Bringing Down the Paper Aristocracy

Nelson Hultberg

January 7, 2003

As we descend further into the Kondratieff winter over the next decade, the possibility of a serious financial meltdown in America and worldwide will become ever greater. In such a period of economic crisis, there is sure to be a considerable polarization of views in the media as to what kind of monetary system should be constructed in the rebuilding process, and how best to avoid a severe system breakdown again in the future.

Because of this crisis atmosphere, the next 10 years will be a prime opportunity to advance the ideas of sound money and economic freedom. American citizens, who have remained close-minded to the advocacy of gold as money in the past, will suddenly turn receptive to our views in face of the failure of the paper money paradigm. Many millions of Americans could be converted to the cause. With a large enough groundswell of public opinion, the powers that run Washington could possibly be forced to adopt a gold-backed dollar and a freer economy as we come out of the Kondratieff winter. We live in an era of tumultuous, imperceivable change. After all, who thought that the Soviet empire would fall in 1991. The world’s Paper Aristocracy could well receive the same fate.

In light of such a possibility, our most pressing need today is to confront as many fellow citizens as possible with the truth about economic freedom and a gold standard. Americans have been taught a host of egregious lies about economics, capitalism, and the 19th century. As a result, they view the fundamental fulcrums of freedom in the same way they view small pox — as something to protect themselves from by appropriate government innoculation. We need to allay such fear if we are to have any chance of advancing a free economy and a sound money in the aftermath of the upcoming winter.

The Message We Need to Convey

There are numerous questions that must be answered clearly and confidently. Such as: What would happen in a free-market where government could not intervene to inflate the money supply? Just what kind of economy would evolve without a Federal Reserve to monopolize the banking system?

We on the libertarian-conservative right know the answers to such questions, but our fellow citizens do not. They need to learn that the ideal monetary system would be a free-market in banking devoid of government intervention and a Federal Reserve. They need to learn that there would be a “commodity money” such as gold that would be produced from the world’s mines in response to its demand, and that government would not be able to manipulate or corrupt its production. Instead of the whims of federal bankers and their depreciating paper money, the marketplace would determine what was money, and it would produce what the people wanted rather than what the politicians dictated.

The Keynesian establishment, of course, claims that such a gold-backed system would be dangerously chaotic and unworkable. On the contrary, it is their paper system that is chaotic and unworkable. A free gold-backed banking system would create an economy with growth periods, followed by slack periods, followed by growth periods, over and over again as the money supply (through the mechanism of a rising and falling interest rate) becomes more or less available to borrowers. The overall growth trend of a free gold-backed dollar economy would be up in the sense that a gradual staircase goes up. There would be slight lulls and cooling off plateaus — slack periods — mixed in with the expansive periods, but the economy would not have to suffer the reckless and destructive inflation-deflation whipsaws that we have experienced throughout the 20th century under fiat paper money.

It is the natural law of supply and demand at work here in conjunction with interest rates that acts as the regulator, like it is at work regulating every aspect of a free economy. The interest rate is simply the price that bankers charge for their money, and like all prices it is subject to fluctuations according to supply and demand. When money is scarce, interest rates will rise and cool off the economy. When money is plentiful, they will go down and heat up the economy. New stocks of commodity money would become available, or would be withdrawn from circulation and held in personal cash holdings in accordance with the rise and fall of interest rates.

Americans need to learn that such a natural law safeguards the nation, but only if left alone and not tampered with by federal money managers, only if allowed to bring on the “slack periods” of recession.

Contrary to conventional economic thought, such slack periods are natural in a growing healthy economy. They are the necessary safety valves to right the ship of industry, to ease off on the expansion a bit, to re-evaluate and liquidate any malinvestment that has taken place. In a free economy, such periods are never severe, always short as the forces of the marketplace, through the free flow of capital and interest rates, right themselves and begin anew the growth cycle.

In addition, such recessions in a free economy devoid of central banking would not be nationwide. The country as a whole would not go into a slump; only specific industries and localities would experience a slow down as they liquidate their over extensions and faulty judgments. It’s only when the economy is controlled centrally (through the Federal Reserve and Washington planning) that recessionary periods are massive and felt throughout the nation.

