On June 28, 1914 two assassinations in Sarajevo triggered the beginning of the Great War in Europe a month later. Libertarian writers, including me, have pointed out that the incredible slaughter of that war, and the disastrous events that followed it such as WW II, could not have happened if the belligerent nations hadn’t suspended gold convertibility. Writing in The Quarterly review in 1915, author J. S. Nicholson tells us:
The two principal forms assumed by the abandonment were the Moratorium and Inconvertibility. The two forms are in essence the same. Inconvertibility is generally applied to bank notes; it means that the bankers are authorised to refuse to meet their promises to pay in gold on demand. . . A moratorium means that all debtors (not specially excluded) are authorised to postpone the fulfillment of their monetary obligations.
Germany adopted at once the method of inconvertibility, and prided itself on not being obliged to adopt the moratorium; but inconvertible notes were issued on such terms and to such an extent that a moratorium was not needed. France adopted both methods. The United Kingdom adopted openly the method of moratorium, and in a disguised manner the method of inconvertibility.
English people will long remember the beginnings of the Great War, when some of the London banks refused to give gold for Bank of England notes and people were forced (or delighted) to receive postal orders as legal tender. They will long remember also the advent of the new sin of hoarding gold and the new virtue of turning it out of their pockets into the banks.
With the war the whole duty of the private man as regards gold was declared to be total abstinence; the proper place for gold (so it was preached) was a bank; and the proper business of the bank was to hoard it.
With paper replacing gold, governments would not be restrained from continuing the war for lack of funds, and the killing and destruction thus continued unabated reaching astronomical levels.
The “neutral” US was already deeply into the war unofficially with the House of Morgan arranging the sale of British and French IOUs here in the states, as well as serving as a purchasing agent for allied war materials. It was a lucrative racket but contingent on Britain and France winning the war against Germany.
And that became a real problem. Victory seemed increasingly unlikely as German submarine attacks were destroying Allied shipping at the rate of 300,000 tons per week, threatening to force a negotiated treaty and bringing the roof down on Morgan’s empire. Previously-sold bonds would go into default, and the cash flow for war materials would dry up. Woodrow Wilson, who in 1916 had been re-elected on the grounds that “he kept us out of war,” called on Congress for a declaration of war against Germany on April 6, 1917.
Among young men enthusiasm for dying in the trenches didn’t match the government’s enthusiasm for sending them there. But this was no problem for our beloved monopoly of violence:
With the country’s youth showing no interest in dying or killing for corrupt politicians, Wilson decided to bring out the bayonets. On May 18, 1917 he signed the Selective Service Act to register over ten million men, from which over 2.8 million were drafted. In an apparent bid to make himself and his administration the inspiration for Big Brother, Wilson added that the draft was “in no sense a conscription of the unwilling; it is, rather, selection from a nation which has volunteered in mass.” “Volunteers” who didn’t register got a year in prison, and anyone found obstructing the conscripting process was subject to a $10,000 fine and 20 years in prison. [Ch. 14]
The US was already prepared to fund the war with the enactment of the Income Tax and the passage of Federal Reserve Act of 1913, both under Wilson’s watch. Americans have no trouble seeing the connection between higher taxes and war, but the role of the Fed has always been obscure, and deliberately so. The war helped clarify the Fed’s nature as a lender of money it didn’t have. According to Phil Davies, Federal Reserve Bank of Minneapolis,
Congress created the Fed as an independent central bank to isolate it from political pressure, but during the war monetary policy was beholden to the needs of the Treasury. “Independence was sacrificed to maintain interest rates that lowered the Treasury’s cost of debt finance,” [Alan] Meltzer (2003) writes [in his A History of the Federal Reserve.]
Although the Fed focused on war finance at the expense of inflation during World War I, it emerged as a major player on the world stage after the war as it developed into a full-fledged central bank.
Ask almost any economist and he will tell you that inflation is a general rise in prices. Ask an Austrian economist and he will tell you inflation is an increase in the money supply that often results in higher prices. How does the Fed increase the money supply without digging gold out of the ground? By having the government prohibit convertibility or outlaw gold altogether and printing irredeemable paper “dollars” instead, then forcing us to use them (legal tender laws). Government has taken a serious crime, counterfeiting, and made it legal only when the Fed engages in it.
What exactly did the Fed and its buddy the government accomplish with their policies? The US war dead is estimated at 117,000 with another 204,000 wounded. Too bad we can’t meet them one at a time. We can toss in a few thousand other results, such as the rise of Hitler, Stalin, the Great Depression, WW II, the National Security State with its penchant for assassinations, coups, and torture, the progressive destruction of the currency, etc., etc., etc. leading to the point where today the reality of nuclear war is once again hovering over us and the dollar is approaching worthlessness as Americans struggle to survive.
When Ron Paul and a few others call for ending the Fed, they’re calling for putting a stop to a major destroyer of civilization. But let’s not forget that it took an act of government to give the Fed the power it has. How can we remove government’s violent power? See this and this for more information.
George Ford Smith is a former mainframe and PC programmer and technology instructor, the author of eight books including a novel about a renegade Fed chairman (Flight of the Barbarous Relic), a filmmaker (Do Not Consent), and an advocate of stateless market government. He welcomes speaking engagements and can be reached at gfs543@icloud.com.
