“Just War” and Debt Becomes Just War and Debt

A just war, in Murray Rothbard’s view, “exists when a people tries to ward off the threat of coercive domination by another people, or to overthrow an already-existing domination.”  Like all wars, a just war is laced with dangers beyond the inferno of the battles, especially if war funding relies to a significant degree on the printing press.  The American Revolution is a case in point. 

On June 22, 1775 the colonial delegates assembled in Philadelphia, under the inspiration of Gouverneur Morris [1], decided to print $2 million in “bills of credit” called Continentals.  The plan was to begin redeeming them in 1779, not with hard coin, but by levying taxes in the Continentals themselves, which would then be retired.  So appealing was the idea of printing money that by 1779 a total of $227 million had been issued.  The bills were everywhere, and everywhere despised.  In a letter to John Jay, president of the Continental Congress, George Washington complained that “a wagon load of money will scarcely purchase a wagon load of provisions."  By December 1779 the Continental had fallen to 42-1 against specie, and by spring of 1781 the currency was virtually worthless.

Individual states were also printing money to finance the war, and the British too adopted the printing press as a war strategy, printing Continentals and using Tories known as “shovers” to shove the imitations into circulation and thus accelerate the currency’s depreciation.

Inflationists in Congress accepted the depreciation as a clever way to impose the necessary taxes to pay for the war, though Gouverneur Morris thought it was too bad that Washington’s soldiers would suffer the most from this tactic.  As the value of the currency rapidly approached zero, the Continental army turned to direct theft (“impressment”) to acquire their provisions when merchants balked at trading goods for something worthless.

The Continental was allowed to die without redeeming it, but in 1779 Congress began emitting “loan certificates” that were also used as money.  A big chunk of this money hung around after the war as a peacetime public debt.  Robert Morris, the leader of the nationalist faction, pushed for its redemption at par in specie as a means of stuffing the pockets of associates who had purchased the certificates at highly depreciated prices.

Redemption was also a way of rallying support for taxing power in Congress.  Under the Articles of Confederation and perpetual Union, which was ratified on March 1, 1781, the United States of America was considered a “league of friendship” rather than a central government, with each state retaining “its sovereignty, freedom, and independence.”  Although the Articles recognized the obligation of Congress to pay all debts incurred before ratification, the Articles did not give Congress the authority to coerce such payments from the states.

To the nationalists, the lack of taxing power and other alleged deficiencies made the Confederation government “the laughing stock of the Atlantic world,” as historian Leonard L. Richards notes in his masterpiece, Shays’s Rebellion: The American Revolution’s Final Battle.  [2]  Throughout the 1780s, they tried fruitlessly to get enough of them together to replace the Articles.  In modern parlance, what they needed was a “New Pearl Harbor,” a major crisis that could be propagandized for political ends.  In 1786, Shays’s Rebellion provided the break they needed.

Shays’s Regulators

As the official story is told, indigent farmers in western Massachusetts were unable to pay their taxes, so the courts were sending them to jail and seizing their farms.  To avoid the penalties for defaulting on their debts, the story continues, Daniel Shays and a few other “wretched officers” from the Revolution led backcountry rabble to shut down the courts. 

Massachusetts Governor James Bowdoin called out the militia to put a stop to the uprising.  When most of them sided with the rebels, he turned to wealthy Bostonians to fund a temporary army.  Led by General Benjamin Lincoln, the army prevented the insurgents from seizing the federal arsenal at Springfield in late January 1787, then crushed the rebellion permanently a week later in a surprise attack at Petersham.  Though the top rebel leaders fled to other states, most of the others eventually returned to their farms.  Bowdoin agreed to pardon the rebels if they signed an oath of allegiance to the state, which the vast majority did.

As Richards argues compellingly, the standard story of Shays’s Rebellion as an uprising of debtor farmers does not wash.  Richards had discovered by accident that the Massachusetts archives had microfilmed the signatures of the 4,000 men who signed the state’s oath of allegiance.  Since many of the insurgents also included their occupations and hometowns, he was able to gather more information about them with the help of town archivists and historians.  For example:

•  At the time of the rebellion Daniel Shays owed money to at least 10 men.  Of those 10, three were rebel leaders.  For every rebel who went to court as a debtor, another went as a creditor.
  
•  Colrain, the most rebellious town, had 12 families involved in debt suits during 1785 and 1786.  Yet only four of these families provided men to the town’s total of 156 rebels.  Their leader, James White, who led the assault against the Springfield arsenal, was convicted of high treason.  He was also one of Colrain’s creditors.
  
•  In 1786 creditors in Connecticut took over 20 percent of the state’s taxpayers to court.  Yet there was no comparable revolt in Connecticut.

It wasn’t debt that triggered the rebellion, Richards concludes, it was the new state government and its attempt to enrich the few at the expense of the backcountry. 

Like other states, Massachusetts had issued notes to help fund the Revolutionary War.  Immediately upon issue they depreciated to about one-fourth par, and later declined to about one-fortieth of their face value.  Many soldiers were paid in these notes, then later unloaded them to speculators at high discounts.  Speculators bought roughly 80 percent of the notes, of which half were owned by just 35 men.  Every one of these 35 had served in the state house during the 1780s or had a close relative who did. 

The legislature voted to consolidate its war notes at face value and praised the speculators as “worthy patriots” who had come to the state’s aid in its time of need.  But these men did not buy the notes directly from the government; they bought them for a song from farmers and soldiers, who were now being taxed to redeem them at full value.  The speculators, most of whom had stayed home during the war, were seeking to benefit at the expense of veterans.

Poll and property taxes were to account for 90 percent of all taxes.  The poll tax placed a fine on every male 16 years or older.  Thus, a regressive tax ensured a wealth transfer from farm families with grown sons to the pockets of Boston speculators.

