The Free Market 13, no. 2 (February 1995)
When anti-socialist, post-Soviet reformers of the Baltic states sought to reign in government power, they looked to solve the money problem first. Moscow held unlimited power to flood their economies with cheap money, and to fund itself as an imperial power lording it over other peoples. That had to end before the market economy could be restored.
Republicans should follow this lead if they want to solve our problem with big government. Richard Nixon thought that going off the gold standard would be good for himself politically. But his reckless action made possible, even inevitable, the explosive expansion of government spending, debt, and intervention that followed.
Alan Greenspan, then an independent economist, warned that the remnants of the gold standard were all that stood between the American people and Leviathan. He was right, of course, but now, as chairman of the Federal Reserve, he exercises the power over the economy he once told all freedom lovers to loathe.
From time to time, James Grant, the Austrian School journalist of Grant’s Interest Rate Observer, prepares a prospectus on the U.S. government. He’s not trying to market U.S. debt to his subscribers, but to make a more profound point: no sane person would buy U.S. debt if the issuing agent were judged by market standards of creditworthiness. It is only the central bank’s power to buy debt, to be the “lender of last resort,” that leads people to buy and hold in perpetuity.
When Orange County went bankrupt, the market worked as it was supposed to. It evaluated the bonds, saw that something was fishy, and dumped them all at once. The Orange County government, like the fabled the tulip bulb industry in Denmark, was bust. Now, if Orange County had a Federal Reserve, its powerful treasurer could have fueled the growth of county government until the next millennium.
That’s nothing to brag about. It’s not alchemy at work, but a high-brow version of old-fashioned counterfeiting. A central bank agrees to create as much money as is necessary to cover every potential monetary claim. This allows for miles-high pile-up of debt and the unlimited creation of new money. The Fed, in particular, has a variety of tricks in its bag: requiring banks to keep fewer savings for outstanding loans, lowering the rate charged to member banks for overnight purchases, and outright purchase of Treasury securities.
Much of our country’s economic and cultural decline dates from 1972, and the Fed is a primary cause. A 1972 dollar is now worth about 29, thanks to the central bank’s power to create money out of thin air and “insure” deposits with a promise never to run out of printer’s ink. People who saved for their retirement then know now that they are not even close to being prepared now.
The increase in nominal prices and wages has not harmed everyone proportionately. The government is much richer than it was, and look who’s poorer: savers, families, small businessmen, workers, and the rest of the middle class. We’ve been clobbered by the Fed’s printing presses. The essentials of life—education, health care, housing—have all become much less affordable.
The destruction of the gold standard—which really began with the founding of the Fed in 1913—has allowed the government to fund an entire class of reliably liberal voters, and agitators to push for more programs.
The growth of government made possible by fiat, Fed-controlled money has created a policy culture in which everything is permissible. Every good and service comes under a myriad of regulations. Every business and local government obeys countless mandates. No one in public life talks of substantial budgets cuts on the order of $500 billion, which ought to be only the beginning.
The Fed is indeed mischievous, and in more ways than even gold bugs know. The central bank has recently thrown itself into the social engineering business. Its regulatory arm won’t approve bank mergers unless the banks have paid tribute to the underclass by overlooking poor credit histories.
The gold standard was once a dam holding back the floods of statism, but it was blown up by a multigenerational conspiracy of self-interested politicians and special interests. It wasn’t just the central government that benefited. Large bankers themselves appreciate the profits and power that come with the ability to expand money and credit beyond what real savings could ever support.
A form of the gold standard was called for in the 1980 Republican platform, although Ronald Reagan did nothing to give us one (though he deserves credit for creating the U.S. Gold Commission that enabled Ron Paul and Jesse Helms to bring back American gold coinage). The point is this: Republicans in those days at least understood the importance of reining in the power of the Fed-bank-government cartel to create unlimited amounts of fiat money.
The then-prominence of supply-siders brought some attention to the issue of monetary reform. But their preferred solution—a watered-down version of the already diluted Bretton Woods system—would not have defined the dollar in terms of gold, or allowed domestic convertibility. Instead it would have resurrected something weaker than the system that fell apart in the early 1970s, suggesting that even supply-siders are unwilling to learn from history.
Since the 1994 election, the Republican elite hasn’t breathed a word challenging the enormous power the Federal Reserve exercises over the economy. For the backbenchers, anyway, let’s hope it’s because of ignorance, and not because they’re owned by the large banks or want the Fed to fund their pet legislative projects, just as it funded Democratic ones in the past.
At least one trend points in the wrong direction: the Republican leadership doesn’t want to force the Fed chairman to testify before the Banking Committee anymore. That’s too bad since it removes one source of accountability, if a small one, from an otherwise unaccountable entity.
Some Republicans operate on the theory that the more “independent” a central bank is, the less it is tempted into inflationary policies. The view is a conventional one and derives largely from the empirical example of Switzerland and Germany.
The problem with empirics is that they ignore cause and effect. The Germans and Swiss have relatively sound money not because the central bankers are independent, but because the economic and political culture won’t allow inflationary schemes of the sort we’re saddled with. The central banks would lose all credibility if they tried.
There can be no such thing as a thoroughly independent central bank in the way the corner grocery store is independent. Politics determines a central bank’s decisions, as does the desire to increase bank profits. We’re just not supposed to notice or talk about it in polite company.
If the Republicans really wanted to challenge Leviathan, they would strangle the Fed, its very lifeblood. If we dismantled the Fed and made our money good as gold again, it would matter a lot less who sat in the White House or the Congress, for they would have much less power to harm us even if they wanted to.
Forget the balanced-budget amendment: the gold standard is what big government types really fear. That so few want to unplug the government’s money machine tells us more about the governing elites, including the Republicans, then we are perhaps willing to face.
