Peter Schiff, who was famously ridiculed for calling the crisis of 2008, steps up as a prognosticator again in his new book, The Real Crash: America's Coming Bankruptcy — How to Save Yourself and Your Country. We had way too much government and cheap credit leading up to 2008, he says, and even more government and cheap credit since then, which is why the next crisis will be the real haymaker.

His book is divided into two main sections. Part I addresses the problems, while part II, which is by far the lion's share of his discussion, presents solutions. In a nutshell, the problem is government, and the solution is to take an ax to it — again and again. Since this view is currently unacceptable to policymakers and the public at large, we can only hope reality will win out before calamity hits.

The Real Crash is encyclopedic in its coverage and highly readable in its presentation. Is there a government agency that truly serves the interests of all Americans? He finds few. What about services people actually want, such as K-12 education: Could they be done better at the state or local levels? Or better still by the free market? In most cases the answer is a profound "Yes!" to both.

Living on Bubbles

Our problems stem from a love of bubbles and the flawed economic theory that blesses them.

During Alan Greenspan's reign at the federal reserve we had a savings and loan bubble, followed by a tech bubble, followed by a housing bubble. Now with Ben Bernanke at the Fed, we have a government bubble, meaning the Fed is creating money that the banks are then lending to the Treasury to expand government. "If you keep replacing one bubble with another, you eventually run out of suds. The government bubble is the final bubble."

When the dot-com and housing bubbles burst we at least had something to show for them — "a few good Internet companies and some pretty nice McMansions, [but] no such benefits will remain when the government bubble pops."

The Fed, Schiff says, should let interest rates rise so people can start saving again. The Fed's low rates discourage savings, which are

the key to economic growth, as it finances capital investment, which leads to job creation and increased output of goods and services. A society that does not save cannot grow. It can fake it for a while, living off foreign savings and a printing press, but such "growth" is unsustainable — as we are only now in the process of finding out.

But for politicians and central bankers, rising interest rates are an abomination. The cost to service the national debt would go through the roof, while the economic contraction that would likely result would raise the deficit. The federal government would have to spend less, and many of the country's biggest companies depend on government spending, through contracting, subsidies, or consumption.

But rising rates and the terrible pain it would cause is the good news; the bad news, if the Fed continues to hold rates low, is the economy will eventually go into hyperinflation. "Rising interest rates will be productive pain — like medicine," he writes, "while hyperinflation will be destructive pain." If we stay the course and pretend everything will somehow work out, we could be facing a crisis worse than the Great Depression.

Bernanke on the Great Depression

Chairman Bernanke, of course, is well-known as an "expert" on the Great Depression, and many people are betting the farm that he and his Keynesian staff have the skills to steer us back to sunny beaches and bikinis. Bernanke's approach is to keep asset values from falling by any and all means. One of the reasons the depression of the 1930s became great, he believes, is because the Fed allowed the money supply to fall following the Crash. With less money in the economy, prices nosedived. People didn't consume as much, consequently businesses didn't profit as much, therefore employees got fired, and the economy headed south in a self-perpetuating spiral.

"Sustained deflation can be highly destructive to a modern economy and should be strongly resisted," Bernanke said in a 2002 speech that inspired his nickname. And by deflation, he means "falling prices."

Schiff explains what's wrong with this analysis.

First, for 100 years prior to the 1929 Crash, bank deposits actually gained value each year. In other words, we had a century of deflation, that much-feared condition that Bernanke has vowed to avoid at all costs.

Second, from mid-1921 to mid-1929, the Fed increased the money supply by 55 percent, giving rise to a real estate and stock bubble. Most but not all economists missed the bubble and its inevitable consequences because rising productivity kept consumer prices fairly stable. Even as stock prices were falling only days before the Crash, Irving Fisher said stocks had reached a "permanently high plateau," and he expected to see "the stock market a good deal higher than it is today within a few months." In 1928, Ludwig von Mises had published a full critique of Fisher's monetary theory, claiming that Fisher's reliance on price indexes would bring about the Great Depression. Nonetheless, Fisher's stable price theory carried the day, and when the sky fell the Fed, along with Hoover, "did something," as Schiff explains:

Hoover's Fed actually boosted the money supply by 10 percent in the two weeks following the 1929 crash. Repeatedly throughout Hoover's term, the Fed created more money. But the money supply fell because people began hoarding cash, and banks stopped lending out their money.

Also,

Deposits went down by 30 percent, but most of that was due to people pulling their money out.

In other words, the money supply shrank despite the Fed's interventions, not because of its inactions.

Did a falling money supply promote massive unemployment?

Not by itself. Hoover insisted on keeping wages high, and during his re-election bid in 1932 boasted that the wages of U.S. workers were "now the highest real wages in the world." They probably were, and by not allowing wages to fall along with other prices, unemployment soared.

Had Hoover simply allowed the free market to function, the recovery would have been so strong that he likely would have been elected to a second term, and Teddy would have been the last Roosevelt to occupy the White House. Instead he handed the Keynesian baton to Franklin Delano Roosevelt . . .

None of this, as we know, is even close to the standard view of the Depression. Instead, we're told

that government needs to play a bigger role in battling downturns, and the Fed needs to pump in cash to jump-start the economy. This bad lesson stays with us today, and beginning in the early 1990s, this way of thinking started the cycle of bubbles that put us where we are now.

End Keep the Fed

The one puzzling part of Peter Schiff's masterpiece is his view that the federal reserve, as originally conceived, was a good idea. He describes the Fed as "reckless," the "biggest culprit in discouraging savings," and insists "we never should have trusted the Fed to respect its boundaries." But he also says:

The original intention of the Fed was something I might have supported had I been around back then. In theory, it was an agent of stability that could also promote economic growth. . . .

The Fed would increase the money supply as the economy expanded, and then reduce the money supply as the economy contracted. . . .

In theory the Fed was a good idea. It's just that in practice it did not work, because politicians quickly abused it.

He argues that before 1913, banks were issuing their own currencies backed "by assets, such as gold, and by the banks' loan portfolios." If "you traveled to California, your bank note from Connecticut might not be honored by other merchants or the California banks."

Thus, he concludes, it was natural "for bankers to hatch an idea of a "banks' bank. Banks could deposit some of their assets — commercial paper or gold — with the Fed, and the Fed in return would issue its own bank notes to the individual bank."

While this may sound plausible, questions arise as to (1) why the "banks' bank" needed "guns and badges" (i.e., government cartelization) to make it work; (2) why loan portfolios or commercial paper can be assumed to be an acceptable substitute for gold coin; (3) why a central bank is needed to expand and contract the money supply — in other words, why assume the supply/demand relation of the free market fails when the good in question is commodity money; (4) why the historical record of central banks acting as an agent of stability and sustainable economic growth is short on examples; and (5) why did the Fed, at its creation, possess a massive inflationary structure if it was sold as a means to promote stability?

I believe central banking, by its nature, is a means of institutionalizing, centralizing, and cartelizing moral hazard. It is my view that the Fed was never a good idea, but one of the absolute worst ever brought to fruition.

These concerns notwithstanding, his critique of the Fed as it currently exists is emphatically on the money. Though he doesn't support its abolition he does say, "In an ideal world, there would be no Fed, and I think the nation would be better off if the Fed had never been created."

How we can save ourselves

Readers of his book don't have to be swept up in the impending disaster. Unlike the crash of 2008 when investors flocked to the dollar as a safe haven, he believes the dollar and U.S. bonds will collapse before the U.S. economy goes under. He devotes a chapter to crisis investing based on the observation that since Americans have been living beyond their means, many others have been living beneath their means.

Elsewhere in the world there are more creditors than debtors, and there is pent-up demand and excess production. In the future, these economies will see a surge in demand, while ours will see demand fall. . . .

Bottom line: purchasing power is shifting. You should try to invest in companies that will benefit from this shift. These will primarily be foreign companies. Of course, many foreign companies sell to the United States. These aren't the businesses I'm talking about.

He describes his investment strategy as

a stool with three solid legs: (1) quality dividend-paying foreign stocks in the right sectors; (2) liquidity, and less volatile investments, such as cash and foreign bonds; and (3) gold and gold mining stocks.

Of particular interest to this reader was his section on the poor man's investment strategy. If consumer prices head for the moon the government will likely impose price controls, thereby creating shortages. Solution: buy in bulk now and stock up. One advantage is that

any returns are tax free. For example, if you buy a box of cornflakes today and eat it two years from now when the price of a new box is 40 percent higher, that's a 40 percent tax-free return.

