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Financing the Empire

Tags The FedGold StandardMonetary Theory

11/09/2006Mark Thornton

[This talk was delivered on October 27, 2006, at "Imperialism: Enemy of Freedom," the Mises Institute Supporter's Summit. It is available in MP3 audio from Mises Media.]

People poke fun at Austrian economists because we support the gold standard. They cannot understand why we would "cling" to this "relic" of history. They view it as going backward in history to a less advanced state of affairs and to something that is primitive and unscientific. They ask us: how would we control this gold standard? After all, isn't the gold standard unstable?

We answer: yes, the gold standard is unstable in the same sense that all markets are unstable, which is one reason why we support the gold standard — because it automatically makes all the necessary adjustments to the changes that occur in the real world. In any case, gold is much more stable than paper money and the gyrations in the gold market reflect the unstable dollar, not any inherent instability in the gold market.

A gold standard also helps prevent governments from starting useless spending programs, creating expensive bureaucracies, running budget deficits, and waging unnecessary wars. It can even help smooth out and even eliminate the business cycle. Economic science and history all point to the advantages of market-based money and the disadvantages of government-controlled systems.

At this point our critics are convinced. They are convinced that we are all crackpots and that we have lost touch with reality and that we have a screw loose. We have not even mentioned at this point that a true gold standard makes the financing of imperialism nearly impossible. Nor have we hinted that Operation Iraqi Liberation (OIL) is just the latest "operation" in US imperialism.

Even our supply-side friends think we are crazy for advocating a gold and silver coin standard that is completely market driven. They like gold too, but they wish that the central bank would target the price of gold at, say, $500 per ounce. Robert Mundell, a recent Nobel laureate in economics, also recommends a targeted gold exchange system.

The problem with their suggestion is not gold, but the government control of money. It is really just a variation on all the other so-called "systems." It would not be stabilizing, as government central banks could still manipulate the money supply and interest rates.

Lags between policy changes and their ultimate impact on the gold market could create swings in the economy and cause chaos in credit markets. It also does not eliminate fractional reserve banking so that changes in the gold market would be amplified several times in both directions. We would still face the problems of inflation and business cycles. Ultimately we would also face the twin problems of the system going into default and the potential that governments would simply renege on their promises. The historical trail of broken promises, suspensions of convertibility, and changing targets is too long and crowded to take such a system seriously.

As Murray Rothbard has shown, it was precisely this gold exchange system that was the economic basis of American imperialism in the late 19th century. It was mainstream American economists who put forward the theory of "capitalistic imperialism" that helped justify the government's overseas adventures to open up foreign markets for American business.

These economists argued that America had too much capital and that it was vital for the survival of "advanced capitalism" to forcibly open markets to American investment and goods. Economist Charles Conant wrote that "America must be prepared to use force if necessary." America, he argued, must not be held back by the abstract theories and extreme conclusions of our Founding Fathers and that "only with the firm hand of the responsible governing races … can … progress be conveyed to the tropical and undeveloped countries." (Rothbard, History of Money and Banking in the United States, pp. 210–212)

America — a country born in the crucible of revolution against British Imperialism — would now be transformed into an imperial power itself. Conant called for rewriting the Constitution to centralize power and for maintaining of a large standing army and navy to pacify both the domestic population and our foreign subjects.

Rothbard noted:

"The leap into political imperialism by the United States in the late 1890s was accompanied by economic imperialism, and one of the keys to economic imperialism was monetary imperialism. In brief, the developed Western countries by this time were on the gold standard, while most of the Third World nations were on the silver standard … what the new imperialists set out to do was to pressure or coerce Third World countries to adopt, not a genuine gold coin standard, but a newly conceived 'gold-exchange' or dollar standard." (218–9)

The idea here was that foreign central banks would hold their reserves in dollars deposited in New York banks so that when our banks inflated, gold would not flow out of the country as is the case with a genuine gold standard. Hence the United States used political, economic, and military pressure to persuade our new possessions and other underdeveloped countries to join the dollar system.

By the time of the Panic of 1907 (which was used as a justification to create the Federal Reserve) the gold standard had been firmly shackled and had lost all the qualities that made it the foundation of capitalism, free trade, and prosperity.

