reserves held may be less than 100%. Individual nations may, under some conditions, be able to devalue their own national currency relative to the fixed rates and to gold.

For adherents to Murray Rothbard’s theory of banking, the gold standard means gold as money proper with banks holding 100% reserves against demand deposits. Under these conditions there is no necessity or even any purpose to having a central bank and devaluation is a form of default.

What does Forbes have in mind?  He has been associated with supply side economics, who have their own so-called “gold standard”. So-called because it is not much of a gold standard at all, only a rule that the central bank is supposed to manage the inflation of the fiat money system in line with the gold price.

Under this system, gold is not money proper, it is a good whose price is considered the best indicator of the looseness or tightness of monetary policy. As Frank Shostak points out, this system offers none of the advantages of using real gold as money. And why should anyone expect that when push comes to shove, the Fed will follow any rule when the situation seems to demand improvements?

As Murray Rothbard wrote in his critique of a similar money supply growth rule advocated by Milton Friedman, “Of course, Friedman would then advise the Fed to use that absolute power wisely, but no libertarian worth the name can have anything but contempt for the very idea of vesting coercive power in any group and then hoping that such group will not use its power to the utmost.”

When the current system fails, there are two primary barriers to the adoption of a better system. The first is the political actors who moved to abandon the gold standard the first time around haven’t gone away. The vested interest of powerful groups who wish to use the fiat money printing press are still around; if a new opening appears, the usual suspects will apply for their jobs back. That which has not killed them has made them stronger.

[You can read more about these political actors who tried to bury Ron Paul's "Gold Bible" by clicking here.--Ed.]

But the deeper obstacle is ideology. Most economists and central bankers actually believe that a) an economy cannot grow without an increasing quantity of money, b) the gold standard caused the Great Depression, c) The Fed determines monetary policy, a necessary and beneficial function and, d) the banking system needs a lender of last resort in the case of financial crises, you know, those crises that just sort of happen, that come out of no-where with no warning and hit us when we least expect.

None of the preceding propositions are true, but as long as they are accepted factoids, the next monetary system is likely to look a lot more like the current one with extra lipstick than anything that existed in the 19th century.

Regards,

Robert Blumen

Robert Blumen is an independent enterprise software consultant based in San Francisco.

The Gold Standard Cannot Survive Political Logic was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

He promoted the idea of educational vouchers issued by local governments and based on taxes extracted from the public. He did not consider the obvious fact that the courts would make this the wedge by which the state would take over private education. He and I debated this in 1993.

Most of all, he promoted the idea that storing gold in government vaults to back the currency is wasteful. It wastes gold. It wastes storage space. It wastes armed guards. So, to make monetary policy more efficient, the Federal Reserve should increase money — he never said which M — by 2% to 5% per annum. He wanted central-bank-controlled fiat money.

The only critics from the fringes of academia were the Austrian School economists. We knew that an efficient government is a dangerous government. We also knew that a central bank that does not face an outflow of gold in response to its policies of monetary inflation will inflate far more than would be allowed in any gold-related economy.

I responded to this argument, which had been picked up by The Wall Street Journal, back in 1969.

Hans Sennholz responded on many occasions. So did Murray Rothbard. But we were not taken seriously. We were not part of the mainstream. Academic economists had long since abandoned any support of a gold coin standard. They did not all support Friedman’s idea of a restrained Federal Reserve. In fact, very few of them supported it. They wanted flexibility. They still do.

Once Nixon closed the gold window, there was no turning back. The monetary base grew, all of the various Ms grew, prices rose, bubbles grew and blew, and the Federal debt rose to today’s gigantic, unsustainable level — unsustainable apart from mass inflation followed by hyperinflation.

The abolition of a currency convertible on demand into gold was only one part of Dr. Friedman’s contraption. The other part was his suggestion of floating exchange rates. This deserves special consideration.

Milton Friedman’s Contraption

Friedman easily took apart the idea of fixed exchange rates. Fixed exchange rates are a form of price control. Friedman was a good enough economist to know that price controls produce shortages. The artificially undervalued currency goes out of circulation. The overvalued currency produces gluts. There will be runs on central banks.

Domestic purchasers of foreign goods say to the central bank: “Sell us the artificially undervalued foreign currency at the official price.” The central bank runs out of foreign currencies. Trade collapses. There is then a devaluation. The official prices of the foreign currencies are raised to new fixed exchange rates.

It was easy for Friedman to expose this as ridiculous. “Just float the currencies,” he said. “Let the free market set their prices.” This was good advice. Price controls do not work as promoted. They always produce gluts or shortages.

