by Murray N. Rothbard
originally appeared in The Freeman, September and October
Money is a
crucial command post of any economy, and therefore of any society.
Society rests upon a network of voluntary exchanges, also known
as the "free-market economy"; these exchanges imply a
division of labor in society, in which producers of eggs, nails,
horses, lumber, and immaterial services such as teaching, medical
care, and concerts, exchange their goods for the goods of others.
At each step of the way, every participant in exchange benefits
immeasurably, for if everyone were forced to be self-sufficient,
those few who managed to survive would be reduced to a pitiful standard
of goods and services, also known as "barter," is hopelessly
unproductive beyond the most primitive level, and indeed every "primitive"
tribe soon found its way to the discovery of the tremendous benefits
of arriving, on the market, at one particularly marketable commodity,
one in general demand, to use as a "medium" of "indirect
exchange." If a particular commodity is in widespread use as
a medium in a society, then that general medium of exchange is called
becomes one term in every single one of the innumerable exchanges
in the market economy. I sell my services as a teacher for money;
I use that money to buy groceries, typewriters, or travel accommodations;
and these producers in turn use the money to pay their workers,
to buy equipment and inventory, and pay rent for their buildings.
Hence the ever-present temptation for one or more groups to seize
control of the vital money-supply function.
goods have been chosen as moneys in human societies. Salt in Africa,
sugar in the Caribbean, fish in colonial New England, tobacco in
the colonial Chesapeake Bay region, cowrie shells, iron hoes, and
many other commodities have been used as moneys. Not only do these
moneys serve as media of exchange; they enable individuals and business
firms to engage in the "calculation" necessary to any
advanced economy. Moneys are traded and reckoned in terms of a currency
unit, almost always units of weight. Tobacco, for example, was reckoned
in pound weights. Prices of other goods and services could be figured
in terms of pounds of tobacco; a certain horse might be worth 80
pounds on the market. A business firm could then calculate its profit
or loss for the previous month; it could figure that its income
for the past month was 1,000 pounds and its expenditures 800 pounds,
netting it a 200 pound profit.
history, two commodities have been able to outcompete all other
goods and be chosen on the market as money two precious metals,
gold and silver (with copper coming in when one of the other precious
metals was not available). Gold and silver abounded in what we can
call "moneyable" qualities, qualities that rendered them
superior to all other commodities. They are in rare enough supply
that their value will be stable, and of high value per unit weight;
hence pieces of gold or silver will be easily portable, and usable
in day-to-day transactions; they are rare enough too, so that there
is little likelihood of sudden discoveries or increases in supply.
They are durable so that they can last virtually forever, and so
they provide a safe "store of value" for the future. And
gold and silver are divisible, so that they can be divided into
small pieces without losing their value; unlike diamonds, for example,
they are homogeneous, so that one ounce of gold will be of equal
value to any other.
and ancient use of gold and silver as moneys was pointed out by
the first great monetary theorist, the eminent 14th-century French
scholastic Jean Buridan, and then in all discussions of money down
to money and banking textbooks until the Western governments abolished
the gold standard in the early 1930s. Franklin D. Roosevelt joined
in this deed by taking the United States off gold in 1933.
There is no
aspect of the free-market economy that has suffered more scorn and
contempt from "modern" economists, whether frankly statist
Keynesians or allegedly "free market" Chicagoites, than
has gold. Gold, not long ago hailed as the basic staple and groundwork
of any sound monetary system, is now regularly denounced as a "fetish"
or, as in the case of Keynes, as a "barbarous relic."
Well, gold is indeed a "relic" of barbarism in one sense;
no "barbarian" worth his salt would ever have accepted
the phony paper and bank credit that we modern sophisticates have
been bamboozled into using as money.
bugs" are not fetishists; we don't fit the standard image of
misers running their fingers through their hoard of gold coins while
cackling in sinister fashion. The great thing about gold is that
it, and only it, is money supplied by the free market, by the people
at work. For the stark choice before us always is: gold (or silver),
or government. Gold is market money, a commodity which must be supplied
by being dug out of the ground and then processed; but government,
on the contrary, supplies virtually costless paper money or bank
checks out of thin air.
We know, in
the first place, that all government operation is wasteful, inefficient,
and serves the bureaucrat rather than the consumer. Would we prefer
to have shoes produced by competitive private firms on the free
market, or by a giant monopoly of the federal government? The function
of supplying money could be handled no better by government. But
the situation in money is far worse than for shoes or any other
commodity. If the government produces shoes, at least they might
be worn, even though they might be high-priced, fit badly, and not
satisfy consumer wants.
Money is different
from all other commodities: other things being equal, more shoes,
or more discoveries of oil or copper benefit society, since they
help alleviate natural scarcity. But once a commodity is established
as a money on the market, no more money at all is needed. Since
the only use of money is for exchange and reckoning, more dollars
or pounds or marks in circulation cannot confer a social benefit:
they will simply dilute the exchange value of every existing dollar
or pound or mark. So it is a great boon that gold or silver are
scarce and are costly to increase in supply.