Nationalist versions of the insurgency spread throughout the states and upset many elites, including George Washington, who was enjoying a peaceful retirement at Mount Vernon.  According to Washington’s trusted friend and former artillery commander General Henry Knox, who was planning to build a four-story summer home on one of his Maine properties, the insurgents wanted to seize the property of the rich and redistribute it to the poor and desperate.  David Humphreys, one of Washington’s former aides living in New Haven, told him the uprising was due to a “‘licentious spirit among the people,’” whom he characterized as “levelers” determined “’to annihilate all debts public & private.’”

The “rebels,” for their part, saw themselves from the very beginning as Regulators whose purpose was “the suppressing of tyrannical government in the Massachusetts State.”  The Shays Regulators drew upon the success story of Vermont in the 1770s in which Bennington farmers, in a dispute with New York land speculators, had stopped courts from sitting and terrorized surveyors sent on behalf of the speculators.

On March 19, 1787 Knox wrote Washington hinting that he would be given the president’s chair at the Philadelphia convention in May.  Knox stressed that Washington would not be presiding over some middling conference of tinkerers amending a defective document but instead would be leading a prestigious body of men as they created a more “energetic and judicious system.”

Nationalists at the Constitutional Convention that spring wanted a stronger central government - an elective monarchy, in Alexander Hamilton’s view.  Though they didn’t get the results they pushed for, the nationalists and their intellectual heirs of today have shown that their lust for a more “energetic” government will not be thwarted by words on paper. 

Hamilton’s Funding Proposals

As Rothbard notes, there were two ways to fund the debt:  One way that was compatible with the decentralized nature of the union under the Articles was to apportion the Congressional debt among the states and let them raise taxes to pay their share.  The other way was crucial to “the cherished principles of national aggrandizement”:  Give Congress the power to tax so it can do the funding.  [3]  Article I, Section 8, Clause 1 secured this power.

In January 1790 the 34-year-old Hamilton, as Treasury Secretary, presented his plan to Congress for retiring the Revolutionary War debt.  The $54 million federal debt would be funded at par and the federal government would assume responsibility for the states’ $25 million war debts.  The plan called for converting federal debt into bonds that would mature after an assigned period of time, paying 4 percent interest on long term bonds and 6 percent interest on those of shorter duration.  The new government would pay the principal on the debt from a sinking fund established through the post office.  Revenue for the fund would come from an import tariff and an excise tax on what Hamilton labeled “pernicious luxuries” that included whiskey.  His plan was not to pay off the debt, but to recycle it.  When bonds came due he would have new bonds issued to replace them.  As long as interest payments on the debt could be paid, the government’s credit was assured.

Among those opposing his plan was Hamilton’s former Federalist Papers ally, James Madison, who argued that repaying the debt at par to current bearers was stiffing war veterans and farmers for the benefit of wealthy “stockjobbers.”  He favored a plan of discrimination, wherein the government would pay the original bearers the face value of the certificates and the current bearers the highest market value plus interest. 

Aside from the near impossibility of finding the original bearers, Hamilton opposed discrimination on the grounds that it amounted to a “breach of contract” if the government did not pay to the bearer on demand the full value of their certificates.  How else would the government “justify and preserve their confidence”?  The buyer of a depreciated security, Hamilton argued,

is not even chargeable with having taken an undue advantage. He paid what the commodity was worth in the market, and took the risks of reimbursement upon himself. He of course gave a fair equivalent, and ought to reap the benefit of his hazard; a hazard which was far from inconsiderable, and which, perhaps, turned on little less than a revolution in government. . . .

In funding wealthy speculators in this manner, Hamilton was well aware this would concentrate investment capital in relatively few hands and would encourage them to make further investments in the federal government.  This was a critical part of his agenda: to strengthen the union at the expense of the individual states.

Senator William Maclay, one of Hamilton’s most vocal critics, brought the public into the debate with a scathing article he wrote for a Philadelphia newspaper in February, 1790.   Assumption, he argued, was a means of reducing state governments to insignificance and of establishing a “pompous Court,” by which he meant an arrogant and powerful central government.  “The people will be meddling with serious matters unless you amuse them with trifles,” he said caustically.  A pompous Court in partnership with a pliant press would keep the people amused as it goes about its task of having the citizenry subsidize New York’s monied class.  The Treasury will grow in influence, and thus

shall the capital of the United States [New York] in a few years equal London or Paris in population, extent, expense and dissipation, while for the aggrandizement of one spot, and one set of men, the national debt shall tower aloft to hundreds of millions.

As the debate raged throughout the spring and early summer, Hamilton, sensing defeat, turned to Secretary of State Thomas Jefferson for help.  Jefferson invited Madison and Hamilton over for supper and together they cut a deal.  In exchange for the needed votes, Hamilton would agree to relocate the nation’s capital from New York to Philadelphia for 10 years, then finally to a place on the Potomac, where it would be next door to Virginia, more accessible to the South generally, and removed from Hamilton’s power base.  The arrangement was consummated when the Residence Act narrowly passed both houses in early July, and the Funding Bill became law on August 4 by a slim margin. 

Still, the issue did not die.  On December 16, a date immortalized by the Boston Tea Party in 1773, Virginia’s General Assembly issued a formal protest.  Unlike many heavily-indebted northern states, Virginia had already imposed taxes to redeem a large part of its debt and had expected the balance to be extinguished in the near future.  Hamilton’s plan of assumption would benefit the more profligate states while imposing heavy taxes on Virginians for which the Assembly had no way of providing relief.  Furthermore, since no clause of the Constitution gave Congress the authority to assume the debts of the states, and given that obedience to the law of land was held as a “hallowed maxim,” Virginia could not “acquiesce in a measure” that was clearly unconstitutional.  As the perpetuation of debt in England has threatened everything that relates to English liberty, the Assembly noted, the same can be expected in the United States if assumption is not repealed.

It wasn’t.