His writing is full of fresh and sometimes bold insights on long-standing issues. Readers will find his discussions on drug prohibition, marriage, abortion, guns, health care, and prostitution especially engaging, I believe. His detailed historical and legal discussion of the income tax is the best I've ever read, nor does he pull punches in describing it:

It's hard to imagine a tax more destructive of productivity, more destructive of entrepreneurship, more destructive of our lives, more difficult and costly to comply with, more subject to gaming, or more absurd in its logical consequences. Congress should immediately, fully, and permanently abolish the income tax, and the Internal Revenue Service (IRS) along with it.

He would replace the tax with a revenue-raising tariff on imports.

Yes, tariffs suck. But they suck less than income tax. In fact, they might be preferable to a national sales tax.

Conclusion

Peter Schiff has written a riveting guide on what to do about our snowballing social, financial, and economic problems. Inasmuch as he recommends freeing people from government, his solutions are far from pain-free and consequently will not be popular with the political class or their dependents. Well, it's time they got over it. As Schiff writes in his introduction, it's as if we're headed down an icy hill with politicians in the driver's seat accelerating toward the bottom.

We need a grown-up to grab the wheel and steer us into the ditch on the side of the road. That won't be pretty, but it's better to go into the ditch at 80 miles an hour than crash into a brick wall at the bottom of the hill at 120.

The Real Crash is a must-read.

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.

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.

The following is the preface to my forthcoming book, The Jolly Roger Dollar: An Introduction to Monetary Piracy, which will soon be available on Amazon.

Money and banking should be permanently divorced from the State.

Mankind should be divorced from the state but that’s going well beyond the scope of this little book. For now, at least, our goal should be to kill central banking wherever it exists and open up the market to alternative moneys – alternatives to the fiat paper issued by central banks. Market participants should be free to choose what they wish to use for money without government interference. Legal tender laws, since they constitute invasions of private property, should be repealed. For the same reason, banking should lose the legal privileges that protect the practice of fractional reserve lending. What is needed is freedom – freedom to conduct our monetary and banking affairs regulated only by private property rights and economic law.

The cover of this book was created to remind readers that the monetary and banking system we have is fundamentally an act of theft. It is monetary piracy because the currencies we swap for real goods and property titles are hijacked versions of the real thing. What constitutes the real thing, who did the hijacking, when, for what purpose, and the results it has brought are discussed in the remainder of this work.

The money we now carry in our pockets or checking accounts serves the purpose of providing a medium of exchange. If it didn’t banks would be in the wallpaper business. But it also serves to transfer wealth from those unconnected to the money creation process to those closely associated with it. This is why monetary policy is more accurately thought of as monetary piracy.

In 2010, Federal Reserve officials celebrated the centennial founding of the Fed at Jekyll Island, Georgia. The institution that was finally passed into law in 1913 was supposed to make financial crises and bad money virtual impossibilities. It has instead made crises and bad money permanent conditions. If freedom is not allowed to work its curative powers, the Fed and its currency-on-demand machine will continue to harm us.

Liberty is always on the defensive, having to bargain and plead with a state-backed ruling elite. We should not have to justify human freedom. The free market, centered as it is around consumer preferences, open competition, and private property rights, will keep us honest, to borrow an expression from my father’s era. If there is to be a ruling elite, let them rise to their positions naturally, as entrepreneurs on a free market. Only in such an environment will those on top be on permanent probation, forever subject to the market’s approval, because the customers who put them there always have the option of removing them when they fail to deliver.

For the most part this book is based on articles I wrote over the past decade. I have redacted some of the material to clarify certain points or update sources. If the same thoughts reappear now and again, I offer this explanation: the subject of money and banking is so corrupted with myth, misinformation, and half-truths that repetition is a necessary corrective. It strikes me as incontestable that, as Goethe is said to have observed,

Truth has to be repeated constantly, because Error also is being preached all the time, and not just by a few, but by the multitude.

Reprinted with permission from Barbarous Relic.

George F. Smith [send him mail] is the author of 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.

"The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves." ~ Alan Greenspan, 1966

An NBER working paper by Carmen Reinhart and Belen Sbrancia describes how Western governments in the post-world war economies unloaded their debts on credulous citizens through a policy of financial repression. Because it is politically palatable (as opposed to outright default, hyperinflation, or overt tax increases) some analysts expect governments to try it again. One part of it – inflation – is already well-underway. Financial repression means savers (investors) will be forced to pay leviathan’s debts, whether they like it or not.

The particulars of financial repression vary, but the general scheme is this: Using its power to violate private property rights, the government makes the domestic investment community a "captive audience." With central bank cooperation it mandates low nominal interest rates along with a higher inflation rate, resulting in negative real interest rates. The latter transfers wealth from, say, pension funds to the government, thus liquidating a portion of its debt. Since the bond holders are "captive," there is no ready remedy for investors wishing to preserve or grow their wealth. If investors attempt an alternative such as purchasing physical precious metals, the government will either restrict those activities or abolish them. One way or another it will see that it has the "captives" needed to pay its bills.

The working paper contains language suggesting the authors have accepted several monetary fallacies. For example, we read:

It is important to stress that during the period after WWI the gold standard was still in place in many countries, which meant that monetary policy was subordinated to keep a given gold parity. In those cases, inflation was not a policy variable available to policymakers in the same way that it was after the adoption of fiat currencies.

The post-WWI gold standard was a straw version of the classical gold standard, which itself was under government control. Yet it’s true, holders of Federal Reserve Notes could, in theory, swap them for gold coins prior to Roosevelt’s heist in 1933. "Monetary policy" (inflation) was indeed subordinated to gold, which is why government got rid of it, and the government-spawned gold-exchange standard of the 1920s served to set up gold, intentionally or not, to take the fall when the roof collapsed. As economist Joesph Salerno writes,

The end of the classical liberal era in 1914 caused the removal from government central banks of the "golden handcuffs" of the genuine gold standard. Were these "golden handcuffs" still in place in the 1920’s, central banks would have been rigidly constrained from inflating their money supplies in the first place and the business cycle that culminated in the Great Depression would not have taken place.

The fractional-reserve scheme began to cave, as it always had, when too many people attempted to claim their property at the same time. It exposed the essential fraud of the banking system, though few economists see it that way. Which is not surprising, given that most of them, directly or indirectly, feed at the Fed’s trough.

In another section of the NBER paper, Reinhart and Sbrancia tell us,

World War I and the suspension of convertibility and international gold shipments it brought, and, more generally, a variety of restrictions on cross border transactions were the first blows to the globalization of capital. Global capital markets recovered partially during the roaring twenties, but the Great Depression, followed by World War II, put the final nails in the coffin of laissez faire banking.

This is truly shameful scholarship. Banking was in no sense "laissez-faire." The Federal Reserve Act of 1913, establishing a government-enforced banking cartel, erased the last traces of freedom in banking. As we read in Wikipedia,

[Laissez faire] describes an environment in which transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs and enforced monopolies.

The Fed is a monopoly money producer established by the state. As such it is in violation of capitalism’s private property foundation, and its very presence creates distortions in market activities. (See The Ethics of Money Production, p. 170) It seems that the further we move away from laissez-faire the more it is blamed for the catastrophes that follow in interventionism’s wake.

Still, the NBER paper has great value. The authors (rather tediously) document how Western governments from 1945-1980 used repressive financial schemes to pay down their debt relative to GDP. The great appeal of such schemes is their transparency to the general public, making them virtually irresistible to today’s debt-choked governments.

Reinhart and Rogoff’s This Time is Different: Eight Centuries of Financial Folly spells it out this way:

Under financial repression, banks are vehicles that allow governments to squeeze more indirect tax revenue from citizens by monopolizing the entire savings and payment system. Governments force local residents to save in banks by giving them few, if any, other options. They then stuff debt into the banks via reserve requirements and other devices. This allows the government to finance a part of its debt at a very low interest rate; financial repression thus constitutes a form of taxation. Citizens put money into banks because there are few other safe places for their savings. Governments, in turn, pass regulations and restrictions to force the banks to relend the money to fund public debt. (from Prudent Investor Newsletters) (emphasis mine)

It’s an effective racket, almost as effective as the central banking – debt monetization schemes that brought us to disaster’s door in the first place.

Reprinted with permission from Barbarous Relic.

George F. Smith [send him mail] is the author of 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.