But if government
manages to establish paper tickets or bank credit as money, as equivalent
to gold grams or ounces, then the government, as dominant money-supplier,
becomes free to create money costlessly and at will. As a result,
this "inflation" of the money supply destroys the value
of the dollar or pound, drives up prices, cripples economic calculation,
and hobbles and seriously damages the workings of the market economy.
tendency of government, once in charge of money, is to inflate and
to destroy the value of the currency. To understand this truth,
we must examine the nature of government and of the creation of
money. Throughout history, governments have been chronically short
of revenue. The reason should be clear: unlike you and me, governments
do not produce useful goods and services that they can sell on the
market; governments, rather than producing and selling services,
live parasitically off the market and off society. Unlike every
other person and institution in society, government obtains its
revenue from coercion, from taxation. In older and saner times,
indeed, the king was able to obtain sufficient revenue from the
products of his own private lands and forests, as well as through
highway tolls. For the State to achieve regularized, peacetime taxation
was a struggle of centuries. And even after taxation was established,
the kings realized that they could not easily impose new taxes or
higher rates on old levies; if they did so, revolution was very
apt to break out.
the Money Supply
is permanently short of the style of expenditures desired by the
State, how can it make up the difference? By getting control of
the money supply, or, to put it bluntly, by counterfeiting. On the
market economy, we can only obtain good money by selling a good
or service in exchange for gold, or by receiving a gift; the only
other way to get money is to engage in the costly process of digging
gold out of the ground. The counterfeiter, on the other hand, is
a thief who attempts to profit by forgery, e.g., by painting a piece
of brass to look like a gold coin. If his counterfeit is detected
immediately, he does no real harm, but to the extent his counterfeit
goes undetected, the counterfeiter is able to steal not only from
the producers whose goods he buys. For the counterfeiter, by introducing
fake money into the economy, is able to steal from everyone by robbing
every person of the value of his currency. By diluting the value
of each ounce or dollar of genuine money, the counterfeiter's theft
is more sinister and more truly subversive than that of the highwayman;
for he robs everyone in society, and the robbery is stealthy and
hidden, so that the cause-and-effect relation is camouflaged.
saw the scare headline: "Iranian Government Tries to Destroy
U.S. Economy by Counterfeiting $100 Bills." Whether the ayatollahs
had such grandiose goals in mind is dubious; counterfeiters don't
need a grand rationale for grabbing resources by printing money.
But all counterfeiting is indeed subversive and destructive, as
well as inflationary.
But in that
case, what are we to say when the government seizes control of the
money supply, abolishes gold as money, and establishes its own printed
tickets as the only money? In other words, what are we to say when
the government becomes the legalized, monopoly counterfeiter?
Not only has
the counterfeit been detected, but the Grand Counterfeiter, in the
United States the Federal Reserve System, instead of being reviled
as a massive thief and destroyer, is hailed and celebrated as the
wise manipulator and governor of our "macroeconomy," the
agency on which we rely for keeping us out of recessions and inflations,
and which we count on to determine interest rates, capital prices,
and employment. Instead of being habitually pelted with tomatoes
and rotten eggs, the chairman of the Federal Reserve Board, whoever
he may be, whether the imposing Paul Volcker or the owlish Alan
Greenspan, is universally hailed as Mr. Indispensable to the economic
and financial system.
best way to penetrate the mysteries of the modern monetary and banking
system is to realize that the government and its central bank act
precisely as would a Grand Counterfeiter, with very similar social
and economic effects. Many years ago, the New Yorker magazine, in
the days when its cartoons were still funny, published a cartoon
of a group of counterfeiters looking eagerly at their printing press
as the first $10 bill came rolling off the press. "Boy,"
said one of the team, "retail spending in the neighborhood
is sure in for a shot in the arm."
And it was.
As the counterfeiters print new money, spending goes up on whatever
the counterfeiters wish to purchase: personal retail goods for themselves,
as well as loans and other "general welfare" purposes
in the case of the government. But the resulting "prosperity"
is phony; all that happens is that more money bids away existing
resources, so that prices rise. Furthermore, the counterfeiters
and the early recipients of the new money bid away resources from
the poor suckers who are down at the end of the line to receive
the new money, or who never even receive it at all.
New money injected
into the economy has an inevitable ripple effect; early receivers
of the new money spend more and bid up prices, while later receivers
or those on fixed incomes find the prices of the goods they must
buy unaccountably rising, while their own incomes lag behind or
remain the same. Monetary inflation, in other words, not only raises
prices and destroys the value of the currency unit; it also acts
as a giant system of expropriation of the late receivers by the
counterfeiters themselves and by the other early receivers. Monetary
expansion is a massive scheme of hidden redistribution.
When the government
is the counterfeiter, the counterfeiting process not only can be
"detected"; it proclaims itself openly as monetary statesmanship
for the public weal. Monetary expansion then becomes a giant scheme
of hidden taxation, the tax falling on fixed income groups, on those
groups remote from government spending and subsidy, and on thrifty
savers who are naïve enough and trusting enough to hold on to their
money, to have faith in the value of the currency.
going into debt are encouraged; thrift and hard work discouraged
and penalized. Not only that: the groups that benefit are the special
interest groups who are politically close to the government and
can exert pressure to have the new money spent on them so that their
incomes can rise faster than the price inflation. Government contractors,
politically connected businesses, unions, and other pressure groups
will benefit at the expense of the unaware and unorganized public.