But then Friedman recommended his old favorite: pure fiat currencies. He said that these can be managed rationally by means of a fixed rule governing a predictable expansion of money. “Turn it over to the Federal Reserve. All will be well if the Federal Reserve does not tamper with the rate of growth.” As John Wayne said in The Searchers: “That’ll be the day.”

Nixon adopted Friedman’s contraption. First, there would be no more convertibility of gold for foreign official government agencies.

For a little less than two years, there were universal price controls on American goods. These controls led to shortages and a disruption of international trade. The dollar was not officially floated until December 1973.

When the price controls came off, prices rose. In 1975, Gerald Ford launched the WIN plan: Whip Inflation Now. The recession of 1975 did exactly that. Then came the worst monetary inflation in American peacetime history: 1976-80. Gold and silver soared.

Friedman’s contraption clearly was not working. Floating exchange rates were not the problem. The abolition of the gold exchange standard was the problem.

Friedman’s contraption has engulfed the whole world in monetary inflation, bubbles, and busts.

Stockman on the Contraption

In a lecture to the Mises Institute on March 12, David Stockman blames floating exchange rates and the abolition of the gold standard.

That the demise of the gold standard should have been as destructive of fiscal discipline as it was of monetary probity can hardly be gainsaid. Under the ancient regime of fixed exchange rates and currency convertibility, fiscal deficits without tears were simply not sustainable — no matter what errant economic doctrines lawmakers got into their heads.

Back then, the machinery of honest money could be relied upon to trump bad policy. Thus, if budget deficits were monetized by the central bank, this weakened the currency and caused a damaging external drain on monetary reserves; and if deficits were financed out of savings, interest rates were pushed up — thereby crowding out private domestic investment.

This is an accurate assessment of what happened. But the anchor to this was not the fixed exchange rate system, because the IMF had no real authority to enforce them. The anchor was the promise of the United States to sell gold at $35 an ounce. When the chain was cut, and the U.S. kept its gold, the international currency system was cut adrift. The anchor resides in the vault of the New York Federal Reserve Bank.

In the good old days, there was pain, Stockman observed. “Politicians did not have to be deeply schooled in Bastiat’s parable of the seen and the unseen. The bitter fruits of chronic deficit finance were all too visible and immediate.” This ended in 1971.

During the four decades since the gold window was closed, the rules of the fiscal game have been profoundly altered. Specifically, under Professor Friedman’s contraption of floating paper money, foreigners may accumulate dollar claims or exchange them for other paper monies.

But there can never be a drain on U.S. monetary reserves because dollar claims are not convertible. This infernal engine of fiat dollars, therefore, has had numerous lamentable consequences but among the worst is that it has facilitated open-ended monetization of the U.S. government debt.

The government is running a $1.6 trillion deficit. Nothing can be done politically to stop this. We are on a runaway train. The main brakes were removed in 1971. The only brake now is that of the bond vigilantes, but the Federal Reserve is the buyer of bonds today, along with Asian central banks. Stockman observed that “the Fed’s QE2 bond purchases have been so massive that it is literally buying Treasury paper in the secondary market almost as fast as new bonds are being issued.”

Is all this Friedman’s fault? Stockman lets him off the hook, to some extent.

By contrast, under the contraption that Professor Friedman inspired, trade account imbalances are never settled. They just grow and grow and grow — until one day they become the object of fruitless jabbering at a photo-op society called G-20.

In all fairness, Professor Friedman did not envision a world of rampant dirty floating. Indeed, it would have taken a powerful imagination to foresee four decades ago that China would accumulate $3 trillion of foreign currency claims or more than 50% of GDP, and then insist over a period of years and decades that it did not manipulate its exchange rate!

My response: it was all Friedman’s fault, intellectually speaking. When an economist recommends a policy, he also recommends its effects. Friedman failed to see what Austrian School economists had predicted: the unleashing of fiat money, and manipulated rates — dirty floating. Dirty floating is all there is in a world run by government-licensed central banks without gold coin convertibility. But for our saying this, decade after decade, the economics profession has marginalized us.

Conclusion

Milton Friedman was always too clever by half. He advised governments to get more efficient, and they did so. They used his advice to expand their power and expand their reach into our wallets.

We told him so. He did not listen. His followers did not listen. Today, they all sit mute at the side of the road, mumbling about potentially excessive deficits and potentially excessive price inflation, but generally approving of the Federal Reserve.

