Preface to "The Jolly Roger Dollar"

The following is the preface to my forthcoming book, The Jolly Roger Dollar: An Introduction to Monetary Piracy, which will soon be available on Amazon.

Money and banking should be permanently divorced from the State.

Mankind should be divorced from the state but that’s going well beyond the scope of this little book.  For now, at least, our goal should be to kill central banking wherever it exists and open up the market to alternative moneys - alternatives to the fiat paper issued by central banks. Market participants should be free to choose what they wish to use for money without government interference.  Legal tender laws, since they constitute invasions of private property, should be repealed.  For the same reason, banking should lose the legal privileges that protect the practice of fractional reserve lending.  What is needed is freedom - freedom to conduct our monetary and banking affairs regulated only by private property rights and economic law.

The cover of this book was created to remind readers that the monetary and banking system we have is fundamentally an act of theft.  It is monetary piracy because the currencies we swap for real goods and property titles are hijacked versions of the real thing.  What constitutes the real thing, who did the hijacking, when, for what purpose, and the results it has brought are discussed in the remainder of this work.

The money we now carry in our pockets or checking accounts serves the purpose of providing a medium of exchange.  If it didn’t banks would be in the wallpaper business.  But it also serves to transfer wealth from those unconnected to the money creation process to those closely associated with it.  This is why monetary policy is more accurately thought of as monetary piracy.

In 2010, Federal Reserve officials celebrated the centennial founding of the Fed at Jekyll Island, Georgia.  The institution that was finally passed into law in 1913 was supposed to make financial crises and bad money virtual impossibilities.  It has instead made crises and bad money permanent conditions.  If freedom is not allowed to work its curative powers, the Fed and its currency-on-demand machine will continue to harm us.

Liberty is always on the defensive, having to bargain and plead with a state-backed ruling elite.  We should not have to justify human freedom.  The free market, centered as it is around consumer preferences, open competition, and private property rights, will keep us honest, to borrow an expression from my father’s era.  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, 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.

For the most part this book is based on articles I wrote over the past decade.  I have redacted some of the material to clarify certain points or update sources.  If the same thoughts reappear now and again, I offer this explanation: the subject of money and banking is so corrupted with myth, misinformation, and half-truths that repetition is a necessary corrective.  It strikes me as incontestable that, as Goethe is said to have observed,

Truth has to be repeated constantly, because Error also is being preached all the time, and not just by a few, but by the multitude.

George Ford Smith
Lawrenceville, GA USA
November, 2011

The Utah Monetary Declaration

Earlier this year Utah passed a legal tender act authorizing the use of federally-minted gold and silver coins as money within the state.  Seeking to expand this idea to other states, sound money advocates from across the country met at the University of Utah campus in Salt Lake City on Monday, September 26, 2011 and drafted a declaration they are urging people to circulate as far and wide as possible, but especially to their state representatives.  

Special thanks to Ron Hera for making this issue public.

Here is the Utah Monetary Declaration:


Utah Monetary Declaration

WHEREAS, money, as a medium of exchange, a store of value, and a unit of measure promotes economic activity, growth and productivity by facilitating specialization and trade, the accumulation of wealth and its long-term investment, as well as accountability in setting prices, tracking progress, and settling accounts;
WHEREAS, natural money – precious metal coin – by virtue of its inherent qualities of recognizability, measurability, uniformity, divisibility, durability, portability and scarcity has reliably retained its purchasing power, notwithstanding periodic fluctuations, over the centuries and millennia of human history, serving as an effective medium of exchange and store of value often without any governmental declaration to require, legitimize or perpetuate its adoption and operation as such;
WHEREAS, sound money, by retaining stable purchasing power over time, best serves societal needs by substantially reducing the uncertainty of inflation risk for creditors and deflation risk for debtors as well as encouraging saving and investment among the general populace and benefiting the economic zone in which it circulates by stimulating the economy and by attracting foreign capital and commerce to the region;

WHEREAS, history attests that monopolistic monetary systems frequently engender currency debasement, resulting in serious consequences such as lost purchasing power, inequitable wealth redistributions, misallocation of productive resources, and chronic unemployment, and that, as the cornerstone of a free market and society, the right to choose, whether between suppliers of goods and services, political parties and candidates, or between alternative media of exchange, effectively promotes the general welfare;

