Socialism, American Style, Part 5
The Federal Reserve System is another prime example of American socialism, because it is based on central planning, a core element of socialism. Government officials plan, in a top-down, command-and-control manner the monetary affairs of hundreds of millions of people. It is impossible to overstate the disastrous consequences of this system of monetary central planning, not only in terms of monetary debasement but also in terms of the economic booms and busts that this system has produced since its founding in 1913.
The United States once had the finest monetary system in history, one that was brought into existence by the Constitution, the document that called the federal government into existence. Its system was based on making gold coins and silver coins the official money — or “legal tender” — of the United States.
The Constitution did not call into existence a government of general powers. Instead, the document made it clear that the government would be one of limited, enumerated powers. If a power wasn’t enumerated, then the federal government was prohibited from exercising it.
The Constitution delegated the power to “coin” money to the federal government. At the risk of be-laboring the obvious, “coinage” means coins, not currency represented by paper. If the Framers had wanted to delegate the power to print currency to the federal government, they would have delegated the power to “print” money, not “coin” money, to the federal government.
Making the Framers’ intent even clearer was the restriction the Constitution placed on the states. The states were expressly prohibited from making anything but gold and silver coins legal tender.
Thus, from the very beginning everyone understood that America’s monetary system was a gold-coin, silver-coin standard. Soon after the federal government was called into existence, the federal government began minting both gold coins and silver coins, which continued to be the official money of the United States for more than 125 years.
Today, many college economics professors and mainstream journalists like to say that America’s founding monetary system was one in which paper money was “backed by gold.” Nothing could be further from the truth. There was never any paper-money system. America’s monetary system was always one in which gold coins and silver coins were the official money of the Unit-ed States.
Debauching the money
The Constitution also delegated to the federal government the power to borrow money. Such debts would ordinarily be reflected by paper instruments, such as bills, notes, and bonds, which were payable in gold coins or silver coins. Sometimes people would use the paper instruments in trade. But everyone understood that they were all promises to pay money, not money themselves. The money they promised to pay was the official money of the United States — gold coins and silver coins.
The reason the Framers brought into existence a gold-coin, silver-coin standard was a simple one: they wanted America to have a sound monetary system, one in which government officials would be precluded from plundering and looting people through the monetary debasement that inevitably comes with paper currency.
Throughout history, excessive government spending has been a monumental problem for political regimes. To get the money to spend, governments tax people. The greater the spending, the higher the taxes.
The problem that political regimes have always faced, however, is resistance among the citizenry to the payment of taxes, especially excessive taxes to finance profligate spending by their political regimes. People like to keep most, if not all, of their money. They are the ones producing their wealth through hard work, ingenuity, or maybe just sheer luck. Their wealth provides them with more ways to pursue happiness. Thus, the more the government takes from them, the worse off they are.
Political leaders, therefore, realize that if they are taxing people excessively, people will resist and, in worst-case scenarios, will revolt. Revolutions are violent and sometimes successful, in which case government leaders are often left dead at the end of the process. Thus, early on political leaders figured out a way to tax people indirectly in a secret, surreptitious manner. That indirect manner of taxation is known as inflation.
Today, many college economics professors and mainstream journalists think that the term “inflation” means rising prices. Thus, when the prices of nearly everything start to rise, they will say that inflation is occurring.
In actuality, inflation occurs when the government is expanding or “inflating” the supply of money. What happens when the supply of something increases? Its value goes down. That’s what happens with money, and the reduced value is reflected by the rise in prices of the things that money buys. If a gallon of milk costs $5 today and $10 tomorrow, the inflation of the money supply has caused the value of people’s money to be reduced by 50 percent. That 50 percent reduction in spending power is a tax — a secret, surreptitious tax, but a tax nonetheless.
The benefit of inflation, from the standpoint of government officials, is that most people don’t realize that it’s the government that has caused the value of their money to drop. They see most goods rising in price and blame the milk producer, the automobile seller, the oil companies, the bankers, and everyone but the government. Political leaders feed into that mindset by suggesting that inflation is some sort of outside force, like the flu, that they are committed to eradicating. They’ll initiate campaigns such as Whip Inflation Now (WIN), castigate and condemn private sellers for being “profiteers” and “price gougers,” and sometimes even impose price controls on sellers of goods and services.
The Framers were well aware of this sordid monetary debauchery throughout history. In fact, they had just recently experienced their own inflation during the Revolutionary War. The Continental Congress had printed up so much paper currency that when people wanted to express that something was worthless, they would say that it wasn’t “worth a Continental,” which had been the official paper currency of the United States.