As Adam Smith explains, the free market brings its wonders to the world by virtue of an invisible hand. Individuals cooperating under the international division of labor and seeking generally to satisfy their own wants end up promoting the general welfare, often without intending to or without realizing it.

Not to be outdone, government too has developed a systemic hand that is usually not seen. Unlike the market, when this hand moves, we lose. Through inflation, government snatches the market’s bounty for its own purposes, enervating our lives accordingly.

As a “stealth tax,” inflation requires no legislation to impose, no agency to collect, and diverts responsibility for damages onto politicians’ favorite whipping boys. It gives government the ability to buy almost anything for nothing, while creating endless problems that serve as a pretext for intervention. Inflation is the foundation of arrogant government and a prescription for our own demise.

Government inflates through its central bank, the Federal Reserve System. The Fed does many other things, but its foremost responsibility is to make the dollar buy less without leaving a trail.

Central banks such as the Fed are engines of inflation. Inflation is not some curse of capitalism; it is government policy, and it destroys capitalism . Inflation, economist Judy Shelton explains, chisels away at the foundation of free markets and the laws of supply and demand. It distorts price signals, making retailers look like profiteers and deceiving workers into thinking their wages have gone up. It pushes families into higher income tax brackets without increasing their real consumption opportunities.1

Inflation is alluded to in the Fed’s charter, which calls on it “to furnish an elastic currency.”2 Ben Bernanke once boasted about it: “[T]he U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”3

If this sounds like counterfeiting, be advised that almost no one sees it that way, especially government and Fed officials. According to the MSN Encarta dictionary, a counterfeiter is a person who makes “a copy of something, especially money, in order to defraud or deceive people.” Does that shoe fit the Fed? You decide.

The Fed’s inflation is often part of a process called “monetizing the federal debt,” a stultifying expression describing the hocus-pocus used to cover government’s deficits. In simple language, government puts ink on pieces of paper and calls them “securities,” in response to which the central bank puts ink on pieces of paper, calls it money, and buys the securities (though indirectly).

Like magic, the federal government has new money to spend – thanks to the tooth fairy known as the Fed.

When government imposed its central bank on us in 1913, pulling money from a hat was more of a challenge than it is now. If the Fed printed too many paper tickets, people would begin to wonder if the banking system could redeem them in gold on demand, as stated on the tickets. The fear of a bank run acted as a brake on inflation.

Since inflation is the increase in the money supply, gold imposed a limit on the amount of government debt the Fed could buy, which in turn put restrictions on government spending. Restrictions on government spending put restrictions on government expansion. If gold could be eliminated, those restrictions would go away.

When the Fed was being sold to the public, its advocates told people it would prevent panics and recessions by virtue of its power to provide money and cheap credit on demand. Eight years after its inception the country slid into a recession (1921), and after another eight years the stock market crashed. By the time a new administration took power in 1933, the economy was on its knees.

Assured the free market had failed them, a bewildered public turned to government for deliverance. On April 5, 1933 President Roosevelt issued Executive Order 6102, in which he ordered all persons to turn in their gold or face a possible 10-year prison sentence and a $10,000 fine. He gave them until April 28 to comply.4 For this and countless other New Deal interventions, most historians regard Roosevelt as a demigod for “saving” capitalism.

After the gold heist, dollars were no longer redeemable, at least domestically. Foreigners were allowed (though not encouraged) to swap their dollars for gold until August 15, 1971, when President Nixon repudiated the government’s redemption obligations.

With gold completely severed from the dollar, our monetary system lost its best defense against political caprice. Not surprisingly, inflation rose to double digits by 1973. As economist Ludwig von Mises tells us, the gold standard makes the supply of money depend on the profitability of mining gold.5 The pure fiat dollar faces no obstacles to its production, other than the integrity of government and Fed officials.

Nevertheless, spokespeople for government’s monetary monopoly assure us the proliferation of printing press dollars helps the economy. As such, the Fed doesn’t inflate, it accommodates. Inflation is a dirty word for its “accommodative monetary policies.”6

Fed Accommodation

What happens when the Fed “accommodates” us by increasing the stock of money?

First, it reduces the value of the dollar. More dollars means each one buys less, putting upward pressure on prices. Technology and improvements in production tend to push prices downward, but because of inflation fewer people can afford admission to the market’s bounty.

As a rough idea of how far the dollar has plummeted, $5,000 in 1913 had greater buying power than $110,000 in 2011.7

Second, a depreciating dollar discourages savings. Why put money away if it’s going to lose value? Instead, millions of investment neophytes put their funds in the stock market in an attempt to protect themselves against Fed printing presses. Has this been a successful hedge?

During the biggest bull market in history – 1984 to 2001 – the S&P rose 14.5 percent a year. But frequent trading by fund managers and high fees reduced the average rate of return to 4.2 percent annually. According to Vanguard group founder John Bogle, if you include the results of 2002, the average return from equities was under 3 percent per year – less than the inflation rate.8

Third, new injections of money spur a tinsel prosperity, and the Fed keeps injecting new money to feed the boom. With so much borrowing and spending, prices may rise even faster than the rate of currency inflation.

As the public broods over higher prices, a semantic shift takes place. Inflation comes to mean not an increase in the money supply, but the rise in prices itself.9 Thus, businesses that charge higher prices become the villains, while government officials that threaten price controls are the avenging angels. Most people have no idea what the Fed does, so government can scapegoat business and appear to be defenders of the public weal. Nor do most people understand that price ceilings create shortages, by encouraging consumption and retarding production. Shortages, in turn, bring on government-imposed quotas, which foster corruption, black markets, and violent crime.

Fourth, as the influx of dollars drives prices higher some industries find themselves at a disadvantage with foreign competitors, tempting them to lobby Washington for protection from imports. Protective tariffs and quotas, of course, push prices up further, while sometimes sparking trade wars as other countries retaliate on American exports. And trade wars can lead to shooting wars.

In June, 1930, with the economy fighting the recession brought on by Fed monetary policies, President Hoover signed the Smoot-Hawley Tariff Act, raising tariff levels to the highest in U.S. history. Other countries immediately retaliated, markets shut down, and economic conditions worsened worldwide.

Fifth, inflation raises nominal incomes, pushing people into higher tax brackets, which increases government tax revenue. As people’s wealth goes out the window in depreciating dollars, taxes consume more of what remains.

Sixth, inflation shifts wealth from people who can’t or don’t know how to defend themselves from monetary destruction to those who can. As a simple example, a person living on a fixed income may find his buying power so depleted he sells a family heirloom to pay for an unanticipated expense. Or a bank that was part of the lending spree that helped drive prices skyward may foreclose on the homes of some of its borrowers, whose incomes were ravaged by monetary debauchery.

Seventh, the Fed’s “accommodative” measures keep people working much later in their careers because they cannot afford to live off their deteriorating pensions. Dollar depreciation is a huge reason why both husband and wife work in many families.

Eighth, because government often gets the new money first, it can fund controversial measures such as war and bailouts without drawing taxpayer ire. Government simply puts the funding on its charge card, prompting the alchemy of Fed debt monetization. We get the bill, of course, but this way it’s spread over everything else we buy, so we never see it itemized.

Ninth, because inflation has an uneven affect on prices, raising some faster or sooner than others, people have a hard time distinguishing illusion from reality. As cheap credit abounds, business people, investors, and cube dwellers hear the siren call of can’t-miss profit opportunities. Fortunes are made then lost, and companies that lose money find it harder to keep employees.

Tenth, government may pose as the savior of a group of voters they’ve impoverished, such as the elderly, by subsidizing their medical expenses. New entitlements create the need for more revenue, which fuels more inflation, pushing the dollar closer to a complete collapse.

Eleventh, as Mises observed, “under inflationary conditions, people acquire the habit of looking upon the government as an institution with limitless means at its disposal: the state, the government, can do anything.”10 Through deficit spending the state will devour limited resources trying to maintain this illusion.

If gold is the barbarous relic its many detractors claim it is, we might expect the Fed’s fiat currency to be a better deal. But even former Fed Chairman Greenspan admits that it isn’t, telling a New York audience in 2002 that prices soared in the decades following the gold heist of 1933.11

Lord Keynes, the 20th century’s guru of deficit spending, never spelled out how deficits should be financed, admitting only that increased taxation was not the answer.12 Perhaps he had pangs of conscience about calling for inflation outright, since he knew it would destroy society in a manner that not one man in a million could diagnose.13

Political issues dominate the news, but how little we hear about the policies nurturing those issues, one of which is government’s power to confiscate wealth with the Fed’s invisible hand.