If money was gold rather than paper, and if it was held by the people rather than the government, it would be deposited in thousands of independent banks around the country. No one bank would have the power to expand the nation’s money supply, such as we have at present under the Federal Reserve system, because no one bank would own all the gold as the federal government and its central bank presently do. Moreover, no one bank would have the power to extend excessive credit because they would be obligated to redeem all paper notes with gold. Therefore, credit expansion and contraction would be localized affairs determined by the different judgments of thousands of bankers around the country rather than one powerful monetary czar at the Fed in Washington. Such a free, decentralized banking system would diffuse the financial power of the economy out among the people where it belongs and remove it from powerful federal bureaucrats where it invariably is corrupted to the ultimate detriment of us all in the long run.

When the government intervenes through the Federal Reserve, it does so with the express purpose of eliminating the vital recessionary periods via continual injections of easy credit and paper money into the economy. The whole Keynesian school of Economics is based upon keeping the economy in a never ending nationwide boom, or as the street junkie might say — “a perpetual high from where I’m never coming down!” But reality doesn’t work that way. What goes up must come down (or at least stop and fall back a bit before continuing on). The inflationists only prolong that day when the economy must go through its recessionary liquidation of malinvestment.

Grandiose Fallacy of Keynesian Policy

Americans desperately need to learn that our present economic crisis was Fed induced, that the Fed’s inflationary policies have created monstrous levels of debt and have been carried to such huge expenditures into so many malinvestments that a recession is no longer adequate to restore a healthy equilibrium of growth and expansion. Now a full scale depression is required — a Kondratieff winter — whereby all the credit expansion and debt can be worked off.

Our job in the next ten years will be to explain to our fellow citizens the GRANDIOSE FALLACY of Keynesian monetary policy — to make them grasp that like the smack freaks of today’s drug culture who refuse to foresee the perils of heroin, today’s Keynesian bankers and politicians have blindly ignored the inevitable perils that must come with continual monetary inflation and its “centralized management.”

The reason why a policy of politically managed monetary inflation cannot be maintained indefinitely lies in the weakness of human nature. Human nature being what it is, it is next to impossible for federal bankers (governed and pressured by men of political zeal) to hold an induced rate of inflation at a steady level every year. Politicians always succumb to the lure of buying votes with the power of money creation and the illusion of prosperity it brings about. This susceptibility all too often translates into packing the Federal Reserve board with easy money advocates and cutting behind the scene deals with Fed chairmen before rewarding them with appointment.

Our recent extravagant boom economy of the nineties is a perfect case in point. The reason why Greenspan and the Fed pumped massive “credit” into the economy throughout the 90’s was because it created an illusion of prosperity, it made everybody feel good, it made businesses hum and politicians joyous. It created celebrity status for Greenspan himself; he became a financial god to Wall Street. In light of such “boom times,” few men would not have their judgment clouded when it became necessary to “disinflate” the money supply so as to head off the danger of a bubble stock market. And Greenspan did indeed have his judgment clouded in 1996, when he decided to keep interest rates artificially low and allow for the “irrational exuberance” his monetary policies had created to continue for four more years. Was it possible that such an easy money policy was the price that Greenspan had to promise to be reappointed by Clinton midway through his administration? We will never know for sure, but whatever the reason, the result was the wild bubble market on Wall Street and then the subsequent crash in which we are now embroiled.

Power lust and the weaknesses of human nature are the primary reasons why a policy of politically managed monetary inflation cannot be safely maintained at a sustainable pace. But there are other reasons also. The nature of the inflation process itself has built into it an automatic escalator. Once started it invariably requires ever larger doses of credit and paper dollars to sustain the boom, just like the heroin addict requires ever larger doses of heroin to achieve the same high. This is because once inflation gets to a high enough level to seriously affect the consumers of a nation, they increase the velocity of money (i.e., they spend their dollars faster) in order to get value out of the currency before it depreciates. This makes rising prices grow even faster. Once begun, inflation is a feverish, uncontrollable monster that feeds voraciously upon itself. It does not grow arithmetically. It grows geometrically.

