An Honest Monetary System

Nelson Hultberg

July 10, 2016

All legitimate economists today accept the fact that central bank expansion of the money supply at a faster rate than the economy’s production of goods and services results in price inflation, i.e., stealing of the people’s wealth. If not checked, it brings about the destruction of a nation’s currency. In light of this, we need to ask ourselves what type of money can a society possibly have when its government officials and federal bankers can simply print that money at will?

History clearly teaches us that no stable, prosperous country can remain so very long if it leaves control of its money supply up to the machinations of corruptible men in power at the government’s Treasury and central bank. The temptation is simply too great for such men to promote excessive expansion of the money supply in order to create an illusion of prosperity so that the electorate will continue to reward them with more power.

Such temptation began in America in 1913 no sooner than the ink was dry on Congress’ legal authorization of the Federal Reserve banking system. It was then greatly expanded with Franklin Roosevelt’s confiscation of gold from Americans in 1933, along with his initiation of J.M Keynes’ “new economics.” This led to the disastrous spending policies and inflation-deflation cycles that we now endure. Ever since World War II ended, Fed currency expansion has resulted in our economy suffering from annual price inflations of 1%-13%, all under the Keynesian “necessity” of massive government spending and intervention into the economy.

The Fed’s monetary policy under Republican and Democratic administrations alike has always been to pump more credit (i.e., debt) into the system because, according to Keynes and his academic progeny, this is the only way to maintain a prosperous economy. This assumes that the creation of fiat money and easy credit will increase people’s wealth without any harmful ramifications.

But as I pointed out in Printing Our Way to Prosperity, fiat money printing will not increase our real wealth. Real wealth is created by men and women engaging in productive enterprises – planting and harvesting crops, running efficient factories, conveying services to their fellow man, etc. It cannot be created by government “injections of liquidity” into the economy at a faster pace than production of goods and services. All that comes about with such irrational economics is a boom-bust economy in which inflationary periods and recessionary periods alternate over and over again until finally the credit / debt level becomes too overwhelming for the people to tolerate. At this time, the country and its economy must go through a prolonged liquidation of such debt, i.e., a severe depression of multi-year duration. (See Keynesianism’s Ugly Secret.)

The Keynesian philosophy of trying to increase demand with increases of fiat money is what led to the runaway inflation of the 1970s and to the hallucinatory bubble economy of the 1990s, then to the inevitable bust of 2008, and a following boom to 2016 that cannot last. Another bust period will soon be upon us.

Unless we bring about genuine monetary reform, we as a country are doomed, like Sisyphus rolling his stone up and down the hill for all of eternity, to merely repeating the Keynesian fallacies. This means constant boom-and-bust cycles with relentless theft of the people’s money forever into the future. The only way to eliminate such instability and corruption is to establish a monetary standard other than the whims of federal bankers and bureaucrats. Throughout history that standard has always been gold.

Restoration of Monetary Stability

Restoration of such a standard, however, will require revolutionary thinking in the field of money and monetary theory. The original gold standard’s flaws have to be avoided. A plan must be devised that can be phased in over time, a plan that allows the public to become acclimated to the use of gold as money again. Fortunately we have the works of several scholars and a former presidential candidate with which to accomplish this – men such as Henry Hazlitt, Hans Senholz, Antal E. Fekete, and Ron Paul have offered notable insights on the necessity and restoration of a gold standard. [1]

Restoration of a gold monetary system and an independent banking system are, thus, the ultimate answer to the boom-bust economics of Keynesianism. But such a gold oriented, independent banking system cannot be established overnight. It will require several decades, fifty years at least, to educate the people as to its necessity.

In the meantime, we must convince American citizens that we can no longer allow money to be arbitrarily created by a cartel of political bankers in Washington. The money supply and its growth must be divorced from the dictates of federal bureaucrats, which will bring the problem of price inflation and its ruinous consequences under control.

Thus as a first step to restoration of an honest money system, we must pressure Congress into putting strict limitations on the rate of monetary growth by the Fed. The way to do this is through Milton Friedman’s 4% auto-expansion plan for the money supply. His plan would computerize the increase of the money supply at 4% annually – in other words, remove monetary growth from the arbitrary whims of Federal Reserve bureaucrats and make it automatic, mandated by law. This would allow us to check the irresponsible power of the Fed until the American people can be educated as to the necessity of restoring gold-backed money and abolishing the Fed.

The Friedman plan suffers from some flaws (e.g., the money supply is difficult to define precisely – do we use M1, M2, M3? And the Fed cannot control “velocity” of money, which is just as important as “quantity” in determining price rises). So the Friedman plan would be only a temporary measure, implemented to temper the inordinate power of the Fed until the people can be persuaded to enact a gold-backed monetary system.