We have already
described one part of the contemporary flight from sound, free-market
money to statized and inflated money: the abolition of the gold
standard by Franklin Roosevelt in 1933, and the substitution of
fiat paper tickets by the Federal Reserve as our "monetary
standard." Another crucial part of this process was the federal
cartelization of the nation's banks through the creation of the
Federal Reserve System in 1913.
a particularly arcane part of the economic system; one of the problems
is that the word "bank" covers many different activities,
with very different implications. During the Renaissance era, the
Medicis in Italy and the Fuggers in Germany, were "bankers";
their banking, however, was not only private but also began at least
as a legitimate, noninflationary, and highly productive activity.
Essentially, these were "merchant-bankers," who started
as prominent merchants. In the course of their trade, the merchants
began to extend credit to their customers, and in the case of these
great banking families, the credit or "banking" part of
their operations eventually overshadowed their mercantile activities.
These firms lent money out of their own profits and savings, and
earned interest from the loans. Hence, they were channels for the
productive investment of their own savings.
To the extent
that banks lend their own savings, or mobilize the savings of others,
their activities are productive and unexceptionable. Even in our
current commercial banking system, if I buy a $10,000 CD ("certificate
of deposit") redeemable in six months, earning a certain fixed
interest return, I am taking my savings and lending it to a bank,
which in turn lends it out at a higher interest rate, the differential
being the bank's earnings for the function of channeling savings
into the hands of credit-worthy or productive borrowers. There is
no problem with this process.
The same is
even true of the great "investment banking" houses, which
developed as industrial capitalism flowered in the 19th century.
Investment bankers would take their own capital, or capital invested
or loaned by others, to underwrite corporations gathering capital
by selling securities to stockholders and creditors. The problem
with the investment bankers is that one of their major fields of
investment was the underwriting of government bonds, which plunged
them hip deep into politics, giving them a powerful incentive for
pressuring and manipulating governments, so that taxes would be
levied to pay off their and their clients' government bonds. Hence,
the powerful and baleful political influence of investment bankers
in the 19th and 20th centuries: in particular, the Rothschilds in
Western Europe, and Jay Cooke and the House of Morgan in the United
By the late
19th century, the Morgans took the lead in trying to pressure the
US government to cartelize industries they were interested in
first railroads and then manufacturing: to protect these industries
from the winds of free competition, and to use the power of government
to enable these industries to restrict production and raise prices.
the investment bankers acted as a ginger group to work for the cartelization
of commercial banks. To some extent, commercial bankers lend out
their own capital and money acquired by CDs. But most commercial
banking is "deposit banking" based on a gigantic scam:
the idea, which most depositors believe, that their money is down
at the bank, ready to be redeemed in cash at any time. If Jim has
a checking account of $1,000 at a local bank, Jim knows that this
is a "demand deposit," that is, that the bank pledges
to pay him $1,000 in cash, on demand, anytime he wishes to "get
his money out." Naturally, the Jims of this world are convinced
that their money is safely there, in the bank, for them to take
out at any time. Hence, they think of their checking account as
equivalent to a warehouse receipt. If they put a chair in a warehouse
before going on a trip, they expect to get the chair back whenever
they present the receipt. Unfortunately, while banks depend on the
warehouse analogy, the depositors are systematically deluded. Their
money ain't there.
honest warehouse makes sure that the goods entrusted to its care
are there, in its storeroom or vault. But banks operate very differently,
at least since the days of such deposit banks as the Banks of Amsterdam
and Hamburg in the 17th century, which indeed acted as warehouses
and backed all of their receipts fully by the assets deposited,
e.g., gold and silver. This honest deposit or "giro" banking
is called "100 percent reserve" banking. Ever since, banks
have habitually created warehouse receipts (originally bank notes
and now deposits) out of thin air. Essentially, they are counterfeiters
of fake warehouse receipts to cash or standard money, which circulate
as if they were genuine, fully backed notes or checking accounts.
Banks make money by literally creating money out of thin air, nowadays
exclusively deposits rather than bank notes. This sort of swindling
or counterfeiting is dignified by the term "fractional reserve
banking," which means that bank deposits are backed by only
a small fraction of the cash they promise to have at hand and redeem.
(Right now, in the United States, this minimum fraction is fixed
by the Federal Reserve System at 10 percent.)
