Recently by George F. Smith: Preface to The Jolly Roger Dollar
Ron Paul published Gold, Peace, and Prosperity in 1981. What makes his pamphlet especially attractive today is the speed with which it can be consumed. A reader could get through his robust prose during an hour lunch break.
But why would a reader want to do that? Why not read one of Paul’s more recent books instead, even if it couldn’t be read in one sitting?
The answer is, the earlier work provides an excellent foundation for his later writings. It offers a clear, non-technical summary of his views on money and the economy.
Ron Paul has made his mark as an advocate of sound money. As such, he is totally opposed to fiat money and its imposition through the government-supported cartel, the Federal Reserve. It is largely through a hijacked monetary system that government has become a threat to civilization. In this pamphlet, Paul puts it all in perspective with everyday language, as if he’s talking to you – over lunch.
Sound money, he says, is money that is “fully redeemable.” The paper currency people use in transactions is only a substitute for money proper, which traditionally has been gold and silver coin. The adverb “fully” means that every note issued is a claim ticket to a specified weight of gold stored in a bank warehouse.
Why is this arrangement sound? Because it makes the value of money depend on the profitability of mining gold, rather than the “politics of the hour,” as Mises put it. A money that’s sound means the money supply remains relatively stable.
Unsound money is money that bankers and government can inflate virtually without limit. Unsound money equates “monetary policy” with varying degrees of inflation, as determined by a panel of politically-influenced bureaucrats.
Since inflation is indistinguishable in its effects from counterfeiting, the bureaucrats are simply counterfeiters with grandiose titles; their sacred monetary policy is nothing more than “legalized counterfeiting.” Inflation, Paul explains, citing Murray Rothbard, is “new money issued by the banking system, under the aegis of government.”
Blaming Arabs, businessmen, labor unions, or consumers for rising prices doesn’t drown out the steady hum of printing presses running 24-hours-a-day, ballooning the money supply, and thereby debasing every dollar previously printed.
Referencing Hans Sennholz, he says:
An increase in the money supply confers no social benefits whatsoever. It merely redistributes income and wealth, disrupts and misguides economic production, and as such constitutes a powerful weapon in a conflict society.
If inflation is so bad, why does it exist? Because it benefits “whoever gets the new money first” – government, bankers, and favored businesses.
A good example is the credit the government created to bail-out the Chrysler Corporation, largely to finance a labor contract that pays the employees twice the average industrial wage. But unions, like businesses, can only persuade government to inflate if the inflation mechanism is in place. A redeemable currency would make this impossible.
Who pays for inflation? The poor and middle classes, and those on fixed incomes. By the time they get the new money – if they get it at all – prices have gone up (or they’ve failed to drop, as they would have without inflation). These groups are cheated by inflation, and eventually are either wiped out through currency depreciation or made dependent on government favors. This pattern has been known for ages, as Paul shows with numerous historical references.
Expansion of the money supply through "spurious paper currency," noted [Andrew] Jackson, "is always attended by a loss to the laboring classes."
"Of all the contrivances for cheating the laboring classes of mankind," added Daniel Webster, "none has been found more effectual than that which deludes them with paper money."
But if prices rise from an increase in the money supply, wouldn’t the price of labor go up, too? Quoting William Gouge, President Jackson’s Treasury advisor in 1833, Paul writes:
Wages appear to be among the last things that are raised. . . . The working man finds all the articles he uses in his family rising in price, while the money rate of his own wages remains the same.
When Lincoln issued greenbacks to pay for the Civil War, Paul notes, “prices rose 183%, while wages went up only 54%. During the World War I inflation, prices rose 135%, and wages increased only 88%. The same is true today.”
In answer to the claim that the Fed was created to prevent inflation and the periodic panics that erupted in the 19th century, Paul points out that inflation was written into the central bank’s founding charter, in the requirement to provide a more “elastic” currency. With the Federal Reserve Act of 1913,
a 40% gold cover for Federal Reserve notes and 35% for Federal Reserve deposits were required. The fact that it was not 100% showed that the central bankers planned more inflation. . . .
The central bank never set out to protect the integrity of our money. In fact, the Fed set out to destroy it by institutionalizing inflation. The gold coin standard was doomed and today’s inflation made inevitable the day the Federal Reserve was created.
A gold coin standard, regulated by the market, acts as a restraint on inflation because it is the money, not the paper issued as a substitute. This is why governments hate gold – they can’t produce it in unlimited quantities. Using a non-redeemable paper currency avoids the risks of raising taxes while allowing politicians to pay for their wars and bureaucracies by running the printing press behind the curtain.
Since a gold standard enables the average person to restrain the government’s attempts to inflate, control the economy, run up deficits, and fight senseless wars, the central planners had to eliminate this fundamental American freedom to own gold. This was accomplished with the Gold Reserve Act of 1934, which outlawed private ownership of gold, prohibited the use of "gold clause" contracts, and abolished the gold coin standard.
Thanks to Paul and others who support sound money, the government in 1974
reversed the unconstitutional 1934 law that barred private ownership of gold. In 1977, gold clause contracts were legalized.
One of my favorite passages in the book is Paul’s succinct comment on the Great Depression. Ben Bernanke wrote a collection of technical essays on the subject and has earned the reputation among his Keynesian colleagues as an expert on the Depression, never mind that he got it wrong. In 2002 he famously apologized to Milton Friedman and Anna Schwartz for the Fed’s mismanagement of the money supply after the Crash, which he concluded could have been avoided if central bankers had provided “low and stable inflation” as a monetary background. (For an in-depth discussion of this episode, see Joseph Salerno’s Money, Sound and Unsound, Chapter 16, “Money and Gold in the 1920s and 1930s: An Austrian View”.) Applying the Austrian theory of the trade cycle, Ron Paul summarizes the Depression in 25 words:
Federal Reserve inflation during the 1920s, combined with economic interventionism by both Republican and Democratic administrations, caused and perpetuated the Great Depression of the 1930s.
One could hardly state the truth more concisely.
Many commentators are pointing out that the U.S. is declining into a police state, if it isn’t there already, but what some – especially the monetarists – overlook is the connection between honest money and freedom. For Ron Paul, freedom is “the ultimate justification for honest money.” And here he presents one of the most familiar quotes in libertarian literature, a non-Keynesian comment written by Keynes himself:
There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose.
Ron Paul was one of those one-in-a-million many years ago. Sit down with him some lunch hour and see why.
Reprinted with permission from Barbarous Relic.
George F. Smith [send him mail] is the author of The Jolly Roger Dollar: An Introduction to Monetary Piracy, Eyes of Fire: Thomas Paine and the American Revolution, and The Flight of the Barbarous Relic, a novel about a renegade Fed chairman. Visit his website and his blog.