Revenge of the barbarous relic

“Let’s try, shall we?

“Bankers and politicians have had a mutually rewarding relationship for ages. Bankers create money and loan it out at interest, which can be very profitable. Trouble is, creating money electronically or with a printing press, which is what central banks do, is counterfeiting. In return for a share of the newly-created money, government lets banks get away with it. Government gets bigger, bankers get richer.

“Bank counterfeiting, which is another name for inflation, fuels a great many evils for which it gets little credit, such as wars and depressions. To put an end to this racket we need to establish a free market in banking, which means open it up to competition. What would prevent banks from counterfeiting on a free market? Property right enforcement. All money is someone’s property. If I deposit my money in a bank and pay a fee for the service, I expect to be able to get it back on demand. If the bank can’t provide it because the bank’s loaned it to someone else, it has violated my property rights. If the law respects property rights consistently, the law will hold the bank responsible. In the long run at least, counterfeiting would be unprofitable. Few bankers will find such prospects tempting.

“Money was founded on the market. At first it was a commodity that was bartered for other commodities or services. But because of the great number of people willing to accept it in trade, it began to be acquired for trading purposes only – as a medium of exchange, or money.

"Gold won the competition as the most popular money long ago. Gold is very difficult to produce, which is one of the biggest reasons it became the preferred medium of exchange. When a rare commodity such as gold is used for money, the supply remains fairly constant.

"People have always known that increasing the money supply dilutes the value of each monetary unit. But apparently they didn’t make a connection between this fact and government’s eagerness to adopt a fiat dollar as our monetary standard. When new money is created as a matter of policy, as it has been for generations with the encouragement of leading economists, the dollar is doomed, and so are dollar users.

“We need to remember, though, that banking as such is crucial to higher civilization. As one commentator has astutely observed, without an international banking system most of us wouldn’t be alive today. Money and banking make possible the division of labor, which has drastically reduced child mortality and raised living standards wherever free markets flourished.

"But it’s also true that throughout most of banking history, banks promised to redeem their notes in some precious metal, either gold or silver. Though they could keep that promise for only a small fraction of their customers, it still served as a vital check on their propensity to counterfeit.

“For Americans, the gold standard was killed by presidential decree during the crisis of the Great Depression. In 1971 another president told foreigners they could no longer get gold for American dollars and thus removed the last trace of monetary gold from international trade. Since then all governments have been on a fiat money standard, depreciating their currencies as a matter of policy.

“The story of gold’s disappearance is part of a larger narrative about the growth of government. Besides being a check on bank counterfeiting, or inflation, gold is also a serious restriction on government expansion. For the advocates of big government, therefore, gold becomes a barbarous relic that stands in their way.

“The corruption of money began when people started keeping their gold with banks, which would issue deposit receipts, or banknotes, as money-substitutes. Because of the banker’s reputation for trust and propriety, their notes were readily acceptable in trade as substitutes for the gold locked away in their vaults. People knew they could redeem the notes for gold any time they wished. But because of the convenience of carrying and doing business with banknotes rather than coins, people tended to leave their gold in the bank.

“Bankers became the money centers of their communities, even though most of the money under their protection wasn’t theirs – they could only claim a small percentage of it as a fee for their service. Because money was in their possession, though, businessmen would come to them for loans, and the bankers, seeking additional profit opportunities, found ways to accommodate them.

“Unfortunately, they turned to counterfeiting as a means of accommodation. What I mean is, they began creating and loaning out deposit receipts that had no gold behind them. The new notes were counterfeit because they were being passed off with the understanding that they were genuine gold substitutes. But in fact the notes only looked like the real thing. The bankers knew, though, that as long as they didn’t issue too many of these counterfeit bills, they would escape detection.

“In extending loans with counterfeit notes or by creating unbacked deposit accounts, they could point to conspicuous growth in the local economy. According to almost everything we read, bankers weren’t committing fraud, they were helping business grow, putting people to work, helping them earn a living. As businessmen, the bankers could tell themselves they were merely reacting to the demands of the market, in their case a demand for money. And they reacted by simply printing and issuing it.

“Looking back, most commentators now find little fault with what they were doing. So what if their notes weren’t backed by gold? Today’s financial press would say the bankers were ‘investing’ or ‘accommodating’ or ‘providing liquidity.’ You never hear anyone call it counterfeiting, at least not in mainstream circles.