WHEREAS, for the equal protection of all people, rich and poor, the open circulation of complementary and competing currencies should be fostered and promoted by every sovereign state, including those of The United States of America pursuant to their monetary powers (expressly reserved in article 1, § 10 and in the 10th amendment of the United States Constitution) to monetize gold and silver coin as an alternative, voluntary medium of exchange, and as an effective check and balance against debasement of the national currency by the national government which is constitutionally precluded from demonetizing state legal tender, through disparate tax treatment, discriminatory regulation, the threat of suppression and seizure, or otherwise;

NOW THEREFORE, we the undersigned hereby declare and affirm that:
1.     As an essential element of true liberty and of the pursuit of happiness in a free society, all people enjoy the inherent and unalienable right to lawfully acquire, hold and use as a medium of exchange whatever form or forms of money they may prefer, including especially gold and silver coin.
2.     All free and sovereign states bear the moral, political and legal obligation not only to refrain from debasing their own currencies (except under the most exigent circumstances) and from erecting barriers to the unfettered circulation of monies issued under the authority of their sovereign trading partners, but also to affirmatively defend and protect against fraud, counterfeiting, uttering, passing off, embezzlement, theft or neglect by requiring full transparency and accountability of all state chartered financial institutions.
3.     No tax liability nor any regulatory scheme promoting one form of money over another should apply to: (a) the holding of any form of money, in a financial institution or otherwise; (b) the exchange of one form of money for any other; or (c) the actual or imputed increase in the purchasing power of one form of money as compared to another.
4.     Except in the case of governmentally assessed taxes, fees, duties, imposts, excises, dues, fines or penalties, the authority of government should never be used to compel payment of any obligation, contract or private debt in any specific form of money inconsistent with the parties' written, verbal or implied agreement, or to frustrate the intent of contracting parties or impair contractual obligations by invalidating the application of a discount or surcharge agreed to be dependent upon the particular medium of exchange or method of payment employed.
5.     The extent and composition of a person's monetary holdings, including those on deposit with any financial institution, should not be subject to disclosure, search or seizure except upon adherence to due process safeguards such as requiring an adequate showing of probable cause to support the issuance by a court of competent jurisdiction of a lawful warrant or writ executed by legally authorized law enforcement officers.

We hereby urge business leaders, educators, members of the media, legislators, government officials as well as judicial and law enforcement officers to use their best combined efforts to reinstate and promote the legal and commercial framework necessary to establishing and maintaining well-functioning, sound monetary systems based on choice in currency.

The signatories hereto concur in the general principles expressed in the foregoing declaration notwithstanding specific reservations some may have as to how such principles should be interpreted and applied in practice.

Austrians Remove the Burden of Fear

Bad ideas are sometimes the hardest to de-throne.  It’s probably accurate to say most people think of money as the paper currency printed by governments.  And it is money in the sense that it functions as a medium of exchange, but is it sound, is it vulnerable to inflation?  Its very existence is evidence that it is, so why are so many people reluctant to switch to a money that isn’t?

There any many myths surrounding hard money currencies, and one of them is that money, both its nature and supply, is best left to the alleged guardian of our rights, the state.  The fact that money came into existence on the market and its ultimate form and supply were determined by economic law, is disregarded.  Money matters belong to the state, because the state, unlike the rest of us, is in a position to remove itself from market discipline.  Since the state is necessary to our survival, the story goes, it cannot do its job unless it can control the growth of money.  Money therefore must be of such a nature that its supply can grow in accordance with the orders of a state-appointed committee.

Even the classical gold standard was under control of the state.  When that control proved too limited for those eager for war, it was abandoned.  The gold standard did not fail.  States failed to keep the gold standard.

When Keynes unloaded his General Theory on the world in 1936 it was a manifesto of state economic law.  Free market economists would critique his work, but capitalism untethered scared the public.  After 1929 it became the devil in fine suits.  The fact that even top economists and industry leaders failed to see the Crash coming was especially unnerving.