The eight Massachusetts men in the House had been badly split on many issues regarding the new government, but on assumption they were united, since the debt would be funded by means other than direct taxes.  According to Governor John Hancock, the consolidated debt of Massachusetts was $5,276,955, of which $5,055,451 ended up in Hamilton’s program.  Institutions claimed $347,097 of this amount, while the remaining part belonged to 1,480 individual citizens.  Included in this group were speculators living in or near Boston who would be awarded almost 80 percent of the monetary total.  [4]

State leaders in Massachusetts had tried to pay off the state’s war debts by 1790, and for this they had imposed an onerous tax scheme borne mostly by farmers in the west.  Hamilton’s plan removed this burden.  Since many of them were subsistence farmers, rarely buying anything from the outside world, the new taxes amounted to almost no tax at all.  The federal debt thus had little effect on their everyday lives. The taxes that drove them to shut down the courts in 1786 were gone.

Conclusion

Hamilton’s funding proposals were step one in a fiscal policy that later included a rudimentary central bank and a proposal to protect favored American industries from foreign competition.  By hijacking the legal system Hamilton did indeed manufacture a “revolution in government,” one that overturned the revolution of 1776.   Though ostensibly constrained by the new constitution, he reinterpreted key clauses in such a way that the government could do almost anything, as long as it was declared to be in “the public interest.”

Somehow, ordinary Americans found themselves to be the public whose interests required subordination to the decrees of the government.  The Whiskey Rebellion of 1794, in which Hamilton joined President Washington and 13,000 conscripts and officers from the creditor aristocracy of the eastern seaboard to crush penny-ante tax protestors in western Pennsylvania, dramatized this point.  So did the War to Prevent Southern Independence and every war or crisis since.  So did the Sixteenth Amendment, the Seventeenth Amendment, the Federal Reserve Act, the Current Tax Payment Act of 1943 (Withholding), the Patriot Act, the National Defense Authorization Act . . . I leave it to the reader to fill in the rest.  Today, with Hamilton’s “implied powers” interpretation of the Constitution deeply ingrained in public rhetoric, a major political figure like Nancy Pelosi can respond contemptuously to a question about ObamaCare’s constitutionality without fearing congressional censure.

As the U.S. national debt continues its ascent to the heavens with the blessings of leading economists, the massive tower of IOUs sways to and fro at the mercy of political currents.  Will Asians continue to buy the debt?  Will the Fed be pressured to monetize more of it?  Will the Fed say “Enough!” and let interest rates soar?  Will the government, with its dedication to endless war and cheap money, take over the task of obliterating the dollar so it can fulfill the grandiose dreams of the political class?

Or will people finally say “Enough!” and remove the government from monetary affairs altogether?

George F. Smith is the author of The Flight of the Barbarous Relic, a novel about a renegade Fed chairman, Eyes of Fire: Thomas Paine and the American Revolution, a script about Paine's impact on the early stages of the Revolution, and The Jolly Roger Dollar: An Introduction to Monetary Piracy.  Visit his website. Send him mail.


References:

1.  Conceived in Liberty, Volume IV, Murray Rothbard, Mises Institute, Auburn, AL, 1999, p. 379

2. Shays’s Rebellion: The American Revolution’s Final Battle, Leonard L. Richards, University of Pennsylvania Press, 2003, p. 25

3. Conceived in Liberty, pp. 394-395

4. Shays’s, p. 157

Who's the real winner?

The Washington Post ran an article that all but concedes the GOP nomination to Mitt following his big win in Nevada, his second consecutive victory. 

the former Massachusetts governor’s win here, coupled with his enormous Florida victory just days ago, proved Republicans have begun to coalesce around his candidacy in earnest. He swept nearly every voting group in Nevada including those that have been slow to come aboard, such as tea party activists and voters who describe themselves as extremely conservative.

But who is really winning here, and who is losing?

Those who are “extremely conservative” apparently find nothing objectionable to the existence of the IRS or the Federal Reserve System, or to the Department of Education that grinds out an increasingly groupthink, uncompetitive population of Americans.  But, you say, conservative Republicans have been trying to get rid of the DoED since Carter created it, except for the neoconservative Bush II who expanded it with No Child Left Behind (NCLB).  The governor has had glowing words for NCLB, which is not to say he will keep it.  His rhetoric of late has had a Tea Party flavor, so there’s no telling what he really believes.  Any man who receives the support of over 100 registered lobbyists is up for grabs.  Any candidate whose biggest supporters are the biggest banks will not suddenly turn Austrian when the next crisis hits.  Can you see Romney standing triumphantly over the dead carcass of the Fed, his biggest donors’ best friend?  Neither can I. 

But these are technicalities.  The extremely conservative conservatives know a global superpower needs staggering amounts of revenue, so there’s no need to disturb the flow of wealth from their paychecks and pockets to military contractors.  Many of them probably are military contractors.

The real issue is not whether Romney (or Gingrich or whoever, except Paul) calls for the abolition of the income tax or the Department of Education.  They could conceivably make a powerful speech calling for their elimination - during the campaign.  They will say whatever the voters’ ears are expecting because the campaign is for the voters.  They like to believe they’re in control.  For the voters, the post-election period is the morning after.

Barack Obama campaigned on “change” in 2008.  We got more stimulus, more debt, more war - in most respects, Bush III.  George W. Bush called for smaller government in his run for the presidency in 2000.  Once elected federal spending mushroomed with wars, subsidies, police state measures, and a massive new entitlement.  Ronald Reagan said government was the problem not the solution.  He gave us more of the problem.  In 1940 Franklin Roosevelt promised not to send our boys overseas to fight in the European war, all the while working covertly to get the country into war.  In some respects the Democratic Party platform of 1932 sounded almost laissez-faire.

The Democratic Party solemnly promises by appropriate action to put into effect the principles, policies, and reforms herein advocated, and to eradicate the policies, methods, and practices herein condemned. We advocate an immediate and drastic reduction of governmental expenditures by abolishing useless commissions and offices, consolidating departments and bureaus, and eliminating extravagance to accomplish a saving of not less than twenty-five per cent in the cost of the Federal Government. . . . {emphasis added]

Keep in mind that back then government was a midget compared to today.

We favor maintenance of the national credit by a federal budget annually balanced . . . .

We advocate a sound currency to be preserved at all hazards . . . .

You might say the New Deal was not in keeping with these “solemn promises.”