Let's see how
the fractional-reserve process works, in the absence of a central
bank. I set up a Rothbard Bank, and invest $1,000 of cash (whether
gold or government paper does not matter here). Then I "lend
out" $10,000 to someone, either for consumer spending or to
invest in his business. How can I "lend out" far more
than I have? Ahh, that's the magic of the "fraction" in
the fractional reserve. I simply open up a checking account of $10,000
which I am happy to lend to Mr. Jones. Why does Jones borrow from
me? Well, for one thing, I can charge a lower rate of interest than
savers would. I don't have to save up the money myself, but can
simply counterfeit it out of thin air. (In the 19th century, I would
have been able to issue bank notes, but the Federal Reserve now
monopolizes note issues.) Since demand deposits at the Rothbard
Bank function as equivalent to cash, the nation's money supply has
just, by magic, increased by $10,000. The inflationary, counterfeiting
process is under way.
English economist Thomas Tooke correctly stated that "free
trade in banking is tantamount to free trade in swindling."
But under freedom, and without government support, there are some
severe hitches in this counterfeiting process, or in what has been
termed "free banking."
should anyone trust me? Why should anyone accept the checking deposits
of the Rothbard Bank?
even if I were trusted, and I were able to con my way into the trust
of the gullible, there is another severe problem, caused by the
fact that the banking system is competitive, with free entry into
the field. After all, the Rothbard Bank is limited in its clientele.
After Jones borrows checking deposits from me, he is going to spend
that money. Why else pay for a loan? Sooner or later, the money
he spends, whether for a vacation, or for expanding his business,
will be spent on the goods or services of clients of some other
bank, say the Rockwell Bank. The Rockwell Bank is not particularly
interested in holding checking accounts on my bank; it wants reserves
so that it can pyramid its own counterfeiting on top of cash reserves.
And so if, to make the case simple, the Rockwell Bank gets a $10,000
check on the Rothbard Bank, it is going to demand cash so that it
can do some inflationary counterfeit pyramiding of its own.
But, I, of
course, can't pay the $10,000, so I'm finished. Bankrupt. Found
out. By rights, I should be in jail as an embezzler, but at least
my phoney checking deposits and I are out of the game, and out of
the money supply.
free competition, and without government support and enforcement,
there will only be limited scope for fractional-reserve counterfeiting.
Banks could form cartels to prop each other up, but generally cartels
on the market don't work well without government enforcement, without
the government cracking down on competitors who insist on busting
the cartel, in this case, forcing competing banks to pay up.
Hence the drive
by the bankers themselves to get the government to cartelize their
industry by means of a central bank. Central banking began with
the Bank of England in the 1690s, spread to the rest of the Western
world in the 18th and 19th centuries, and finally was imposed upon
the United States by banking cartelists via the Federal Reserve
System of 1913. Particularly enthusiastic about the central bank
were the investment bankers, such as the Morgans, who pioneered
the cartel idea, and who by this time had expanded into commercial
In modern central
banking, the central bank is granted the monopoly of the issue of
bank notes (originally written or printed warehouse receipts as
opposed to the intangible receipts of bank deposits), which are
now identical to the government's paper money and therefore the
monetary "standard" in the country. People want to use
physical cash as well as bank deposits. If, therefore, I wish to
redeem $1,000 in cash from my checking bank, the bank has to go
to the Federal Reserve, and draw down its own checking account with
the Fed, "buying" $1,000 of Federal Reserve Notes (the
cash in the United States today) from the Fed. The Fed, in other
words, acts as a bankers' bank. Banks keep checking deposits at
the Fed and these deposits constitute their reserves, on which they
can and do pyramid ten times the amount in checkbook money.
the counterfeiting process works in today's world. Let's say that
the Federal Reserve, as usual, decides that it wants to expand (i.e.,
inflate) the money supply. The Federal Reserve decides to go into
the market (called the "open market") and purchase an
asset. It doesn't really matter what asset it buys; the important
point is that it writes out a check. The Fed could, if it wanted
to, buy any asset it wished, including corporate stocks, buildings,
or foreign currency. In practice, it almost always buys US government
that the Fed buys $10,000,000 of US Treasury bills from some "approved"
government bond dealer (a small group), say Shearson Lehman on Wall
Street. The Fed writes out a check for $10,000,000, which it gives
to Shearson Lehman in exchange for $10,000,000 in US securities.
Where does the Fed get the $10,000,000 to pay Shearson Lehman? It
creates the money out of thin air. Shearson Lehman can do only one
thing with the check: deposit it in its checking account at a commercial
bank, say Chase Manhattan. The "money supply" of the country
has already increased by $10,000,000; no one else's checking account
has decreased at all. There has been a net increase of $10,000,000.
But this is
only the beginning of the inflationary counterfeiting process. For
Chase Manhattan is delighted to get a check on the Fed, and rushes
down to deposit it in its own checking account at the Fed, which
now increases by $10,000,000. But this checking account constitutes
the "reserves" of the banks, which have now increased
across the nation by $10,000,000. But this means that Chase Manhattan
can create deposits based on these reserves, and that, as checks
and reserves seep out to other banks (much as the Rothbard Bank
deposits did), each one can add its inflationary mite, until the
banking system as a whole has increased its demand deposits by $100,000,000,
ten times the original purchase of assets by the Fed. The banking
system is allowed to keep reserves amounting to 10 percent of its
deposits, which means that the "money multiplier"
the amount of deposits the banks can expand on top of reserves
is 10. A purchase of assets of $10 million by the Fed has generated
very quickly a tenfold ($100,000,000) increase in the money supply
of the banking system as a whole.
all economists agree on the mechanics of this process even though
they of course disagree sharply on the moral or economic evaluation
of that process. But unfortunately, the general public, not inducted
into the mysteries of banking, still persists in thinking that their
money remains "in the bank."