Unaware of Austrian trade cycle theory, the public saw the market as an alluring evil, drawing people into its clutches with promises of riches then suddenly stripping them of their wealth.  Fear, then, and not ideological persuasion, led them to reject the market as it existed in the 1920s, and along with it any notion that the unhampered market was self-regulating.

Prior to U.S. entry into World War I, the government and its media allies worked hard trying to convince Americans that Germany was a threat to civilization itself.  No such effort was required to scare them about the Depression.  Unlike the Germans who were “over there,” the Depression was very painfully over here.

Robert Higgs’ outstanding book, Neither Liberty Nor Safety: Fear, Ideology, and the Growth of Government, underscores the importance of widespread fear for government growth.  In his opening chapter, “Fear: The Foundation of Every Government’s Power,” he contends that, contrary to the positions of Hume, Mises, Rothbard, and others, “public opinion is not the bedrock of government.  Public opinion rests on something deeper and more primordial: fear.”  After the Crash, the man in the street feared the market, and the governments of Hoover and FDR were eager to oblige.  Gold, by then, had been corrupted enough to take the fall.

Whether the public still feared the market six years later was immaterial because neither major party offered a free market candidate for election.  But Franklin Roosevelt knew the importance of keeping the public uneasy.  In his State of the Union address of 1936, he told listeners that “in thirty-four months we have built up new instruments of public power. In the hands of a people's Government this power is wholesome and proper.”  In hands under control of “an economic autocracy such power would provide shackles for the liberties of the people.”  It’s difficult to believe Americans would fall for the notion of a wholesome “people’s government,” but the times were ripe for collectivist concepts as long as they were served up properly.  FDR won re-election that year by a huge landslide.

It’s been said that FDR “saved” capitalism by co-opting the radical left into his New Deal.  Without FDR, in other words, we would be living under full fascism instead of quasi-fascism.  The free market was still useful, especially the name, but only if government-appointed bureaucrats regulated it, and never mind the contradiction.  Exactly which regulations were needed was a big unknown, but as a way of emphasizing the new in New Deal, government would experiment until it found the right combination.  How would they know if the system of “rugged individualism” that favored the big guys was adequately harnessed?  By looking at the economy.  Every trouble spot, for the government, acted like a magnet, the attraction of which was in direct proportion to the potential votes at stake.

The Highly Regulated “Free” Market

So successful were FDR and his successors in saving capitalism that finding something today that isn’t taxed, regulated, subsidized, cartelized, forbidden, mandated, or bound like a mummy in endless red tape, is a near impossibility.  We can get a feel for the massive amount of regulations the market is subjected to on the federal level alone by browsing the electronic version of the Code of Federal Regulations, updated daily by the Office of the Federal Register.  Obama, as president, has the whole economy in his hands.  As Higgs points out, with passage of

the National Emergencies Act (1976) and the International Emergency Economic Powers Act (1977), nearly all economic liberties in this country exist at the sufferance of the president.  If he decides to take over the economy, he possesses ample statutory power to do so. [p. 132]

What was once an economy with a strong element of freedom has become an economy of rent-seeking special interests, or as Nock expressed it, people using politics to gain an “uncompensated appropriation of wealth produced by others.”  In accordance with Garet Garrett’s thesis of a revolution within the form and the word, the old names have been quite useful for getting people to look the wrong way, as we saw in 2008 when Bush announced he was “abandoning free market principles” to save the economy from collapse.

The “forgotten man” of the Depression, whether Sumner’s or FDR’s, was fearful, and considering the intellectual ammunition at his disposal it’s easy to see why.  But what can one say about today?  Should people be fearful of the economic mess governments have created?  Not necessarily.  More people are beginning to understand, if only vaguely, that “politics” has brought the roof down, and that a sound economy is impossible without something politically indifferent supporting it: sound money.

Austrian critics are debunking the claims about gold’s role in the Great Depression, pointing out that the straw-man gold exchange standard of the 1920s and early 1930s was another government solution destined to collapse.  Ben Bernanke’s statement that “the longer that a country remained committed to gold, the deeper its depression and the later its recovery” is being seen as grossly misleading, at best.