The adoption of the Federal Reserve central bank, the breaking of the last linkages with gold, and the further dollarization of the world banking system has only enhanced the economic arm of US imperialism. Nowadays, the US Treasury can issue bonds in astronomical amounts only to be absorbed seemingly harmlessly by the Fed and central banks around the world. For its part, the Fed pays for the bonds with a simple electronic bookkeeping entry in its accounts and no one is the wiser.

I've taught college courses in Money and Banking where I would explain the details of Fed policy, the regulation of banking, and the money expansion process at great length. When I first started teaching the course, students would inevitably arrive at my office as final exams approach and claim that "this doesn't make sense," "I'm just not getting it," or "I must be missing something."

I then would explain that in order to understand this system you have to think of it as a scam. Something that is criminal. Something that normally would be against the law, but in this case the government is allowing itself to break the law against counterfeiting. I then would remind them about the categories of winners and losers from inflation where the government or government-related classes benefit and everyone else loses. This was clearly one of the most shocking revelations that they had ever experienced. I only wish that I had a scrapbook of photographs of their faces that I could pass around here today.

Only a market-based monetary system eliminates the possibility of inflation and business cycles and this system also prevents government from embarking on the path of imperialism. Market-based money would consist of gold and silver coins and money would be defined by the market as a certain weight of metal of a set level of purity. The supply of money could only be increased from new mining production or from diversions from other uses of the metal via the market mechanism.

Banking would be based on a 100% reserve requirement on all demand deposits. All demand deposits and banknotes would be redeemable on demand and all defaulters would be forced into immediate liquidation. Bank runs would check the behavior of errant banks, thus eliminating bank panics. Savings would be matched up with investment in a stable and harmonious way and business cycles, properly understood, would cease to exist.

Most importantly, market-based money in the form of a gold standard would force governments back towards the classical liberal society and prevent its antithesis — imperialism. It is central banking and fiat money that finances imperialism and it is only a true gold standard that represents sound money. As Mises stressed:

"The meaning of the idea of sound money … was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights." (Mises, The Theory of Money and Credit, p. 454)

The idea of government money is appealing to those of limited intellect and to those who believe in the glory of the state. The government can simply print money to solve all the problems of society, or to pay for anything required by the state. If a stingy legislature fails to pass the necessary taxes, politicians and bureaucrats can spend borrowed money that is effectively laundered by their central bankers. What they fail to recognize are both the economic problems of inflation and that such unshackled politicians spend for their own interests, including unnecessary wars and other imperial adventures.

In fact, while Austrians emphasize the importance of sound money and the problems of inflation, we hold this last impact of sound money in the highest regard because blocking imperialism and despotism is essential for the survival of liberalism. (Adam Smith and Edmund Burke said the same.) I would like to quote Schumpeter on this point, both for his wide-ranging authority on the subject and because he is considered one of the least doctrinaire in terms of policy among Austrian economics (and is labeled by some as a socialist):

"At present [circa early 1950s] we are taught to look upon such a policy [i.e., an automatic gold standard] as wholly erroneous — as a sort of fetishism that is impervious to rational argument. We are also taught to discount all rational and all purely economic arguments that may actually be adduced in favor of it. But quite irrespective of these, there is one point about the gold standard that would redeem it from the charge of foolishness; even in the absence of any purely economic advantage…. An automatic gold currency is part and parcel of a laissez-faire and free-trade economy. It links every nation's money rates and price levels with the money rates and price levels of all the other nations that are 'on gold.' It is extremely sensitive to government expenditure and even to attitudes or policies that do not involve expenditures directly, for example, to foreign policy, to certain policies of taxation, and, in general to precisely all those policies that violate the principles of economic liberalism. This is the reason why gold is so unpopular now and also why it was so popular in the bourgeois era. It imposes restrictions upon governments or bureaucracies that are much more powerful than is parliamentary criticism. It is both the badge and the guarantee of bourgeois freedom — of freedom not simply of the bourgeois interest, but of freedom in the bourgeois sense. From this standpoint a man may quite rationally fight for it, even if fully convinced of the validity of all that has ever been urged against it on economic grounds. From the standpoint of étatisme and planning, a man may not less rationally condemn it, even if fully convinced of all that has ever been urged for it on economic grounds." (Schumpeter, pp. 405–6, emphasis added)

In other words, even if fiat money was based on sound economic grounds we should still have a gold standard to protect our freedom, while the statist should still support fiat money even if they are convinced that it leads to economic ruin.