We should wipe every trace of the Federal Reserve from our lives and allow the market to freely choose our monetary standard, which most likely would be gold. In the meantime, the FOMC should be prohibited from purchasing any more “assets.”

References:

1. “Capitalism Needs a Sound-Money Foundation,” Judy Shelton, The Wall Street Journal, February 11, 2009
2. The Federal Reserve Act
3. Remarks by Governor Ben S. Bernanke, November 21, 2002, “Deflation: Making Sure ‘It’ Doesn’t Happen Here”
4. Presidential Executive Order 6102
5. Mises, Ludwig von, Economic Freedom and Interventionism
6. Remarks by Governor Ben S. Bernanke, January 4, 2004, “Monetary Policy and the Economic Outlook: 2004”
7. Bureau of Labor Statistics Inflation Calculator
8. Bonner, William and Wiggin, Addison, Financial Reckoning Day: Surviving the Soft Depression of the 21st Century, John Wiley & Sons, Hoboken, New Jersey, 2003. p. 245
9. Sennholz, Hans F., Age of Inflation, Western Islands, Belmont, Massachusetts, 1979. p. 69
10. Mises, Ludwig von, Economic Policy: Thoughts for Today and Tomorrow, Regnery Gateway, Washington, D.C., 1979, p. 66
11. Remarks by Chairman Alan Greenspan, December 19, 2002, “Issues for Monetary Policy”
12. Hazlitt, Henry, “Keynesianism in a Nutshell,” 1982
13. Keynes, John Maynard, Economic Consequences of the Peace, 1919

Reprinted with permission from Barbarous Relic.

George F. Smith [send him mail] is the author of 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.

Would you buy
a gold bar from a vending machine? If the ATM were located in a
secure area, and the bars carried an acceptable premium over the
current spot price and could be purchased in units as small as one
gram or as large as an ounce, would you consider swapping your unbacked
paper money for an authenticated 24-karat gold bar?

There are entrepreneurs
who are betting you would. Thomas Geissler, managing director of
the German company GOLD
to go, installed
a gold vending machine in the lounge of the three-billion-dollar
Emirates Palace Hotel in Abu Dhabi earlier this month. His company
is able to produce fifty gold ATMs a month that he plans to install
in places where "the machine will be liked by the audience,"
which so far doesn't include the U.S. Another firm debuted a
similar gold vending machine in Las Vegas a few weeks ago.

But gold is
not yet money again. Why would people buy gold from a vending machine
when all they could do is hoard it or give it away? To Austrians,
the answer is the same for buying gold anywhere: to prepare for
the ultimate rainy day – the Flood, for those who like biblical
references. Bernanke may not want to shower the world with dollars,
but history suggests politicians will gladly do the job and blame
the disaster on speculators (and now Asians, given their current
economic position). If enough people have gold bars and coins in
their possession, the government will have trouble imposing a new
paper money standard to replace the one it destroyed. Hyperinflation
would be bad enough, but to allow government to lay the foundation
for another monetary disaster would be an act of supreme treason
to mankind.

Gold ATMs would
be a convenient way of getting civilization's choice for money to
the general public. Let Krugman and other statists howl about how
senseless it would be to return to the "barbarous relic"
and how Keynes would be rolling over in his grave. People are still
wise enough to know a con game when they see it. The bailout mania
of recent times has shredded the slick wrapper on government's fraudulent
monetary scheme. People see the massive corruption but not necessarily
where it's taking us. They don't see the endgame of monetary inflation.
Thus, the run on gold and silver has not happened yet. Can a run
be modulated with technology? The ATMs' novelty and very presence
will alert people to the seriousness of the crumbling monetary order
and induce them to act now.

If gold-buying
is limited to a relatively few who understand the monetary turmoil
to come, the majority of the public will be vulnerable to the usual
barrage of controls, edicts, and accusations that accompany high
inflation and hyperinflations. But if most people have gold (and
silver) in their possession, they will have a potential exchange
alternative to the wallpaper the government cranks out. They will
learn that the precious metals preserve their wealth, while the
government's imposed money drains it. As the dollar falls ever closer
to zero in purchasing power, their gold and silver holdings will
turn from being keepsakes to items they could exchange for real
goods. ATMs that now accept fiat paper for gold could be joined
by machines that exchange gold for silver or copper, for use in
smaller transactions.

Mises said
for gold to become cash people must have it touch their senses.
In his words (pdf),

Gold must
be in the cash holdings of everybody. Everybody must see gold
coins changing hands, must be used to having gold coins in his
pockets, to receiving gold coins when he cashes his pay check,
and to spending gold coins when he buys in a store. [pp. 450--451]

Very few on
planet earth today have had this experience. As a start, gold-dispensing
ATMs could get those coins into pockets and purses.

As more gold
went into more hands through gold ATMs people would begin to appreciate
the value of saving. In 1966 Alan Greenspan wrote:
"In the absence of the gold standard, there is no way to protect
savings from confiscation through inflation. There is no safe store
of value." Since 1976 matters have
improved somewhat. Government makes us accept its inflated paper,
but it doesn't forbid us to use an alternative. Not directly. It
penalizes gold with sales and capital gains taxes. Still, using
an ATM to get rid of dollars for gold and silver would be a convenient
way for Main Street to build insulation from government "monetary
policy."

Gold and silver
ATMs would teach valuable lessons to our youth. They already know
the metals are rare and highly-prized. And as any parent could testify,
kids of all ages love vending machines. As they fed depreciating
paper money into the machines and pulled 24K gold bars from the
chute in exchange, it might occur to them they were, in effect,
snubbing the tyrants. They would be taking a step, however small,
towards putting their future in their own hands rather than leaving
it to the whims of Washington bureaucrats.

Government
officials could always find ways to stop or cripple the emerging
gold ATM movement, but doing so would be self-defeating. As parasites,
they have a vested interest in the prosperity of others. We can
always hope they have enough self-interest to step aside and let
the market prevail.

George
F. Smith [send him mail]
is the author of 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.

The question
of how much money an economy needs assumes we know what money is
and whether we need any at all.

If I had never
heard of Mises, Rothbard, and other Austrian economists, I might
say money is the Ben Bernanke–issued paper I would like to
have in my wallet. I want absolutely no limit on the amount. When
I decide to spend, I want the money to be there so I can spend it.
Don't make me think about the supply; it should be inexhaustible.
You want hard times? Make money hard to get. When I don't have enough
money, I can't spend, and that hurts me and everyone who's dependent
on me, which is ultimately the whole world. As a general rule, we
can never have too much money in the economy — the more, the better.
Therefore, when we read about Bernanke shifting the printing press
into high gear, we should ignore the babble accusing him of destroying
the dollar, the economy, and what's left of peace, liberty, and
prosperity. We should feel comforted he's doing the right thing.
Or if he's not doing the right thing, it's only because he's not
creating enough money. But in fact he is — look at the Dow.
Look at the staggering profits
of Goldman Sachs. As the big guys go, so goes the country. Wasn't
that
the rationale for Paulson's handouts? Even the unemployment
rate is slowing. We'll soon be back in Fat City — get ready
to uncork the champagne and toast the Fed.

Money in the
sense used above has never been accepted by people voluntarily.
It has to be forced on us through monopoly privilege and legal tender
laws, along with the outlawing or restriction of alternative monies.
Government money comes into existence after a market money is well-established,
with government's notes redeemable in the commodity money. Then
government eliminates the commodity backing and forces people to
use its fiat paper money exclusively. As Mises argued in his regression
theorem, there is no way government can impose its paper money
on an economy from scratch. Money arises first in a barter economy
as a commodity that is commonly accepted in trade.

But why did
people even use a commodity money? Was that itself a corruption
of barter?

Money makes
prosperity possible

Commodity money
arose voluntarily as a logical extension of the direct exchange
of useful goods. In a barter world, the volume of exchanges is limited
to the double-coincidence of wants. Furthermore, the producer of
an indivisible good, such as a chair, might find he wanted five
other goods of lesser value, each from different producers. Without
money, he would either have to do without or trade at a perceived
loss.