(Earlier in his commentary Bernanke explained that the gold standard of the 1920s was a “reconstituted” version of the gold standard that had endured prior to World War I.  Abandoning a pseudo gold standard makes sense only if an honest monetary system replaces it. As it was, the country moved from one controlled system to one much worse.)

Unlike the poor souls of the Depression era, anyone on planet earth who is wired and can read English can access a vast literature of economic theory and criticism.  It would be impossible to deal with today’s misinformation without the many works of Austrian analysis, most of which are accessible to a lay audience.  In their absence we could well be the hapless captives of an FDR admirer like Obama.

Who said it, when and where?

Over the years I've accumulated a long list of quotes about money and banking extracted from online articles and books I've read.  Unlike most other sites that post pithy remarks from famous authors, I include hyperlinks to their sources, so that anyone who wishes can not only verify a quote but, perhaps more importantly, read the context in which it was used.  And unlike other sites, most of these quotes originated with today's financial writers and economists, writing from a perspective consistent with Austrian School principles -- people like Peter Schiff, Lew Rockwell, Steve Saville, Joseph Salerno, Gary North, Edwin Vieira, Judy Shelton, Frank Shostak, Ron Paul, and others, even Alan Greenspan.  What these writers have in common is their respect for a market-sponsored commodity money, traditionally gold and silver coins.

My purpose in publishing these hyperlinked quotes is to draw attention to the vast literature of criticism that has arisen over the money and banking system we are forced to live under.  The list is continually expanding as writers are continually writing.  I ask that you excuse the many omissions such a list necessarily entails and hope you will alert me to insightful quotes I have missed.

I personally find these words of wisdom intellectually stimulating.  Observations such as Ron Paul's "“Everything possible is done to prevent the fraud of the monetary system from being exposed to the masses who suffer from it" or Judy Shelton's "Inflation makes suckers out of savers" are not merely true, but critical to a full understanding of today's political institutions, especially when combined with Jorg Guido Hulsmann's contention that inflation is always an imposed increase in the money supply.  They help keep me focused and fired up.  I hope they will do the same for you.

Here's the list.

From "golden fetters" to handcuffed investors

"The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves." - Alan Greenspan, 1966

An NBER working paper by Carmen Reinhart and Belen Sbrancia describes how Western governments in the post-world war economies unloaded their debts on credulous citizens through a policy of financial repression.  Because it is politically palatable (as opposed to outright default, hyperinflation, or overt tax increases) some analysts expect governments to try it again.  One part of it - inflation - is already well-underway.  Financial repression means savers (investors) will be forced to pay leviathan's debts, whether they like it or not.

The particulars of financial repression vary, but the general scheme is this: Using its power to violate private property rights, the government makes the domestic investment community a "captive audience."  With central bank cooperation it mandates low nominal interest rates along with a higher inflation rate, resulting in negative real interest rates.  The latter transfers wealth from, say, pension funds to the government, thus liquidating a portion of its debt.  Since the bond holders are "captive," there is no ready remedy for investors wishing to preserve or grow their wealth.  If investors attempt an alternative such as purchasing physical precious metals, the government will either restrict those activities or abolish them.  One way or another it will see that it has the "captives" needed to pay its bills.

The working paper contains language suggesting the authors have accepted several monetary fallacies.  For example, we read:

It is important to stress that during the period after WWI the gold standard was still in place in many countries, which meant that monetary policy was subordinated to keep a given gold parity. In those cases, inflation was not a policy variable available to policymakers in the same way that it was after the adoption of fiat currencies.

The post-WWI gold standard was a straw version of the classical gold standard, which itself was under government control.  Yet it's true, holders of Federal Reserve Notes could, in theory, swap them for gold coins prior to Roosevelt's heist in 1933.  "Monetary policy" (inflation) was indeed subordinated to gold, which is why government got rid of it, and the government-spawned gold-exchange standard of the 1920s served to set up gold, intentionally or not, to take the fall when the roof collapsed.  As economist Joesph Salerno writes,

The end of the classical liberal era in 1914 caused the removal from government central banks of the "golden handcuffs" of the genuine gold standard. Were these "golden handcuffs" still in place in the 1920’s, central banks would have been rigidly constrained from inflating their money supplies in the first place and the business cycle that culminated in the Great Depression would not have taken place.