“But by issuing banknotes or credit not covered by gold, the bankers were increasing the money supply, a process identical in its effects to counterfeiting. An increase in the supply of money confers no broad social benefits – but it does benefit early users of the new money at the expense of others: the first users have the advantage of buying goods at current prices. Later, when prices have gone up, the inflated money supply doesn’t benefit anyone. We improve the general welfare by increasing the production of goods, not by increasing the production of money.

“Nevertheless, the banks’ practice of generating unbacked money substitutes prevailed. Invariably, some would go too far and cause depositors to begin doubting their banker’s rectitude. A few would start showing up at teller windows wanting their notes exchanged for gold. Other note holders would catch on, and the bank was soon confronted with a run. But without enough gold to redeem, many of the banks had to shut their doors. As the panic spread, even the more cautious banks would experience massive demands for redemption.

“For reasons of its own, government took a strong interest in the bankers’ plight and usually issued moratoriums on note redemption. For a period sometimes lasting years, banks were permitted to default on their liabilities to note holders while being allowed to conduct all other banking activities.

“Helpful as this privilege was, it wasn’t enough. Banks weren’t always allowed to renege on their promises, their easy credit policies created bankruptcies and recessions, and besides, bank runs were embarrassing. No banker liked seeing crowds swarming at his door demanding what was theirs, even if the law was on his side.

“Fortunately for American bankers and their political allies, Europe provided examples of ingenious solutions to the dilemma of bank counterfeiting. During the early years of the twentieth century U. S. bankers imported some of their ideas and, together with a few powerful politicians, devised a plan for a banking cartel.

“The cartel would consist of all the national banks of the country organized under the authority of a central bank, which would be endowed by government with a monopoly of the note issue. Furthermore, all the deposits of the member banks would be moved to the central bank and held as reserves, with the central bank dictating to its members what fraction of its reserves they had to maintain when making loans. Historically, banks have been held to a ten percent reserve requirement most of the time, meaning they could extend nine dollars in loans for every dollar held in reserve. By dictating reserve ratios for all members, the central bank would control the rate of monetary inflation in a uniform manner so that any one bank wouldn’t get more reckless than the others and get itself and the rest of the banks in trouble.

“Americans didn’t like cartels or centralized power, the planners realized, so they called their creature a ‘reserve system’ instead of a banking cartel and dressed it up with regional branches to avoid the appearance of a concentration of power. As John Kenneth Galbraith observed many years later, the regional design was ingenious for serving local pride ‘and for lulling the suspicions of the agrarians.’ Since no cartel will work without government guns, it was natural, perhaps, to attach the name ‘federal’ to it, as well. Thus, the American central bank became known as the Federal Reserve System, or the Fed.

“Signed into law on December 23, 1913, the Federal Reserve Act was hailed as a major victory of the Progressive Era’s fight against the alleged abuses of concentrated market power, in this case, the Money Trust. Banking was at last rescued from the hands of Wall Street and put under the enlightened care of government. Greed had been tamed by the people through their selfless representatives in Congress and their man in the White House. Government would see that the Fed served the ‘public interest’ and would ensure that it didn’t fail. And with the Fed providing the economy with an ‘elastic currency,’ the ruinous panics and depressions of the past would be gone forever.

“Those were the beliefs, but the facts reveal a far different story.

“It was the Morgans and Rockefellers of Wall Street who turned to government to cage their banking competition, especially the growing challenge from non-national banks in the South and West, and came up with a plan for a central bank. It was the big bankers who took the lead in creating a system that would protect them from the hazards of bank counterfeiting and make them a monopoly issuer of bank notes. After the Act became law, it was Morgan bankers who occupied the seats of power in the new system, particularly at the Fed’s New York branch where Benjamin Strong, president of J. P. Morgan’s Bankers Trust Company, ran the money machine from the Fed’s inception in 1914 to his death in 1928.

“The Fed became an indispensable instrument of profit and power. Beginning in 1914, it cut reserve requirements approximately in half, dropping the ratio from 21 percent to 11 percent, roughly doubling the money supply and permitting both financial aid to the Allies and eventual American entry into the European war. Under the impetus of the war, the Fed became the sole fiscal agent of the Treasury, securing the deposit of all Treasury funds at the Federal Reserve. The Morgans, exploiting its ties with England and its position of power at the New York Fed, became the sole purchasing agent in the U.S. for war materials to be shipped to Britain and France. The Morgans also became the sole underwriter for British and French bonds floated in the U.S. to pay for armaments and other goods the Allies wanted.