The economic / debt crisis that is now descending upon all the world’s industrial nations is going to bring a redesigned global monetary system. Bretton Woods II (the fiat-money-floating-exchange-rate system that Richard Nixon launched in 1971) must be replaced; that much is obvious. What kind of global system it will be is anyone’s guess. But whatever system comes into being, the need for a stable auto-expansion plan for America’s Fed does not change. It is still crucial if we are to gain control over our government. It would make our currency the strongest among all nations and bring investment capital from around the world into our economy. Our sputtering economic engines would be recharged in a major way.

Fallacies of Keynes

Most economists in our government and in our colleges today will naturally attempt to deny the necessity of any kind of automatic expansion of money. They will go to great lengths to try and convince their audiences that the economy’s money supply must be fiat money, and it must be continually inflated via the discretion of the Federal Reserve in order to produce adequate economic growth. But this is totally erroneous. America’s economic growth during the 19th century was spectacular, and there was no Federal Reserve pumping fiat money into the system at all. For example, the chart below shows us the CPI from 1800 to 2005.

cpi1800-2005

The index of consumer prices decreased by 40%, from 51 to 30, between 1800 and 1913 (about 1/3 % per year). This was because the money supply was tied to gold and couldn’t be expanded arbitrarily in excess of the growth of goods and services by the nation’s bankers. The reason is that gold must be manufactured slowly and steadily, while paper can be printed easily and instantly – hundreds of billions of dollars overnight. As a result, there was no upward pressure on prices.

In contrast, today we no longer use gold as money, but paper printed by the Federal Reserve according to FOMC desires. As a result, the Consumer Price Index literally exploded, increasing from 30 to 587 in the years 1913 to 2005. By 2015 the Index had reached 711 for a total increase of 2,270%. [2]  This was because the money supply was created by Fed bureaucrats at a far faster rate than the production of goods and services – all of which should tell us quite clearly that government money managers are not reliable and never will be, and that a fiat money system that can be expanded at the discretion of government bankers will never be stable.

When the above figures are combined with other vital 19th century statistics, we readily see that the Keynesian claim of “economic growth needing monetary inflation” is a fallacy. During the 19th century due to the dollar being backed by gold, we enjoyed gently deflationary prices (the beneficial kind of deflation due to technological improvement), yet also rapid economic growth of all goods and services. America’s GDP increased over 500% in just the years 1870 to 1913, averaging 4.3% annual growth, and real wages for the workingman tripled between the years 1849 and 1915. In comparison, we average about 2.5% annual growth today, real wages are totally stagnant, and we are plagued by inflationary prices brought on by the Federal Reserve’s relentless monetary expansion. [3]

The Keynesians’ claim of massive monetary inflation being a requisite for healthy economic growth is, thus, totally in error. So also is their claim that only with government control over the currency and banking system can we have “stability” in our economy. Growth will take place very nicely without government control of the money supply; and what’s more, it will be real growth, not the frenzied, speculative, boom-bust kind of growth our Great Society dreamers have given us.

As for stability, how can any logical observer of the 20th century claim that the Fed’s inflationary monetary policy has given us stability? As the statistics show so clearly on the above chart, the Fed’s expansion of the money supply has grossly debased the dollar and sent prices skyrocketing over the past 100 years. Yet the publicly announced reason for the Fed’s creation in 1913 was that it would be the great “stabilizer” of the banking system and our economy. Unfortunately it has brought us precisely the opposite.

How to Implement the Plan

Keynesians will object to any 4% auto-expansion plan for the money supply, claiming that it would bring about a depression. Seeing that the money supply is now being expanded at average annual rates of 9%-10%, such a “limiting” of monetary growth would bring a serious deflation to the country. This is true; but the debt liquidation crisis from which we are presently suffering (caused by the Keynesian boom / bust cycle) is bringing deflation to the country anyway.

Thus any implementation of a 4% auto-expansion plan for the money supply would need to wait until after we have reached culmination of the deflation crisis presently engulfing us. The auto-expansion plan could then be initiated as we begin to climb out of the crisis, and thus it would not lead to more deflation. It would lead to responsible growth.

If there is somehow a resurrection of the economy from the present crisis without going through the necessary crash / debt liquidation period to heal it, an auto-expansion plan for the Fed could be phased in slowly over a 10-year period until we have reached a steady rate of 4% annually. Thus either way, the plan can be implemented – quickly as a means to climb out of a vicious recessionary crash, or slowly as a means to ease off of inflation into a more stable monetary system.