The problem is the original contraption: (1) government’s monopolistic control over money and (2) central banking as such. Here, Friedman was supportive of government.

The problem was not floating exchange rates or the breakdown of Bretton Woods in 1971. Those were the inevitable results of Bretton Woods, as Henry Hazlitt warned in the late 1940s, and was fired by the New York Times for saying so.

The problem was not even the Genoa Conference of 1922, the contraption designed to solve the inflation that came as a result of the suspension of redemption in the second half of 1914, when World War I broke out.

The problem was the mass confiscation of the people’s gold in 1914: first by commercial banks, then by the central banks.

Milton Friedman’s contraption was just one more ill-fated attempt to deal with the results of the original confiscation. It was one more case of his outlook: “The government was right to confiscate the gold and end the gold standard. That was an efficient way to fight a war, just as withholding taxes are efficient, and vouchers are efficient.”

Milton Friedman spent his career defending the efficiency of the free market. But, on the really big issues, he sold his peers on the efficiency and good will of government politicians and bureaucrats. “Trust them to be efficient.”

The Austrians said the same thing, but added, following Forrest Gump’s mother, “Efficiency is as efficiency does.” The state gets more efficient only in order to tyrannize people on a cost-effective basis.

Milton Friedman’s contraption was the unchecked welfare-warfare state: unchecked by annual taxation without withholding and unchecked by the gold standard.

If that’s efficiency, include me out.

Regards,
Gary North
Whiskey & Gunpowder

March 21, 2011

Milton Friedman’s Money Machine was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

When push comes to shove — recession — most people trust guns and badges far more than they trust the free market.

Do you trust the Federal Reserve System to maintain prosperity? Or would you prefer to trust gold coins held by millions of Americans?

Most Americans and virtually all professors of economics trust the Federal Reserve System.

That was not true in 1913, the year Congress voted (just before the Christmas recess) to create the Federal Reserve System.

There is a way to avoid recessions, argued Ludwig von Mises in 1912: (1) the gold coin standard and (2) no government licensing of fractional reserve banks.

We never did have both. No nation did in modern times. Ever since World War I broke out in August 1914, we lost the gold coin standard in Europe. We lost it in the United States in 1933, when Roosevelt stole the nation’s gold coins by fiat decree. In short, the entire world has rejected Mises’ argument.

Gold-Hating Special Interest Groups

There are four main groups of critics of the gold coin standard: the greenbackers, the politicians, the academics, and the investment elite.

The “greenbackers” began their propaganda early, in the 1870s. They defend fiat money that is controlled by Congress. These self-taught promoters of government fiat money are monetary statists. They include lawyer Ellen Brown and Bill Still, producer of “The Money Masters” video. They have no influence in Congress or academia, because they oppose fractional reserve banking. But their system relies on people with guns and badges to support legal tender laws. In Brown’s case, she has now come out in favor of Bernanke’s QE2 policies. She is Bernanke’s major cheerleader on the Right.

What is their motive? They want big government. They come to the far Right and the far Left with the same argument: private fractional reserve banking is bad, because it makes big banks rich. They come with the same solution: “Trust Congress.” Trust it to do what? To spend fiat money to create a vast welfare state.

They are all Leftists, but they recruit on the Right by an appeal to the sin of envy: “Let’s bust the bankers by law!” They are statists. They parade as conservatives when they pitch the Right.

Just like the greenbackers, the politicians want cheap money, so that they can spend more than they take in by direct taxation, which is always unpopular. The central bank guarantees to buy government debt at low rates. This lets politicians borrow more money on behalf of taxpayers than would otherwise have been the case, since high rates make it more costly to go into debt. This is why politicians have universally created central banks with a monopoly of control over money.

Then there are the vast majority of academics all over the world. They are apologists for the prevailing system. They are paid to support it. They take the king’s shilling, and they do the king’s bidding.

Some of these academics are paid directly by the state as faculty members in tax-funded, state-licensed, accredited universities. Others are paid indirectly as faculty members in private universities that are protected from competition by means of accreditation systems that are backed up by laws against unaccredited institutions that use the word “university.”

Every accredited university is part of a cartel. This is why universities are not price competitive. This is why they can afford to grant tenure — a practice unknown in the private sector.

There is an army of academic critics of Mises’ argument that the free market should be trusted to provide economic planning, and that people backed up by other people carrying guns and badges should not be trusted. In this army are thousands of state-trained and state-accredited economists, who assert that they believe in the free market. When push comes to shove, they don’t.