“Government, meanwhile, used the war as an excuse to create what one economic historian has aptly called a ‘garrison economy.’ Among other things government took over railroads and communications industries, seized hundreds of manufacturing plants, fixed prices, intervened in hundreds of labor disputes, raised taxes, and conscripted a million men for military service so they could join the bloodbath over there, in the European trenches. The Supreme Court, the alleged guardian of the Constitution – which itself is our alleged guardian against an aggressive government – ruled most of the war interventions constitutional, including the draft. Merely questioning the constitutionality of the draft could get you thrown in jail. Thus, the federal reserve – a government-protected, government-serving, elaborately-cloaked counterfeiting cartel – played a crucial role in converting a peaceful America into a bellicose, interventionist state.

“All the belligerents in the war went off the gold standard and resorted to inflation – counterfeiting – to fund the carnage. Taxes were raised, but only so far. Governments that attempt to fund wars by raising taxes often find themselves facing a revolt on the home front. Wars require massive inflation, and the institution responsible for inflation is the government’s central bank. Without government control of the monetary system through its central bank there would’ve been no war, or certainly not one nearly as long or destructive.

“The war killed over 19 million people, counting both military and civilian deaths. How many of those deaths could have been prevented if the governments did not control the money supplies? If they had engaged in central bank ‘disarmament’ instead of slaughtering one another?

“Rather than pointing out the inflationary theft of resources that underlies all modern wars, many commentators were instead spellbound by the patriotic fervor and the wonderful command and control economy the war brought in its wake. No doubt it was a heady experience for the elites in command and very lucrative for a few others. In this connection I strongly urge you to read a short book written by two-time Medal of Honor recipient, Major General Smedley D. Butler, called War is a Racket. A racket, General Butler said, is something that is not what it seems to the majority of people. Only a small group of insiders knows what it is about. A racket is conducted for the benefit of the very few at the expense of the very many.

“We hear voices calling for patriotism during war. But who exactly were the patriots during ‘the war to end all wars’?

"Was it J. P. Morgan, who repeatedly said, ‘Nobody could hate war more than I do’ as he was amassing commissions totaling $30 million as a purchasing agent of war supplies for England and France?

"Was it Morgan’s steel, shipbuilding, and powder enterprises that bought controlling interest in, and editorial control over, the country’s 25 most influential newspapers?

"Was it President Woodrow Wilson who had won reelection with the slogan ‘he kept us out of war’ then five months later asked Congress to join a war that had already killed 5 million men?

"Was it Senator Robert La Follette of Wisconsin, who rose in the Senate to dissect Wilson’s call for war point by point, arguing that Wilson and his advisors had been colluding with Britain for two years trying to find a pretext for American entry into the fray against England’s enemies?

"Was it the senators who spoke after La Follette and for five hours hotly denounced him as ‘pro-German’ and ‘anti-American’?

"Was it the majority of Americans who in spite of a well-orchestrated media campaign against Germany still opposed joining the war?

"Was it the million men who were conscripted and sent overseas, over 100,000 of whom lost their lives?

"Was it the industrial firms back home, thousands of miles from the slaughter on the Western Front, whose income tax records showed huge profits during the war years?

"Was it the millions here who kept their mouths shut about the war because the Espionage Act of 1917 and its successor, the Sedition Act of 1918, hung a 20-year prison sentence over the heads of Wilson’s critics?

“Washington, Jefferson, Madison, and John Quincy Adams are generally considered patriotic, yet they counseled strongly against American entanglement in foreign affairs. ‘Commerce with all nations, alliance with none,’ were Jefferson’s famous words. America ‘well knows that by once enlisting under other banners than her own, the fundamental maxims of her policies would insensibly change from liberty to force,’ John Quincy Adams warned his colleagues in a famous Fourth of July speech to Congress. ‘Of all the enemies of true liberty,’ James Madison wrote, ‘war is, perhaps, the most to be dreaded, because it comprises and develops the germ of every other. War is the parent of armies; from these proceed debts and taxes; and armies, and debts, and taxes are the known instruments for bringing the many under the domination of the few.’

“The Fed, and its partner in theft, the income tax, enabled politicians and their financial backers to ignore their warnings. Should we be surprised that many American war supporters made out like bandits? J. P. Morgan was one of those Americans who cleaned up handsomely from the war he professed to hate. As journalist H. L. Mencken noted a few years later, ‘The Government hospitals are now full of one-legged soldiers who gallantly protected [Morgan’s] investments then, and the public schools are full of boys who will protect his investments tomorrow.’