Eventually
people discovered they could get around the limitations of direct
exchange by trading their products for goods they could trade later.
Certain goods eventually proved themselves more widely accepted
in trade than others, and people started acquiring them primarily
to make future trades. A good widely used for such indirect exchanges
became known as money. Among its various physical qualities, the
money chosen was divisible into smaller homogeneous units so that
the chair-maker, say, with money at his command from a previous
exchange, could acquire a dozen ears of corn, for instance, without
giving up a whole chair.

Commodity money,
then, arises through the voluntary cooperation of market participants,
meaning there is widespread support for the money without violation
of anyone's property. Over time, gold, and to a lesser extent silver
and copper, became the market's choice of monies.

As Rothbard
tells us, money makes it
possible for

. . . an
elaborate "structure of production" [to] be formed,
with land, labor services, and capital goods cooperating to advance
production at each stage and receiving payment in money. [pp.
20--21]

The round-about
way of trading a good for money, then trading money for some other
goods, is the basis of an expanding economy and the division of
labor. With commodity monies, or what Guido Hlsmann terms "natural
monies," civilization developed, with people living in
houses instead of caves.

In sum, money
originated as a highly-marketable commodity through voluntary exchanges.
It is needed for human life to flourish. But how much do we need?

Following Rothbard,
we learn that the total supply of commodity money in society is
equal to the total weight of the existing money-stuff. If the market
has selected gold as money, then the supply will consist of the
total weight of gold in society, regardless of its shape. Since
the money is a commodity, its supply will be governed by market
forces, such as the profitability of mining or its demand for nonmonetary
uses. Because money is not used up like other commodities and its
potential supply is thought to be small, changes in its supply will
tend to occur slowly.

Since money
as such is neither a consumer nor a capital good, increases in its
supply confer no social benefits. If the supply of hammers increases,
it boosts the availability of hammers to the public; if the supply
of money increases, it makes the hammers more expensive and lowers
their availability. More money, therefore, does not make the general
public richer; it merely dilutes the purchasing power of the money
unit. On the other hand, if the supply of money should decrease,
each remaining monetary unit will buy more. The supply of money,
therefore, does not affect the total wealth of society; it only
affects the price of that wealth.

Conclusion:
Any money supply will do, above a minimum threshold.

How did
we wind up with Bernanke?

There will
always be people who wish to live at the expense of others. Government
does this through taxes and inflation — which is here used as an
increase in the money supply — and in modern times, inflation, because
it is generally misunderstood by the public, is a politically safer
method of confiscation than taxes.

Banks generate
inflation through the practice of fractional-reserve banking. Banks
profit from inflation. The gold redemption requirement limited the
amount of inflation banks could create.

Inflation also
creates crises. In the old days when people lost confidence in their
banks they made a run on their banks to get their money back. No
fractional-reserve bank could meet its obligations. The government
protected the banks by allowing them to default on their obligations
but still keep their doors open. They were allowed to collect loan
payments from debtors.

In 1913, after
over a decade of promoting the idea of banking "reform,"
the biggest bankers got together with key politicians and got a
law passed creating a central bank — the Fed. The Fed would be in
charge of the money supply. The government granted its notes a monopoly
privilege and legal tender status; in return, the Fed provided the
government a new revenue source without the hassle of the legislative
process. The year 1913 is frequently cited as the end of the American
republic and the beginning of the American empire.

For the first
two decades of the Fed's existence, gold was still money, though
its everyday use had been discouraged. As long as gold was still
the heart of the monetary system, it could disrupt Fed plans.

Fed inflation
during the 1920s brought on the depression of the 1930s. This is
not the accepted explanation. The accepted explanation is there
was no inflation during the 1920s because prices remained stable
— and in most quarters stable prices mean no inflation. Prices remained
stable because real economic growth offset Fed increases in the
money supply.

The Fed's monetary
inflation caused malinvestments that had to be corrected. Unlike
all previous recessions in American history, including the recession
of 1920–1921, the government refused to let the correction
happen, first under President Hoover, then under FDR. One of the
first things President Roosevelt did was to confiscate the people's
gold. He took the country off the gold standard, announcing that
Americans could no longer get Fed notes and deposits redeemed in
gold coins. President Nixon did the same for the rest of the world
in 1971.

The American
dollar is no longer tethered to gold. Whereas money was once difficult
to create, thus keeping its supply limited and protecting its value,
the Fed can create fiat paper money in any amounts at the push of
a button. Because of the benefits that accrue to the early users
of the new money, there is pressure throughout the political system
to keep the money machine printing.

Ben Bernanke
is committed to monetary inflation. He claims it is healthy in boom
times and will pull us out of any recession. He blames the Fed for
not inflating enough once the Great Depression began. He's determined
not to make the same mistake today.

Fiat paper
money regimes are not designed to promote a healthy economy. They
are designed as a means of wealth distribution for the benefit of
a few.

That probably
doesn't include you, and it definitely doesn't include me.

George
F. Smith [send him mail]
is the author of The
Flight of the Barbarous Relic, a novel about a renegade Fed
chairman. Visit his website.
Visit his blog.

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 does it in a manner which not one man in a million is able
to diagnose.

At no time
in college did I come close to even hearing about that passage,
let alone actually reading it. The book in which it appeared was
not assigned, nor was the idea of "currency debauchery"
discussed in any political science or economics class. From what
I've read of the author it is by far the most profound thought he
ever penned, and one of the most important ever written. If every
high school student were required to imbibe this passage as a condition
of graduation, the world would likely be facing a sunnier future.

Unfortunately
for the world, the author became famous for raising currency debauchery
to a political and economic ideal. The teachers of today's students,
in high school and elsewhere, were trained to accept that ideal,
in some cases as a condition of graduation. Debauchery — inflation
— is and has been standard operating procedure of every country
that boasts a currency, with the inflating done slowly, at least
in the West, so people won't notice. The only exceptions occur when
those mysterious recessions arrive that require heavier doses of
inflation to prevent the price level from falling. God help us if
our cost of living ever declined.

Ninety years
after publication of that passage, another book has arrived calling
for the abolition of the world's most respected currency debaucher,
the U.S. Federal Reserve. It's author, Ron Paul, has spent the better
part of his career trying to wipe the Fed and its toxic effects
off the face of the earth. His new book, End
the Fed, is, as the title indicates, a death threat to the
central bank. Given Paul's popularity among libertarian activists
and his congressional support for blowing the lid off Fed secrecy,
the book cannot be dismissed as fanciful.

Paul's libertarian
view of the Fed brought to mind the 1950 Damon Knight short story,
"To Serve Man." In that tale, aliens pay a visit to earth
and claim to be man's benefactors, telling a special session of
the U.N. that they want "to bring [them] the peace and plenty
which we ourselves enjoy." Two U.N. translators steal one of
the aliens' books and manage to translate the first chapter, only
to discover to their horror that it's a cookbook.

As he has done
countless times, Ron Paul has translated the Fed-speak of the central
bankers and its many defenders and subjected it to the rigors of
free market and moral analysis. And the results are no less frightening
than the aliens' culinary recipes for mankind.

Can the Fed
be reformed?

The first chapter
of Paul's 210-page book brings the curious on board by explaining
why we should care about killing "the beast," as he refers
to the Fed on at least one occasion. Wouldn't it be more reasonable
to push for reform? Abolishing any government creature is virtually
impossible, especially one nearly a century old that serves as a
pillar of the leviathan state. Isn't a leader who calls for its
abolition setting himself up for defeat?

The answer
is no, for at least two reasons. One, any reform of the Fed would
be pointless. Reform would imply it could exist in some condition
that would be beneficial to all Americans. As a banking cartel with
the license to counterfeit, there is no version of the Fed consistent
with the ideas on which our welfare depends: voluntary exchange
and private property. Second, abolishing the Fed is absolutely necessary
if we care about freedom and civilization, because the central bank
and its printing press are destroying both.

Ending the
Fed, Paul writes,

[W]ould bring
an end to dollar depreciation. It would take away from the government
the means to fund its endless wars. It would curb the government's
attacks on the civil liberties of Americans, stop its vast debt
accumulation that will be paid by future generations, and arrest
its massive expansions of the welfare state that has turned us
into a nation of dependents. [pp. 6--7]

One of his
core beliefs is that,

Bad economic
policy can destroy a civilization — no policy is more dangerous
than bad monetary policy. [p. 9]

He moves on
to the Fed's fictitious history of how it was conceived as a means
of curbing those injurious panics and recessions of the 19th
century, and particularly the Panic of 1907. The solution to the
problem of panics, said the bankers, was a more elastic currency,
which is banker talk for money they could create when they wanted
it. The banks also needed some institution to bail them out when
they got in financial trouble. To accomplish their aims, the banking
elite, together with key politicians, devised a plan for a central
bank with a faade of decentralization. They called it the Federal
Reserve, and it was passed into law by a depleted Congress two days
before Christmas in 1913.

