All legitimate economists today accept the fact that central bank
expansion of the money supply at a faster rate than the economy’s production
of goods and services results in price inflation, i.e., stealing of the
people’s wealth. If not checked, it brings about the destruction of a
nation’s currency. In light of this, we need to ask ourselves what type of
money can a society possibly have when its government officials and federal
bankers can simply print that money at will?
History clearly teaches us that no stable, prosperous country can remain
so very long if it leaves control of its money supply up to the machinations
of corruptible men in power at the government’s Treasury and central bank.
The temptation is simply too great for such men to promote excessive
expansion of the money supply in order to create an illusion of prosperity so
that the electorate will continue to reward them with more power.
Such temptation began in America in 1913 no sooner than the ink was dry on
Congress’ legal authorization of the Federal Reserve banking system. It was
then greatly expanded with Franklin Roosevelt’s confiscation of gold from
Americans in 1933, along with his initiation of J.M Keynes’ “new economics.” This
led to the disastrous spending policies and inflation-deflation cycles that
we now endure. Ever since World War II ended, Fed currency expansion has
resulted in our economy suffering from annual price inflations of 1%-13%, all
under the Keynesian “necessity” of massive government spending and
intervention into the economy.
The Fed’s monetary policy under Republican and Democratic administrations
alike has always been to pump more credit (i.e., debt) into the system
because, according to Keynes and his academic progeny, this is the only way
to maintain a prosperous economy. This assumes that the creation of fiat
money and easy credit will increase people’s wealth without any harmful
ramifications.
But as I pointed out in Printing
Our Way to Prosperity, fiat money printing will not increase our real
wealth. Real wealth is created by men and women engaging in productive
enterprises – planting and harvesting crops, running efficient factories,
conveying services to their fellow man, etc. It cannot be created by
government “injections of liquidity” into the economy at a faster pace than
production of goods and services. All that comes about with such irrational
economics is a boom-bust economy in which inflationary periods and
recessionary periods alternate over and over again until finally the credit /
debt level becomes too overwhelming for the people to tolerate. At this time,
the country and its economy must go through a prolonged liquidation of such debt,
i.e., a severe depression of multi-year duration. (See Keynesianism’s Ugly Secret.)
The Keynesian philosophy of trying to increase demand with increases of
fiat money is what led to the runaway inflation of the 1970s and to the
hallucinatory bubble economy of the 1990s, then to the inevitable bust of
2008, and a following boom to 2016 that cannot last. Another bust period will
soon be upon us.
Unless we bring about genuine monetary reform, we as a country are doomed,
like Sisyphus rolling his stone up and down the hill for all of eternity, to
merely repeating the Keynesian fallacies. This means constant boom-and-bust
cycles with relentless theft of the people’s money forever into the future.
The only way to eliminate such instability and corruption is to establish a
monetary standard other than the whims of federal bankers and bureaucrats.
Throughout history that standard has always been gold.
Restoration of Monetary Stability
Restoration of such a standard, however, will require revolutionary
thinking in the field of money and monetary theory. The original gold
standard’s flaws have to be avoided. A plan must be devised that can be
phased in over time, a plan that allows the public to become acclimated to
the use of gold as money again. Fortunately we have the works of several
scholars and a former presidential candidate with which to accomplish this –
men such as Henry Hazlitt, Hans Senholz, Antal E. Fekete, and Ron Paul have
offered notable insights on the necessity and restoration of a gold standard.
[1]
Restoration of a gold monetary system and an independent banking system
are, thus, the ultimate answer to the boom-bust economics of Keynesianism.
But such a gold oriented, independent banking system cannot be established
overnight. It will require several decades, fifty years at least, to educate
the people as to its necessity.
In the meantime, we must convince American citizens that we can no longer
allow money to be arbitrarily created by a cartel of political
bankers in Washington. The money supply and its growth must be divorced from
the dictates of federal bureaucrats, which will bring the problem of price
inflation and its ruinous consequences under control.
Thus as a first step to restoration of an honest money system, we must
pressure Congress into putting strict limitations on the rate of monetary
growth by the Fed. The way to do this is through Milton Friedman’s 4%
auto-expansion plan for the money supply. His plan would computerize the increase
of the money supply at 4% annually – in other words, remove monetary growth
from the arbitrary whims of Federal Reserve bureaucrats and make it
automatic, mandated by law. This would allow us to check the irresponsible
power of the Fed until the American people can be educated as to the
necessity of restoring gold-backed money and abolishing the Fed.