“The man who unfortunately became the most influential inflationist of the twentieth century, John Maynard Keynes, saw clearly how monetary fraud leads to a country’s downfall. Writing shortly after World War I, he said, ‘There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.’ To ‘debauch’ a currency you inflate it.

“No government bent on amassing power, however, can do so while banknotes and deposits are still redeemable in gold. Gold, therefore, has to go, but it must be removed in a deceptive manner, so that people won’t notice the theft. Encouraging people to keep their gold in banks is a crucial first step on the road to confiscation, but having it reside in local banks means people can withdraw it easily. The next step, therefore, is to create or exploit a crisis and cite that as an excuse to have it moved into the vaults of the central government. In theory, it would still be accessible to the owners, but highly inconvenient and, not coincidentally, unpatriotic to withdraw.

“Thus, in 1917 the Federal Reserve law was changed to allow the Fed to exchange its notes for gold, on the grounds that the government wanted to protect the gold supply from foreigners. In dealing with its member banks the Fed increased its holdings from 28 percent of the nation’s gold stock before American entry into the war to 74 percent by the war’s end. With gold largely centralized at the Fed, people were reluctant to touch it. Instead, they dealt almost exclusively with notes that promised to pay gold coin on demand.

“After the war, and after a depression from 1920 to 1921 made brief by government’s inability to intervene in time, the Fed continued its inflationary policies and financed the boom years of the 1920s. Most economists today will tell you we had no inflation during this decade because overall prices remained the same. But the 1920s were also a period of advancing technology and new methods of manufacturing, which improved productivity enough to hold prices level. In other words, if the banks had not engaged in credit expansion during the ‘20s, prices would’ve dropped, and the country would have enjoyed prosperity without a crash waiting in the wings. But in fact the Fed boosted the money supply by roughly $26 billion from mid-1922 to mid-1929. And the new money pushed stock and real estate prices up to feverish levels.

“The stock market break that began in October, 1929 signaled the beginning of a necessary correction to the preceding boom years. From the country’s first major depression in 1819 until the depression of the early 1920s, government had mostly allowed the economy to correct itself. The depressions, consequently, lasted only about a year or two, and 1930 should have been a typical period of correction and gradual recovery.

“The country’s failure to recover is unfairly blamed on the Federal Reserve, which is charged with failing to initiate an inflationary binge to restore the lost euphoria. The Fed certainly tried to inflate the economy back to the boom by lowering interest rates and purchasing government securities, and it deserves blame for the Crash itself because of the money it created. But it was government intervention that deepened and prolonged the depression.

“To repeat, credit expansion brought on the Crash, government policies lengthened and intensified the depression.

“On the surface, the goals of the interventionists had a noble ring – they were being done to keep wage rates and prices from falling. Thus, for example, the Hawley-Smoot Tariff of June, 1930 was promoted as a way to support domestic industry and labor, but it virtually closed foreign markets to American products. Agriculture, a major export industry, was hit particularly hard, and prices for farm products dropped to unprecedented lows. Hundreds of thousands of farmers went into bankruptcy, and the rural banks who were their creditors suffered the consequences. From 1930 to 1933, many thousands of banks failed. The crushing blow to agriculture caused great harm to the banking system, which in turn spread panic to its millions of customers.

“The Hoover administration did everything it could to revive the economy, which was precisely why economic conditions grew worse. They believed the command economy installed for World War I had been effective in putting the U.S. on the winning side. If government controls were successful during a war, why not put government in charge of a receding economy? Having abandoned the teachings of the classical liberals, they believed that government decrees had produced the goods that won the war. Another round of government impositions, they were convinced, would again make the desired outcome appear.

“‘We could have done nothing,’ Hoover said during his 1932 presidential campaign, but ‘that would have been utter ruin.’ He attacked those economists who had urged a hands-off approach, claiming he was determined not to ‘follow the advice of the bitter-end liquidationists ,‘ as he disparagingly called them, and see the whole body of debtors and savers ‘brought to destruction.’

“But he only intensified the destruction he sought to avoid. Liquidation of unsound projects created by the inflationary boom was precisely the tonic needed to revive the economy, as history and theory had made clear. When he left office, his coercive concern for the whole body of debtors and savers left one in four workers unemployed, a new low in American history.

