L. Neil Smith's
THE LIBERTARIAN ENTERPRISE
Number 296, November 7, 2004
"Please, sir, may I have another?"
A Time to Kill
Exclusive to TLE
Whenever politicians talk about their "plans" for America, the impulse is to grab our wallets and hold tight. But like master magicians, they can swipe wealth from our possession without touching our billfolds. They use an old trick that in modern guise is so effective it passes for sophisticated monetary policy.
The federal government gets revenue by borrowing, taxing, or inflating. Of the two coercive methods, taxation is fairly visible and thus somewhat under our control. But inflation, for most people, is steeped in mystery.
To unravel it, let's begin with the charter of the Federal Reserve System, which says one goal of the Fed is "to provide for an elastic currency." It doesn't explain what an elastic currency is or who will reap the benefits. Since we're talking about a law that interferes with economic freedom, we already know Fed "elasticity" won't bless most people.
In the days when gold was money, banks were often the source of financial calamity for issuing receipts (paper money) to gold they didn't have in their vaults. Though by definition such institutions were bankrupt, it usually took a bank run to expose their insolvency. Were their banking practices at fault? No, said the bankers; it was that "inelastic" metal, gold. What they wanted was money that didn't have to be redeemed.
Bankers and politicians have always found each other useful. During the 19th century, government had routinely rescued bankers from bank runs by allowing them to suspend gold redemption, and bankers had bailed out political pals with timely loans during crises. This cozy relationship eventually produced the cartelization of banking under the Federal Reserve Act, passed on December 23, 1913.
The Federal Reserve's overriding purpose was and is to increase the money supply. Imagine a printer with a legal monopoly on the issue of money, with limitless supplies of ink and paper. Add an aura of reverence and inscrutability, and that's the Fed, the gift Americans found under their Christmas trees in 1913.
Because of the Federal Reserve, the U.S. was able to enter World War I, "the war to end all wars," and finance not only its own efforts but those of its allies. It doubled the money supply and pushed prices up twofold as a consequence. U.S. entry in the war forced Germany into an unconditional surrender, which fostered the movement that brought Hitler to power.
During the 1920s the Fed continued to inflate the money supply, fueling speculation in real estate and the stock market. When the market crashed, few people blamed the Fed because prices had generally remained stable during the boom. Productivity improvements had kept prices from rising, masking the effects of monetary expansion.
The economy struggled to recover. What it needed was freedom. What it got was more government though often to the applause of business leaders. Hoover's interventions from 1929 to 1933 turned a mild recession into a deep depression.
Promising a return to something resembling a free market, FDR took over and made intervention government's calling card. The man revered for saving capitalism removed a major obstacle to government growth by taking America off the gold standard. If you wanted to redeem your Federal Reserve Notes for gold, you couldn't, unless you were a foreigner. President Nixon cut foreigners off in 1971, making the dollar a pure fiat currency, redeemable in nothing.
Government no longer had to worry much about budgets; whatever it didn't dare take in taxes it could get by printing bonds and selling them to the Fed, which created dollars to buy them. With gold swept aside, the Fed could produce money and credit at will, with seeming impunity. Bankers, at long last, had their "elastic currency."
From the country's inception to 1900, the gold dollar actually increased in buying power. Since the Fed took over, the dollar has lost 95% of its value, as a visit to the Bureau of Labor Statistics web site will confirm.
With a record like the Fed's, why aren't politicians screaming for its abolition? Because their little money machine lets them buy votes without raising taxes. The higher prices, of course, are easily blamed on business.
In 2002 Fed Governor Ben Bernanke reassured an audience that "the 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."
Apparently Mr. Bernanke doesn't include as costs the wars, recessions, and a dying dollar.
Rep. Ron Paul (R-TX) has called the Fed "a giant fog machine, designed to fool the victims of its policies, i.e., most of us."
What's good for politicians rarely promotes "the General Welfare." We need to kill the Fed and turn money back over to the market.
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