The fractional-reserve scheme began to cave, as it always had, when too many people attempted to claim their property at the same time.  It exposed the essential fraud of the banking system, though few economists see it that way.  Which is not surprising, given that most of them, directly or indirectly, feed at the Fed's trough.

In another section of the NBER paper, Reinhart and Sbrancia tell us,

World War I and the suspension of convertibility and international gold shipments it brought, and, more generally, a variety of restrictions on cross border transactions were the first blows to the globalization of capital. Global capital markets recovered partially
during the roaring twenties, but the Great Depression, followed by World War II, put the final nails in the coffin of laissez faire banking.

This is truly shameful scholarship.  Banking was in no sense "laissez-faire."  The Federal Reserve Act of 1913, establishing a government-enforced banking cartel, erased the last traces of freedom in banking.  As we read in Wikipedia,

[Laissez faire] describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies.

The Fed is a monopoly money producer established by the state.  As such it is in violation of capitalism's private property foundation, and its very presence creates distortions in market activities.  (See The Ethics of Money Production, p. 170)  It seems that the further we move away from laissez-faire the more it is blamed for the catastrophes that follow in interventionism's wake.

Still, the NBER paper has great value.  The authors (rather tediously) document how Western governments from 1945-1980 used repressive financial schemes to pay down their debt relative to GDP.   The great appeal of such schemes is their transparency to the general public, making them virtually irresistible to today's debt-choked governments.

Reinhart and Rogoff's This Time is Different: Eight Centuries of Financial Folly spells it out this way:

Under financial repression, banks are vehicles that allow governments to squeeze more indirect tax revenue from citizens by monopolizing the entire savings and payment system. Governments force local residents to save in banks by giving them few, if any, other options. They then stuff debt into the banks via reserve requirements and other devices. This allows the government to finance a part of its debt at a very low interest rate; financial repression thus constitutes a form of taxation. Citizens put money into banks because there are few other safe places for their savings. Governments, in turn, pass regulations and restrictions to force the banks to relend the money to fund public debt. (from Prudent Investor Newsletters) (emphasis mine)

It's an effective racket, almost as effective as the central banking - debt monetization schemes that brought us to disaster's door in the first place.

The Fed and gas prices

Last week Austrian economist Robert Murphy testified before Congress on the Fed's role in raising gasoline prices.  Here is part of what he had to say:

After hitting record highs in the summer of 2008, the price of crude oil crashed amidst the financial crisis and slowdown in world economic growth. After hitting a low of $33.87 per barrel on December 19, 2008, the benchmark price of a Cushing oil futures contract had risen to $96.91 by May 17, 2011. . .

There are two main routes through which Fed policy could have influenced oil prices (quoted in dollars). First, the Fed could have caused the dollar to depreciate against other currencies. Second, the Fed could have raised the price of oil relative to most other goods and services. In the remainder of this written testimony, I will first lay out the extraordinary interventions of the Federal Reserve in the wake of the financial crisis, and then turn to each of the two possible connections to oil prices.

The Extraordinary Interventions of the Federal Reserve

The Federal Reserve has engaged in several extraordinary measures since 2007 to deal with the developing financial crisis. The Federal Reserve Bank of New York has compiled a timeline of these specific interventions. In addition to cutting the federal funds target interest rate to virtually zero, the Fed has expanded its balance sheet by purchasing mortgage-related derivatives and Treasury debt. . . .

[F]rom the creation of the Fed in late 1913 up until September 2008, the monetary base grew by a little more than $932 billion. From September 2008 until the present, the monetary base has grown by an additional $1,595 billion. The Federal Reserve has clearly embarked on unprecedented injections of liquidity into the financial system during the last few years. . . 

Crude oil is traded on a world market. If the dollar falls against another currency, such as the euro, then either the euro-price of oil has to fall, or the dollar-price of oil has to rise, to eliminate arbitrage profits. From its peak in March 2009, the dollar has fallen 17 percent against other major currencies. Therefore, holding everything else constant, the dollar deprecation alone from early 2009 can explain a 20.5 percent increase in oil prices (quoted in dollars).  [Emphasis added]  Put differently, the oil price quoted in (say) Japanese yen has not risen as much since early 2009 as it has in U.S. dollars. . .