“And yet, incredibly, we find historians and economists describing Hoover’s policies as ‘laissez-faire,’ as if he sat back and did nothing while the economy tried to correct itself. If only he had. He intervened far more than any president before him and brought the economy to its knees. Government should ‘do something’ was the dominant thinking then as now, and applying the laissez-faire label pinned the blame on the market instead of the government. If Hoover had been re-elected, he might have been even more aggressive in attacking the economy. As it was, he left that to his successor.

“In his inaugural address the new U.S. president told the American people their economic problems were due to ‘unscrupulous money changers’ whose conduct in banking and business was ‘callous’ and ‘selfish.’ He promised his listeners that if Congress should fail to act properly, he would ask them for broad executive powers that might be given to a president in the event of an invasion. One Supreme Court justice described the depression as ‘an emergency more serious than war.’ Taking the hint, Congress acceded to the president’s wish and granted him dictatorial powers to resolve the banking crisis.

“After his inaugural address Roosevelt issued Presidential Proclamation 2039 in which he explained the cause of the national emergency as the ‘heavy and unwarranted withdrawals of gold and currency from our banking institutions for the purpose of hoarding,’ along with speculation abroad in foreign exchange that ‘has resulted in severe drains on the Nation’s stocks of gold.’ Gold and hoarding were his targets. ‘It is in the best interests of all bank depositors,’ he concluded, ‘that a period of respite be provided’ to prevent ‘further hoarding of coin, bullion or currency or speculation in foreign exchange.’ He concluded the proclamation by closing all banks in 1933 from March 6 to March 9, inclusive.

“Hoarding is a pejorative term for an increase in an individual’s cash holdings. If hoarders are guilty of anything, it’s for exposing the unscrupulous and unsound nature of the banking system for manufacturing multiple claims to the same deposit of gold. In 1931, as people were redeeming $800 million in bank deposits for cash, Hoover lashed out at them for their ‘traitorous hoarding.’ In early 1932 he organized a citizens committee and launched a public campaign against hoarders, blaming them for keeping the country mired in the depression by withholding money from circulation. Evidently, Roosevelt and his Brain Trust agreed with him. But people, in taking their money out of the banks, were only trying to protect what was rightfully theirs. There would have been no problems with hoarding had the bankers not been cheating them.

“We need to remember that money is a medium of exchange and not wealth as such, and the act of withdrawing deposits and keeping them off the market, which decreases the money supply, does not destroy wealth. It only means each monetary unit will command more resources than before. In other words, prices will drop.

“But as we saw, falling prices and wages had been the devil government was fighting. Government spokesmen had reversed cause and effect – at least in their public statements. Rather than seeing the depression as causing prices and wages to drop, they credulously proclaimed that lower prices and wages caused the depression, ignoring ample historical evidence to the contrary. By their logic, therefore, bringing the country out of the depression was a matter of boosting prices and wages to where they were during the good times before the Crash. Since ‘hoarding’ was keeping this from happening, on April 5, 1933 Roosevelt ordered all people with gold in their possession to turn it over to the Federal Reserve, for which they would receive government paper money in return.

"Who could pass up a deal like that? The government figured everyone could, so they made it a felony for failing to comply, punishable by a fine not exceeding $10,000 and a prison sentence of up to 10 years.

“In its eagerness to inflate the money supply, government was busy inflating the criminal supply. People, in other words, were becoming criminals only because they were resisting the criminality of the state. One of our foremost economic commentators cites the famous work of Friedman and Schwartz, A Monetary History of the United States, 1867-1960, in pointing out that many American citizens anticipated Roosevelt’s gold confiscation and successfully kept their property from the state’s greedy hands. During the three months prior to Roosevelt’s gold grab, circulating gold coin diminished by a whopping 35.5 percent. The state’s actual theft was only 3.9 million ounces or 22 percent of the gold coin then in circulation. Friedman and Schwartz conclude that the remaining 78 percent – roughly 13.9 million ounces of gold – “was retained illegally in private hands.” I commend those people who resisted the plunder, whoever they were.

“If it had been possible to print gold, government would never have abandoned the gold standard. But it did, and the alleged evil preventing recovery was eliminated by presidential decree. Government now had a money machine with virtually no brakes. They could inflate the money supply as necessary, drive prices and wages up, and put people back to work.

“Things didn’t go exactly as planned and another World War had to start – and end – before the economy returned to its pre-Crash condition."

Read the rest of the speech, as well as the story behind it, in The Flight of the Barbarous Relic


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