Why not assure monetary virtue by trusting,
not in the monetary wisdom of men, but in an objective standard? Why not
emulate our great grandfathers and tie our currency to gold?
Very few economists think this would be a
So few economists indeed, that it is a
statistical oddity. It is all the more curious given the miserable record of
the fiat dollar for the past 35 years while it has been trying to make do
without a link to gold. What makes the loser the winner, and the winner the
loser? My explanation is that the economists have been bribed. The bribe
money can actually be tracked as the record is in the public domain. Please
bear with me as it takes some time to relate this incredible story.
The Federal Reserve (FR) banks pay dividends
at 6 percent per annum of subscribed capital to shareholders, the member
banks. The Federal Reserve Act bars them to pay dividends at a higher rate,
regardless how profitable the FR banks may be. And as you may have guessed,
they are fabulously profitable. So what happens to the undivided surplus? The
answer is this: the Federal Reserve banks remit most of the undivided
surplus to the U.S.
Treasury under false pretenses. In the income statement the remittance is
called �franchise tax on the Federal Reserve notes outstanding�. Now every
federal tax must be authorized by legislation duly passed by the Congress and
signed into law by the President. I urge you to ask your favorite professor
of the dismal monetary science to identify the Act, and provide the date of
its passing, which authorizes the franchise tax. But be prepared for a long
wait while the professor is doing the search, because such an Act does not
exist, has never been proposed or enacted. Incredible, isn�t it?
You are a taxpayer. Would you pay a tax that
has never been authorized by law, but someone at the IRS invented a catchy
name and started collecting it? No, you wouldn�t. You would fight the phantom
tax in the courts, if need be, all the way to the Supreme Court. Now there
are twelve FR banks in the United
States. Every one of them has a legal
department, well-staffed with well-paid legal counsels. Do you think that one
of the twelve might have challenged the unauthorized taxand withheld payment
to test the legality of its collection? Surprise, surprise.
Not one of them ever has. Moreover, not one
shareholder, not one member bank, has spoken out against the arrangement of
paying an illegal tax. Why?
The professors of the dismal monetary science
are at a loss to give you the answer. But I will. In the check-kiting scheme
of the U.S. Treasury and the FR banks the latter are the junior partners.
The allocation of the loot is not on a 50-50
basis. The lion�s share goes to the senior partner. The junior partners must
be satisfied with the crumbs. But crumbs are plentiful to throw a jolly good
party still. Why complain when the FR banks themselves can set the rate at
which the �tax� is assessed? They are free to subtract any and all
expenditures on frills before they come to the bottom line, undivided
And spend on frills they do. One item listed
as legitimate expenditure is money subsidizing economic research. It is a big
item, covering not only in-house research, but also research grants paid to
outsiders on contract at various universities and think-tanks. Now please
estimate if you will the percentage of research funds that goes to economists
analyzing the failure of the fiat dollar and studying the possibility of
return to the gold standard as a remedy. You�ve got it: exactly zero percent.
From the point of view of the FR banks the
more money they spend on subsidizing economic research the less tax they pay.
So funds are gushing forth abundantly, and are granted generously to
subsidize research in dismal monetary science, taking good care to shut out
any dissonant noise about the gold standard.
Lest my detractors charge that I have �the
sour grapes complex� I mention an episode from my active days. In 1975 I
spent a Sabbatical year as Visiting Fellow at Princeton University.
By a strange quirk of fate Paul A. Volcker was also at Princeton University
at the same time as Senior Fellow. Paul was cooling his heels between two
jobs. After having served as Under-Secretary of the Treasury for Monetary
Affairs, overseeing the devaluation of the dollar, he was awaiting a new
assignment at the Fed. We didn�t know it at the time, but soon it turned out
to be his appointment as President of the Federal Reserve Bank of New York,
the most lucrative job in the entire establishment, certainly more lucrative,
if less prestigious, than that of the Chairman of the Federal Reserve Board,
which was to be Volcker�s next assignment a few years later. Paul ran a
seminar for postgraduate students �on international monetary stuff� as he
would call it. I was an irregular, occasionally dropping in to listen to
Paul�s lectures and the presentation of papers by students. I even
contributed a paper myself, as I recall, on gold in the international
monetary system. Paul and I also met outside of the classroom. Once he
invited me to dinner at the Faculty Club of which he was a member.