The Friedman plan suffers from some flaws (e.g., the money supply is
difficult to define precisely – do we use M1, M2, M3? And the Fed cannot
control “velocity” of money, which is just as important as “quantity” in
determining price rises). So the Friedman plan would be only a temporary
measure, implemented to temper the inordinate power of the Fed until the
people can be persuaded to enact a gold-backed monetary system.
The economic / debt crisis that is now descending upon all the world’s
industrial nations is going to bring a redesigned global monetary system.
Bretton Woods II (the fiat-money-floating-exchange-rate system that Richard
Nixon launched in 1971) must be replaced; that much is obvious. What kind of
global system it will be is anyone’s guess. But whatever system comes into
being, the need for a stable auto-expansion plan for America’s Fed does not
change. It is still crucial if we are to gain control over our government. It
would make our currency the strongest among all nations and bring investment
capital from around the world into our economy. Our sputtering economic
engines would be recharged in a major way.
Fallacies of Keynes
Most economists in our government and in our colleges today will naturally
attempt to deny the necessity of any kind of automatic expansion of money.
They will go to great lengths to try and convince their audiences that the
economy’s money supply must be fiat money, and it must be continually
inflated via the discretion of the Federal Reserve in order to produce
adequate economic growth. But this is totally erroneous. America’s
economic growth during the 19th century was spectacular, and there was no
Federal Reserve pumping fiat money into the system at all. For example, the
chart below shows us the CPI from 1800 to 2005.
The index of consumer prices decreased by 40%, from 51 to
30, between 1800 and 1913 (about 1/3 % per year). This was because the money
supply was tied to gold and couldn’t be expanded arbitrarily in excess of the
growth of goods and services by the nation’s bankers. The reason is that gold
must be manufactured slowly and steadily, while paper can be printed easily
and instantly – hundreds of billions of dollars overnight. 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 according to FOMC desires. As a result, the Consumer
Price Index literally exploded, increasing from 30 to 587 in the years 1913
to 2005. By 2015 the Index had reached 711 for a total increase of
2,270%. [2] This was because the money supply was created by
Fed bureaucrats 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 money system
that can be expanded at the discretion of government bankers will never be
stable.
When the above figures are combined with other vital 19th century
statistics, we readily see that the Keynesian claim of “economic growth
needing monetary inflation” is a fallacy. During the 19th century due to the
dollar being backed by gold, we enjoyed gently deflationary prices (the
beneficial kind of deflation due to technological improvement), yet also
rapid economic growth of all goods and services. America’s GDP increased over
500% in just the years 1870 to 1913, averaging 4.3% annual growth,
and real wages for the workingman tripled between the years 1849 and 1915. In
comparison, we average about 2.5% annual growth today, real
wages are totally stagnant, and we are plagued by inflationary prices brought
on by the Federal Reserve’s relentless monetary expansion. [3]
The Keynesians’ claim of massive monetary inflation being a requisite for
healthy economic growth is, thus, totally in error. So also is their 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 control 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 observer of the 20th century claim
that the Fed’s inflationary monetary policy has given us stability? As the
statistics show so clearly on the above chart, the Fed’s expansion of the
money supply has grossly debased the dollar and sent prices skyrocketing over
the past 100 years. Yet the publicly announced reason for the Fed’s creation
in 1913 was that it would be the great “stabilizer” of the banking system and
our economy. Unfortunately it has brought us precisely the opposite.
How to Implement the Plan
Keynesians will object to any 4% auto-expansion plan for the money supply,
claiming that it would bring about a depression. Seeing that the money supply
is now being expanded at average annual rates of 9%-10%, such a “limiting” of
monetary growth would bring a serious deflation to the country. This is true;
but the debt liquidation crisis from which we are presently suffering (caused
by the Keynesian boom / bust cycle) is bringing deflation to the country
anyway.
Thus any implementation of a 4% auto-expansion plan for the money supply
would need to wait until after we have reached culmination of the deflation
crisis presently engulfing us. The auto-expansion plan could then be
initiated as we begin to climb out of the crisis, and thus it would not lead
to more deflation. It would lead to responsible growth.
If there is somehow a resurrection of the economy from the present crisis
without going through the necessary crash / debt liquidation period to heal
it, an auto-expansion plan for the Fed could be phased in slowly over a
10-year period until we have reached a steady rate of 4% annually. Thus
either way, the plan can be implemented – quickly as a means to climb out of
a vicious recessionary crash, or slowly as a means to ease off of inflation
into a more stable monetary system.
The reason why collectivists throughout the country oppose all attempts to
rein in the inflationary power of the Fed with a stable monetary policy is
because they know their ever-expanding welfare-warfare state is tied directly
to massive inflation of the currency. Without the ability to excessively
expand the money supply year after year, the vast panoply of big government
programs and wars could not be financed because American citizens would not
pay for such tyrannical extravagance with taxes. Without such welfare
programs and wars, the collectivists’ egalitarian dream of a Great Planned
Society regulated and manipulated from Washington is dead.