In addition to causing oil prices (quoted in dollars) to rise because of a weakening dollar, Federal Reserve policy may also affect oil prices more directly to the extent that it has caused investors to shift some of their wealth into commodities as an “inflation hedge.”  For example, since September of 2008, gold and silver prices have increased some 80 percent and 210 percent, respectively. A certain segment of investors and the general public are very concerned about the future purchasing power of the dollar, and have invested in the precious metals to protect themselves from potentially large future price inflation.

More generally, some investors may be turning to other commodities (including oil) thinking that they will provide a relatively safe store of value, in the event that the dollar and other paper currencies weaken in the future. However, although this theory has a surface plausibility, in practice it is difficult to distinguish it from an explanation that oil’s price rise is due to “the fundamentals,” i.e. a genuine growth in end-user demand for oil relative to the increase in output. . .

Conclusion

If policymakers want to lower the price of gasoline for American consumers, they have several options. Most obvious, they could reduce federal and state gasoline taxes. They could also expedite the regulatory and permitting process for the development of offshore and other domestic oil resources. Finally, with respect to the Federal Reserve, to the extent that a tighter monetary policy would strengthen the dollar and reduce investor concern about future price inflation, we would see lower crude oil prices and hence lower gasoline prices. It is notoriously difficult though to estimate the quantitative impacts of these policies, because market prices are influenced by so many different factors.

That Other Invisible Hand

As Adam Smith explains, the free market brings its wonders to the world by virtue of an invisible hand.  Individuals cooperating under the international division of labor and seeking generally to satisfy their own wants end up promoting the general welfare, often without intending to or without realizing it.

Not to be outdone, government too has developed a systemic hand that is usually not seen.  Unlike the market, when this hand moves, we lose.  Through inflation, government snatches the market’s bounty for its own purposes, enervating our lives accordingly.

As a “stealth tax,” inflation requires no legislation to impose, no agency to collect, and diverts responsibility for damages onto politicians’ favorite whipping boys.  It gives government the ability to buy almost anything for nothing, while creating endless problems that serve as a pretext for intervention.  Inflation is the foundation of arrogant government and a prescription for our own demise.

Government inflates through its central bank, the Federal Reserve System.  The Fed does many other things, but its foremost responsibility is to make the dollar buy less without leaving a trail.

Central banks such as the Fed are engines of inflation.   Inflation is not some curse of capitalism; it is government policy, and it destroys capitalism .  Inflation, economist Judy Shelton explains, chisels

away at the foundation of free markets and the laws of supply and demand. It distorts price signals, making retailers look like profiteers and deceiving workers into thinking their wages have gone up. It pushes families into higher income tax brackets without increasing their real consumption opportunities. [1]

Inflation is alluded to in the Fed’s charter, which calls on it “to furnish an elastic currency.”  [2]  Ben Bernanke once boasted about it: “[T]he U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.” [3]

If this sounds like counterfeiting, be advised that almost no one sees it that way, especially government and Fed officials.  According to the MSN Encarta dictionary, a counterfeiter is a person who makes “a copy of something, especially money, in order to defraud or deceive people.”  Does that shoe fit the Fed?  You decide.

The Fed’s inflation is often part of a process called “monetizing the federal debt,” a stultifying expression describing the hocus-pocus used to cover government’s deficits.  In simple language, government puts ink on pieces of paper and calls them “securities,” in response to which the central bank puts ink on pieces of paper, calls it money, and buys the securities (though indirectly).

Like magic, the federal government has new money to spend – thanks to the tooth fairy known as the Fed. 

When government imposed its central bank on us in 1913, pulling money from a hat was more of a challenge than it is now.  If the Fed printed too many paper tickets, people would begin to wonder if the banking system could redeem them in gold on demand, as stated on the tickets.  The fear of a bank run acted as a brake on inflation.

Since inflation is the increase in the money supply, gold imposed a limit on the amount of government debt the Fed could buy, which in turn put restrictions on government spending.  Restrictions on government spending put restrictions on government expansion.  If gold could be eliminated, those restrictions would go away.