Intensified Kondratieff in the 20th Century

This is what creates the Kondratieff Cycles that move from the tentative growth of spring, to the rabid inflation of summer, to the blowoff equity bubbles of autumn, and then to the final collapsing credit contraction of the deflationary winter when the “chickens of excess” come home to roost in a maelstrom of consuming debt.

To sum all this up, the boom and bust problem of our economy, which manifests in the 50-60 year Kondratieff Cycle, is caused by mixing the policy of monetary inflation with the human emotions of greed and fear. This is why such a cycle (though documented only as far back as the late 1700’s by Kondratieff) has to some degree or another been a part of human life since governments began clipping coins in ancient times. Clipping coins is a form of inflation.

What we have done this past century that is so dangerous, though, is to cartelize all the independent banks of the 19th century into a giant engine of centralized inflation with the inception of the Federal Reserve. Then under the sway of J.M. Keynes, we compounded this nefarious move by eliminating the discipline of gold from the banking system’s issuance of paper notes — first under FDR in the thirties for American holders of paper dollars, then under Nixon in 1971 for foreign holders of paper dollars. As a result, the government cartelized banking system’s power to issue credit and paper money is now unlimited. Thus the Kondratieff Cycles of the 20th century have become more intensified and severe than the ones of the 19th century.

The Only Workable Answer

Is there an answer to this grandiose fallacy of inflation economics and its monetary debasement from which humans have suffered throughout history (whether by clipping coins in ancient times, or by independent fractional reserve banks in the 19th century, or by federally monopolized banking with no gold backing in the 20th century)? Can we somehow avoid further crises in our future — crises that must come again if we continue to buy into the illusion of creating wealth with printing press money?

There really is only one workable answer: We must elect political administrations that commit themselves to a substantial reduction in government spending and taxation, along with the establishment of sound money.

This would allow the Kondratieff winter and its credit contraction to play itself out in the quickest, least painful manner. This would allow us to work our way back to a productive economy of true growth with a minimum of hardship. Austrian economic theory maintains that any depressionary period would be shortlived if government did not interfere with the readjustment process — i.e., if it let prices and wages fluctuate freely, if it did not try to reinflate the money supply, if it reduced taxes and abstained from protectionist tariffs, if it did not add uncertainty to the mix as Roosevelt and his “New Dealers” did during the 1930’s.

The first step in the process would be to re-establish gold backing in both the domestic market and the foreign exchange markets for the credit and paper dollars that the Federal Reserve creates. This would check the most important source of inflation (fractional reserve banking). James Sinclair maintains that restoration of the Gold Cover Clause is coming, which would effectively launch this step.

The second step would be to phase the Federal Reserve System out of existence and restore a free and independent network of banks totally beyond the control of government money managers. With gold as money, this would check the reoccurence of inflation in the future. In his book, The Case Against the Fed, economist Murray Rothbard, shows how the Federal Reserve could easily be abolished without hardship or dislocations to our society. Its liabilities could be liquidated, while its assets (i.e., its gold) could be revalued vis-a-vis the dollar, and returned to the member banks and their depositors.1

The third and ultimate step would be to establish a 100 percent gold backing for every dollar in the banking system. In his book, The Case For a 100 Percent Gold Dollar, Rothbard outlines how all fractional reserve banking could be eliminated, and with it all inflationary booms and busts. And most importantly, he dispels the myth that gold could not produce enough money for a modern expanding economy. 2

With the above three steps implemented, the Kondratieff Cycle itself could basically be neutralized as a force in our lives. Remember it is brought about by a mixture of monetary inflation with human psychology, i.e., the emotions of greed and fear. Eliminate monetary inflation, and we eliminate the linchpin of the Kondratieff Cycle. There would, of course, still be economic fluctuations in a world based upon a 100 percent gold dollar (due to unpredictable factors of human emotion and error), but they would not be the booms and busts that we have known since ancient times, and certainly not the massive cyclical booms and busts that we have known throughout the past 200 years with the inception of modern fiat money banking and the industrial revolution.