One Fed champion,
the Comptroller of the Currency, issued a statement in 1914 that
the Fed "supplies a circulating medium absolutely safe,"
and that all the previous panics would "seem to be mathematically
impossible." He went on to say that "national-bank failures
can hereafter be virtually eliminated." [p. 24] Drawing on
data from the National Bureau of Economic Research, Paul shows that
at least 18 "mathematically impossible" recessions have
occurred since the Fed's creation.

Later, he discusses
the connection between central banking and government's appetite
for war, and how the Fed provided the bulk of the funding needed
to send Americans overseas to fight in the European bloodbath of
1914–1918.

For the United
States, [the "Great War"] meant the entrenchment of
the imperial presidency and a globalized foreign policy mission.
For Germany, it created the conditions of the great inflation,
which led to Hitler . . . For Russia, it meant the beginning of
Communism. [p. 66]

In a very real
sense, we're still fighting the "war to end all wars"
that central banking made possible.

In a chapter
called "The Current Mess," Paul discusses why the housing
bubble burst and why the government's response to it will only intensify
the crisis. The suffering of housing and other sectors were "symptoms
of a deeper problem: the Fed and its role in sustaining an unsustainable
paper money system." [p. 124] Even Treasury secretary Timothy
Geithner admitted to Charlie Rose that "easy credit" was
one of "three types of broad errors of policy" that created
the crisis, though as Paul's partial transcript of their conversation
reveals, Geithner didn't name the Fed as the culprit.

The Fed created
moral hazard by inducing "investors, savers, borrowers, and
consumers to misjudge what was going on." Fed low interest
rates created opportunities for quick profits, and competitive pressures
made them virtually impossible to resist. But as Paul makes clear,

The problem
isn't with the choices made by central bankers, [such as low interest
rates]. The problem is that they possess the power to make any
choice at all. [p. 127]

The bursting
of the housing bubble, he asserts, marks the end of a monetary era
— the end of the fiat dollar reserve currency system. [p. 125]

Education
is key

In his final
chapters he makes the case for ending the Fed from four perspectives:
philosophical, constitutional, economic, and libertarian. Simply
stated, the Fed "is immoral, unconstitutional, impractical,
promotes bad economics, and undermines liberty. Its destructive
nature makes it a tool of tyrannical government."

Nothing good
can come from the Federal Reserve. It is the biggest taxer of
them all. Diluting the value of the dollar by increasing its supply
is a vicious, sinister tax on the poor and middle class. [p. 141]

In the last
chapter he shows us the way out: "unplug the machinery of the
Fed." [p. 202]

In an ideal
world, the Fed would be abolished forthwith and the money stock
frozen in place. . . credit would be rooted in money saved, not
money created. Congress would remove the Fed's charter, and the
president would stop appointing Fed governors." [p. 203]

Along with
this, the government's gold stock would be used to guarantee the
convertibility of the dollar "at home and abroad," resurrecting
the dollar's role as the world's preeminent hard-money currency.

But Paul doesn't
stop here. We should reconsider and ultimately reject "the
entire idea of a government monopoly on money." We should repeal
legal tender laws and let everyone who wants to get into the business
of money production. "This would create a competitive market
in which the best monies would emerge over time to compete directly
with the federal government's dollar." [p. 205]

This is the
ideal world, but unfortunately not the real one. Paul does not expect
a "graceful transition to sound money" for various reasons,
including the powerful corporate welfare-warfare constituency that
demands "financing well beyond what could be paid for through
taxes or even borrowing." [p. 207]

Thus, as we
work for reform, we should prepare for hyperinflation, poverty,
depression, and quite possibly war, "as protectionist sentiments
around the world grow." [p. 208] If there's good news, it's
that most big government supporters are people of good faith who
are misinformed. We must learn how liberty works ourselves then
help educate those who do not understand. We should draw encouragement
in knowing truth is on the side of liberty.

Even if you're
well-read in Ron Paul, End the Fed will provide an invigorating
presentation of the problems of the central bank. Personally, I
couldn't put it down. It is an invaluable resource for any advocate
of sound money and liberty.

George
F. Smith [send him mail]
is the author of The
Flight of the Barbarous Relic, a novel about a renegade Fed
chairman. Visit his website.
Visit his blog.

An MP3 audio
version of this article, read by Floy Lilley, is available
as a free download.

If Ron Paul
succeeds in getting the Fed audited, the consequences could be far-reaching.
Assuming the audit isn’t rigged to protect the guilty, as a
similar bill was in 1978, the Fed will need every obfuscating
Keynesian to testify and write editorials on its behalf, to reassure
the public that monetary matters really are best left to the gods
who rule us, such as Ben Bernanke and Timothy Geithner. Monetarists,
too, would likely join the "Save the Fed" crusade, perhaps
arguing that even a great free market economist like Milton Friedman
considered the Fed useful for preventing and curing recessions.

But the really
appetizing part of auditing the Fed is knowing what stands behind
it. The Fed is a racket at heart, a con game writ large – what
else can you call an organization with the exclusive privilege of
printing money in the trillions and handing it over to friends?
But if this is true, what does that say about the state, the organization
that created and sanctions it? Is the Fed an honest mistake in the
state’s otherwise undying efforts to preserve our liberty, or might
it be a key component of a bigger racket?

Without the
power of the state, there would be no proposal to audit the Fed
because there would be no Fed to audit. Like any cartel, it exists
to protect its members from market retribution, and only the police
power of the state can make us shoulder that burden. A bill to audit
the Fed could by force of logic become a state audit, much like
the investigations of the 1972 Watergate burglary exposed the grinning
skull behind the government’s public persona. During a Fed audit,
for example, would it not be reasonable to ask why the people’s
elected representatives continue to support a banking system that
secretly steals wealth from their countrymen and other dollar holders?
Or are we to take the naïve position that most elected officials
really are clueless about the Fed’s policy of currency debasement
and the effects such policies
have had in history?

$19
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Partners
in Crime

There are any
number of ways a Fed audit could bring the state itself under close
scrutiny, but let us sketch just one line of argument:

1. It
   is well known that banks engage in fractional-reserve lending,
   meaning that bankers use their deposits in lending operations,
   with only a part of their loans covered by money reserves. Fractional
   reserves expand the money supply, which, until the age of Keynes
   and Fisher, was called inflation. It is also common knowledge
   that when banks extend too much credit, depositors quite naturally
   get nervous and start withdrawing their money.

   Although
   fractional reserves would seemingly qualify as a form of embezzlement
   – the act of taking for personal use other people’s property
   without their knowledge or consent – government court rulings
   have never viewed it as such. As Murray Rothbard observed,
   a bank that fails to meet its deposit obligations is just another
   insolvent, not an embezzler. Following the British ruling in
   Foley v. Hill and Others in 1848, US courts consider
   that money left with a banker is, "to all intents and purposes,
   the money of the banker, to do with as he pleases."

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the rest of the article

George
F. Smith [send him mail]
is the author of The
Flight of the Barbarous Relic, a novel about a renegade Fed
chairman. Visit his website.
Visit his blog.

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Will Barack Obama’s
New Deal finally sink the American economy into the sands? This is
the question author Robert P. Murphy poses at the end of his latest
myth buster, The
Politically Incorrect Guide to the Great Depression and the New Deal.
Readers who follow Murphy’s narrative from page one will understand
that unless the current administration suddenly turns pro free market
and gets out of the way, our future looks grim at best.

According to
Austrian theory, inflation generates the business cycle, which means
it causes periodic depressions. When a collapse came in 1929, government
broke with precedent and adopted measures to minimize the pain of
readjustment but in so doing retarded recovery. Through a long succession
of economic interventions, both the Hoover and Roosevelt administrations
turned what likely would have been a typically brief depression
into the Great Depression. Historians and economists, though, have
developed arguments extolling the fascist policies of the Roosevelt
years for saving an inherently flawed capitalist system, while heaping
blame on Hoover for his do-nothing approach. Intentionally or not,
they created a mythology that has been fed to generations of American
school kids.

It is Murphy’s
purpose to set the record straight.