Concerning gold, Paul didn�t beat around the
bush. He said that there was no objection against gold being the
constitutional monarch. But gold must behave and abide by the decisions of
Parliament.� If gold started asserting
itself, if it misbehaved, then it would be ousted and sent into exile. That�s
what had happened in 1971. Gold would not be tolerated as an absolute
I did not argue with Paul�s anthropomorphism.
I could have pointed out that it was not a question of gold being the
sovereign but the people holding it, as they should according to the
Constitution of the United
Paul never had any qualms about the loyalty
of other countries following the leadership of the dollar, as vassals follow
the feudal lord. Foreign central banks knew full well that their currencies
are in the same boat as the dollar. If they scuttle the boat, then they all
perish. It was a matter of hanging together lest they hang separately (with
thanks to Benjamin Franklin for the felicitous phrase).
Paul of course knew that I was a professional
mathematician. He asked me if I would be interested in setting up a
differential equation to describe the relationship between the foreign
exchange rate and the spread between the rates of interest prevailing in the
two countries. I guess if I had said �yes�, then I could have made a career
as a contributor of dismal monetary science, with a fat research grant from
the FR bank of New York.
But I said �no� adding that, in my opinion, there was no such a thing.
Differential equations describe the relationship of causality. They are quite
useless if what you want to grasp is the relationship of teleology. And the
relationship between foreign exchange rates and interest-rate spreads was a
problem of teleology, not one of causality. You can�t treat individuals who
have free will as if they were inanimate particles in a physical experiment.
That�s the trouble with macroeconomics as opposed to microeconomics. It
assumes that economic aggregates have their own lives, and in their hands
individuals are lifeless, inert matter that, like playdough, could be given
any desired shape.
That�s how my brush with dismal monetary
science ended, needless to say, to the great detriment of my remuneration.
Yet I had no regrets. I had not left my native Hungary when Soviet troops
overran it in 1956 because I wanted to exchange one sycophancy for another.
It should be clear that the funds dished out
by the research departments of the FR banks are bribe money subsidizing
dismal monetary science exclusively, having precious little to do with the
search for and dissemination of truth but designed to entrench and aggrandize
incumbent power. Small wonder that so few economists dare to express views
that the regime of irredeemable currency is a disaster of the first
magnitude, leading to an economic�
catastrophe worse than that following the experiment with fiat money
at the end of the 18th century, admirably documented by Andrew
Dickson White. Very few economists would express their view in public that
tying the dollar to gold is the answer.
Consider once more how profitable the check-kiting
scheme between the Treasury and the FR banks is. The latter can buy off an
entire profession from the crumbs and trickle-down profits, and still have
money left to award to economists from other countries willing to parrot the
Keynesian demand-side theory of money.
This goes to show the utter insidiousness of
the regime of irredeemable currency. Not only does it allow vampirism
plaguing the savers and producers of society through check-kiting while throwing
the gates wide open to vote-buying by politicians, it also corrupts the mind
and frustrates any impartial discussion of the underlying scientific
principles. Irredeemable currency is cancer on the body economic, body
politic, and body academic as well.
The argument against the gold standard is one
of pragmatism, not one of principle. The gold standard would have all the
disadvantages of any system of rigidly fixed foreign exchange rates.
Thus according to Krugman pragmatism trumps
the Constitution, which mandates a metallic monetary system. Worse still,
advocates of the dismal monetary science also think that it is pragmatic not
to press for a Constitutional amendment. Why take a chance? People will not
notice, still less bother, if their Constitution is trampled in the mud.
The Founding Fathers did not establish a
central bank for the United
States. They established the U.S. Mint,
and opened it to silver and gold. In doing so they elevated the principle of
free coinage to the level of basic human rights. The power to create or to
extinguish money was reserved for the people themselves by the Constitution.
It was not delegated to the representatives of the people, nor to so-called
experts hired by them. If people thought that there was too little money in
circulation, or that interest rates were too high, then they could do
something about it. They could take old jewelry and plate, or cause new
silver and gold from the mines to flow, to the Mint to be converted into the
coins of the realm. Conversely, if the people thought that there was too much
money in circulation, or that interest rates were too low, then they could do
something about that, too. They could melt down the coins and convert the
monetary metals into jewelry and plate, or have them exported along with new
gold and silver from the mines.
