the Money Machine
anti-socialist, post-Soviet reformers of the Baltic states sought
to reign in government power, they looked to solve the money problem
first. Moscow held unlimited power to flood their economies with
cheap money, and to fund itself as an imperial power lording it
over other peoples. That had to end before the market economy could
should follow this lead if they want to solve our problem with big
government. Richard Nixon thought that going off the gold standard
would be good for himself politically. But his reckless action made
possible, even inevitable, the explosive expansion of government
spending, debt, and intervention that followed.
Greenspan, then an independent economist, warned that the remnants
of the gold standard were all that stood between the American people
and Leviathan. He was right, of course, but now, as chairman of
the Federal Reserve, he exercises the power over the economy he
once told all freedom lovers to loathe.
time to time, James Grant, the Austrian School journalist of Grant's
Interest Rate Observer, prepares a prospectus on the U.S. government.
He's not trying to market U.S. debt to his subscribers, but to make
a more profound point: no sane person would buy U.S. debt if the
issuing agent were judged by market standards of creditworthiness.
It is only the central bank's power to buy debt, to be the "lender
of last resort," that leads people to buy and hold in perpetuity.
Orange County went bankrupt, the market worked as it was supposed
to. It evaluated the bonds, saw that something was fishy, and dumped
them all at once. The Orange County government, like the fabled
the tulip bulb industry in Denmark, was bust. Now, if Orange County
had a Federal Reserve, its powerful treasurer could have fueled
the growth of county government until the next millennium.
nothing to brag about. It's not alchemy at work, but a high-brow
version of old-fashioned counterfeiting. A central bank agrees to
create as much money as is necessary to cover every potential monetary
claim. This allows for miles-high pile-up of debt and the unlimited
creation of new money. The Fed, in particular, has a variety of
tricks in its bag: requiring banks to keep fewer savings for outstanding
loans, lowering the rate charged to member banks for overnight purchases,
and outright purchase of Treasury securities.
of our country's economic and cultural decline dates from 1972,
and the Fed is a primary cause. A 1972 dollar is now worth about
29, thanks to the central bank's power to create money out of thin
air and "insure" deposits with a promise never to run out of printer's
ink. People who saved for their retirement then know now that they
are not even close to being prepared now.
increase in nominal prices and wages has not harmed everyone proportionately.
The government is much richer than it was, and look who's poorer:
savers, families, small businessmen, workers, and the rest of the
middle class. We've been clobbered by the Fed's printing presses.
The essentials of life education, health care, housing have all
become much less affordable.
destruction of the gold standard which really began with the founding
of the Fed in 1913 has allowed the government to fund an entire
class of reliably liberal voters, and agitators to push for more
growth of government made possible by fiat, Fed-controlled money
has created a policy culture in which everything is permissible.
Every good and service comes under a myriad of regulations. Every
business and local government obeys countless mandates. No one in
public life talks of substantial budgets cuts on the order of $500
billion, which ought to be only the beginning.
Fed is indeed mischievous, and in more ways than even gold bugs
know. The central bank has recently thrown itself into the social
engineering business. Its regulatory arm won't approve bank mergers
unless the banks have paid tribute to the underclass by overlooking
poor credit histories.
gold standard was once a dam holding back the floods of statism,
but it was blown up by a multi-generational conspiracy of self-interested
politicians and special interests. It wasn't just the central government
that benefited. Large bankers themselves appreciate the profits
and power that come with the ability to expand money and credit
beyond what real savings could ever support.
form of the gold standard was called for in the 1980 Republican
platform, although Ronald Reagan did nothing to give us one (though
he deserves credit for creating the U.S. Gold Commission that enabled
Ron Paul and Jesse Helms to bring back American gold coinage). The
point is this: Republicans in those days at least understood the
importance of reining in the power of the Fed-bank-government cartel
to create unlimited amounts of fiat money.
then-prominence of supply-siders brought some attention to the issue
of monetary reform. But their preferred solution a watered-down
version of the already diluted Bretton Woods system would not have
defined the dollar in terms of gold, or allowed domestic convertibility.
Instead it would have resurrected something weaker than the system
that fell apart in the early 1970s, suggesting that even supply-siders
are unwilling to learn from history.
the 1994 election, the Republican elite hasn't breathed a word challenging
the enormous power the Federal Reserve exercises over the economy.
For the backbenchers, anyway, let's hope it's because of ignorance,
and not because they're owned by the large banks or want the Fed
to fund their pet legislative projects, just as it funded Democratic
ones in the past.
least one trend points in the wrong direction: the Republican leadership
doesn't want to force the Fed chairman to testify before the Banking
Committee anymore. That's too bad since it removes one source of
accountability, if a small one, from an otherwise unaccountable
Republicans operate on the theory that the more "independent" a
central bank is, the less it is tempted into inflationary policies.
The view is a conventional one and derives largely from the empirical
example of Switzerland and Germany.
problem with empirics is that they ignore cause and effect. The
Germans and Swiss have relatively sound money not because the central
bankers are independent, but because the economic and political
culture won't allow inflationary schemes of the sort we're saddled
with. The central banks would lose all credibility if they tried.
can be no such thing as a thoroughly independent central bank in
the way the corner grocery store is independent. Politics determines
a central bank's decisions, as does the desire to increase bank
profits. We're just not supposed to notice or talk about it in polite
the Republicans really wanted to challenge Leviathan, they would
strangle the Fed, its very lifeblood. 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.
the balanced-budget amendment: the gold standard is what big government
types really fear. That so few want to unplug the government's money
machine tells us more about the governing elites, including the
Republicans, then we are perhaps willing to face.