Taking Money Back
By Murray N. Rothbard
Money is a crucial command post of any economy, and therefore of
any society. Society rests upon a network of voluntary exchanges,
also known as the "free-market economy"; these exchanges
imply a division of labor in society, in which producers of eggs,
nails, horses, lumber, and immaterial services such as teaching,
medical care, and concerts, exchange their goods for the goods of
others. At each step of the way, every participant in exchange benefits
immeasurably, for if everyone were forced to be self-sufficient,
those few who managed to survive would be reduced to a pitiful standard
of living.
Direct exchange of goods and services, also known as "barter," is
hopelessly unproductive beyond the most primitive level, and indeed
every "primitive" tribe soon found its way to the discovery
of the tremendous benefits of arriving, on the market, at one particularly
marketable commodity, one in general demand, to use as a "medium" of "indirect
exchange." If a particular commodity is in widespread use as
a medium in a society, then that general medium of exchange is called "money."
The money-commodity becomes one term in every single one of the
innumerable exchanges in the market economy. I sell my services as
a teacher for money; I use that money to buy groceries, typewriters,
or travel accommodations; and these producers in turn use the money
to pay their workers, to buy equipment and inventory, and pay rent
for their buildings. Hence the ever-present temptation for one or
more groups to seize control of the vital money-supply function.
Many useful goods have been chosen as moneys in human societies.
Salt in Africa, sugar in the Caribbean, fish in colonial New England,
tobacco in the colonial Chesapeake Bay region, cowrie shells, iron
hoes, and many other commodities have been used as moneys. Not only
do these moneys serve as media of exchange; they enable individuals
and business firms to engage in the "calculation" necessary
to any advanced economy. Moneys are traded and reckoned in terms
of a currency unit, almost always units of weight. Tobacco, for example,
was reckoned in pound weights. Prices of other goods and services
could be figured in terms of pounds of tobacco; a certain horse might
be worth 80 pounds on the market. A business firm could then calculate
its profit or loss for the previous month; it could figure that its
income for the past month was 1,000 pounds and its expenditures 800
pounds, netting it a 200 pound profit.
Gold or Government Paper
Throughout history, two commodities have been able to outcompete
all other goods and be chosen on the market as money; two precious
metals, gold and silver (with copper coming in when one of the other
precious metals was not available). Gold and silver abounded in what
we can call "moneyable" qualities, qualities that rendered
them superior to all other commodities. They are in rare enough supply
that their value will be stable, and of high value per unit weight;
hence pieces of gold or silver will be easily portable, and usable
in day-to-day transactions; they are rare enough too, so that there
is little likelihood of sudden discoveries or increases in supply.
They are durable so that they can last virtually forever, and so
they provide a sage "store of value" for the future. And
gold and silver are divisible, so that they can be divided into small
pieces without losing their value; unlike diamonds, for example,
they are homogeneous, so that one ounce of gold will be of equal
value to any other.
The universal and ancient use of gold and silver as moneys was pointed
out by the first great monetary theorist, the eminent fourteenth-century
French scholastic Jean Buridan, and then in all discussions of money
down to money and banking textbooks until the Western governments
abolished the gold standard in the early 1930s. Franklin D. Roosevelt
joined in this deed by taking the United States off gold in 1933.
There is no aspect of the free-market economy that has suffered
more scorn and contempt from "modern" economists, whether
frankly statist Keynesians or allegedly "free market" Chicagoites,
than has gold. Gold, not long ago hailed as the basic staple and
groundwork of any sound monetary system, is now regularly denounced
as a "fetish" or, as in the case of Keynes, as a "barbarous
relic." Well, gold is indeed a "relic" of barbarism
in one sense; no "barbarian" worth his salt would ever
have accepted the phony paper and bank credit that we modern sophisticates
have been bamboozled into using as money.
But "gold bugs" are not fetishists; we don't fit the standard
image of misers running their fingers through their hoard of gold
coins while cackling in sinister fashion. The great thing about gold
is that it, and only it, is money supplied by the free market, by
the people at work. For the stark choice before us always is: gold
(or silver), or government. Gold is market money, a commodity which
must be supplied by being dug out of the ground and then processed;
but government, on the contrary, supplies virtually costless paper
money or bank checks out of thin air.