In dealing
with such an emotionally charged topic as the Depression, the author
shows remarkable patience and fairness throughout. Yet his logic
is unyielding. At the end of his book, there is hardly a Depression
myth left standing. But at the end, I suspect it isn’t only free
marketeers who are still reading.

The Great
Myths

The political
account of the Great Depression, a tradition taught throughout the
land from the Cold War to the present day, tells us that

• following
  the crash, Hoover’s “do-nothing” policies brought the laissez-faire
  economy to its knees;
• the Federal
  Reserve, our government-created economic stabilizer, failed to
  provide enough credit to keep prices from falling during the early
  1930s;
• People demanded
  and Roosevelt provided a radical new approach to government’s
  relationship to the economy, which eventually got us out of the
  Depression;
• Roosevelt
  had to abolish the gold standard to stabilize the banking system;
• More recent
  research reveals it wasn’t New Deal policies as such that ended
  the Depression, but those policies writ large in the monumental
  expenditures and manpower requirements of World War II.

Because these
are the politically correct views of the Depression, our leaders
are drawing on these myths to “fix” the current crisis.

Hoover the
Interventionist

There was nothing
“laissez-faire”
about Herbert Hoover. He was a staunch interventionist throughout
his political career. As secretary of commerce under Warren Harding,
he “set out to reconstruct America [his words]” to fix the depression
of 1920–1921 (p. 32). “Throughout 1921,” Murphy writes,

Hoover
did what he could to persuade Congress to enact public works
programs to stabilize the economy. Fortunately, the depression
ended before Hoover’s grandiose plans could be realized. (p.
32)

When the next
collapse came in 1929, he called leading financiers and businessmen
to the White House and got them to agree to support current wages,
positions, and investment spending. One of those in attendance was
Henry Ford, who thought wages “must not even stay on their present
level; they must go up” (p. 37). Hoover himself thought “high wages
and low prices” were the “very essence of great production” (p.
33).

Indeed, during
the 1930s, as the prices of most goods and services were plummeting,
wages remained high. Workers with jobs frequently had more buying
power than they had in the booming ’20s. But with falling revenue,
businesses couldn’t maintain their staff levels. “[U]nemployment
went up and up and up, hitting the unimaginable monthly peak of
28.3 percent in March 1933″ (p. 42).

By contrast,
without wage support in the earlier depression, unemployment peaked
at 11.7 percent in 1921, then fell to 2.4 percent by 1923. “That
is how a market with flexible wages and prices quickly corrects
itself after a Fed-induced inflation,” Murphy adds (p. 42).

Hoover’s Tax
on Imports

Concerned about
falling farm prices following the crash, Hoover called on government
to make Americans pay more for food. But the Smoot-Hawley
Tariff of June 17, 1930, did more than raise prices of farm
products. It raised taxes on over 20,000 imported goods to record
levels. Among the tariff increases were over 800 items used in making
cars. In combination with retaliatory tariffs from European countries,
Smoot-Hawley pulled American car sales down from 5.3 million in
1929 to 1.8 million in 1932 (p. 43).

Hoover hurt
the very group he was trying to protect. Because tariff hikes mean
fewer foreign goods are sold in this country, foreigners have fewer
dollars with which to buy American goods. Not surprisingly, American
exports dropped from $7 billion in 1929 to $2.5 billion by 1932.
Since the US agricultural industry was a net exporter, American
farmers were hurt more than many other producers.

Hoover as
a Tax-and-Spend Democrat

Incredible
as it seems today, the federal government ran budget surpluses every
year of the Roaring ’20s and managed to pay down its debt from $25
billion in FY 1919 to $16.2 billion in FY 1930 (p. 47). With plummeting
tax receipts following the crash, Hoover turned to deficit financing
to support a budget increase of 42 percent during his first two
years, a classic Keynesian response to a collapse in “aggregate
demand” (p. 48). In an attempt to reduce the growing budget deficit,
Hoover and Secretary of the Treasury Andrew Mellon convinced Congress
to pass a huge
and encompassing tax increase in 1932. Yet as we would expect
from the Laffer
curve, the Treasury saw only modest gains in receipts due to
the shrunken tax base.

As Murphy points
out, government cut its budget during the depression of 1920–1921
— from $5 billion in FY 1921 to $3.3 billion in FY 1922. When the
depression was over for Harding, Hoover was trying to rein in his
deficits.

Murphy concedes
that, in light of the data alone, it’s theoretically possible Keynesians
are right. They could argue, say, that the budget cuts during the
early ’20s actually exacerbated the depression, while Hoover’s stimulus
during the ’30s averted even higher unemployment rates. But following
the principle of keeping assumptions to a minimum — Occam’s
razor — we should stick with what has always worked, he concludes.
Both government and the people should slash spending during a depression
(p. 50).

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the rest of the article

George
F. Smith [send him mail]
is the author of The
Flight of the Barbarous Relic, a novel about a renegade Fed
chairman. Visit his website.
Visit his blog.

Studying Jörg
Guido Hülsmann’s latest book, The
Ethics of Money Production, is a vastly enriching experience.
After building his case for natural money on the inviolability of
an individual’s right to his own property, he then shows us how
the state has spent the last 400 years usurping this right for the
benefit of a privileged few through its protection of fractional-reserve
banking.

It is the state’s
insatiable appetite for revenue, he argues, that is the motivation
behind the various monetary schemes it imposes on us, which on an
international level begins with the classical gold standard and
runs through today’s paper-money agreements. Although he doesn’t
discuss the current economic crisis directly, his observations provide
a much-needed correction to government’s "do something"
approach.

In this essay,
I will touch on some of Hülsmann’s more salient points, beginning
with the origin of money.

Natural
Money versus "Forced Money"

We know that
in a barter economy the division of labor is primitive because trade
is limited by the double coincidence of wants. A carpenter who needs
shoes finds a shoemaker who needs a chair, and they enter into a
mutually acceptable trade. But trade is also limited by the makeup
of the goods themselves – how will the carpenter acquire a
small amount of flour with the chair he has built?

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February
25, 2009

Many Rothbardians are vowing not to vote in this or any election since voting only supports the State. But I wonder if they could be persuaded otherwise if they knew one of the ballot choices were to dissolve the governments and replace them with voluntary market institutions. Of course, we don’t have that choice, and most people would either laugh or be scared to death if it were proposed. But with sovereign nations riding the Keynesian sled into the Abyss, the dissolution might fall in our laps anyway. Preposterous as it might sound, we might need to consider organizing society around something other than the coercive monopolies driving us to extinction.

Fortunately, we have both experience and theory to draw upon. In this article I want to touch on two sources from each: The classic study by Terry L. Anderson and P. J. Hill, An American Experiment in Anarcho-Capitalism: The Not So Wild, Wild West and Robert P. Murphy’s Chaos Theory.

Thanks to Hollywood and popular literature, the American West [1830-1900] is often portrayed as violent and lawless. As long as you had a fast gun and were willing to use it, you could get away with anything. The reason: weak or nonexistent government. In their literature search, though, Anderson and Hill found ample evidence to the contrary. For example, W. Eugene Hollon, in his book Frontier Violence: Another Look found that “the Western frontier was a far more civilized, more peaceful, and safer place than American society is today [the early 1970s]." Another researcher, Frank Prassel, writing in the mid-1930s, found that

if any conclusion can be drawn from recent crime statistics, it must be that this last frontier [the West] left no significant heritage of offenses against the person, relative to other sections of the country.

In the early West people protected their property and lives with private agencies. Significantly, these agencies understood that violence was a costly method of resolving disputes and usually employed lower-cost methods of settlement such as arbitration and courts. Nor was there a universal idea of justice common to these agencies. People had different ideas of what rules they wished to live under and were willing to pay for. Competition among the agencies provided a choice.

Anderson and Hill looked at four institutions in the early West that approximated anarcho-capitalism (AnCap): land claims clubs, cattlemen’s associations, mining camps, and wagon trains.

Land Claims Clubs

Found throughout the Middle West, the land claims clubs or squatters’ associations showed how newly arriving pioneers joined together for common purposes without government assistance.

Each claims association adopted its own constitution and by-laws, elected officers for the operation of the organization, established rules for adjudicating disputes, and established the procedure for the registration and protection of claims.

Though violence was an option to be used against those who didn’t follow the rules, at least one association used social ostracism to curtail or punish violators. They formally resolved:

That we will not associate nor countenance those who do not respect the claims of settlers and further that we will neither neighbor with them . . . Trade barter deal with them in any way whatever.