The fixed pegging of the dollar to gold is not perfect, but it is far less imperfect than the arbitrary fiat money system that we now employ. History has told us time and again that gold is a chain of discipline around the appetite of government. Those who defend paper as our medium of exchange are ignoring the irremediable natures of men, and the power that they so disingenuously chase. It is incredible that defenders of paper can still promote their paradigm in face of the monstrous booms and busts that have been brought on by the power lusters of the 20th century.

Inflationary Policy Not Needed for Growth

The great majority of economists in our government and in our colleges today continue to deny the necessity of the above reforming steps, and they become almost apoplectic upon hearing that a gold standard is being advocated. They go to great lengths to try and convince their audiences that the economy’s money supply must be continually inflated in order to produce growth. But this is totally erroneous. America’s productive growth during the 19th century was spectacular, and there was no Federal Reserve pumping unconvertible paper money into the system at all.

For example, the Consumer Price Index decreased by 30 percent from 43 to 30 between the years 1800 and 1913 (an average of 1.4 percent per year).3 This was because the money supply of this time, being tied to gold, was very difficult to expand via the printing press in excess of the growth of goods and services. 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 as it sees fit. As a result, the Consumer Price Index increased by 1,663 percent from 30 to 529 in the years 1913 to 2000.4 This was because the money supply was created 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 paper money system will never be stable.

When the above figures are combined with other vital 19th century statistics, we readily see that the Keynesian claim of “growth needing inflation” is a blatant lie. During the 19th century due to the dollar being backed by gold, we enjoyed gently deflationary prices (the beneficial kind of deflation) and yet also rapid economic growth of all goods and services. As recorded in The Statistical History of the United States, the GDP increased over 500 percent in just the years 1870 to 1913, averaging 4.3 percent annual growth, and real wages for the workingman tripled.5 In comparison, we average about 2.3 percent annual GDP growth today, real wages are stagnant, and we are plagued by inflationary prices brought on by the federal government’s relentless monetary expansion, with a possible gargantuan credit collapse now looming ahead to balance our government created excesses.

The Keynesian claim of monetary inflation being a requisite for healthy economic growth is thus ludicrously in error. So also is its 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 inflation 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 observor of the 20th century claim that the Fed’s inflationary monetary policy has given us stability? Yet this was the publicly announced reason for the Fed’s creation in 1913. It was going to be the great “stabilizer” of the banking system and our economy. Yet it has brought us precisely the opposite.

The reason the collectivists throughout the country oppose the stable monetary policy that would be brought about by a strict gold-backed currency is because they know that ever-expanding statism is tied directly to the policy of inflation. And it is through statism and its currency expansion that mega-bankers and perma-politicians acquire their vast wealth and power. Without the ability to inflate the money supply year after year, billions of dollars in profits from government insured loans would be ended for the mega-bankers, and millions of votes for politicians would no longer be able to be purchased through the panoply of big government programs. This would put a serious crimp in the lifestyle that these power elites have come to assume is their rightful due.

Pushing for Genuine Reform

The above three policy proposals for a sound money are giant steps toward America’s restoration. Such steps cannot be launched, of course, until the intellectual climate is receptive to them. But the Kondratieff winter will radically refocus the minds of our reigning intellectuals and open them up to the horrible fallacies of their inflation paradigm. If this “opening up” is combined with greatly increased proselytization efforts on our part, a radical transformation of monetary policy could be brought about.

This next decade could prove to be fertile ground for the spread of the monetary ideal of gold and the free society that would accompany it. Out of trial and tumult, salvation often comes. The world’s Paper Aristocracy could well suffer the same fate as Lenin’s statue in St. Petersburg. It could be brought tumbling down if we commit ourselves to furthering the profound truths of freedom and sound money to as many of our fellow citizens as possible.

  1. Murray N. Rothbard, The Case Against the Fed, Auburn, AL: Ludwig von Mises Institute, 1994.
  2. Murray N. Rothbard, The Case For a 100 Percent Gold Dollar, Auburn, AL: Ludwig von Mises Institute, 1991.
  3. The World Almanac 2002 (New York: World Almanac Books, 2002), p. 103.
  4. Ibid., p. 103.
  5. The Statistical History of the United States from Colonial Times to the Present (Stamford, CT: Fairfield Publishers, 1960), pp. 91, 141, 409, 413.