Thus, the Federal
Reserve and other central banking systems act as giant government
creators and enforcers of a banking cartel; the Fed bails out banks
in trouble, and it centralizes and coordinates the banking system
so that all the banks, whether the Chase Manhattan, or the Rothbard
or Rockwell banks, can inflate together. Under free banking, one
bank expanding beyond its fellows was in danger of imminent bankruptcy.
Now, under the Fed, all banks can expand together and proportionately.
But even with
the backing of the Fed, fractional reserve banking proved shaky,
and so the New Deal, in 1933, added the lie of "bank deposit
insurance," using the benign word "insurance" to
mask an arrant hoax. When the savings and loan system went down
the tubes in the late 1980s, the "deposit insurance" of
the Federal Savings and Loan Insurance Corporation (FSLIC) was unmasked
as sheer fraud. The "insurance" was simply the smoke-and-mirrors
term for the unbacked name of the federal government. The poor taxpayers
finally bailed out the S&Ls, but now we are left with the formerly
sainted Federal Deposit Insurance Corporation (FDIC) for commercial
banks, which is now increasingly seen to be shaky, since the FDIC
itself has less than one percent of the huge number of deposits
The very idea
of "deposit insurance" is a swindle; how does one insure
an institution (fractional reserve banking) that is inherently insolvent,
and which will fall apart whenever the public finally understands
the swindle? Suppose that, tomorrow, the American public suddenly
became aware of the banking swindle, and went to the banks tomorrow
morning, and, in unison, demanded cash. What would happen? The banks
would be instantly insolvent, since they could only muster 10 percent
of the cash they owe their befuddled customers. Neither would the
enormous tax increase needed to bail everyone out be at all palatable.
No: the only thing the Fed could do and this would be in
their power would be to print enough money to pay off all
the bank depositors. Unfortunately, in the present state of the
banking system, the result would be an immediate plunge into the
horrors of hyperinflation.
Let us suppose
that total insured bank deposits are $1,600 billion. Technically,
in the case of a run on the banks, the Fed could exercise emergency
powers and print $1,600 billion in cash to give to the FDIC to pay
off the bank depositors. The problem is that, emboldened at this
massive bailout, the depositors would promptly redeposit the new
$1,600 billion into the banks, increasing the total bank reserves
by $1,600 billion, thus permitting an immediate expansion of the
money supply by the banks by tenfold, increasing the total stock
of bank money by $16 trillion. Runaway inflation and total destruction
of the currency would quickly follow.
To save our
economy from destruction and from the eventual holocaust of runaway
inflation, we the people must take the money-supply function back
from the government. Money is far too important to be left in the
hands of bankers and of Establishment economists and financiers.
To accomplish this goal, money must be returned to the market economy,
with all monetary functions performed within the structure of the
rights of private property and of the free-market economy.
It might be
thought that the mix of government and money is too far gone, too
pervasive in the economic system, too inextricably bound up in the
economy to be eliminated without economic destruction. Conservatives
are accustomed to denouncing the "terrible simplifiers"
who wreck everything by imposing simplistic and unworkable schemes.
Our major problem, however, is precisely the opposite: mystification
by the ruling elite of technocrats and intellectuals, who, whenever
some public spokesman arises to call for large-scale tax cuts or
deregulation, intone sarcastically about the dimwit masses who "seek
simple solutions for complex problems." Well, in most cases,
the solutions are indeed clear-cut and simple, but are deliberately
obfuscated by people whom we might call "terrible complicators."
In truth, taking back our money would be relatively simple and straightforward,
much less difficult than the daunting task of denationalizing and
decommunizing the Communist countries of Eastern Europe and the
former Soviet Union.
Our goal may
be summed up simply as the privatization of our monetary system,
the separation of government from money and banking. The central
means to accomplish this task is also straightforward: the liquidation
of the Federal Reserve System the abolition of central banking.
How could the Federal Reserve System possibly be abolished? Elementary:
simply repeal its federal charter, the Federal Reserve Act of 1913.
Moreover, Federal Reserve obligations (its notes and deposits) were
originally redeemable in gold on demand. Since Franklin Roosevelt's
monstrous actions in 1933, "dollars" issued by the Federal
Reserve, and deposits by the Fed and its member banks, have no longer
been redeemable in gold. Bank deposits are redeemable in Federal
Reserve Notes, while Federal Reserve Notes are redeemable in nothing,
or alternatively in other Federal Reserve Notes. Yet, these notes
are our money, our monetary "standard," and all creditors
are obliged to accept payment in these fiat notes, no matter how
depreciated they might be.
to cancelling the redemption of dollars into gold, Roosevelt in
1933 committed another criminal act: literally confiscating all
gold and bullion held by Americans, exchanging them for arbitrarily
valued "dollars." It is curious that, even though the
Fed and the government establishment continually proclaim the obsolescence
and worthlessness of gold as a monetary metal, the Fed (as well
as all other central banks) clings to its gold for dear life. Our
confiscated gold is still owned by the Federal Reserve, which keeps
it on deposit with the Treasury at Fort Knox and other gold depositaries.