The reason why collectivists throughout the country oppose all attempts to rein in the inflationary power of the Fed with a stable monetary policy is because they know their ever-expanding welfare-warfare state is tied directly to massive inflation of the currency. Without the ability to excessively expand the money supply year after year, the vast panoply of big government programs and wars could not be financed because American citizens would not pay for such tyrannical extravagance with taxes. Without such welfare programs and wars, the collectivists’ egalitarian dream of a Great Planned Society regulated and manipulated from Washington is dead.

Legacy of Keynes

This is the legacy of Keynes. His monetary philosophy has led us to abandoning the sound money of gold and embracing the illusory money of Federal Reserve bureaucrats. This has led us to an ever burgeoning government in Washington and many economic distortions that we would not have to endure but for the irrationality of letting government bankers create our money.

As with almost all intellectuals of his era, Keynes was greatly influenced by Karl Marx even though he publicly denounced him. Prior to Keynes, socialism and its wealth redistribution had found scant enthusiasm in America. But Keynes smoothed over the harsh Marxist anti-individualism with artful sophistry and clever rhetoric into something salable to Americans. He created an academic shroud of respectability for the crude thievery of inflation.

In 1920, Keynes probably still harbored some respect for the classical liberal order of capitalism, but by 1936 he had been converted to gradualist socialism. When Keynes advised FDR and other Western leaders to adopt a policy of permanent fiat money inflation to fuel state intervention into the economy, he was setting in place the end of a free capitalist society. Keynes knew precisely that his economic policies would erode capitalism as a system and usher in massive statism. His monetary philosophy is nothing more than the “secret confiscation of wealth” he wrote about in 1920 in his book, The Economic Consequences of the Peace [4], and which is so eagerly condoned by our legislators and federal bankers today.

In his classic, Economics In One Lesson, Henry Hazlitt, sums up Keynes’ inflation philosophy very well: “Like every other tax, inflation acts to determine the individual and business policies we are all forced to follow. It discourages all prudence and thrift. It encourages squandering, gambling, reckless waste of all kinds. It often makes it more profitable to speculate than to produce. It tears apart the whole fabric of stable economic relationships. Its inexcusable injustices drive men toward desperate remedies. It plants the seeds of fascism and communism. It leads men to demand totalitarian controls. It ends invariably in bitter disillusion and collapse.” [5]

Salvation of America

The salvation of America lies in ending this inflation-deflation cycle of wealth confiscation via currency debasement. This will require genuine reform of our monetary system. The answer to so many of our problems would come if we would end the injurious monetary inflation of the Fed. Prices of goods and services would stop relentlessly rising. Excessive labor union demands would subside. Capital formation would increase. True prosperity would result. Poverty would shrink at a faster pace. Yet life would churn at a more moderate and predictable pace. The elderly would be able to keep the security they worked for. Jobs would stop leaving America for third-world countries. And we could all get off this infuriating treadmill of never quite catching up with our bills. In general, life would again be stable, productive, and free rather than the speculative, frenzied, Washington-managed economy that has evolved under the whip of collectivist ideology.

The fate of a free country lies in the integrity of its money. The integrity of a country’s money lies in the independence it has from government control. The independence that a money system has from government control depends upon the rationality and will of the people. The upcoming years are going to severely test the rationality and the will of the American people.

We are confronted today with a perilous chain of boom-bust crises that is bringing great tumult to our lives. How we handle the next bust phase of Keynesianism will determine the fate of America for centuries. There is great opportunity for the cause of freedom if we can convince the American people to establish control over the money creation powers of the Fed. It is an opportunity that we need to prepare for now. As we climb out of the upcoming bust cycle, we must enact an “honest monetary system” for our country that prohibits Federal Reserve bureaucrats from expanding the money supply at will.

Notes

1. See Ron Paul, “The Political and Economic Agenda for a Real Gold Standard,” Mises Institute, January 17, 2008, http://mises.org/story/2826#. Also Antal E. Fekete, “Money and Credit,” http://professorfekete.com/math.asp. And “The Gold Standard,” FEE, http://fee.org/economics/gold-standard.

2. CPI figures for the graph, 1800-2005, are from the Federal Reserve Bank of Minneapolis, https://www.minneapolisfed.org/community/teaching-aids/cpi-calculator-information/consumer-price-index-1800. Likewise for the figures from 2005-2015.

3. Figures from The Statistical History of the United States from Colonial Times to the Present (Stamford, CT: Fairfield Publishers, 1960), pp. 91, 141, 409, 413.

4. John Maynard Keynes, The Economic Consequences of the Peace (New York: Harcourt, Brace and Howe, 1920), pp. 235-236.

5. Henry Hazlitt, Economics In One Lesson (New York: Manor Books, 1962), p. 124.

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