It is true that the international gold
standard confines the foreign exchange rate between two countries adhering to
it to a narrow range between the gold export and import points. This is not a
drawback of the gold standard; it is one of its main excellence. It is
responsible for the promotion of division of labor between countries. Each
country will produce the goods and services for which it is best fitted, and
import other goods and services which can be produced more efficiently
abroad. The regime of floating exchange rates (that should be properly called
the regime of sinking exchange rates) destroys international division
of labor and promotes autarky.
But it destroys division of labor
domestically as well. Previously the exporter could concentrate his talent
and energies on production, knowing that as long as he is the best, no
foreign competitor could harm his business. This is no longer true under
floating. Foreign competitors could nail his business on the foreign
exchanges. The central banks, as advocated by dismal monetary science, could
manipulate foreign exchange rates to his detriment. It goes by the name
�beggar thy neighbor�. To be successful as an exporter it is no longer
sufficient to excel in production. The exporter also has to be a skillful
speculator in foreign exchange. This is what has killed many a small business
during the past 35 years. The principals could not cope with volatility in
the foreign exchange market. Big business, on the other hand, decided that it
was less risky to export jobs than goods, and this is exactly what they did.
An unprecedented dismantling of production facilities on American soil was
the result, because the price of the imported ingredients rose faster than
export earnings, thanks to the deliberate dollar debasement.
Floating exchange rates were a giant step
backwards in division of labor, discouraging talent from going into
productive enterprise. Talent now goes into financial speculation, as
witnessed by the snow-balling derivatives market where the commitment of
speculators is estimated at more than two hundred trillion dollars, or
more than the market capitalization of the entire globe.
One of the more imbecile ideas of dismal monetary
science is that devaluation of the currency helps the country to export more
and import less, thus rectifying the trade imbalance. It is absolutely
amazing that economists do not find it repulsive to parrot this trash,
apparently on order from the grant departments of the FR banks (in whose
interest the policy of currency debasement clearly is). In 1968 the exchange
rate with Japan was around
320 yens to the dollar and there was a huge trade deficit run by the U.S. To
rectify it a dollar-debasement policy was put into effect promising that it
would cure the deficit and turn it into a surplus. That is not what happened.
In the next ten years the value of the dollar was pushed all the way down
from 320 to 80, or one quarter of the initial, while the trade deficit
instead of turning into a surplus ballooned tenfold. The question arises how
much more beating does the dollar have to take before a dent is made in the
The explanation for the perverse reaction of
the patient to Keynesian therapy as advocated by dismal monetary science is
actually quite simple. Naturally, it was never permitted to be publicized by
the award-officers at the FR banks. Currency devaluation makes your terms of
trade with the rest of the world deteriorate. This means that you can import
less for every dollar of export earnings as a result of devaluation.
Virtually all export items have imported
ingredients, so devaluation makes them more expensive to produce, not less.
While it may let you sell your existing inventory at bargain-basement prices
to foreigners, this is fool�s paradise. The boost in exports is strictly
temporary. It is all at the expense of future production which is put in
jeopardy by the higher cost of imported ingredients, as the experience of the
American industry for the past 35 years has amply demonstrated.
Currency devaluation is not unlike
self-mutilation. You don�t cut off one of your arms while trying to compete
with foreigners in the world market. Yet this is exactly what America has
done to itself. The country�s de-industrialization is the direct result of
the deliberate debasement of the dollar for the past 35 years. Keynesian
demand-side monetary theory suggests, and Krugman agrees, that devaluing the
currency has a benefit to offer to the export industry. It is the benefit of
the grave. Power is being turned off at factories and plants that once were
busy, humming and producing, while providing well-paid industrial jobs for
Americans. The once prosperous and productive industrial heartland of America has
been turned into a graveyard, thanks to the floating (sinking) dollar.
The trade deficit of the United States
is at an all-time high and still increasing. No economist has the courage to say
it, but it is caused by the policy of deliberate dollar debasement, now in
its 35th year. You have to pursue the argument of dismal monetary
science ad absurdum to understand it. If a little bit of devaluation
is supposed to be good for the country, then a big devaluation should be even
better and, reducing the exchange rate to zero, Nirvana itself. Then the
country could give away its goods and services to foreigners free of charge.
That, finally, will really perk up exports.
Andrew Dickson White, Fiat Money Inflation
It Came, What It Brought, How It Ended (an online e-book)
Paul Krugman, The Gold Bug Variations �
The Gold Standard and the Men Who Love It
April 2, 2005