Indeed, from 1933 until the 1970s, it continued to be illegal for
any Americans to own monetary gold of any kind, whether coin or
bullion or even in safe deposit boxes at home or abroad. All these
measures, supposedly drafted for the Depression emergency, have
continued as part of the great heritage of the New Deal ever since.
For four decades, any gold flowing into private American hands had
to be deposited in the banks, which in turn had to deposit it at
the Fed. Gold for "legitimate" nonmonetary purposes, such
as dental fillings, industrial drills, or jewelry, was carefully
rationed for such purposes by the Treasury Department.
due to the heroic efforts of Congressman Ron Paul it is now legal
for Americans to own gold, whether coin or bullion. But the ill-gotten
gold confiscated and sequestered by the Fed remains in Federal Reserve
hands. How to get the gold out from the Fed? How to privatize the
Fed's stock of gold?
is revealed by the fact that the Fed, which had promised to redeem
its liabilities in gold, has been in default of that promise since
Roosevelt's repudiation of the gold standard in 1933. The Federal
Reserve System, being in default, should be liquidated, and the
way to liquidate it is the way any insolvent business firm is liquidated:
its assets are parceled out, pro rata, to its creditors. The Federal
Reserve's gold assets are listed, as of October 30, 1991, at $11.1
billion. The Federal Reserve's liabilities as of that date consist
of $295.5 billion in Federal Reserve Notes in circulation, and $24.4
billion in deposits owed to member banks of the Federal Reserve
System, for a total of $319.9 billion. Of the assets of the Fed,
other than gold, the bulk are securities of the US government, which
amounted to $262.5 billion. These should be written off posthaste,
since they are worse than an accounting fiction: the taxpayers are
forced to pay interest and principle on debt that the Federal Government
owes to its own creature, the Federal Reserve. The largest remaining
asset is Treasury currency, $21.0 billion, which should also be
written off, plus $10 billion in SDRs, which are mere paper creatures
of international central banks, and which should be abolished as
well. We are left (apart from various buildings and fixtures and
other assets owned by the Fed, and amounting to some $35 billion)
with $11.1 billion of assets needed to pay off liabilities totalling
the situation is not as dire as it seems, for the $11.1 billion
of Fed gold is a purely phoney evaluation; indeed it is one of the
most bizarre aspects of our fraudulent monetary system. The Fed's
gold stock consists of 262.9 million ounces of gold; the dollar
valuation of $11.1 billion is the result of the government's artificially
evaluating its own stock of gold at $42.22 an ounce. Since the market
price of gold is now about $350 an ounce, this already presents
a glaring anomaly in the system.
Where did the
$42.22 come from?
of a gold standard is that the monetary unit (the "dollar,"
"franc," "mark," etc.) is defined as a certain
weight of gold. Under the gold standard, the dollar or franc is
not a thing in itself, a mere name or the name of a paper ticket
issued by the State or a central bank; it is the name of a unit
of weight of gold. It is every bit as much a unit of weight as the
more general "ounce," "grain," or "gram."
For a century before 1933, the "dollar" was defined as
being equal to 23.22 grains of gold; since there are 480 grains
to the ounce, this meant that the dollar was also defined as .048
gold ounces. Put another way, the gold ounce was defined as equal
to taking us off the gold standard domestically, Franklin Roosevelt's
New Deal "debased" the dollar by redefining it, or "lightening
its weight," as equal to 13.714 grains of gold, which also
defined the gold ounce as equal to $35. The dollar was still redeemable
in gold to foreign central banks and governments at the lighter
$35 weight; so that the United States stayed on a hybrid form of
international gold standard until August 1971, when President Nixon
completed the job of scuttling the gold standard altogether. Since
1971, the United States has been on a totally fiat-paper standard;
not coincidentally, it has suffered an unprecedented degree of peace-time
inflation since that date. Since 1971, the dollar has no longer
been tied to gold at a fixed weight, and so it has become a commodity
separate from gold, free to fluctuate on world markets.
When the dollar
and gold were set loose from each other, we saw the closest thing
to a laboratory experiment we can get in human affairs. All Establishment
economists from Keynesians to Chicagoite monetarists
insisted that gold had long lost its value as a money, that gold
had only reached its exalted value of $35 an ounce because its value
was "fixed" at that amount by the government. The dollar
allegedly conferred value upon gold rather than the other way round,
and if gold and the dollar were ever cut loose, we would see the
price of gold sink rapidly to its estimated nonmonetary value (for
jewelry, dental fillings, etc.) of approximately $6 an ounce. In
contrast to this unanimous Establishment prediction, the followers
of Ludwig von Mises and other "gold bugs" insisted that
gold was undervalued at 35 debased dollars, and claimed that the
price of gold would rise far higher, perhaps as high as $70.
to say that the gold price never fell below $35, and in fact vaulted
upward, at one point reaching $850 an ounce, in recent years settling
at somewhere around $350 an ounce. And yet since 1973, the Treasury
and Fed have persistently evaluated their gold stock, not at the
old and obsolete $35, to be sure, but only slightly higher, at $42.22
an ounce. In other words, if the US government only made the simple
adjustment that accounting requires of everyone evaluating
one's assets at their market price the value of the Fed's
gold stock would immediately rise from $11.1 to $92.0 billion.