Imperialism is inherently expensive, nonproductive, and unprofitable. Imperialism therefore cannot be justified with the idea that it helps the domestic population because only a tiny minority of elites benefit, but it impoverishes the rest of society. The beneficiaries include government contractors, ego-crazed politicians, and mercantilist business enterprises. (In the case of Operation Iraqi Liberation, it is oil interests.)

If we could identify our impoverishment with imperialism we would rise up and overthrow our rulers, but central banks and fiat money blind us to our source of poverty. Government bonds are issued to pay for imperial adventures and these bonds are then effectively laundered by central banks. Government obtains resources and our labor and the average person has little idea that they have been swindled.

The idea that imperialism can be justified because it helps our subjected people is ridiculous and the height of self-delusion. Subjects only put up with foreign rule and interference in the face of their significant military disadvantages and even then, some do fight to the death. All societies have their pluses and minuses and to think that your society is all pluses while theirs is all minuses is the height of self-conceit, especially when you are imposing your will with the point of a bayonet.

Imposing certain aspects of your system such as law, money, religion, politics, etc. on a different society is a recipe for disaster. First, it will not work. Second, it will have unintended consequences within the new mixed system. And third, it will create opposition to your society's values and institutions — across the board — and ignite reactionary movements against you, such as religious fundamentalism and terrorism. As we can now see, the results of British and American imperialism in the Middle East are in full bloom. Such problems can be avoided if we follow the ideas of Austrian economists, particularly Ludwig von Mises and Murray Rothbard.

Central banks make imperialism possible by financing imperialist adventures in such as a way as to cloak the true cost. Joseph Salerno has shown in his article in the Costs of War — "War and the Money Machine: Concealing the Costs of War beneath the Veil of Inflation" — how and why the state uses inflation to pay for war.

The Fed can hide the cost of war, but ultimately it does not reduce the cost of war; it increases it by (1) encouraging more war, destruction and imperialism and by (2) imposing the cost of monetary manipulation that hurts the economy (e.g., the business cycle). The average citizen can only think that they have been slapped in the face by the invisible hand or run over by the invisible truck.

As Operation Iraqi Liberation (OIL) confirms, the US government has no plans to end its imperial rampage. OIL had bipartisan support and all the recent talk in Washington about withdrawals, timetables, and new strategies is just an election-season salve to make sure the anti-war movement does not fester out of control. It also confirms that imperialism is the enemy of freedom and the champion of death, destruction, and deception. Finally, it also confirms that the Fed is the compliant financier of imperialism and will continue to be.

The only way to stop this destructive juggernaut is to unmask imperialism as the enemy of freedom, peace, and prosperity. The people must understand it is inherently bad for us and for those the government chooses to control. We must unmask the dirty secret of imperialism that it is only the powerful few elites who benefit from imperialism. We must unmask the fact that they use the Federal Reserve to dupe the masses into supporting imperialism. The Fed must be stopped. Gold coins must return as our monetary standard. The ideas of the Austrian economists must prevail. The evil ideology of deception, death, and destruction that is imperialism must itself be destroyed by the force of good ideas.


Contact Mark Thornton

Mark Thornton is the Peterson-Luddy Chair in Austrian Economics and a Senior Fellow at the Mises Institute. He is the book review editor of the Quarterly Journal of Austrian Economics, and has authored seven books and is a frequent guest on national radio shows.


Denson, John V. 1999. The Costs of War: America's Pyrrhic Victories.

Mises, Ludwig von. The Theory of Money and Credit.

Rothbard, Murray N. History of Money and Banking in the United States.

Schumpeter, Joseph A. 1954. History of Economic Analysis. New York: Oxford University Press.