In the entire academic profession, all over the world, there is not a single textbook in economics that says that central banking is conceptually and operationally a cartel-enforcement institution for privately owned large banks: an anti-free market institution. There never has been such a textbook. Every economics textbook separates the chapter on cartels from the chapter on central banks. Neither chapter refers the reader to the other chapter.

This is not random. This is a crucial part of the arrangement between the national government and the bankers’ cartel in every nation. The academic cartel joins with the bankers’ cartel to screen out any suggestion in a textbook that either of these state-licensed cartels is in fact a cartel. “You scratch my back, and I’ll scratch yours. You promote the right of my agents to carry guns and badges, and I’ll promote yours.”

Finally, there is the investment elite. They want a safety net for bad investments they have recommended. They also want leverage: debt-funded, high-return speculation. They want to be on the winning side of “moral hazard.” This is what central banking gives them.

Members of these four special-interest groups hate the gold coin standard. They hate it for the same reason: it transfers economic authority from the cartels to private citizens. In short, it offers no guns or badges to the government.

Friedman on the Fed

Consider academia. The archetype of the seemingly pro-free market professors was Milton Friedman. In a recent report, “Milton Friedman’s Contraption,” I went into detail about Friedman’s faith in central banking. His faith was misplaced. He trusted the banking cartel as a concept. He did not reject it as the creation of the United States government. He did not reject it as a cartel. On the contrary, he promoted it avidly and famously.

He recommended that the Federal Reserve System’s Federal Open Market Committee (FOMC) stop planning. He recommended a 3% to 5% per annum increase in fiat money. If the FOMC would just follow his advice, he assured us, there would be stable economic growth and stable prices.

Friedman was terminally naïve. To promote any system of central planning ignores the obvious: this is too much power to entrust to anyone. The bureaucrats always do the wrong thing. What is the wrong thing? This: to prohibit the free market from providing the solution to the problem at hand. The central planners hold power specifically to thwart the free market. This is why the state gives them guns and badges.

Friedman was viscerally committed to Federal Reserve Notes, as Mark Skousen and I learned at a dinner meeting with him back in the late 1990s. I don’t want to spoil your fun. Read about it halfway through this article. It’s about a $20 gold piece vs. a $20 Federal Reserve Note. I did not know what was coming. I was an innocent bystander, not an unindicted co-conspirator.

There are only two conceptual options in monetary theory: a full gold coin standard in which the citizens hold the golden hammers or a system of economic planning in which elite members of the planning bureaucracy hold the digital hammers. There is no third choice. A mixture always leads to inflation, recession, and centralization.

Professional gold-haters reject gold because they do not want the public to hold the hammers. They hate decentralized economic authority. They want people like themselves to have the final say.

The planners will always adopt a policy different from the correct one. What is the correct one? To revoke the legal authority of the nation’s central bank and let the free market replace it. As Ludwig von Mises said, when asked what the government should do to overcome a recession: “Nothing. Earlier.” Friedman spent his entire career advising economists and even the U.S. Treasury (in 1943) on how to plan more efficiently. They followed his advice only when this meant taxing more efficiently and regulating more efficiently. He never caught on to how they were using him.

Is this too harsh? Not at all. In 1942, when 20-year Rockefeller agent, Beardsley Ruml, who was then president of the New York Federal Reserve Bank, proposed Federal withholding taxes, Friedman went to work devising reasons. He was in the Treasury Department. Did the government accept these arguments? Yes. Did Ruml ever ask Friedman’s advice on Federal Reserve policy? No.

In 1963, Friedman offered his now-famous critique of the FED’s policies, 1930—33. He said the FED did not inflate enough. Did academia accept this argument? Of course. Did Bernanke accept it? Yes.

Friedman and Schwartz’s insight was that, if monetary contraction was in fact the source of economic depression, then countries tightly constrained by the gold standard to follow the United States into deflation should have suffered relatively more severe economic downturns. Although not conducting a formal statistical analysis, Friedman and Schwartz gave a number of salient examples to show that the more tightly constrained a country was by the gold standard (and, by default, the more closely bound to follow U.S. monetary policies), the more severe were both its monetary contraction and its declines in prices and output.

He got Friedman’s main message: “gold . . . bad.” Did Bernanke ever follow Friedman’s advice on 2% to 5% money growth? Yes: in 2006–7. Did this create a recession? Yes, just as Austrian economists publicly began saying in 2006, based on the Austrian theory of the business cycle. Did he then abandon Friedman’s slow growth rule and adopt Friedman’s economic crisis policy: a doubling of the monetary base? Yes.