Then there was Woodrow Wilson.  He was re-elected in 1916 for keeping us out of the war, then by May the following year was instituting a draft to ship Americans to France to join the carnage.  Wilson knew what his overseas crusade would turn out to be.  During the night of April 2, only hours before asking Congress for a declaration of war, Wilson spoke privately to Frank Cobb, editor of the New York World, a Progressive newspaper with strong ties to the Democratic Party.  Lamenting a decision he regarded as necessary, he told Cobb that once war was declared, people will

forget there ever was such a thing as tolerance.  To fight you must be brutal and ruthless, and the spirit of ruthless brutality will enter into the very fibre of our national life, infecting Congress, the courts, the policeman on the beat, the man in the street.

According to Cobb, Wilson also said “the Constitution would not survive” the war, and that “free speech and the right of assembly would go.”  He made sure that happened.  Nor did he let these considerations prevent him from addressing Congress.

Like today’s war hawks, he didn’t let financial considerations bother him, either.  In 1913, state worship had given birth to the twin indispensables of tyranny, the income tax and the federal reserve system.  As Ralph Raico tells us,

Taxes for the lowest bracket tripled, from 2 to 6 percent, while for the highest bracket they went from a maximum of 13 percent to 77 percent. In 1916, less than half a million tax returns had been filed; in 1917, the number was nearly three and half million, a figure which doubled by 1920. . . .

Through the recently-established Federal Reserve System, the government created new money to finance its stunning deficits, which by 1918 reached a billion dollars a month⎯more than the total annual federal budget before the war.

The consequences of Wilson’s decision?  Sheldon Richman: “Communism in Russia (and everywhere else it later reverberated), Nazism in Germany, the Great Depression, the New Deal, and World War II (not to mention the Cold War and the growth of the American leviathan).”

War and the growth of the state - they’re inseparable.

This is why presidential candidates, with one conspicuous exception, can be counted on not to remove or lessen the power of any of the state’s vital organs, such as the income tax, the central bank, or the Department of Education.  They might be replaced or altered but not at the expense of state power or revenue. 

This is also why Ron Paul wants to eviscerate the state.  A government unrestrained by law is an individual’s worst enemy.  For Paul it’s not a "policy position," it’s a conviction.  He’s been fighting to remove legal coercion from our lives since his first day in Congress, in 1976.  Got room in your hip pocket?  He wants to downsize it until it fits - government, that is.  A vote for Ron Paul, then, is a vote for honest, responsible, peace-loving people.  If that means you, then a vote for Paul is a vote for yourself.  A vote for any of the others is a vote for lobbyists, bankers, and warmongers - people who most definitely don’t have your welfare in mind.

In this light, who really wins when Mitt, Newt, or Rick is declared victorious?

The Heist Known as Fed Accommodation

Fed Chairmen often speak of "accommodation" as if it's the magic needed to solve economic problems.  But what happens when the Fed “accommodates” us by increasing the stock of money?

First, it reduces the value of the dollar.  More dollars means each one buys less, putting upward pressure on prices.  Technology and improvements in production tend to push prices downward, but because of inflation fewer people can afford admission to the market’s bounty.

As a rough idea of how far the dollar has plummeted, $5,000 in 1913 had greater buying power than $110,000 in 2011. [BLS inflation calculator]

Second, a depreciating dollar discourages savings.  Why put money away if it’s going to lose value?  Instead, millions of investment neophytes put their funds in the stock market in an attempt to protect themselves against Fed printers.  Has this been a successful hedge?

During the biggest bull market in history – 1984 to 2001 – the S&P rose 14.5 percent a year.  But frequent trading by fund managers and high fees reduced the average rate of return to 4.2 percent annually.  According to Vanguard group founder John Bogle, if you include the results of 2002, the average return from equities was under 3 percent per year – less than the inflation rate. [Bonner and Wiggin, p. 245]

Third,  new injections of money spur a tinsel prosperity, and the Fed keeps injecting new money to feed the boom.  With so much borrowing and spending, prices may rise even faster than the rate of currency inflation.

As the public broods over higher prices, a semantic shift takes place.  Inflation comes to mean not an increase in the money supply, but the rise in prices itself. [Sennholz, p. 69]  Thus, businesses that charge higher prices become the villains, while government officials  that threaten price controls are the avenging angels.  Most people have no idea what the Fed does, so government can scapegoat business and appear to be defenders of the public weal.  Nor do most people understand that price ceilings create shortages, by encouraging consumption and retarding production.  Shortages, in turn, bring on government-imposed quotas, which foster corruption, black markets, and violent crime.

Fourth, as the influx of dollars drives prices higher some industries find themselves at a disadvantage with foreign competitors, tempting them to lobby Washington for protection from imports.  Protective tariffs and quotas, of course, push prices up further, while sometimes sparking trade wars as other countries retaliate on American exports.  And trade wars can lead to shooting wars.

On June 17, 1930, with the economy fighting the recession brought on by Fed monetary policies, President Hoover signed the Smoot-Hawley Tariff Act, raising tariffs on over 20,000 imported goods to unprecedented levels.  Other countries immediately retaliated, markets shut down, and economic conditions worsened worldwide.

Fifth, inflation raises nominal incomes, pushing people into higher tax brackets, which increases government tax revenue.  As people’s wealth goes out the window in depreciating dollars, taxes consume more of what remains.

Sixth, inflation shifts wealth from people who can’t or don’t know how to defend themselves from monetary destruction to those who can.  As a simple example, a person living on a fixed income may find his buying power so depleted he sells a family heirloom to pay for an unanticipated expense.  Or a bank that was part of the lending spree that helped drive prices skyward may foreclose on the homes of some of its borrowers, whose incomes were ravaged by monetary debauchery.

Seventh, the Fed’s “accommodative” measures keep people working much later in their careers because they cannot afford to live off their deteriorating pensions.  Dollar depreciation is a huge reason why both husband and wife work in many families.  

Eighth, because government often gets the new money first, it can fund controversial measures such as war and bailouts without drawing taxpayer ire.  Government simply puts the funding on its charge card, prompting the alchemy of Fed debt monetization.  We get the bill, of course, but this way it’s spread over everything else we buy, so we never see it itemized. 