We know, in the first place, that all government operation is wasteful,
inefficient, and serves the bureaucrat rather than the consumer.
Would we prefer to have shoes produced by competitive private firms
on the free market, or by a giant monopoly of the federal government?
The function of supplying money could be handled no better by government.
But the situation in money is far worse than for shoes or any other
commodity. If the government produces shoes, at least they might
be worn, even though they might be high-priced, fit badly, and not
satisfy consumer wants.
Money is different from all other commodities: other things being
equal, more shoes, or more discoveries of oil or copper benefit society,
since they help alleviate natural scarcity. But once a commodity
is established as a money on the market, no more money at all is
needed. Since the only use of money is for exchange and reckoning,
more dollars or pounds or marks in circulation cannot confer a social
benefit: they will simply dilute the exchange value of every existing
dollar or pound or mark. So it is a great boon that gold or silver
are scarce and are costly to increase in supply.
But if government manages to establish paper tickets or bank credit
as money, as equivalent to gold grams or ounces, then the government,
as dominant money-supplier, becomes free to create money costlessly
and at will. As a result, this "inflation" of the money
supply destroys the value of the dollar or pound, drives up prices,
cripples economic calculation, and hobbles and seriously damages
the workings of the market economy.
The natural tendency of government, once in charge of money, is
to inflate and to destroy the value of the currency. To understand
this truth, we must examine the nature of government and of the creation
of money. Throughout history, governments have been chronically short
of revenue. The reason should be clear: unlike you and I, governments
do not produce useful goods and services which they can sell on the
market; governments, rather than producing and selling services,
live parasitically off the market and off society. Unlike every other
person and institution in society, government obtains its revenue
from coercion, from taxation. In older and saner times, indeed, the
King was able to obtain sufficient revenue from the products of his
own private lands and forests, as well as through highway tolls.
For the State to achieve regularized, peacetime taxation was a struggle
of centuries. And even after taxation was established, the kings
realized that they could not easily impose new taxes or higher rates
on old levies; if they did so, revolution was very apt to break out.
Controlling the Money Supply
If taxation is permanently short of the style of expenditures desired
by the State, how can it make up the difference? By getting control
of the money supply, or, to put it bluntly, by counterfeiting. On
the market economy, we can only obtain good money by selling a good
or service in exchange for gold, or by receiving a gift; the only
other way to get money is to engage in the costly process of digging
gold out of the ground. The counterfeiter, on the other hand, is
a thief who attempts to profit by forgery, e.g., by painting a piece
of brass to look like a gold coin. If his counterfeit is detected
immediately, he does no real harm, but to the extent his counterfeit
goes undetected, the counterfeiter is able to steal not only from
the producers whose goods he buys. For the counterfeiter, by introducing
fake money into the economy, is able to steal from everyone by robbing
every person of the value of his currency. By diluting the value
of each ounce or dollar of genuine money, the counterfeiter's theft
is more sinister and more truly subversive than that of the highwayman;
for he robs everyone in society, and the robbery is stealthy and
hidden, so that the cause-and-effect relation is camouflaged.
Recently, we saw the scare headline: "Iranian Government Tries
to Destroy U.S. Economy by Counterfeiting $100 Bills." Whether
the ayatollahs had such grandiose goals in mind is dubious; counterfeiters
don't need a grand rationale for grabbing resources by printing money.
But all counterfeiting is indeed subversive and destructive, as well
as inflationary.
But in that case, what are we to say when the government seizes
control of the money supply, abolishes gold as money, and establishes
its own printed tickets as the only money? In other words, what are
we to say when the government becomes the legalized, monopoly counterfeiter?
Not only has the counterfeit been detected, but the Grand Counterfeiter,
in the United States the Federal Reserve System, instead of being
reviled as a massive thief and destroyer, is hailed and celebrated
as the wise manipulator and governor of our "macroeconomy," the
agency on which we rely for keeping us out of recessions and inflations,
and which we count on to determine interest rates, capital prices,
and employment. Instead of being habitually pelted with tomatoes
and rotten eggs, the Chairman of the Federal Reserve Board, whoever
he may be, whether the imposing Paul Volcker or the owlish Alan Greenspan,
is universally hailed as Mr. Indispensable to the economic and financial
system.
