The U.S. keeps an enemy of the state locked up under heavy military guard. Many years ago, when this dissident was allowed to move about freely, it became the bedrock of people's freedom. But the state charged the dissident with creating crises, and eventually enough people fell for it. Thus, there was little public outcry when the state sentenced the dissident to eternal incarceration.
The dissident, of course, is gold. Why does government keep it out of our hands? Because if we used it as money, it would jeopardize the state's counterfeiting racket. And that racket, carried out by the federal reserve, has fueled the creation of the megalomaniacal monster residing within the Beltway.
Economists call it fiat money — the paper bills that roll off the federal reserve's printing presses — because it is backed by nothing. But this is misleading; fiat money would be just so much refuse without the backing of government guns.
Let's review a few basics. Coercion, not cooperation, is the defining feature of government action. In a money economy, government seizes monetary assets to buy the goods and services it wants or to subsidize politically-favored groups. If private individuals seize money, it's called theft; when government seizes it, it's called taxation. But the state's direct seizure of money can only go so far before people revolt, as history has amply demonstrated. This is where counterfeiting comes to its rescue.
Counterfeiting is the act of making a copy of something, usually with the intent of securing unfair gain. When applied to money, counterfeiting involves a two-fold process: (1) It inflates the amount of money in circulation, thus raising prices and lowering the value of the dollar; and (2) it redistributes income and wealth, because the counterfeiters get the new money first.
The counterfeiters use this money to buy various goods and services. The people who did business with the counterfeiters now have the new money to go shopping. The counterfeited money ripples through the economy from one pocket to another. Gradually, the prices of goods and services begin to rise because of increased demand; and demand increases because of the injection of new money into the economy. But the early users of the new money don't pay the penalty of higher prices; only the later users do. Even worse, people on a fixed income don't receive the new money at all; they just pay higher prices. Counterfeiting thus redistributes income and wealth by favoring early users over later ones.
As Murray Rothbard notes, government, when it turns to counterfeiting, can "appropriate resources slyly and almost unnoticed, without rousing the hostility touched off by taxation. In fact, counterfeiting can create in its very victims the blissful illusion of unparalleled prosperity." [1]
Through counterfeiting, government imposes a hidden "tax" few people notice. What they do notice is a rise in prices and depreciation of the dollar. Government can easily blame this state of affairs on the greed of business, which most people readily accept.
What happens when we live under gold? On a free market, the various names that a monetary unit may have (dollar, franc, mark) are simply names for a certain weight of gold or silver. For example, the dollar was once defined as 1/20 of an ounce of gold. It can be dangerous to say a dollar is backed by gold; it becomes too easy to separate a dollar from the gold it designates.
Gold has to be mined. It's a costly operation, and the supply is severely limited. The annual output will constitute a small fraction of the world's current reserve. In a healthy economy, the annual increase in goods and services will more than offset the annual output of mined gold. The result will be a gradual decline in prices, which means an ounce of gold will continue to buy more year after year. Because gold appreciates in value, people will be encouraged to save it, making more money available for investment in production. A rising output and falling prices means the standard of living will increase for each person. [2]
Banking's Connection to the State
We once had a gold standard, though never without the taint of government meddling. If life with gold was so good, how did a demagogue's dream like the federal reserve come to replace it?
A brief answer is: Investment bankers claimed the gold standard was too "inelastic" and wanted a system in which bank failures would not be allowed to happen. An even briefer answer is: we trusted government to run the monetary system.
Bankers, Rothbard observes, "are inherently inclined toward statism." Commercial bankers, who engage in fractional-reserve lending, are, on a free market, always hanging over the abyss of bankruptcy; they readily run to the government for aid and bailouts. Investment bankers, in underwriting government bonds, acquire a vested interest in government deficits and forced debt transfer to taxpayers. [3]
Both kinds of bankers, therefore, are tied closely to government, and both try to influence and control domestic and foreign policy.
During the late 19th century and continuing into the 20th, J. P. Morgan's financial empire virtually ran the federal government. Morgan people served in critical cabinet positions and during the 1890s redirected foreign policy into aggressive economic and political expansion abroad. Secretary of State Richard Olney, a long-time Morgan associate, used the military might of the U.S. to push Great Britain out of its Latin America markets. Later, Olney allied the U.S. with Britain to capture markets in the Far East.
During political fighting with the Rockefeller interests, the Morgans in 1912 created the Progressive Party and ran former president Theodore Roosevelt as their candidate. Their successful aim was to keep the Republican Taft from being re-elected and to ensure the election of Democratic candidate, Woodrow Wilson. Backing Wilson's run for the White House were various Morgan men.
By 1914, the financial health of the Morgan empire was declining. The railroads they controlled were being regulated into decline, and they had been too slow to do much in the market for industrial securities. But rejuvenation was just an assassination away. When World War I broke out, the Morgans leaped into action. They underwrote British and French war bonds in the U.S. and were heavily involved in financing American munitions to the Allies. "Overall, from 1915 to 1917, the export department of J.P. Morgan and Co. negotiated more than $3 billion of contracts to Britain and France." [4]
Meanwhile, the Morgans and other financial interests were beating the drums for U.S. entry into the war. By joining the hostilities in April, 1917, America prevented a negotiated settlement between the warring powers and pushed the Allies into a peace of unconditional surrender and territorial dismemberment, a peace which unraveled into World War II. "Wilson's decision to enter the war may have been the single most fateful action of the 20th century," Rothbard writes, "causing untold and unending misery and destruction." [5]
No Funding, No War
The relatively hard-money, gold standard system that existed before 1914 could not have financed the massive loans and deficits needed for the war. In this sense, the gold standard is anti-war.
But the bankers didn't want such a system. The Morgans, the Rockefellers, and the Kuhn, Loebs and their associates had been working on a new banking system that would inflate money and credit to give them the "elasticity" they desired. After five years of planning, amending, and compromising, they got the Federal Reserve Act passed at the end of 1913. In came the federal reserve. The Fed enabled the banking system to fund the war, and every war since.
Many of those currently opposed to the probable invasion of Iraq support big government. They love all the welfare spending, regulations, programs, and every other government madness. They just don't want war. But why should a state that coerces its citizens have the slightest concern about coercing other people? It's a difference in degree, not a difference in principle.
The Administration expects war protesters, but imagine how they'd react if a million people marched on Washington to demand an end to the Fed and a return to the gold standard. The people would be on to something — the Fed's racket. That would get the state's attention. The protesters would be sounding the death knell of big government.
Lew Rockwell notes: "If we dismantled the Fed and made our money good as gold again, it would matter a lot less who sat in the White House or the Congress, for they would have much less power to harm us even if they wanted to." [5]
References
1. What has government done to our money? Murray N. Rothbard, Ludwig von Mises Institute, 1990, p. 562. The Case Against the Fed, Murray N. Rothbard, Ludwig von Mises Institute, 1994, pp. 20-21
3. Wall Street, Banks, and American Foreign Policy, Murray N. Rothbard, Center for Libertarian Studies, 1995, p. 1
4. Ibid., p. 16
5. Unplug the Money Machine, Llewellyn H. Rockwell, Jr., http://www.mises.org/freemarket_detail.asp?control=259
Other Works by George Smith
from The Laissez Faire Electronic Times, Vol 2, No 11, March 17, 2003