On educational vouchers — his program for the more efficient use of confiscated property tax revenue — the Establishment never bothered to get around to implementing it. The teachers’ union opposes it. “Nice idea in theory, Milton,” academia said, “but it’s just too Utopian. We’ll get back to you on that.” They will, too: whenever private schools constitute a major threat to the teachers’ union, and the government decides to take over the private schools by providing “free” money, along with the regulations that always accompany free money from the government.

Conclusion: the ruling elite always trotted out Friedman when it was convenient, but it ignored him when it wasn’t. In short, it acted in its own self-interest. He was there to help where it counted most: taxation policy and a defense of the legitimacy of central banking and 100% fiat money.

Friedman and all economists other than Austrian School economists hate the idea of a gold coin standard. A lot of them carry this hatred into the financial markets. They hate gold as an investment, not just as a monetary policy. They hate it at all times. They tell people not to buy it when it is cheap. They tell them this after it has doubled, then tripled, then quadrupled.

Why? Because to buy gold is to vote against the Keynesian-planned economy. It is to vote against the Keynesian-dominated central bank. It is a vote against the high-tax, debt-funded government bureaucrats who think they are wiser than the decentralized planning of private citizens in a free market. They hate it because they are part of the self-appointed, self-regulated elite. They want to feather their nests by sending out people with guns and badges to extract wealth from the general public.

Those who own gold are able to evade some of the effects of laws enforced by people with guns and badges. This enrages the elite. It has enraged them in the United States ever since 1791. From Alexander Hamilton to James Madison to Daniel Webster to Henry Clay to Abraham Lincoln to Teddy Roosevelt to Woodrow Wilson to Herbert Hoover to Franklin Roosevelt to today, the gold coin standard has enraged them. They want the citizenry to submit to fiat money, guns, and badges. They want the citizenry to submit to their plans. They are monetary statists because they are statists. They want fiat money because they want guns and badges.

“But Gold Will Fall!”

After the central banks stop inflating, gold will indeed fall. So will everything else except currency, including Treasury bonds. Will this be before the central banks produce hyperinflation? I hope so. If not, gold will fall on the far side of a currency collapse, where the value of a dollar fell to zero value. Gold will never fall to zero value. The dollar could.

“But gold will fall,” the experts tell us. Fall from what? “Today’s unsustainable price.” Did you recommend buying gold before the price got unsustainable. “No.” Why not? “Because gold’s price is always unsustainable.” It was unsustainable at $257 back in 2001. “No, I mean it is unsustainable this high.” How high? “Whatever it is today.” So, gold will fall from where it is today. “Yes,” So, you have shorted gold on the futures market. “No.” Why not? “Because gold might go up.” Why? “Because gold may be sustainable for a while.” How long until it falls? “One of these days.”

Here is their rule: “Buy low, sell high, except when it’s gold. Never buy gold.”

Here is the meaning of this rule: “Believe in the power of the central bank to provide wealth, in good times and better times.”

What about bad times? “There will be no bad times, as long as central banks have the power to create money.”

But unemployed workers are having bad times. “They don’t count.” Why not? “Because they don’t work on Wall Street or in Washington.”

Underwater home owners are having bad times. “Only briefly. Home prices are unsustainable.” You mean they will fall further. “No, I mean they are unsustainable this low.” Why? “Because the Federal Reserve System is pumping in money.”

So, should I buy gold? “No.” Why not? “Because gold’s price is unsustainable.” You mean it will fall. “Yes.” But housing prices will not fall. “Correct.” But they have been falling this year. “This is a temporary correction.” Like the price of gold whenever it falls? “No. When the price of gold falls, it is a return to normal pricing.” So, when the price of gold rises, this is a temporary correction. “Correct.”

It has been rising for over nine years. “It’s a temporary correction.” How long is temporary? “However long it takes for gold to fall.”

Would you favor a policy of the government selling its gold? “No.” Why not? “Because that would require a full audit of the Federal Reserve System.” Why shouldn’t there be an audit of the Federal Reserve System? “Because we must maintain the independence of the Federal Reserve System.” Just as we do with respect to . . . to. . . . what other government agency? “The CIA.” You think the CIA should be independent. “I think the CIA has guns and badges and bombs and poisons, so I don’t mess with the CIA. The CIA gets what it wants.” But so does the Federal Reserve. “This is a good thing.” Why? “Because the Federal Reserve is the source of wealth.” So, digits are wealth. “Yes.”

Gold is wealth. “You can’t eat gold.” You can’t eat digits, either. “You can get people to accept digits in exchange for wealth.” How? “With badges and guns.” Like the CIA. “Now that you mention it, yes.”