Indeed, the best way to penetrate the mysteries of the modern monetary
and banking system is to realize that the government and its central
bank act precisely as would a Grand Counterfeiter, with very similar
social and economic effects. Many years ago, the New Yorker magazine,
in the days when its cartoons were still funny, published a cartoon
of a group of counterfeiters looking eagerly at their printing press
as the first $10 bill came rolling off the press. "Boy," said
one of the team, "retail spending in the neighborhood is sure
in for a shot in the arm."
And it was. As the counterfeiters print new money, spending goes
up on whatever the counterfeiters wish to purchase: personal retail
goods for themselves, as well as loans and other "general welfare" purposes
in the case of the government. But the resulting "prosperity" is
phony; all that happens is that more money bids away existing resources,
so that prices rise. Furthermore, the counterfeiters and the early
recipients of the new money bid away resources from the poor suckers
who are down at the end of the line to receive the new money, or
who never even receive it at all. New money injected into the economy
has an inevitable ripple effect; early receivers of the new money
spend more and bid up prices, while later receivers or those on fixed
incomes find the prices of the goods they must buy unaccountably
rising, while their own incomes lag behind or remain the same.
Monetary inflation, in other words, not only raises prices and destroys
the value of the currency unit; it also acts as a giant system of
expropriation of the late receivers by the counterfeiters themselves
and by the other early receivers. Monetary expansion is a massive
scheme of hidden redistribution. When the government is the counterfeiter,
the counterfeiting process not only can be "detected";
it proclaims itself openly as monetary statesmanship for the public
weal. Monetary expansion then becomes a giant scheme of hidden taxation,
the tax falling on fixed income groups, on those groups remote from
government spending and subsidy, and on thrifty savers who are naive
enough and trusting enough to hold on to their money, to have faith
in the value of the currency.
Spending and going into debt are encouraged; thrift and hard work
discouraged and penalized. Not only that: the groups that benefit
are the special interest groups who are politically close to the
government and can exert pressure to have the new money spent on
them so that their incomes can rise faster than the price inflation.
Government contractors, politically connected businesses, unions,
and other pressure groups will benefit at the expense of the unaware
and unorganized public. We have already described one part of the
contemporary flight from sound, free market money to statized and
inflated money: the abolition of the gold standard by Franklin Roosevelt
in 1933, and the substitution of fiat paper tickets by the Federal
Reserve as our "monetary standard." Another crucial part
of this process was the federal cartelization of the nation's banks
through the creation of the Federal Reserve System in 1913.
Banking is a particularly arcane part of the economic system; one
of the problems is that the word "bank" covers many different
activities, with very different implications. During the Renaissance
era, the Medicis in Italy and the Fuggers in Germany, were "bankers";
their banking, however, was not only private but also began at least
as a legitimate, non-inflationary, and highly productive activity.
Essentially, these were "merchant-bankers," who started
as prominent merchants. In the course of their trade, the merchants
began to extend credit to their customers, and in the case of these
great banking families, the credit or "banking" part of
their operations eventually overshadowed their mercantile activities.
These firms lent money out of their own profits and savings, and
earned interest from the loans. Hence, they were channels for the
productive investment of their own savings.
To the extent that banks lend their own savings, or mobilize the
savings of others, their activities are productive and unexceptionable.
Even in our current commercial banking system, if I buy a $10,000
CD ("certificate of deposit") redeemable in six months,
earning a certain fixed interest return, I am taking my savings and
lending it to a bank, which in turn lends it out at a higher interest
rate, the differential being the bank's earnings for the function
of channeling savings into the hands of credit-worthy or productive
borrowers. There is no problem with this process.
The same is even true of the great "investment banking" houses,
which developed as industrial capitalism flowered in the nineteenth
century. Investment bankers would take their own capital, or capital
invested or loaned by others, to underwrite corporations gathering
capital by selling securities to stockholders and creditors. The
problem with the investment bankers is that one of their major fields
of investment was the underwriting of government bonds, which plunged
them hip-deep into politics, giving them a powerful incentive for
pressuring and manipulating governments, so that taxes would be levied
to pay off their and their clients' government bonds. Hence, the
powerful and baleful political influence of investment bankers in
the nineteenth and twentieth centuries: in particular, the Rothschilds
in Western Europe, and Jay Cooke and the House of Morgan in the United
States.