When the Fed was being sold to the public, its advocates told people it would prevent panics and recessions by virtue of its power to provide money and cheap credit on demand.  Eight years after its inception the country slid into a recession (1921), and after another eight years the stock market crashed.  By the time a new administration took power in 1933, the economy was on its knees.

Assured the free market had failed them, a bewildered public turned to government for deliverance.  On April 5, 1933 President Roosevelt issued Executive Order 6102, in which he ordered all persons to turn in their gold or face a possible 10-year prison sentence and a $10,000 fine.  He gave them until April 28 to comply. [4]  For this and countless other New Deal interventions, most historians regard Roosevelt as a demigod for “saving” capitalism.

After the gold heist, dollars were no longer redeemable, at least domestically.  Foreigners were allowed (though not encouraged) to swap their dollars for gold until August 15, 1971, when President Nixon repudiated the government’s redemption obligations.

With gold completely severed from the dollar, our monetary system lost its best defense against political caprice.  Not surprisingly, inflation rose to double digits by 1973.  As economist Ludwig von Mises tells us, the gold standard makes the supply of money depend on the profitability of mining gold. [5]  The pure fiat dollar faces no obstacles to its production, other than the integrity of government and Fed officials.

Nevertheless, spokespeople for government’s monetary monopoly assure us the proliferation of printing press dollars helps the economy.  As such, the Fed doesn’t inflate, it accommodates.  Inflation is a dirty word for its “accommodative monetary policies.” [6]

Fed Accommodation

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. [7]

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 printing presses.  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. [8]

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.  [9]  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.

In June, 1930, with the economy fighting the recession brought on by Fed monetary policies, President Hoover signed the Smoot-Hawley Tariff Act, raising tariff levels to the highest in U.S. history.  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 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.” [10]  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. [11]

Lord Keynes, the 20^th century’s guru of deficit spending, never spelled out how deficits should be financed, admitting only that increased taxation was not the answer.  [12]  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.  [13]

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.

We should wipe every trace of the Federal Reserve from our lives and allow the market to freely choose our monetary standard, which most likely would be gold.  In the meantime, the FOMC should be prohibited from purchasing any more “assets.”

References:

1 “Capitalism Needs a Sound-Money Foundation,” Judy Shelton, The Wall Street Journal, February 11, 2009, http://online.wsj.com/article/SB123440593696275773.html

2 The Federal Reserve Act, http://www.federalreserve.gov/generalinfo/fract/

3 Remarks by Governor Ben S. Bernanke, November 21, 2002, “Deflation: Making Sure “It” Doesn’t Happen Here,”

http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm

4 Presidential Executive Order 6102, http://www.the-privateer.com/1933-gold-confiscation.html

5 Mises, Ludwig von, Economic Freedom and Interventionism, http://www.mises.org/efandi/ch43.asp

6  Remarks by Governor Ben S. Bernanke, January 4, 2004, “Monetary Policy and the Economic Outlook: 2004,” http://www.federalreserve.gov/boarddocs/speeches/2004/20040104/default.htm

7 Bureau of Labor Statistics, http://www.bls.gov/data/inflation_calculator.htm

8 Bonner, William and Wiggin, Addison, Financial Reckoning Day: Surviving the Soft Depression of the 21^st Century, John Wiley & Sons, Hoboken, New Jersey, 2003. p. 245

9 Sennholz, Hans F., Age of Inflation, Western Islands, Belmont, Massachusetts, 1979. p. 69

10 Mises, Ludwig von, Economic Policy: Thoughts for Today and Tomorrow, Regnery Gateway, Washington, D.C., 1979, p. 66

11  Remarks by Chairman Alan Greenspan, December 19, 2002, “Issues for Monetary Policy,” http://www.federalreserve.gov/boarddocs/speeches/2002/20021219/default.htm

12 Hazlitt, Henry, “Keynesianism in a Nutshell,” 1982,  http://www.thefreemanonline.org/columns/keynesianism-in-a-nutshell/

13 Keynes, John Maynard, Economic Consequences of the Peace, 1919, http://socserv2.socsci.mcmaster.ca/~econ/ugcm/3ll3/keynes/peace.htm#Ch6