The Mises Institute monthly, free with membership
February 1995
Volume 13, Number 2
When anti-socialist, post-Soviet reformers of the Baltic states sought to reign in government
power, they looked to solve the money problem first. Moscow held unlimited power to flood
their economies with cheap money, and to fund itself as an imperial power lording it over other
peoples. That had to end before the market economy could be restored.
Republicans should follow this lead if they want to solve our problem with big government.
Richard Nixon thought that going off the gold standard would be good for himself politically.
But his reckless action made possible, even inevitable, the explosive expansion of government
spending, debt, and intervention that followed.
Alan Greenspan, then an independent economist, warned that the remnants of the gold
standard
were all that stood between the American people and Leviathan. He was right, of course, but
now, as chairman of the Federal Reserve, he exercises the power over the economy he once told
all freedom lovers to loathe.
From time to time, James Grant, the Austrian School journalist of Grant's Interest Rate
Observer, prepares a prospectus on the U.S. government. He's not trying to market U.S.
debt to
his subscribers, but to make a more profound point: no sane person would buy U.S. debt if the
issuing agent were judged by market standards of creditworthiness. It is only the central bank's
power to buy debt, to be the "lender of last resort," that leads people to buy and hold in
perpetuity.
When Orange County went bankrupt, the market worked as it was supposed to. It evaluated
the
bonds, saw that something was fishy, and dumped them all at once. The Orange County
government, like the fabled the tulip bulb industry in Denmark, was bust. Now, if Orange County
had a Federal Reserve, its powerful treasurer could have fueled the growth of county government
until the next millennium.
That's nothing to brag about. It's not alchemy at work, but a high-brow version of
old-fashioned
counterfeiting. A central bank agrees to create as much money as is necessary to cover every
potential monetary claim. This allows for miles-high pile-up of debt and the unlimited creation of
new money. The Fed, in particular, has a variety of tricks in its bag: requiring banks to keep
fewer savings for outstanding loans, lowering the rate charged to member banks for overnight
purchases, and outright purchase of Treasury securities.
Much of our country's economic and cultural decline dates from 1972, and the Fed is a
primary
cause. A 1972 dollar is now worth about 29, thanks to the central bank's power to create money
out of thin air and "insure" deposits with a promise never to run out of printer's ink. People who
saved for their retirement then know now that they are not even close to being prepared now.
The increase in nominal prices and wages has not harmed everyone proportionately. The
government is much richer than it was, and look who's poorer: savers, families, small
businessmen, workers, and the rest of the middle class. We've been clobbered by the Fed's
printing presses. The essentials of life--education, health care, housing--have all become much
less affordable.
The destruction of the gold standard--which really began with the founding of the Fed in
1913--has allowed the government to fund an entire class of reliably liberal voters, and agitators
to push for more programs.
The growth of government made possible by fiat, Fed-controlled money has created a policy
culture in which everything is permissible. Every good and service comes under a myriad of
regulations. Every business and local government obeys countless mandates. No one in public
life talks of substantial budgets cuts on the order of $500 billion, which ought to be only the
beginning.
The Fed is indeed mischievous, and in more ways than even gold bugs know. The central
bank
has recently thrown itself into the social engineering business. Its regulatory arm won't approve
bank mergers unless the banks have paid tribute to the underclass by overlooking poor credit
histories.
The gold standard was once a dam holding back the floods of statism, but it was blown up by
a
multigenerational conspiracy of self-interested politicians and special interests. It wasn't just the
central government that benefited. Large bankers themselves appreciate the profits and power
that come with the ability to expand money and credit beyond what real savings could ever
support.
A form of the gold standard was called for in the 1980 Republican platform, although Ronald
Reagan did nothing to give us one (though he deserves credit for creating the U.S. Gold
Commission that enabled Ron Paul and Jesse Helms to bring back American gold coinage). The
point is this: Republicans in those days at least understood the importance of reining in the power
of the Fed-bank-government cartel to create unlimited amounts of fiat money.
The then-prominence of supply-siders brought some attention to the issue of monetary
reform.
But their preferred solution--a watered-down version of the already diluted Bretton Woods
system--would not have defined the dollar in terms of gold, or allowed domestic convertibility.
Instead it would have resurrected something weaker than the system that fell apart in the early
1970s, suggesting that even supply-siders are unwilling to learn from history.
Since the 1994 election, the Republican elite hasn't breathed a word challenging the
enormous
power the Federal Reserve exercises over the economy. For the backbenchers, anyway, let's hope
it's because of ignorance, and not because they're owned by the large banks or want the Fed to
fund their pet legislative projects, just as it funded Democratic ones in the past.
At least one trend points in the wrong direction: the Republican leadership doesn't want to
force
the Fed chairman to testify before the Banking Committee anymore. That's too bad since it
removes one source of accountability, if a small one, from an otherwise unaccountable entity.
Some Republicans operate on the theory that the more "independent" a central bank is, the
less it
is tempted into inflationary policies. The view is a conventional one and derives largely from the
empirical example of Switzerland and Germany.
The problem with empirics is that they ignore cause and effect. The Germans and Swiss have
relatively sound money not because the central bankers are independent, but because the
economic and political culture won't allow inflationary schemes of the sort we're saddled with.
The central banks would lose all credibility if they tried.
There can be no such thing as a thoroughly independent central bank in the way the corner
grocery store is independent. Politics determines a central bank's decisions, as does the desire to
increase bank profits. We're just not supposed to notice or talk about it in polite company.
If the Republicans really wanted to challenge Leviathan, they would strangle the Fed, its very
lifeblood. If we dismantled the Fed and made our money good as gold again, it would matter a
lot
less who sat in the White House or the Congress, for they would have much less power to harm
us even if they wanted to.
Forget the balanced-budget amendment: the gold standard is what big government types
really
fear. That so few want to unplug the government's money machine tells us more about the
governing elites, including the Republicans, then we are perhaps willing to face.
-------------------------------------------
Llewellyn H. Rockwell, Jr. is president and founder of the Ludwig von Mises Institute
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