Conclusion

There is an intellectual battle between the vast majority of experts and a handful of Austrian School economists. The battle is over which system to trust: one in which individuals buy and sell with their money of choice or with money issued by state-licensed banks that are under the control of the national government.

It is a debate over free market decentralized planning based on private ownership vs. central planning based on government coercion.

It is a debate over gold money or government digital money.

The next time you hear some expert spouting off on the evils or foolishness of gold, mentally imagine a bureaucrat with two uniformed goons with badges and pistols standing at your front door. The bureaucrat says, “I’m from the government, and I’m here to help you.”

Regards,
Gary North

Whiskey & Gunpowder

March 18, 2011

Gold vs. Guns and Badges was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

If not, it is here in the Whiskey Redan, deep in the heart of Texas. A “redan,” you will recall, is a fortification with only three corners, and I chose the term partially because Gary had already snagged “the Whiskey Bunker” and to allow myself to define what the three most important factors are easily, according to my whim of the moment. Today I’m going to go with “God, Gold, and Guns,” which you will notice is in alphabetical order. We don’t discuss religion in the Bar, politics and economics being quite controversial enough, so that leaves us with Gold and Guns.

We can deal with the Gun facet pretty easily: if a government doesn’t have “guns” (i.e., military forces sufficient to deal with less than friendly neighbors), it won’t be long before a nation is absorbed by more belligerant and better-armed forces. If the people don’t have guns, governments tend to overreach. When the people don’t have guns, crime rises.

Which brings us to everyone’s favorite topic, shimmering metals, and, in particular, the much-disputed question of whether they are a “barbaric relic” or the best means of assuring both a stable monetary system and preventing governments from inflating through the printing press.

Amazing, isn’t it, how putting matters simply can make them much clearer? Why doesn’t any government have a gold standard? Because there was too much “money” and power to be gained by going to fiat currency. Despite the obvious advantages geopolitically why isn’t anyone doing more than flirting very tentatively with the idea of money that is backed unit for unit with gold or silver? Because governments don’t want to give up the power they have or fear that cutting back on so-called “safety nets” would lead to their destruction. More than that, every nation I can think of quickly has spent itself into such a hole that it cannot simply recall all of the paper currency and swap it out for gold and silver at parity or even a sensible fraction thereof. I doubt that the Feds could have managed a penny on the dollar even before the stupifying debt incursion of the last eighteen months–and we have only their unverified word on how much physical gold is on hand. A country with no foreign debt might have some chance of pulling conversion off without devastating consequences, but are there any governments that don’t have foreign debt or own that of others? Perhaps a period with a two- or three-tiered exchange rate, such as Hugo Chavez inagurated recently, would work. In Venezuela, now, what your money is worth depends upon what you are spending it on! My idea of good economic policy does not include armed guards in business establishments to prevent the owners from raising their prices. Ceylon (sorry, “Sri Lanka”) tried it but is too small; Monaco isn’t a good candidate, either, nor is Andorra.

So there the golden fruit hangs, seemingly out of reach. IF a country with reasonable clout (the US, Britain, BRIC, perhaps even an OPEC member) could make the transition without losing heads or thrones there would be no further question of what the world’s reserve currency would be. We can certainly take Saudi Arabia off the list of possibilities because the price of keeping the house of Saud in charge is $70/barrel in giveaways. Short of defaulting internally and externally and eliminating the notion of “entitlements” the Feds and Parliament certainly can’t get away with it, and such actions would surely precipitate blood in the streets of a nation where 40% of the citizens are on the dole and 40% of those employed work for government at some level.

I learned long ago from a very fine general, “Don’t bring me a problem unless you have a solution.” This saved the general a lot of frivolous complaints, but it did something better: the person who has the problem is most likely the one best-qualified to formulate a solution. It forces people to think for themselves as well as taking into account their familiarity with the restrictions and results. Of course I have an answer to the problem of what nation can–and must, by its Constitution–adopt a strict gold standard, and by fortuitous happenstance that country neither prints fiat “money” nor does it have vast foreign or internal debt. It is laboring under the small inconvenience of having been occupied by a foreign power for a hundred and fifty years.

Yes, I’m back to the campaign to restore the Republic of Texas via a public vote whether to request an amendment to the US Constitution to allow Texas to be admitted as a State (a process that will take at least twenty years and bales of Timmy’s paper) or to ratify the current treaty between those United States and the Republic of Texas, reclaim our independence, suggest with firm politeness that the Feds and all of their works retire to their side of our respective borders, and insist that Washington abide by the 2004 decree of a Federal Judge that Washington “cease and desist hostilities against the land and people of Texas.” I don’t know about you, but I consider the IRS and federal mandates to be hostile.

