Many people know how to earn money, but few are aware of what the Federal Reserve
System, acting on behalf of the U.S. Government, is doing to their money. It is
inflating and depreciating the dollar at various rates – at double-digit
rates during the 1970s and early 80s and at single-digit rates ever since. The
present dollar is worth no more than 10 cents of the 1970 dollar and 50 cents
of the 1980 dollar.
The reasons and explanations given for this loss may change over time, but the
consequences are always the same. Inflation covertly transfers income and wealth
from all creditors to all debtors. It dispossessed present creditors of nine-tenths
of their 1980 savings and enriched debtors by the same amount. The dollar savings
accumulated since then have shrunk at lesser rates but are fading away notwithstanding.
No wonder, many victims readily conclude that thrift and self-reliance are useless
and even injurious and that spending and debt are preferable by far. They may
join the multitudes of spenders who prefer to consume today and pay tomorrow,
and they may call on government demanding compensation, aid, and care in many
forms. Surely, the hurt and harm inflicted by inflation are a mighty driving force
for government programs and benefits.
In their discussions and analyses of various problems, economists usually avoid
the use of moral terms dealing with ultimate principles that should govern human
conduct. Ever fearful of being embroiled in ethical controversies they seek to
remain neutral and “value-free.” They do counsel legislators and regulators
on the cost-efficiency of a policy but not on its moral implications. They may
offer professional advice on the efficiency of money management but not on the
morality or immorality of inflationary policies. They dare not state that inflation
is a pernicious form of taxation which most people do not recognize as such. Authorities
of money and banking rather than taxing authorities redistribute income and wealth
under cover of ignorance. Placed on every person in the form of higher goods prices,
the application does not fall equally and simultaneously on every buyer. The people
who receive the newly created money first may actually benefit, as goods prices
readjust rather slowly. Others who receive it later or not at all will have to
tighten their belts. Above all, inflation ravishes the savings of countless Americans
and turns many into prodigal spenders and debtors.
The biggest debtor also is the biggest inflation profiteer. With some eight trillion
dollars in debt, the Federal Government is by far the biggest winner. In fact,
it gains not only from debt depreciation, which at just three percent amounts
to some $240 billion every year, but also from Federal Reserve money and credit
creation that enables the U.S. Treasury to suffer annual budget deficits of some
$500 billion a year. Without the power to inflate and depreciate the dollar at
will, the U.S. Government would be a different institution, like that which the
Founding Fathers had envisioned. But endowed with the power of inflation it has
become an almighty organization that redistributes income and wealth and refashions
the social and economic order.
The primary beneficiaries of the new order are its own managers: legislators,
regulators, and a huge army of civil servants. They are first in power, prestige,
and benefits. Many U.S. Senators and Congressmen are the admired and esteemed
benefactors of countless petitioners for handouts and favors. They are revered
for every benefit they bestow. And there are the officials of the Department of
Commerce with 7 benefit programs, the Department of Education with 34 programs,
the Department of Energy with 6, the Department of Health and Human Services with
8, the Department of Housing and Urban Development with 14, the Department of
the Interior with 3, the Department of Labor with 9, the Department of Transportation
with 9, and various government commissions and authorities with another 10 programs.
Federal politicians and agents are the wise and virtuous judges and juries of
benefits amounting to more than $1 trillion every year. How “honorable”
would they be, pray tell, without Federal Reserve assistance in financing the
deficits and its power to print more money?
Evil acts tend to breed more evil acts. Inflationary policies conducted for long
periods of time not only foster the growth of government but also depress economic
activity. Standards of living may stagnate or even decline as growing budget deficits
thwart capital accumulation and investment that are sustaining the standards.
Inflation misleads businessmen in their investment decisions, which causes much
waste and many bankruptcies. In fact, it is the root cause of the boom-and-bust
cycle which wreaks havoc on economic activity. Indeed, inflation breeds many evils
of which most Americans are unaware.
Since 1971 when President Nixon abolished the last vestiges of the gold standard
and repudiated all obligations to meet international obligations with payments
in gold, the U.S. dollar has been the dominant world currency. It enables Americans
to buy massive quantities of foreign goods and services, suffering annual trade
deficits of more than half a trillion dollars now, and making payment in ever-depreciating
dollars. Foreign central and commercial banks as well as many foreign individuals
are using their dollars with the hope that they will retain their purchasing power
in the long run. Asian creditors are holding more than $2 trillion in claims,
Japan and China alone an estimated $1.5 trillion between them. A dollar depreciation
rate of just 3 percent strips Japan and China of some $45 billion in purchasing
power every year. They undoubtedly are suffering such losses in silence because
they are mindful of the many benefits they are receiving from amicable relations
with the United States. American capital is rushing into China, building many
plants and introducing modern technology while some 20,000 young Chinese are studying
at American colleges and universities. At the same time Japanese and Chinese companies
are investing surplus dollars in the United States, assuming control over American
corporations. If the United States government should ever disrupt this peaceful
relationship with discriminatory trade restrictions and painful barriers, the
Asian creditors may dump some dollar holdings. The dollar crash would be heard
around the globe.
is no conscience in politics. Economic policies may be changed, reformed, and
readjusted because they are ineffective, unproductive, and unpopular, but rarely
ever because they are immoral. Debt may be a grievous bondage to an honorable
man, but it may be a “national bond” which, in President Roosevelt’s
words, u201Cis owed not only by the nation but also to the nation.” Surely, politicians
have a code of laws to observe and obey, but honesty in matters of debt and money
is not one of them.
If it is true that we cannot do wrong without suffering wrong, we must brace for
more grief to come.