Ninth, because inflation has an uneven affect on prices, raising some faster or sooner than others, people have a hard time distinguishing illusion from reality.  As cheap credit abounds, business people, investors, and cube dwellers hear the siren call of can’t-miss profit opportunities.  Fortunes are made then lost, and companies that lose money find it harder to keep employees.

Tenth, government may pose as the savior of a group of voters they’ve impoverished, such as the elderly, by subsidizing their medical expenses.  New entitlements create the need for more revenue, which fuels more inflation, pushing the dollar closer to a complete collapse.

Eleventh, as Ludwig von Mises observed, “under inflationary conditions, people acquire the habit of looking upon the government as an institution with limitless means at its disposal: the state, the government, can do anything.” [Mises, p. 66]  Through deficit spending the state will devour limited resources trying to maintain this illusion.

If gold is the barbarous relic its many detractors claim it is, we might expect the Fed’s fiat currency to be a better deal.   But even former Fed Chairman Greenspan admits that it isn’t, telling a New York audience in 2002 that prices soared in the decades following the gold heist of 1933.

Lord Keynes, the 20th century’s guru of deficit spending, never spelled out how deficits should be financed, admitting only that increased taxation was not the answer. [Hazlitt, 1982]  Perhaps he had pangs of conscience about calling for inflation outright, since he knew it would destroy society in a manner that “not one man in a million“ could diagnose. [Keynes, 1919, Ch. 6]

Political issues dominate the news, but how little we hear about the policies nurturing those issues, one of which is government’s power to confiscate wealth with the Fed’s invisible hand.

The foregoing is an excerpt from my book, The Jolly Roger Dollar: An Introduction to Monetary Piracy.

Lunch with Ron Paul

Ron Paul published Gold, Peace, and Prosperity in 1981.  What makes his pamphlet especially attractive today is the speed with which it can be consumed.  A reader could get through his robust prose during an hour lunch break.

But why would a reader want to do that?  Why not read one of Paul’s more recent books instead, even if it couldn’t be read in one sitting?

The answer is, the earlier work provides an excellent foundation for his later writings.  It offers a clear, non-technical summary of his views on money and the economy.

Ron Paul has made his mark as an advocate of sound money.  As such, he is totally opposed to fiat money and its imposition through the government-supported cartel, the Federal Reserve.  It is largely through a hijacked monetary system that government has become a threat to civilization.  In this pamphlet, Paul puts it all in perspective with everyday language, as if he’s talking to you - over lunch.

Sound money, he says, is money that is “fully redeemable.”  The paper currency people use in transactions is only a substitute for money proper, which traditionally has been gold and silver coin.  The adverb “fully” means that every note issued is a claim ticket to a specified weight of gold stored in a bank warehouse.

Why is this arrangement sound?  Because it makes the value of money depend on the profitability of mining gold, rather than the “politics of the hour,” as Mises put it.  A money that’s sound means the money supply remains relatively stable.

Unsound money is money that bankers and government can inflate virtually without limit.  Unsound money equates “monetary policy” with varying degrees of inflation, as determined by a panel of politically-influenced bureaucrats.      

Since inflation is indistinguishable in its effects from counterfeiting, the bureaucrats are simply counterfeiters with grandiose titles; their sacred monetary policy is nothing more than “legalized counterfeiting.”  Inflation, Paul explains, citing Murray Rothbard, is “new money issued by the banking system, under the aegis of government.”

Blaming Arabs, businessmen, labor unions, or consumers for rising prices doesn't drown out the steady hum of printing presses running 24-hours-a-day, ballooning the money supply, and thereby debasing every dollar previously printed.

Referencing Hans Sennholz, he says:

An increase in the money supply confers no social benefits whatsoever.  It merely redistributes income and wealth, disrupts and misguides economic production, and as such constitutes a powerful weapon in a conflict society.

If inflation is so bad, why does it exist?  Because it benefits “whoever gets the new money first” - government, bankers, and favored businesses. 

A good example is the credit the government created to bail-out the Chrysler Corporation, largely to finance a labor contract that pays the employees twice the average industrial wage. But unions, like businesses, can only persuade government to inflate if the inflation mechanism is in place. A redeemable currency would make this impossible.

Who pays for inflation?  The poor and middle classes, and those on fixed incomes.  By the time they get the new money - if they get it at all - prices have gone up (or they’ve failed to drop, as they would have without inflation).  These groups are cheated by inflation, and eventually are either wiped out through currency depreciation or made dependent on government favors.  This pattern has been known for ages, as Paul shows with numerous historical references.

Expansion of the money supply through "spurious paper currency," noted [Andrew] Jackson, "is always attended by a loss to the laboring classes."

"Of all the contrivances for cheating the laboring classes of mankind," added Daniel Webster, "none has been found more effectual than that which deludes them with paper money."

But if prices rise from an increase in the money supply, wouldn’t the price of labor go up, too? Quoting William Gouge, President Jackson’s Treasury advisor in 1833, Paul writes:

Wages appear to be among the last things that are raised. . . . The working man finds all the articles he uses in his family rising in price, while the money rate of his own wages remains the same.

When Lincoln issued greenbacks to pay for the Civil War, Paul notes, “prices rose 183%, while wages went up only 54%. During the World War I inflation, prices rose 135%, and wages increased only 88%. The same is true today.”

In answer to the claim that the Fed was created to prevent inflation and the periodic panics that erupted in the 19th century, Paul points out that inflation was written into the central bank’s founding charter, in the requirement to provide a more “elastic” currency.  With the Federal Reserve Act of 1913,

a 40% gold cover for Federal Reserve notes and 35% for Federal Reserve deposits were required. The fact that it was not 100% showed that the central bankers planned more inflation. . . .

The central bank never set out to protect the integrity of our money. In fact, the Fed set out to destroy it by institutionalizing inflation. The gold coin standard was doomed and today's inflation made inevitable the day the Federal Reserve was created.

