Imagine a thief so skilled he can take your money without it ever leaving your hands. If this sounds impossible, you underestimate the power of central planners.
How does it happen?
We know money as a medium of exchange. Over the centuries, just about everything was used for money, including tobacco, sugar, cattle, beads, and fishhooks. Two commodities — gold and silver — eventually supplanted all the others. Not only did most people prize them for their ornamental characteristics, they were easily divisible, durable, and transportable.
Two points we should always remember: 1) In a free market, money is first a highly marketable commodity, a concrete good people want for its own sake and not just as a medium of exchange; and 2) people buying and selling in a free market chose gold and silver to serve as money because those commodities best fulfilled their need for an exchange media. [1]
People often say we were once on the gold standard. What this means is the dollar was just a name for 1/20 of an ounce of gold, just as a British pound sterling was a name for 1/4 of an ounce of gold. Dollars, sterling and other currencies did not exist independently from their designation of a certain weight and fineness of gold. Paper money was not money per se, but a legal claim for a specific amount of precious metal, either gold or silver. It was well-understood that these certificates carried with them the promise of payment without delay in their respective metals, from any bank or the U.S. Treasury itself. [2]
The government has always influenced the money system, even under the de facto gold standard of the 19th century. In addition to monopolizing the mint, government intervened through legal tender laws, the creation of paper money, and the development of inflationary banking. In spite of these interventions, the business cycle of inflations and recessions were relatively short-lived because recovery was market-driven, not government-controlled.
For the most part, Americans enjoyed a robust economy that carried into the 20th century. Then in 1913, the government passed two major pieces of economic legislation: the Federal Reserve Act and the income tax amendment. The Federal Reserve Act created a central bank, the Federal Reserve, which began issuing Federal Reserve Notes. When these notes appeared in 1914, they carried the message that they were not directly redeemable in gold. Furthermore, the income tax amendment stated that the revenue collected would not be shared with the states.
This was a major shift toward central control of the economy. The income tax legislation allowed government to aggrandize power while appeasing widespread "soak the rich" sentiment. When explaining the Federal Reserve Act, President Wilson said it was needed to promote higher employment, stabilize the dollar, grow the country, and increase consumption. Yet, industrial production increased 534% in the U.S. from 1878 to 1913. [3] Does this characterize an economy crying out for help?
Through a policy of artificial credit, the government inflated the boom of the 1920s that brought about the stock market crash of 1929. While president-elect Roosevelt waited for inauguration in January, 1933, concerned economists sent him a letter that was also printed in the press urging him to take certain measures to restore the economy's health. Part of their letter read: "The gold standard of present weight and fineness should be unflinchingly maintained. We should also encourage and facilitate the prompt restoration of the gold standard abroad . . . With adequate movement of goods across international borders [which the reciprocal lowering of tariffs, another of their recommendations, would encourage], the gold of the United States and of the world is more than adequate for all credit needs." [4]
The statement of the economists was consistent with the Democratic platform of 1932. During his campaign, Roosevelt pledged 100% support of the gold standard, as did the Republicans. But on March 9, 1933, Congress abdicated its responsibility and gave Roosevelt full discretionary powers over money and banking. He didn't waste time using them.
On March 11, 1933 he issued an order forbidding banks to make gold payments. On April 5, Roosevelt ordered all citizens to surrender their gold — no person could hold more than $100 in gold coins, except for collector's coins. He also made it unlawful to export gold for payment abroad, unless done through the Treasury. The penalty for defying Roosevelt was 10 years in prison and a $250,000 fine. [5]
"It became clear to governments that they could not afford to allow people to own and keep their gold," Murray Rothbard explains. "Government could never cement its power over a nation's currency, if the people, when in need, could repudiate the fiat paper and turn to gold for money." [6]
On June 5, 1933 Roosevelt signed a resolution he had introduced in Congress nullifying the gold clause in all government and private contracts. It meant what it said — that no one had the right to demand payment in gold for any debt. [7] The Constitution says that no state shall "make any Thing but gold and silver Coin a Tender in Payment of Debts" — a clear challenge to the president's actions. When Roosevelt asked Senator Thomas P. Gore from Oklahoma what he thought of the resolution, the blind statesman replied: "Why, that's just plain stealing, isn't it Mr. President?" [8] Roosevelt succeeded in having the Senator unseated in the 1936 elections.