Some claims associations were formed to oppose “speculators,” while others encouraged speculation, exemplifying how the clubs “developed rules consistent with the preferences, goals, and endowments of the participants.”

Cattlemen’s Associations and Mining Camps

Like the claims groups, cattlemen’s associations drew up formal rules governing their members, but their enforcement methods were often more violent. As protection agencies, they hired gunfighters (stock detectives) to eliminate rustlers. The mercenaries were not motivated by ethics, but by “the side which made them the first or best offer.”

Did the gunslingers ever form criminal associations of their own, selling protection and violating property rights as they wished? There were a few loose associations of this kind, but they were “dealt with more quickly and more severely under private property protective associations than under government organization.”

The California gold rush of 1848 brought thousands of easterners west to seek their fortune, as did gold discoveries later in Colorado, Montana, and Idaho. Many gold seekers organized before leaving home, and as with other private agencies the rules varied between organizations. People had the choice of purchasing the set of rules they preferred. Interestingly, many of the mining organizations prohibited lawyers from their districts and in one case specified no more than fifty nor less than twenty lashes for lawyers who were caught practicing law.

Anderson and Hill:

One early Californian writes, "We needed no law until the lawyers came," and another adds, "There were few crimes until the courts with their delays and technicalities took the place of miners’ law.”

Miners courts provided a system of justice, and a judge and jury were selected from among the members. Any law-abiding miner might serve as prosecutor or defender of the accused.

In Colorado there is some evidence of competition among the courts for business, and hence, an added guarantee that justice prevailed.

Wagon Trains

Wagon trains rolling west in search of gold provide perhaps the best example of anarcho-capitalism in the American frontier. Realizing they would be passing beyond the pale of the law, the pioneers “created their own law-making and law- enforcing machinery before they started.” In many cases they created constitutions similar to the U.S. Constitution. Once the travelers were beyond the jurisdiction of the federal government, they elected officers to enforce the rules laid out in the document.

The constitutions also included eligibility for voting and decision rules for amendment, banishment of individuals from the group, and dissolution of the company.

What made this arrangement work, according to the authors, was a profound respect for property rights. Yet there was little mention of property rights in their constitutions. The inviolability of property rights was so throughly ingrained that the pioneers rarely resorted to violence even when starvation was imminent. Quoting John Phillip Reid from his study of the Overland Trail, the authors tell us:

While a few of those who were destitute may have employed tricks to obtain food, most begged, and those who were "too proud to beg" got along the best they could or employed someone to beg for them.

Certainly the transient nature of these rolling communities made them more adaptable to anarcho-capitalism. The demand for “public goods” such as roads or schools never came up, for example, though they did have to protect themselves from Indian attacks without relying on the State. For the most part, their arrangements worked. People bought protection and justice, found competition among rules producers, and the result was an orderly society, unlike that generally associated with anarchy.

Murphy’s Case for Anarcho-Capitalism

In Chaos Theory, Robert P. Murphy sketches how market forces would operate to support the private production of justice and defense – two areas that are traditionally conceded to be the sole province of the State. Murphy contends that not only would the market be able to provide these services, but would do so much more efficiently and equitably than the system we have now.

Here, we’ll confine our discussion to a few key points he makes about the production of “justice” on the free market.

As with the western pioneers and the world today, no single set of laws or rules is needed to bind everyone. People would enter into voluntary contracts that spell out the rules they agree to live by. “All aspects of social intercourse would be ‘regulated’ by voluntary contracts.”

Who makes the rules? Private legal experts, who would draft laws under open competition with rivals. The market deals with “justice” as it does with other services. As Murphy notes,

“the market” is just shorthand for the totality of economic interactions of freely acting individuals. To allow the market to set legal rules really means that no one uses violence to impose his own vision on everyone else.

In an advanced AnCap society, insurance companies would play a major role. People would buy policies, for example, to indemnify their victims if they were ever found guilty of a crime. As they do now, insurance companies would employ experts to determine the risks of insuring a given individual. If a person were considered too great a risk he might be turned down, and this would be information others would use in deciding if and how they wished to interact with him.

Critics say this might work for peaceful, rational people but what about incorrigible thieves and ax murderers? How would market anarchy deal with them?

All Property Is Privately Owned

Murphy reminds us that “wherever someone is standing in a purely libertarian society, he would be on somebody’s property.” This allows for force to be used against criminals without violating their natural rights. He cites the example of a person entering a movie theater, with an implicit contract such as the following:

If I am judged guilty of a crime by a reputable arbitration agency [perhaps listed in an Appendix], I release the theater owner from any liability should armed men come to remove me from his property.

In this way the use of force would have been authorized by the recipient himself beforehand.

But where do these armed men take the criminal? On a free market, a high-security analog to jails would evolve. These jails, though, would resemble hotels because they would be competing with each other for business, which in AnCap means both pleasing the criminal and guaranteeing his secure detention. Unlike government prisons there would be no undue cruelty and virtually no chance of escape. If a dangerous criminal escaped and killed again the insurance company would be held liable. And a prisoner who didn’t like the way he was treated would have the option of switching to a different jail, as long as his insurance company was in agreement.

Would the Mafia Take Over?

People who support the State because they believe organized crime would take control of an AnCap society should consider that we’re already living under the “most ‘organized’ criminal association in human history.” Whatever crimes the Mafia has committed, they are nothing – nothing – compared to the wanton death and destruction states have perpetrated.

We need to consider, too, that the mob gets its strength from the government, not the free market.

All of the businesses traditionally associated with organized crime – gambling, prostitution, loan sharking, drug dealing – are prohibited or heavily regulated by the state. In market anarchy, true professionals would drive out such unscrupulous competitors.

Applying AnCap

Murphy discusses several applications of anarcho-capitalism in today’s world, one of which is medical licensing. Almost everyone believes that without government regulation we would all be at the mercy of quacks. “Ignorant consumers would go to whatever brain surgeon charged the lowest price, and would be butchered on the operating table.” Therefore, we need the iron fist of government to restrict entry into the medical profession.

But this is pure fiction. Since the demand for safe and effective medicine is universal, the market would respond accordingly with voluntary organizations that would allow only qualified doctors into their ranks. Insurance companies, too, would only underwrite doctors who met their standards, since they would stand to lose millions in malpractice suits.

Regarding the ongoing controversy of gun control, Murphy sees legitimate points to both sides of the debate:

Certainly we cannot trust the government to protect us once it has disarmed us. But on the other hand, I feel a bit silly arguing that people should be able to stockpile atomic weapons in their basement.

How might AnCap resolve this? Let’s say Joe Smith wants an insurance company to agree to pay $10 million to the estate of anyone Smith happens to kill. “The company will be very interested to know whether Smith keeps sawed off shotguns – let alone atomic weapons – in his basement.” In this way truly dangerous weapons would be restricted to those willing to pay the high premiums for owning them.

Though it’s hard to imagine any company willing to issue a policy to a holder of nuclear weapons, nevertheless, if someone wanted to, there would be no agency with the authority to prohibit owning them. But without a policy, a person would be unable to guarantee his contracts with others and would find it virtually impossible to function in society.

Getting there from here

Establishing an AnCap society depends heavily on the history of the region. North Korean market anarchists, for example, might have to use violence to curtail that brutal regime, while in the United States, “a gradual and orderly erosion of the State is a wonderful possibility.”

The one thing all such revolutions would share is a commitment by the overwhelming majority to a total respect of property rights.

People already understand that rape and murder are crimes – even rapists and murderers. The hard part is convincing people “that murder is wrong even when duly elected ‘representatives’ order it.”

We can build on intuitive notions of justice, just as newly arriving miners in California respected the claims of earlier settlers.

To take a more modern example, even inner city toughs unthinkingly obey the “rules” in a pickup game of basketball, despite the lack of a referee.

As he explains in a footnote, the players in a pickup game still recognize the existence of a foul (and other rules), even if the offending player denies he committed one.

Now, the market solution to such ambiguity and bias, for games deemed important enough to warrant the extra cost and hassle, is to appoint official referees to apply the “law” (which they too unthinkingly respect). Notice that at no point is a violent monopoly needed to achieve this orderly outcome.

Conclusion

Those who defend the State as necessary to protect property rights should brush up on their history, from day one to the present. As Murphy wraps up,

I ask that the reader resist the temptation to dismiss my ideas as “unworkable,” without first specifying in what sense the government legal system “works.”

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.

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