By the late nineteenth century, the Morgans took the lead in trying
to pressure the U.S. government to cartelize industries they were
interested in--first railroads and then manufacturing: to protect
these industries from the winds of free competition, and to use the
power of government to enable these industries to restrict production
and raise prices.
In particular, the investment bankers acted as a ginger group to
work for the cartelization of commercial banks. To some extent, commercial
bankers lend out their own capital and money acquired by CDs. But
most commercial banking is "deposit banking" based on a
gigantic scam: the idea, which most depositors believe, that their
money is down at the bank, ready to be redeemed in cash at any time.
If Jim has a checking account of $1,000 at a local bank, Jim knows
that this is a "demand deposit," that is, that the bank
pledges to pay him $1,000 in cash, on demand, anytime he wishes to "get
his money out." Naturally, the Jims of this world are convinced
that their money is safely there, in the bank, for them to take out
at any time. Hence, they think of their checking account as equivalent
to a warehouse receipt. If they put a chair in a warehouse before
going on a trip, they expect to get the chair back whenever they
present the receipt. Unfortunately, while banks depend on the warehouse
analogy, the depositors are systematically deluded. Their money ain't
there.
An honest warehouse makes sure that the goods entrusted to its care
are there, in its storeroom or vault. But banks operate very differently,
at least since the days of such deposit banks as the Banks of Amsterdam
and Hamburg in the seventeenth century, which indeed acted as warehouses
and backed all of their receipts fully by the assets deposited, e.g.,
gold and silver. This honest deposit or "giro" banking
is called "100 percent reserve" banking. Ever since, banks
have habitually created warehouse receipts (originally bank notes
and now deposits) out of thin air. Essentially, they are counterfeiters
of fake warehouse-receipts to cash or standard money, which circulate
as if they were genuine, fullybacked notes or checking accounts.
Banks make money by literally creating money out of thin air, nowadays
exclusively deposits rather than bank notes. This sort of swindling
or counterfeiting is dignified by the term "fractional-reserve
banking," which means that bank deposits are backed by only
a small fraction of the cash they promise to have at hand and redeem.
(Right now, in the United States, this minimum fraction is fixed
by the Federal Reserve System at 10 percent.)
Fractional Reserve Banking
Let's see how the fractional reserve process works, in the absence
of a central bank. I set up a Rothbard Bank, and invest $1,000 of
cash (whether gold or government paper does not matter here). Then
I "lend out" $10,000 to someone, either for consumer spending
or to invest in his business. How can I "lend out" far
more than I have? Ahh, that's the magic of the "fraction" in
the fractional reserve. I simply open up a checking account of $10,000
which I am happy to lend to Mr. Jones. Why does Jones borrow from
me? Well, for one thing, I can charge a lower rate of interest than
savers would. I don't have to save up the money myself, but simply
can counterfeit it out of thin air. (In the nineteenth century, I
would have been able to issue bank notes, but the Federal Reserve
now monopolizes note issues.) Since demand deposits at the Rothbard
Bank function as equivalent to cash, the nation's money supply has
just, by magic, increased by $10,000. The inflationary, counterfeiting
process is under way.
The nineteenth-century English economist Thomas Tooke correctly
stated that "free trade in banking is tantamount to free trade
in swindling." But under freedom, and without government support,
there are some severe hitches in this counterfeiting process, or
in what has been termed "free banking." First: why should
anyone trust me? Why should anyone accept the checking deposits of
the Rothbard Bank? But second, even if I were trusted, and I were
able to con my way into the trust of the gullible, there is another
severe problem, caused by the fact that the banking system is competitive,
with free entry into the field. After all, the Rothbard Bank is limited
in its clientele. After Jones borrows checking deposits from me,
he is going to spend it. Why else pay money for a loan? Sooner or
later, the money he spends, whether for a vacation, or for expanding
his business, will be spent on the goods or services of clients of
some other bank, say the Rockwell Bank. The Rockwell Bank is not
particularly interested in holding checking accounts on my bank;
it wants reserves so that it can pyramid its own counterfeiting on
top of cash reserves. And so if, to make the case simple, the Rockwell
Bank gets a $10,000 check on the Rothbard Bank, it is going to demand
cash so that it can do some inflationary counterfeit-pyramiding of
its own. But, I, of course, can't pay the $10,000, so I'm finished.