A gold coin standard, regulated by the market, acts as a restraint on inflation because it is the money, not the paper issued as a substitute.  This is why governments hate gold - they can’t produce it in unlimited quantities.  Using a non-redeemable paper currency avoids the risks of raising taxes while allowing politicians to pay for their wars and bureaucracies by running the printing press behind the curtain.

Since a gold standard enables the average person to restrain the government's attempts to inflate, control the economy, run up deficits, and fight senseless wars, the central planners had to eliminate this fundamental American freedom to own gold. This was accomplished with the Gold Reserve Act of 1934, which outlawed private ownership of gold, prohibited the use of "gold clause" contracts, and abolished the gold coin standard.

Thanks to Paul and others who support sound money, the government in 1974

reversed the unconstitutional 1934 law that barred private ownership of gold. In 1977, gold clause contracts were legalized.

One of my favorite passages in the book is Paul’s succinct comment on the Great Depression.  Ben Bernanke wrote a collection of technical essays on the subject and has earned the reputation among his Keynesian colleagues as an expert on the Depression, never mind that he got it wrong.  In 2002 he famously apologized to Milton Friedman and Anna Schwartz for the Fed’s mismanagement of the money supply after the Crash, which he concluded could have been avoided if central bankers had provided “low and stable inflation” as a monetary background.  (For an in-depth discussion of this episode, see Joseph Salerno’s Money, Sound and Unsound, Chapter 16, “Money and Gold in the 1920s and 1930s: An Austrian View”.)  Applying the Austrian theory of the trade cycle, Ron Paul summarizes the Depression in 25 words:

Federal Reserve inflation during the 1920s, combined with economic interventionism by both Republican and Democratic administrations, caused and perpetuated the Great Depression of the 1930s.

One could hardly state the truth more concisely.

Many commentators are pointing out that the U.S. is declining into a police state, if it isn’t there already, but what some - especially the monetarists - overlook is the connection between honest money and freedom.  For Ron Paul, freedom is “the ultimate justification for honest money.”  And here he presents one of the most familiar quotes in libertarian literature, a non-Keynesian comment written by Keynes himself:

There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose.

Ron Paul was one of those one-in-a-million many years ago.  Sit down with him some lunch hour and see why.
 

Finding Hope in a World of Perpetual War

Because I'm free
Nothing's worrying me.
from
“Raindrops Keep Falling on My Head” by Hal David and Burt Bacharach

It takes time to steal a wise man’s freedom.  He can’t be talked out of it.  But he can be made to give it up for something higher.  What’s higher?  Why, his country, of course.  What is his country?  He doesn’t know exactly.  Whatever it means it can’t omit the government.  The government, he learns in government schools, is a vital part of the better things in life.  

It started long ago, well before even the oldest among us were alive.  Ruthless exploiters had taken over the economy.  What was needed was regulation, we were told.  Not market regulation - not the profit and loss kind, which only fed the cutthroats of the world - but government regulation, the kind that uses government ways.  Free markets, we were assured, meant scoundrels were free to chew up innocents.  With government regulations and the institutions they created we would have nirvana.  The bad boys would be put in their place.  The little guys would be the economy’s poster boys. 

But there was more to it than this.  The regulations would come within the framework of a new ideology.  The bad boys wouldn’t want to be bad anymore.  They would shed their shell of arrogant individualism for the enlightened beauty of selfless service.  They would repudiate their exploitative ways.  They would seek to cooperate.  With whom?  With the regulatory agencies.  The big tycoons and their friends in government would partner to serve the little people.

Partners in war

What better example of this new partnership than the combined efforts of government and business leaders in getting the country into the 20th century’s two world wars.  The little people were served by the honor of being conscripted into the military and sent overseas to kill as many of our enemies as possible - the enemies on the battlefields and on the seas, who were also conscripted and ordered to kill by their governments.  And when the enemy finally surrendered most of the little guys came home.  Many died, but Americans are told they perished for a value higher than themselves, their country, whatever that is exactly.   

As for the big tycoons, they joined with important officials and ran the war economy by fiat - cheap credit, higher taxes, pro-war cheerleading, and ruthless suppression of anti-war sentiment.  As fate would have it, some of the businesses made record high profits.  Freedom was outlawed to a great extent but only because of the wars.  Freedom cannot be tolerated during war, especially wars that could easily have been avoided.  But when the wars ended the little people got most of their freedom back.

As long as people have freedom, they can push back when pushed and know that the law will stand by them.  Except, as noted, during war.  They can start a business, pursue a career, move wherever they want, buy and sell, get married, raise a family, travel - all without getting permission from the government.  They can do anything except violate another person’s freedom.  With the exception being war.

And that’s precisely the problem.

Perpetual war for perpetual control

War in the 21st century has achieved a unique status.  War now is war without end.   Bringing the troops home from Iraq did not end the war on terror.  The war on terror is a war on a concept.  You cannot negotiate for peace with a concept.  If you believe terror is your enemy, your enemies could be anywhere - the North Pole, a soccer game in Africa, or Dr. Seuss Day at your local elementary school.  What is terror?  Whatever the U.S. government declares it to be.  Disagree and you could end up in a FEMA camp.  Or dead.  Who is to be the judge of whether one is committing an act of terror?  The commander-in-chief.  We are at war.  The commander-in-chief runs the show in wartime.

There are three possible ways the war on terror can be stopped.  Perhaps the most obvious - and too nuts to consider seriously - is for U.S. agents to kill so many people it would shake the pillars on which government rests.  Since government by nature is a parasite, destroying its host - humanity’s net producers - would kill the parasite and end the war.  There would be no one to produce and thus no one to tax, either directly or through monetary debauchery.  Another way is by decree - a president such as Ron Paul says, “Game over.”  An announcement such as that could be the equivalent of JFK announcing his intention to bring all U.S. troops home from Vietnam by the end of 1965 - with the same results.  I trust Dr. Paul is fully aware of the risks and would manage them accordingly.  Finally, the third way is through bankruptcy.  A government that can’t pay its bills cannot prosecute a war.

