Sound Money: The Impossible Dream?

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Our gold standard money didn’t fail us in 1913; it was murdered.

Did it deserve to die? What was its crime?

It had provided us with nothing less than relative peace and prosperity over a span of 136 years. It had not only retained one hundred percent of its value, it had gained eleven percent. That’s right. The dollar we started with in 1776 bought us eleven percent more after almost seven generations. Then, J.P. Morgan’s creatures picked a quiet 23rd of December in 1913 to suffocate our sound money system. Since that manslaughter, the purchasing power of a dollar has plummeted over 95%. We now pay twenty times more than J.P. Morgan did for any item.

Morgan and his henchmen had global plans for the state. Their vision was of a state, under their direction, that would supplant the failing British Empire. This state would support and create wars, marshal powerful and intimidating forces over foreign and domestic affairs, dispense military contracts to political favorites, grow a professional bureaucracy, seize central powers while diminishing individual liberties, and fund any welfare plan designed to deliver votes. Importantly, Morgan’s bank would be the state’s bank for all of this activity.

So, under the guise of stabilizing the dollar, the Federal Reserve Act destabilized it, causing booms and busts while proliferating and prolonging conflicts everywhere. The new Central Bank designed for the state the secret paper door to all the money it could dream of spending, at the bald expense of unsuspecting, trusting citizens.

Morgan did not originate the concept of this taxation by stealth inflation. In Colonial times, Massachusetts had needed money and simply printed it, also. One Bostonian had seen the consequent harm clearly,

William Douglas understood that paper issues were a form of taxation on the public…that increasing the quantity of money only depreciates the value of each unit, so that a larger supply of money does no better or greater work for society than a smaller. Hardest hit by the severe depreciation of all the notes were nondebtors, especially creditors, fixed-income groups, charitable endowments, and laborers, whose wages rose less than prices. Conceived In Liberty, Volume II, p.139, by Murray N. Rothbard.

A military historian, Martin van Creveld, also sees clearly why and how the state grabs total monetary control. He tells the full story in The Rise and Decline of the State. Van Creveld reveals that,

"[the] states having finally succeeded in their drive to conquer money, the effect of absolute economic dominance on the states themselves was to allow them to fight each other on a scale and with a ferocity never equaled before or since. … The concentration of all economic power in the hands of the state would not have been necessary, nor could it have been justified, if its overriding purpose had not been to impose order on the one hand and fight its neighbors on the other. (pp. 241—2)"

Thus, the murder of sound money became the most consequential death of the last one hundred years. The Bretton Woods reform of 1944 was an acknowledged failure by August 1971 when Nixon closed the international gold window. The state, having cast off its golden restraints, made the Twentieth Century a nightmarish bloodbath the world around.

Today, the state’s fiat money theft and death machine wobbles. It can no longer animate spirits or digitally create everlasting bubbles. Observe the tremulous, palsied ravages of the wayward printing press:

  • US Economy: Currently in a double-dip depression, the economy experiences the worst contraction since the first drop in the Great Depression.
  • Debt: The US must borrow 46 cents for every dollar spent this year. Outstanding public debt as of 18 August is $11,704,322,903, 918. An estimated population of the United States is 307,209,243, so each citizen’s share of this debt is $38,127. The debt-to-GDP ratio is 82%. This debt will grow by a trillion dollars a year. The debt has to be rolled over every four years. That’s $240 billion a month to be skimmed off capital markets. The four largest budget items are wars, social security, Medicare/Medicaid, and interest on the debt.
  • Credit cards: Credit card debt is $990 billion and rising. Private debt per citizen is $23,902.
  • Pension and health-care liabilities: Believed to be over $99 trillion. Brookings Institution’s Alice Rivlin states that the long-term budget outlook is impending catastrophe.
  • Home foreclosures: The housing bubble peaked in July 2005. One half of Americans now holding mortgages will be unable to pay them in 2011. One household in every 355 homes received a foreclosure-related notice in July. The Fed pays banks to keep their money with the Fed. Lending that money seems not as safe. Real estate is unlikely to rise, making it also unlikely that lenders will want to continue any mortgages whose value has dropped 20 to 40% even though many need to be re-set. States having the highest foreclosure rates are Nevada, California, Arizona, Florida, Utah, Idaho, Georgia, Illinois, Colorado and Oregon.
  • Inflation/ Deflation: The monetary base has doubled over the last year, so inflation, or hyperinflation waits, but prices are currently falling 1.3% annually now. The Fed’s money machine is so broken that its efforts to produce just a mild-flavored inflation will fail. China’s imports are way down and we could be trapped in a long deflation.
  • Bank Failures: Seventy-four banks have failed so far in 2009. This compares unfavorably with 25 in 2008 and just three in 2007. More defaults are ahead. The number of banks on the FDIC’s list of problem institutions rose to 305 in the first quarter.
  • Unemployment: Officially 9.5%. June unemployment rate topped 20% in Michigan, Oregon, Nevada, California, South Carolina and Rhode Island. Rates are higher than published and often manipulated. If the number falls, it will probably only be because those people have given up looking. The government is the major employing sector now. Mike Shedlock predicts structurally high unemployment for a decade.
  • Fed intervention increased: A Money Market Investor Funding Facility and an Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility were created; the government has taken equity positions in many larger banks; more moral hazard is encouraged by the Treasury issuing a blanket guarantee of money-market fund liabilities; and, more moral hazard is encouraged by raising FDIC limit to $250,000 from $100,000.
  • Manufacturing: China has officially become the leading manufacturer of the world. The US does pizza delivery well. US manufacturing barely employs 11% of the labor force.

Fractional reserves and fiat funny-money caused the implosion of these areas of economic life in the US. Our monetary system is a collapsing apparatus. Clearing this market seems an impossible task. Yes, economic law will work its magic to match supply and demand, but can it plough through such an incredible economic global mess within our lifetimes? Will the frantic state stop intervening long enough for the economic body to heal itself?

Since a sound money system has delivered peace and prosperity in our historical past, could it not be called upon to do so again?

Is it an exercise in futility to spend any time even thinking about life after the Fed, embracing specie-backed money that is not the inflationary design instrument of the state? Gary North has written an article on replacing the dollar as the world reserve currency. Few have written on the mechanics of getting back to sound money. But, many are thinking that unthinkable. Audit the Fed cries are turning into End the Fed demands. That begs the question, "What then?" Repealing legal tender laws, generating competing currencies, denationalizing money, meeting the small change challenge of 100% reserve money, letting the market select which commodity will be the specie basis, and a few zillion other considerations tickle the mind.

It’s a fitting and proper time to be thinking of what such a free market monetary system could smell like, taste like, look like and be like. Who knows? The shambles that the central bank has made with the power Congress sadly placed in its paws, calls for rigorous analysis of a free society’s options. As this empire collapses, creating a fresh monetary system won’t be an option for our future. It will be a necessity. We once again will need to navigate our communities out of the barter systems we will initially be thrown into. No banker or politician or Keynesian economist will help us. Sound money is suicide to them. Literally, sound money is Bernanke’s worst nightmare. So, without those bankers, politicians, or most economists, we’ll need to have given the creation of a sound monetary system in our twenty-first century serious thought.

It’s time to get thinking. It’s time to prepare. It’s time to dream that impossible dream.

Floy Lilley [send her mail] is an adjunct faculty member at the Mises Institute. She was formerly with the University of Texas at Austin’s Chair of Free Enterprise, and an attorney-at-law in Texas and Florida.

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