Bankrupt. Found out. By rights, I should be in jail as an embezzler,
but at least my phoney checking deposits and I are out of the game,
and out of the money supply.
Hence, under free competition, and without government support and
enforcement, there will only be limited scope for fractional-reserve
counterfeiting. Banks could form cartels to prop each other up, but
generally cartels on the market don't work well without government
enforcement, without the government cracking down on competitors
who insist on busting the cartel, in this case, forcing competing
banks to pay up.
Central Banking
Hence the drive by the bankers themselves to get the government
to cartelize their industry by means of a central bank. Central Banking
began with the Bank of England in the 1690s, spread to the rest of
the Western world in the eighteenth and nineteenth centuries, and
finally was imposed upon the United States by banking cartelists
via the Federal Reserve System of 1913. Particularly enthusiastic
about the Central Bank were the investment bankers, such as the Morgans,
who pioneered the cartel idea, and who by this time had expanded
into commercial banking.
In modern central banking, the Central Bank is granted the monopoly
of the issue of bank notes (originally written or printed warehouse
receipts as opposed to the intangible receipts of bank deposits),
which are now identical to the government's paper money and therefore
the monetary "standard" in the country. People want to
use physical cash as well as bank deposits. If, therefore, I wish
to redeem $1,000 in cash from my checking bank, the bank has to go
to the Federal Reserve, and draw down its own checking account with
the Fed, "buying" $1,000 of Federal Reserve Notes (the
cash in the United States today) from the Fed. The Fed, in other
words, acts as a bankers' bank. Banks keep checking deposits at the
Fed and these deposits constitute their reserves, on which they can
and do pyramid ten times the amount in checkbook money.
Here's how the counterfeiting process works in today's world. Let's
say that the Federal Reserve, as usual, decides that it wants to
expand (i.e., inflate) the money supply. The Federal Reserve decides
to go into the market (called the "open market") and purchase
an asset. It doesn't really matter what asset it buys; the important
point is that it writes out a check. The Fed could, if it wanted
to, buy any asset it wished, including corporate stocks, buildings,
or foreign currency. In practice, it almost always buys U.S. government
securities.
Let's assume that the Fed buys $10,000,000 of U.S. Treasury bills
from some "approved" government bond dealer (a small group),
say Shearson, Lehman on Wall Street. The Fed writes out a check for
$10,000,000, which it gives to Shearson, Lehman in exchange for $10,000,000
in U.S. securities. Where does the Fed get the $10,000,000 to pay
Shearson, Lehman? It creates the money out of thin air. Shearson,
Lehman can do only one thing with the check: deposit it in its checking
account at a commercial bank, say Chase Manhattan. The "money
supply" of the country has already increased by $10,000,000;
no one else's checking account has decreased at all. There has been
a net increase of $10,000,000.
But this is only the beginning of the inflationary, counterfeiting
process. For Chase Manhattan is delighted to get a check on the Fed,
and rushes down to deposit it in its own checking account at the
Fed, which now increases by $10,000,000. But this checking account
constitutes the "reserves" of the banks, which have now
increased across the nation by $10,000,000. But this means that Chase
Manhattan can create deposits based on these reserves, and that,
as checks and reserves seep out to other banks (much as the Rothbard
Bank deposits did), each one can add its inflationary mite, until
the banking system as a whole has increased its demand deposits by
$100,000,000, ten times the original purchase of assets by the Fed.
The banking system is allowed to keep reserves amounting to 10 percent
of its deposits, which means that the "money multiplier"--the
amount of deposits the banks can expand on top of reserves--is 10.
A purchase of assets of $10 million by the Fed has generated very
quickly a tenfold, $100,000,000 increase in the money supply of the
banking system as a whole.
Interestingly, all economists agree on the mechanics of this process
even though they of course disagree sharply on the moral or economic
evaluation of that process. But unfortunately, the general public,
not inducted into the mysteries of banking, still persists in thinking
that their money remains "in the bank."