Legacy of Keynes
This is the legacy of Keynes. His monetary philosophy has led us to
abandoning the sound money of gold and embracing the illusory money of
Federal Reserve bureaucrats. This has led us to an ever burgeoning government
in Washington and many economic distortions that we would not have to endure
but for the irrationality of letting government bankers create our money.
As with almost all intellectuals of his era, Keynes was greatly influenced
by Karl Marx even though he publicly denounced him. Prior to Keynes, socialism
and its wealth redistribution had found scant enthusiasm in America. But
Keynes smoothed over the harsh Marxist anti-individualism with artful
sophistry and clever rhetoric into something salable to Americans. He created
an academic shroud of respectability for the crude thievery of inflation.
In 1920, Keynes probably still harbored some respect for the classical
liberal order of capitalism, but by 1936 he had been converted to gradualist
socialism. When Keynes advised FDR and other Western leaders to adopt a
policy of permanent fiat money inflation to fuel state intervention into the
economy, he was setting in place the end of a free capitalist society. Keynes
knew precisely that his economic policies would erode capitalism as a system
and usher in massive statism. His monetary philosophy is nothing more than
the “secret confiscation of wealth” he wrote about in 1920 in his book, The
Economic Consequences of the Peace [4], and which is so eagerly condoned
by our legislators and federal bankers today.
In his classic, Economics In One Lesson, Henry Hazlitt, sums up
Keynes’ inflation philosophy very well: “Like every other tax, inflation acts
to determine the individual and business policies we are all forced to
follow. It discourages all prudence and thrift. It encourages squandering,
gambling, reckless waste of all kinds. It often makes it more profitable to
speculate than to produce. It tears apart the whole fabric of stable economic
relationships. Its inexcusable injustices drive men toward desperate
remedies. It plants the seeds of fascism and communism. It leads men to
demand totalitarian controls. It ends invariably in bitter disillusion and
collapse.” [5]
Salvation of America
The salvation of America lies in ending this inflation-deflation cycle of
wealth confiscation via currency debasement. This will require genuine reform
of our monetary system. The answer to so many of our problems would come if
we would end the injurious monetary inflation of the Fed. Prices of goods and
services would stop relentlessly rising. Excessive labor union demands would
subside. Capital formation would increase. True prosperity would result.
Poverty would shrink at a faster pace. Yet life would churn at a more
moderate and predictable pace. The elderly would be able to keep the security
they worked for. Jobs would stop leaving America for third-world countries.
And we could all get off this infuriating treadmill of never quite catching
up with our bills. In general, life would again be stable, productive, and
free rather than the speculative, frenzied, Washington-managed economy that
has evolved under the whip of collectivist ideology.
The fate of a free country lies in the integrity of its money. The
integrity of a country’s money lies in the independence it has from government
control. The independence that a money system has from government control
depends upon the rationality and will of the people. The upcoming years are
going to severely test the rationality and the will of the American people.
We are confronted today with a perilous chain of boom-bust crises that is
bringing great tumult to our lives. How we handle the next bust phase of
Keynesianism will determine the fate of America for centuries. There is great
opportunity for the cause of freedom if we can convince the American people
to establish control over the money creation powers of the Fed. It is an
opportunity that we need to prepare for now. As we climb out of the upcoming
bust cycle, we must enact an “honest monetary system” for our country that
prohibits Federal Reserve bureaucrats from expanding the money supply at
will.
Notes
1. See Ron Paul, “The Political and Economic Agenda for a Real Gold
Standard,” Mises Institute, January 17, 2008, http://mises.org/story/2826#.
Also Antal E. Fekete, “Money and Credit,”
http://professorfekete.com/math.asp. And “The Gold Standard,” FEE,
http://fee.org/economics/gold-standard.
2. CPI figures for the graph, 1800-2005, are from the Federal Reserve Bank
of Minneapolis, https://www.minneapolisfed.org/community/teaching-aids/cpi-calculator-information/consumer-price-index-1800.
Likewise for the figures from 2005-2015.
3. Figures from The Statistical History of the United States from
Colonial Times to the Present (Stamford, CT: Fairfield Publishers,
1960), pp. 91, 141, 409, 413.
4. John Maynard Keynes, The Economic Consequences of the Peace
(New York: Harcourt, Brace and Howe, 1920), pp. 235-236.
5. Henry Hazlitt, Economics In One Lesson (New York: Manor Books,
1962), p. 124.
