Thursday, December 29, 2011

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.

Tuesday, December 27, 2011

Finding Hope in a World of Perpetual War

Because I'm free
Nothing's worrying me.
“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.   


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.

Thursday, December 8, 2011

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 piracyDownload a free sample.