Before the printing press was invented, political leaders had nonetheless developed a way to tax people through inflation. People would pay their taxes with coins that had been issued by the king. Let’s say, for example, that the king had issued coins represented to contain one ounce of gold. When the one-ounce gold coin entered the realm as tax revenue, the king would have his minions shave off the edges of the coins. They would then melt down the shavings and produce more one-ounce gold coins, which the king would then use to buy things. The problem, of course, is that when he would spend the shaved coins, they would contain less than one ounce of gold. That would naturally cause those coins to trade at a discount compared to coins that actually did contain one ounce. When that happened, the king would go into a rage, given that people were challenging his integrity and authority. That’s when he would enact what are called “legal tender laws,” which require people to accept the debased coins at face value.
Thus, when the Framers establish America’s gold-coin, silver-coin standard, that sort of monetary debasement was certainly possible, given that the federal government was responsible for coining the official money of the country. But that’s not what happened. Instead, for more than a century, the federal government’s coins were of the utmost quality and integrity.
America’s gold-coin, silver-coin standard was a major contributing factor to the enormous growth in economic prosperity during the 19th century. People knew that they could save large portions of their income with the knowledge that the value of their savings would not be wiped out through inflation. People often put their savings into 100-year corporate bonds, which were payable in gold coins, knowing that their bonds would retain their value.
Things began to change in the late 1800s, when the Progressive movement began agitating for the adoption of welfare-state programs and warfare-state programs, which inevitably meant increases in federal spending. In 1913, the Progressives were successful in achieving two measures that revolutionized American life: the adoption of a federal income tax and the establishment of the Federal Reserve System, which enabled the federal government to centrally plan the monetary affairs of the country through expansion and contraction of federal debt instruments.
In the “Roaring 20s,” the Fed expanded, over-expanded, and then over-contracted the supply of debt instruments, which led directly to the stock market crash in 1929, which in turn ushered in the Great Depression. To this day, many college professors and mainstream journalists are convinced that the Great Depression demonstrated the failure of America’s “free enterprise” or “capitalist” system. As libertarian Nobel Prize-winning economist Milton Friedman and the Austrian economists have documented so well, the Great Depression was a direct consequence of the Federal Reserve System’s policies.
The Great Depression provided Franklin Roosevelt with the opportunity to terminate America’s gold-coin, silver-coin system. Of course, the only legal way to have done that was through a constitutional amendment, given that it was the Constitution, not the president or Congress, that established America’s gold-coin, silver-coin standard. But emergencies and crises have always been the occasions for politicians to exercise dictatorial powers and destroy liberty.
Roosevelt was no exception. He issued a decree, later supported by Congress, commanding every American to deliver his gold coins to the federal government, in exchange for federal debt instruments that would be irredeemable. That is, the debt instruments promised to pay nothing. Any American caught owning gold coins was threatened with a felony prosecution for owning what had been the official money of the United States for more than 100 years.
Roosevelt’s nationalization of gold constitutes one of the most morally repugnant acts in the his-tory of the United States. It was no different from the nationalizations of private property that were being committed by the communist regime in the Soviet Union. Demonstrating how the courts in every land go silent during times of crisis, the U.S. Supreme Court upheld Roosevelt’s action.
The floodgates were now open for U.S. officials’ out-of-control federal spending, with respect to both welfare and warfare throughout the 1930s, 1940s, and every decade since then. The result has been decades of massive income taxation and monetary debauchery through inflation of the money supply, along with an endless series of financial booms and busts.
For some reason, Roosevelt chose not to make silver coins illegal to own, and for a time, they continued to circulate. After 1964, however, the supply of new, cheap, alloyed coins became so large that it didn’t behoove people to use silver coins for purchases when they could get what they wanted with the cheapened, debased coins instead. Who wants to purchase a $1 soft drink with a silver dollar when he can get it for four cupro-nickel quarters? The disappearance of silver coins from the American economy was a real-life demonstration of Gresham’s Law in economics: bad money drives good money out of circulation.
Today, the federal government is spending money like it was going out of style. People are already taxed to the hilt. The federal government’s debt now exceeds $26 trillion. The Federal Reserve is massively expanding the money supply. This cannot end well.
What is the solution to all this economic mayhem?
One necessary prerequisite is the abolition of the Federal Reserve, America’s socialist monetary institution that has caused so much damage and destruction to the economic well-being of the American people.
While a return to the constitutional gold-coin, silver-coin standard would be a significant improvement, that would still not be the ideal monetary system. The ideal would be a totally free-market monetary system, one based on the separation of money and state, one in which the government plays no role at all. This was the type of system proposed by another Nobel Prize–winning economist, the Austrian economist Friedrich Hayek, in his book The Denationalization of Money.
The free market produces the best of everything. It is also our heritage as Americans. A free-market money system would be a major factor in the restoration of prosperity and liberty to our land.
This article was originally published in the September 2020 edition of Future of Freedom.
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