The day one more than fifty per cent. of the voters agrees we would prefer to be the ninth richest nation in the world rather than a satrap of Baghdad on the Potomac, we revert instantly to our 1836 Constitution which has been updated with scrupulous legality only to include universal sufferage. Other than that the Convention, very wisely indeed, left that splendid brief document alone.

Our Constitution states specifically that “money” shall consist of gold and silver coins we mint ourselves. You can look up the “for profit corporation dba the State of Texas” and see what our financial position is with Dun and Bradstreet. (While you’re at it, check on the for-profit corporation dba the USA.) You can infer easily how rapidly expenses will drop when ties are cut with DC. Consider just a few…the cost of gasoline, alcohol, and tobacco…the end of Federal mandates which cost us billions a year…the immediate and very real “raise” everyone employed within our borders would receive when income taxes and FICA were removed. Our Constitution, like yours, forbids taxing earnings or heads, but we can make it stick when you didn’t. The true dream of the Republic is not to regain a Wild West with saloons, spittons, and gunfights, but to start over very, very carefully, learning from the mistakes and abuses of the past 175 years and attain a true Jeffersonian republic.

Our money will be “good as gold” because it will be gold. True, for convenience there may be paper currency, but it will say “redeemable for the equivalent in precious metals,” not “Federal Reserve Note.” Your $100 dollar bill is an IOU you cannot count on collecting; if we had one, it would be worth roughly a tenth of an ounce of gold today, tomorrow, and for decades to come. Yes, the metals market does fluctuate, doesn’t it? So do exchange rates. I can see the scurry to hold Texas Gold or even fully-backed paper (be that notes or even bonds if we chose to offer some) because our money will be real. Today’s Bernanke is the equivalent of an Andrew Jackson twenty years ago, a loss of 80% of stated value. The dollar of today is worth less than 4% of an oversized bill a hundred years ago. That is the penalty of fiat currency. We have our own system of Texas banks and deposits in them would be far safer than in your local, FDIC “guaranteed” banks. We’ll have bullion to back our claims. They don’t.

I cannot foresee the Republic of Texas feeling any need to sell bonds, but if it did they would be an excellent value so long as we break free without being invaded again by US or UN forces. Americans are so accustomed to having everything controlled by the fell hand of the Statists that it can be difficult to grasp how few legitimate expenses a truly Constitutional government has. In “Educating the Masses,” archived here, I discussed my solution to the one thing the Texas Constitution says about education: that there must be a “plan” to educate the children. Compare the cost-effectiveness (to say nothing of the superior results we can guarantee) of my plan versus Washington, D.C. spending $14,000/year/student. When the kids can go to private schools there for as little as $7,000 a year (Although Obama’s children are in pricey Friends at eight times that), why on earth is there a disastrously ineffective public school system in the District of Columbia? Silly question; power, the ability to tax and spend, and the politics of envy and racism. As an aside, I am appalled by the very concept of “hate speech.” Someone explain to me why speech permitted under the First Amendment is showing up at a military funeral with a sign that says “Thank God for dead soldiers,” clearly meant to mock, not to comfort the family, but I will be walking on very thin ice if I say what I think about a Marine General’s suggestion that gay troops be billeted together! I haven’t any objection to “separate but equal” (a school system that produced superior education and far less strife; propinquity has not lead to true friendship between those of different color and religions), but I really disapprove of putting all of the–someone come up with a word that won’t get me arrested–in barracks where they can party hearty after lights out knowing that everyone else there is either a potential partner or like-minded. That is scarcely conducive to “good order and discipline.” Wry laugh. We can understand Thomas Jefferson’s sensible suggestion that a brothel be located close to the University of Virginia so that the boys’ minds wouldn’t be distracted in a time when young ladies were supervised strictly. I have trouble with a Lysistrata Corps.

Back to business. At a guess, fewer than 2% of you, dear readers, reside in our fair Republic. (Simple arithmetic. Divide by 50 plus at least Australia, Switzerland, China, and South Africa, where I correspond with readers.) The reasons our fight to regain our freedom should be of interest to you are myriad: as an example to your own governments and citizens; as a shining dream you can partake of by applying for citizenship and paying a flat 10% tax during your probationary period; and as an investment opportunity that is far safer than what goes on in your land, just for starters.