On January 30, 1934 Roosevelt signed the Gold Reserve Act into law, which transferred title of the Federal Reserve Banks' deposits of gold to the U.S. Treasury. In exchange, the banks received gold certificates. What did the certificates mean? They meant only that something had been taken from the banks. They were not a claim against the gold in the Treasury. [9] With this act, Roosevelt completed confiscation of the citizens' gold.
As James Bovard observes, "citizens had accepted a paper currency based on the government's pledge to redeem it in gold at $20 per ounce; then, when Roosevelt decided to default on that pledge, he also felt obliged to turn all citizens holding gold into criminals." [10] Roosevelt also condemned them as selfish traitors.
One day later Roosevelt reduced the gold content of the dollar by 41%, raising the price of gold from $20.67 per ounce to $35.00 an ounce. The devaluation resulted in a $2.8 billion "bonus" for the government.
Government's policy of debasing our money, which the U.S. Coinage Act of 1792 made punishable by death [11], hit full stride under Roosevelt. As the world's reserve currency since 1945, the U.S. dollar has been playing the part of gold in international trade. Almost no one seriously questions fiat money anymore. Fed Chairman Alan Greenspan told a House Financial Services Committee last February that "in years past, there's been considerable evidence that fiat currencies have been mismanaged in general and that inflation has been too often the result . . . [But we're] learning how to manage a fiat currency . . . Whether that continues is a forecast which I can't really project on." [12]
Has a managed fiat currency enhanced our prosperity?
Here's one clue to the answer. Go to "How Much is That Worth Today?" [13] and try a few computations. You'll find that a dollar in 2001 was roughly equivalent to five cents in 1901. But a dollar in 1901 had the same value as $1.50 in 1801!
In other words, under a mostly market-driven money system, the dollar actually appreciated in value over the course of the 19th century — a period during which average incomes rose and the population greatly expanded. Under government-controlled fiat money, after nearly a century of war, waste, wealth-theft, and welfare, with many families now needing two incomes to live decently, the dollar today is almost worthless.
Next time you think government is completely inept, think again. To rob so many of so much, while keeping complaints relegated to the lunatic fringe, requires uncommon skill of deception.
References
1. What Has Government Done to Our Money?, Murray N. Rothbard, http://www.mises.org/money.asp2. The Last Great Bubble — Counterfeiting the Dollar, M. A. Nystrom, http://www.gold-eagle.com/editorials_02/nystrom022602.html
3. Central Banks, Gold, and the Decline of the Dollar, Robert Batemarco, http://www.libertyhaven.com/regulationandpropertyrights/bankingmoneyorfinance/goldstandard/centralbank.html
4. Economics and the Public Welfare, Benjamin M. Anderson, D. Van Nostrand Company, New York, 1949, p. 303.
5. The Great Gold Robbery, James Bovard, http://www.libertyhaven.com/regulationandpropertyrights/bankingmoneyorfinance/goldstandard/greatgold.shtml
6. Rothbard, p. 43.
7. Nystrom
8. Anderson, p. 319
9. Anderson, p. 349
10. Bovard
11. Nystrom
12. Paul and Gold — Greenspan and Enron, http://www.gold-eagle.com/editorials_02/paul030202.html
13. How Much is That Worth Today?, Economic History Resources, http://eh.net/hmit/ppowerusd/
Other Works by George F. Smith
from The Laissez Faire Electronic Times, Vol 1, No 14, May 20, 2002