From 1933 to
1971, the once very large but later dwindling number of economists
championing a return to the gold standard mainly urged a return
to $35 an ounce. Mises and his followers advocated a higher gold
"price," inasmuch as the $35 rate no longer applied to
Americans. But the majority did have a point: that any measure or
definition, once adopted, should be adhered to from then on. But
since 1971, with the death of the once-sacred $35 an ounce, all
bets are off. While definitions once adopted should be maintained
permanently, there is nothing sacred about any initial definition,
which should be selected at its most useful point. If we wish to
restore the gold standard, we are free to select whatever definition
of the dollar is most useful; there are no longer any obligations
to the obsolete definitions of $20.67 or $35 an ounce.
if we wish to liquidate the Federal Reserve System, we can select
a new definition of the "dollar" sufficient to pay off
all Federal Reserve liabilities at 100 cents to the dollar. In the
case of our example above, we can now redefine "the dollar"
as equivalent to 0.394 grains of gold, or as 1 ounce of gold equalling
$1,217. With such redefinition, the entire Federal Reserve stock
of gold could be minted by the Treasury into gold coins that would
replace the Federal Reserve Notes in circulation, and also constitute
gold coin reserves of $24.4 billion at the various commercial banks.
The Federal Reserve System would be abolished, gold coins would
now be in circulation replacing Federal Reserve Notes, gold would
be the circulating medium, and gold dollars the unit of account
and reckoning, at the new rate of $1,217 per ounce. Two great desiderata
the return of the gold standard, and the abolition of the
Federal Reserve would both be accomplished at one stroke.
step, of course, would be the abolition of the already bankrupt
Federal Deposit Insurance Corporation. The very concept of "deposit
insurance" is fraudulent; how can you "insure" an
entire industry that is inherently insolvent? It would be like insuring
the Titanic after it hit the iceberg. Some free-market economists
advocate "privatizing" deposit insurance by encouraging
private firms, or the banks themselves, to "insure" each
others' deposits. But that would return us to the unsavory days
of Florentine bank cartels, in which every bank tried to shore up
each other's liabilities. It won't work; let us not forget that
the first S&Ls to collapse in the 1980s were those in Ohio and
in Maryland, which enjoyed the dubious benefits of "private"
points up an important error often made by libertarians and free-market
economists who believe that all government activities should be
privatized; or as a corollary, hold that any actions, so long as
they are private, are legitimate. But, on the contrary, activities
such as fraud, embezzlement, or counterfeiting should not be "privatized";
they should be abolished.
leave the commercial banks still in a state of fractional reserve,
and, in the past, I have advocated going straight to 100 percent,
nonfraudulent banking by raising the gold price enough to constitute
100 percent of bank demand liabilities. After that, of course, 100
percent banking would be legally required. At current estimates,
establishing 100 percent to all commercial bank demand deposit accounts
would require going back to gold at $2,000 an ounce; to include
all checkable deposits would require establishing gold at $3,350
an ounce, and to establish 100 percent banking for all checking
and savings deposits (which are treated by everyone as redeemable
on demand) would require a gold standard at $7,500 an ounce.
But there are
problems with such a solution. A minor problem is that the higher
the newly established gold value over the current market price,
the greater the consequent increase in gold production. This increase
would cause an admittedly modest and one shot price inflation. A
more important problem is the moral one: do banks deserve what amounts
to a free gift, in which the Fed, before liquidating, would bring
every bank's gold assets high enough to be 100 percent of its liabilities?
Clearly, the banks scarcely deserve such benign treatment, even
in the name of smoothing the transition to sound money; bankers
should consider themselves lucky they are not tried for embezzlement.
Furthermore, it would be difficult to enforce and police 100 percent
banking on an administrative basis. It would be easier, and more
libertarian, to go through the courts. Before the Civil War, the
notes of unsound fractional reserve banks in the United States,
if geographically far from home base, were bought up at a discount
by professional "money brokers," who would then travel
to the banks' home base and demand massive redemption of these notes
The same could
be done today, and more efficiently, using advanced electronic technology,
as professional money brokers try to make profits by detecting unsound
banks and bringing them to heel. A particular favorite of mine is
the concept of ideological antibank vigilante leagues, who would
keep tabs on banks, spot the errant ones, and go on television to
proclaim that banks are unsound, and urge note and deposit holders
to call upon them for redemption without delay. If the vigilante
leagues could whip up hysteria and consequent bank runs, in which
noteholders and depositors scramble to get their money out before
the bank goes under, then so much the better: for then, the people
themselves, and not simply the government, would ride herd on fractional
reserve banks. The important point, it must be emphasized, is that
at the very first sign of a bank's failing to redeem its notes or
deposits on demand, the police and courts must put them out of business.