Led by the Federal Reserve, the western world’s central banks are bringing down their governments by doing what governments so desperately want: loaning them more money.  Money in this sense is the thin-air variety, the kind that confiscates wealth.  Paper money will keep the charade going until the currency becomes so worthless no one uses it, not even the governments’ enforcers.  With the currency destroyed the wars will stop, at least temporarily.  At that point it’s anyone’s guess as to what will happen.  The Keynesians could be in ascendance and force a new paper regime on us, or we could at last achieve monetary freedom and bring government under our control. 

Ron Paul’s election would amount to a second American Revolution.  Even with powerful forces opposing him he could, in time and with the aid of an uncompromising constituency, kill the Fed, kill the income tax, stop the wars, bring the troops home, and put government back in its cage.  If this sounds impossible consider that it was once normal - a benevolent, prosperous normal.  There would be pain but it would be the pain of a doctor administering a needed medicine to treat a deadly disease.  The goal would be the restoration of health, rather than the perpetuation of government destruction.   

Conclusion

Our greatest hope lies in the election of Ron Paul.  If the establishment somehow keeps him out of the White House, we would have to wait for government to default on its debts and fight for freedom under those conditions.

My latest book, The Jolly Roger Dollar: An Introduction to Monetary Piracy, is available in Kindle format on Amazon.

Morgan Monetary Piracy

When a major fractional-reserve breakdown occurred in 1907, Thomas Woodrow Wilson, then president of Princeton, endeared himself to the banking movement by declaring that "all this trouble could be averted if we appointed a committee of six or seven public-spirited men like J. P. Morgan to handle the affairs of our country." [Griffin, p. 448] Colonel Edward Mandell House, a close Morgan associate who served as shadow president when Wilson was elected to the White House, became the "unseen guardian angel of the [banking] bill" that emerged in 1913. [Griffin, p. 459]

Originally drafted at a secret meeting of banking elites at Morgan's hunting lodge on Jekyll Island, Georgia in November, 1910, the Glass-Owen Bill, as it was finally called, overwhelmingly passed the House and Senate on December 22, 1913 and was signed into law by Wilson the following day. [Griffin, p. 468]

The Fed began operations in November, 1914, with Morgan men occupying key positions. The new law gave the bankers what they wanted: a monopoly of the note issue. Commercial banks could only issue demand deposits redeemable in Fed notes or nominally in gold. National banks were compelled to join the System but had the legal option of becoming state banks, which were not required to join though many state banks chose to do so in 1917 when federal regulations were relaxed. [Rothbard. p. 112]

Critically, gold coin and bullion were moved further away from the public when member banks shipped their gold to the Fed in exchange for reserves. [Rothbard, p. 119]

The inflationary potential of the system is revealed by its structure: The Fed inflated by pyramiding on its gold, member banks by pyramiding on its reserves at the Fed, and nonmembers by pyramiding on its deposits at member banks. Furthermore, after a few years the Fed began withdrawing fully-backed U.S. Treasury gold certificates from circulation and substituting Federal Reserve Notes instead. With Fed notes requiring only 40 percent backing of gold certificates, more gold was available on which to pyramid reserves.

Also, with the advent of the Fed, reserve requirements for demand deposits were cut approximately in half, moving from a 21.1 percent average under the National Banking System to 11.6 percent, then lower still to 9.8 percent in June, 1917, after the U.S. had joined the war. Reserve requirements for time deposits dropped from the same 21.1 percent average to 5 percent, then 3 percent in 1917. Commercial banks developed a policy of shifting borrowers into time deposits to inflate even further. [Rothbard, pp. 238-239]

Thus, the country now had a government-privileged central bank called the Federal Reserve. By hoarding gold as its pyramidal base, the Fed was weaning the public from the use of gold coins, which would make them easier to confiscate later on. Through the Fed, member banks would be inflating at a uniform rate to avoid trouble with redemption demands.

Did this new system bring the big bankers in line, as it was supposed to? Did the Federal Reserve Act provide "a circulating medium absolutely safe," as the Report of the Comptroller of the Currency of 1914 stated?

Did the people running the banking cartel, almost all of whom were Morgan men, create a better world for most Americans?

Drawing on data from the National Bureau of Economic Research, [Ron] Paul shows that at least 18 "mathematically impossible" recessions have occurred since the Fed's creation.

The "Great" War

The ones who profited from World War I had little in common with the men who fought it. The fighting was left mostly to young conscripts, many millions of whom were killed or wounded. The ones who profited knew their way around Washington.

If monetary control had resided with the market instead of government, the war would not have been fought. Or if it had started, it would've ended much sooner. Sound money had to die before men could die in such large numbers.

When war got underway in August, 1914 the European belligerents immediately stopped redeeming their currencies in gold and started issuing debt. Needing a lucrative market for their bonds, England and France selected the House of Morgan in the U.S. to act as their sales agent. The money acquired from bond sales reverted back to Morgan to purchase war materials, rewarding him with commissions on both the sales and the acquisitions. Furthermore, many of the companies with which Morgan did business were part of the vast Morgan domain. The pacifist Morgan, who said, "Nobody could hate war more than I do," was raking in huge profits keeping the Allied war machines cranking out death and destruction overseas.

As G. Edward Griffin writes, referencing Ron Chernow's work on the House of Morgan,

Morgan offices at 23 Wall Street were mobbed by brokers and manufacturers seeking to cut a deal. The bank had to post guards at every door and at the partners' homes as well. Each month, Morgan presided over purchases which were equal to the gross national product of the entire world just one generation before. [Griffin, p. 236]

"The United States became the arsenal of the Entente [Ralph Raico writes]. Bound now by financial as well as sentimental ties to England, much of American big business worked in one way or another for the Allied cause. . . The Wall Street Journal and other organs of the business elite were noisily pro-British at every turn . . . ."