Our goal is to reduce government intrusion to the bare minimum required to keep the peace, internally and externally. Government HAS no other valid purposes than to protect the citizenry and its borders. When the Colonies broke off from England (an England somewhat distracted at the time or the rebellion would never have succeeded) it was for a dream of freedom, the most minamal of governments, and–laughter–individual gain. Nothing wrong with that, free enterprise being the best way to raise the standard of living of all citizens. Our promise is of a Republic where what you earn is yours to keep, where local “taxing authorities” cannot demand property taxes to fund their pet projects, where income is generated primarily through taxes on foreign corporations–including those headquartered in the US–and tariffs, and you are free to use what you earn to support your family, start or expand a business, and prepare for your own future. No, there won’t be any welfare, but those who will not work can either not eat, convince friends/family/churches/charitable institutions to support them, or go to any of your forty-nine states. That worked for Tommy Thompson, and it will work for us.

Just imagine a truly gold-backed currency, and no income taxes, property taxes, “sin” taxes, EPA, NEA, or socialized medicine. I’ll close with a discussion of that. I receive Social Security, and if I live to be well over a hundred I am unlikely to recoup what we “contributed” for over forty years. I have no choice about being on Medicare, which takes precedence over the TriCare a “grateful” government promised me for life for the sacrifices John and I made. The government removes that sum without my permission, and my only option is to refuse my stipend and have no medical insurance at all other than TriCare, which doesn’t appear to cover much any more. The tariff last year was right at $1200, making the (very unusual) three trips I made to the doctor cost me $412 each, including co-pays. This is not my idea of a good bargain. This price will probably triple in coming months, in a world where Obamacrats, desperate for money, denied any COLA increases for the next three years. Left to my own devices I would have a catastrophic care policy and simply pay the current average of $110/visit. In the world we are trying to make no one will provide “free” medical care for those whom, quite frankly, we expect to seek refuge in your welfare states, but no one will attempt to mandate what arrangements you make for your medical care, either. I did an analysis based on what it cost to go to our family doctor in 1955–cash only, of course. In inflation-adjusted dollars it would cost you $35 for a standard office visit if the government and “health care insurance” did not exist.

The “land of the free and the home of the brave” doesn’t look much like that to me, any more. The latest Gary North suggests that the “trade of the decade” is to shed all stocks and buy uranium. I’m sure that is excellent advice…but suggest that you hedge your bets by investing in Texas-based corporations. If our bid for freedom fails, Texas was still the last into the depression and hit most lightly by it. Ah, but if we succeed…I am certain you could take to the idea of dividends paid in gold.

Regards,
Linda Brady Traynham
Whiskey & Gunpowder

March 30, 2010

Chasing the Gold Standard was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

What America needs desperately is a “re-set” button, just not one in flawed Russian.  We’re already being overcharged.  What would solve most of the problems (after some truly horrible tangles were unraveled) would be to go back a minimum of a hundred years and start over. 1909 would do quite nicely.

Did you gasp, “Are you mad woman?!  You would lose your right to vote!”  No, I am not insane at all.  If the price of restoring the gold standard, eliminating the Federal Reserve, dismantling the welfare state, getting rid of millions of pages of deleterious regulations, wiping out all the “laws” set by Liberal judges, and following the Constitution strictly is forfeiting my right to vote–take it with my blessing.  It would be the best trade of my life.

I’m a trader, not an “investor.”  Every time the government tells us it is “investing” in our future, the results are the same as holding stocks for the long term–with all the fun of margin calls, a thing no one with any regard for his skin would contemplate for a moment.  Hold stocks as “investments” and whatever increase you have will be eaten up by inflation or destroyed by business cycles or government actions.  Sometimes you don’t get out of Polaroid or Texas Instruments or the “war” on drugs in time.  In a moment of sentimental madness you might considered picking up some Flying Tigers or “Head Start.”

You can’t fall in love with stocks; pick ‘em up, ride ‘em up, cash ‘em out, Rawhide! and on to the next one.  It isn’t safe to fall in love with government programs, either.  They don’t pay dividends, you can’t get them out of your portfolio, and they proliferate like mongrel puppies, howling their ugly little heads off, messing on the floor, consuming ever-increasing amounts of resources, and repeating the cycle endlessly.

Making money in the stock market and running governments sensibly both need to be done cooly, intelligently, with a level head, firm principles, and a committment to getting out of anything that doesn’t work.

Regards,
Linda Brady Traynham

April 27, 2009

Obama and Clinton Are Right! was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.