Instant justice, period, with no mercy and no bailouts.
a regime, it should not take long for the banks to go under, or
else to contract their notes and deposits until they are down to
100 percent banking. Such monetary deflation, while leading to various
adjustments, would be clearly one-shot, and would obviously have
to stop permanently when the total of bank liabilities contracted
down to 100 percent of gold assets. One crucial difference between
inflation and deflation, is that inflation can escalate up to an
infinity of money supply and prices, whereas the money supply can
only deflate as far as the total amount of standard money, under
the gold standard the supply of gold money. Gold constitutes an
absolute floor against further deflation.
If this proposal
seems harsh on the banks, we have to realize that the banking system
is headed for a mighty crash in any case. As a result of the S&L
collapse, the terribly shaky nature of our banking system is at
last being realized. People are openly talking of the FDIC being
insolvent, and of the entire banking structure crashing to the ground.
And if the people ever get to realize this in their bones, they
will precipitate a mighty "bank run" by trying to get
their money out of the banks and into their own pockets. And the
banks would then come tumbling down, because the people's money
isn't there. The only thing that could save the banks in such a
mighty bank run is if the Federal Reserve prints the $1.6 trillion
in cash and gives it to the banks igniting an immediate and
devastating runaway inflation and destruction of the dollar.
are fond of blaming our economic crisis on the "greed of the
1980s." And yet "greed" was no more intense in the
1980s than it was in the 1970s or previous decades or than it will
be in the future. What happened in the 1980s was a virulent episode
of government deficits and of Federal Reserveinspired credit
expansion by the banks. As the Fed purchased assets and pumped in
reserves to the banking system, the banks happily multiplied bank
credit and created new money on top of those reserves.
There has been
a lot of focus on poor-quality bank loans: on loans to bankrupt
Third World countries or to bloated and, in retrospect, unsound
real estate schemes and shopping malls in the middle of nowhere.
But poor quality loans and investments are always the consequence
of central banking and bank-credit expansion. The all-too-familiar
cycle of boom and bust, euphoria and crash, prosperity and depression,
did not begin in the 1980s. Nor is it a creature of civilization
or the market economy. The boom-bust cycle began in the 18th century
with the beginnings of central banking, and has spread and intensified
ever since, as central banking spread and took control of the economic
systems of the Western world. Only the abolition of the Federal
Reserve System and a return to the gold standard can put an end
to cyclical booms and busts, and finally eliminate chronic and accelerating
credit expansion, business cycles, heavy government debt, and high
taxes are not, as Establishment historians claim, inevitable attributes
of capitalism or of "modernization." On the contrary,
these are profoundly anticapitalist and parasitic excrescences grafted
onto the system by the interventionist State, which rewards its
banker and insider clients with hidden special privileges at the
expense of everyone else.
free enterprise and capitalism is a system of firm rights of private
property, with everyone secure in the property that he earns. Also
crucial to capitalism is an ethic that encourages and rewards savings,
thrift, hard work, and productive enterprise, and that discourages
profligacy and cracks down sternly on any invasion of property rights.
And yet, as we have seen, cheap money and credit expansion gnaw
away at those rights and at those virtues. Inflation overturns and
transvalues values by rewarding the spendthrift and the inside fixer
and by making a mockery of the older "Victorian" virtues.
the Old Republic
of American liberty and of the Old Republic is a multifaceted task.
It requires excising the cancer of the Leviathan State from our
midst. It requires removing Washington, DC as the power center of
the country. It requires restoring the ethics and virtues of the
19th century, the taking back of our culture from nihilism and victimology,
and restoring that culture to health and sanity.
the long run, politics, culture, and the economy are indivisible.
The restoration of the Old Republic requires an economic system
built solidly on the inviolable rights of private property, on the
right of every person to keep what he earns, and to exchange the
products of his labor. To accomplish that task, we must once again
have money that is produced on the market, that is gold rather than
paper, with the monetary unit a weight of gold rather than the name
of a paper ticket issued ad lib by the government. We must have
investment determined by voluntary savings on the market, and not
by counterfeit money and credit issued by a knavish and State-privileged
banking system. In short, we must abolish central banking, and force
the banks to meet their obligations as promptly as anyone else.
Money and banking
have been made to appear as mysterious and arcane processes that
must be guided and operated by a technocratic elite. They are nothing
of the sort. In money, even more than the rest of our affairs, we
have been tricked by a malignant Wizard of Oz. In money, as in other
areas of our lives, restoring common sense and the Old Republic
go hand in hand.
N. Rothbard (19261995) was the author of Man,
Economy, and State, Conceived
in Liberty, What
Has Government Done to Our Money, For
a New Liberty, The
Case Against the Fed, and many
other books and articles. He was
also the editor with Lew Rockwell of The
Rothbard-Rockwell Report, and academic vice president of
the Ludwig von Mises Institute.