For Wall Street, peace was not an option. With the possibility of Allied bonds going into default, investors would incur a loss amounting to $1.5 billion. Commissions would be lost as well as the profits from selling war materials. The Treasury could make direct grants to the Allies but only if the U.S. abandoned its "neutrality" and entered the war. [Griffin, p. 239] Following Wilson's address to Congress, it did so officially on April 6, 1917.

The Morgan cash flow was thus saved. The U.S. extended the Allies credits – which reverted back to Morgan to pay off loans – income taxes surged, especially on the wealthy, and the Fed inflated. Between 1915 and 1920 the money supply and prices roughly doubled. Federal deficits were running a billion dollars a month by 1918, exceeding the annual federal budget before the war. . . .

Trusting government instead of the market

On March 12, 1933 President Roosevelt delivered his first fireside chat and told the American people the new dollar, which they could no longer redeem for gold coin, was money they could trust. "This currency is not fiat currency," he insisted. "It is issued only on adequate security – and every good bank has an abundance of such security."

He told his audience their confidence in the "readjustment of our financial system" was the most important element in its success – even, he said, "more important than gold." "Have faith," he pleaded. Do "not be stampeded by rumors or guesses."

On April 5, 1933 he issued Executive Order 6102, in which he told Americans that a month hence they would be prosecuted as felons if they still had gold coins in their possession. . . .

Alan Greenspan noted that in the two decades following the abandonment of the gold standard in 1933,

the consumer price index in the United States nearly doubled. And, in the four decades after that, prices quintupled. Monetary policy, unleashed from the constraint of domestic gold convertibility, had allowed a persistent overissuance of money. [Dec. 19, 2002]

In other words, with the dollar no longer defined as a weight of gold or other metal, the Fed's "monetary policy" depreciated its purchasing power by 91 percent in 60 years, from 1933-1993.

 As recently as a decade ago, central bankers, having witnessed more than a half-century of chronic inflation, appeared to confirm that a fiat currency was inherently subject to excess.

Central bankers merely "witnessed" the "half-century of chronic inflation" that followed their "monetary policy." 

Sixty years ago Garet Garrett wrote:

There is a long history of monetary experience. It tells us that government is at heart a counterfeiter and therefore cannot be trusted to control money, and that this is true of both autocratic and popular government. The record has been cumulative since the invention of money. Nevertheless it is not believed. [my emphasis]

It's as if "monetary delusions are, by some strange law of folly, recurring and incurable," he says. When sound money was in use its supply was limited - by nature and economic law, not by government planners. For that reason the state abolished it and stuck us with a money they can create at will. The state's money removes the idea of limited means, and since it's controlled by the state, it removes the idea of limiting the state. Given the federal influence on education, media, and just about everything, should we be surprised no one is on center stage calling the government a counterfeiter?

If there is to be a ruling elite, let them rise to their positions naturally, as entrepreneurs on a free market. Only in such an environment will those on top be on permanent probation, as it were, forever subject to the market's approval, because the customers who put them there always have the option of removing them when they fail to deliver.

The preceding, including links, is extracted from my new Kindle book, The Jolly Roger Dollar: An introduction to monetary piracy.  Download a free sample.

This too will be a brutal passage

"Is everything gonna be all right"?

This is the question Ron Holland raises in a recent article, and of course the only answer is, no one really knows.  "My advice is to legally diversify much of your wealth outside your home country, currency and the political leeches running everything and then live your life."  What else can we do?  We can pay close attention to the big banks and the governments they fund. 

1.  "As a contrarian I believe if the PIIGS return to their national currencies, this could actually benefit both them and those northern European nations remaining in the euro. While a win/win situation for individual nations this would be catastrophic for the banking elites and they seldom lose and why I believe the banks and EU politicians will do their best to keep every nation in the EU."

2.  "If you want to know what will happen in the US, just watch the mega-bank bailouts in Europe and the forced austerity measures on the already bankrupt PIIGS and their citizens, this is our future. Forget what the politicians promise, the financial experts say or the establishment news propaganda as the tide of wealth confiscation will also sweep the United States. The Federal Reserve and central bank cartels have created too much fiat money and the politicians have borrowed too much sovereign debt to buy votes and they will steal your wealth to prop up the governments, banking elites and political establish."

3.  The Super Committee, as expected, has turned out to be a Super Farce.  "Basically nothing will happen in reducing the budget and our debt will be continually downgraded."

4.  Could a Middle East war jack oil prices up to $200 a barrel?  If Israel gets its way, there will be war against Iran.  Oil prices could soar.  A revolution in Egypt could cause further havoc in the Middle East.

5.  Governments will crack down hard on dissenters, as witnessed in Egypt and the United States. Police are no longer "peace officers."  They are fast becoming militarized - even in the schools.  Law and order will be reduced to obey or else. 

6.  "If the firewall around the sovereign debt of Italy fails then the entire continent will likely be thrown into a prolonged recession and debt crisis as rising interest rates and falling bond prices jump the Atlantic to the final western redoubt of stable government bonds, the United States. This is what everyone fears most, no place of safety in the West."

7.  Was the MF Global Collapse "a deliberate attack against those making money speculating against the dollar and favoring gold?"  As Lawrence Lepard wrote recently,

Personally, I have $90,000 at MF Global and I would like to have my honestly earned money returned. Unfortunately, the odds of that happening any time soon seem slim. In part because when MF Global entered bankruptcy the judge appointed a Trustee whose law firm has done substantial work for JP Morgan, a deeply interested party. We will probably never find out what happened here. . . . 

I, for one, do not accept that Jon Corzine is stupid enough to lever up MF Global 40:1 and use the proceeds and customer money to bet on European sovereign debt. This was a hit, pure and simple. That is why there is no resolution to the problem.

And why a "hit"?  Simple: To punish commodities speculators for betting against government debt and fiat money.

So, how in the world can we wake up feeling optimistic about the future?  We can't.  That's asking too much.  The government parasite is too big and powerful.  And the government is imploding, financially.

Holland: "My answer is to quit worrying, take sound preparations and then get on with your life. Every generation and nation have had their trials and tribulations, success and failures and although today looks eerily like the 1930’s, this too will pass."

True.  But it will be a brutal passage for many.