Thus, the Federal Reserve and other central banking systems act
as giant government creators and enforcers of a banking cartel; the
Fed bails out banks in trouble, and it centralizes and coordinates
the banking system so that all the banks, whether the Chase Manhattan,
or the Rothbard or Rockwell banks, can inflate together. Under free
banking, one bank expanding beyond its fellows was in danger of imminent
bankruptcy. Now, under the Fed, all banks can expand together and
proportionately.
"Deposit Insurance"
But even with the backing of the Fed, fractional reserve banking
proved shaky, and so the New Deal, in 1933, added the lie of "bank
deposit insurance," using the benign word "insurance" to
mask an arrant hoax. When the savings and loan system went down the
tubes in the late 1980s, the "deposit insurance" of the
federal FSLIC [Federal Savings and Loan Insurance Corporation] was
unmasked as sheer fraud. The "insurance" was simply the
smoke-and-mirrors term for the unbacked name of the federal government.
The poor taxpayers finally bailed out the S&Ls, but now we are
left with the formerly sainted FDIC [Federal Deposit Insurance Corporation],
for commercial banks, which is now increasingly seen to be shaky,
since the FDIC itself has less than one percent of the huge number
of deposits it "insures."
The very idea of "deposit insurance" is a swindle; how
does one insure an institution (fractional reserve banking) that
is inherently insolvent, and which will fall apart whenever the public
finally understands the swindle? Suppose that, tomorrow, the American
public suddenly became aware of the banking swindle, and went to
the banks tomorrow morning, and, in unison, demanded cash. What would
happen? The banks would be instantly insolvent, since they could
only muster 10 percent of the cash they owe their befuddled customers.
Neither would the enormous tax increase needed to bail everyone out
be at all palatable. No: the only thing the Fed could do, and this
would be in their power, would be to print enough money to pay off
all the bank depositors. Unfortunately, in the present state of the
banking system, the result would be an immediate plunge into the
horrors of hyperinflation.
Let us suppose that total insured bank deposits are $1,600 billion.
Technically, in the case of a run on the banks, the Fed could exercise
emergency powers and print $1,600 billion in cash to give to the
FDIC to pay off the bank depositors. The problem is that, emboldened
at this massive bailout, the depositors would promptly redeposit
the new $1,600 billion into the banks, increasing the total bank
reserves by $1,600 billion, thus permitting an immediate expansion
of the money supply by the banks by tenfold, increasing the total
stock of bank money by $16 trillion. Runaway inflation and total
destruction of the currency would quickly follow. To save our
economy from destruction and from the eventual holocaust of run away
inflation, we the people must take the money-supply function back
from the government. Money is far too important to be left in the
hands of bankers and of Establishment economists and financiers.
To accomplish this goal, money must be returned to the market economy,
with all monetary functions performed within the structure of the
rights of private property and of the free-market economy.
It might be thought that the mix of government and money is too
far gone, too pervasive in the economic system, too inextricably
bound up in the economy, to be eliminated without economic destruction.
Conservatives are accustomed to denouncing the "terrible simplifiers" who
wreck everything by imposing simplistic and unworkable schemes. Our
major problem, however, is precisely the opposite: mystification
by the ruling elite of technocrats and intellectuals, who, whenever
some public spokesman arises to call for large-scale tax cuts or
deregulation, intone sarcastically about the dimwit masses who "seek
simple solutions for complex problems." Well, in most cases,
the solutions are indeed clear-cut and simple, but are deliberately
obfuscated by people whom we might call "terrible complicators." In
truth, taking back our money would be relatively simple and straightforward,
much less difficult than the daunting task of denationalizing and
decommunizing the Communist countries of Eastern Europe and the former
Soviet Union.
Our goal may be summed up simply as the privatization of our monetary
system, the separation of government from money and banking. The
central means to accomplish this task is also straightforward: the
abolition, the liquidation of the Federal Reserve System--the abolition
of central banking. How could the Federal Reserve System possibly
be abolished? Elementary: simply repeal its federal charter, the
Federal Reserve Act of 1913. Moreover, Federal Reserve obligations
(its notes and deposits) were originally redeemable in gold on demand.
Since Franklin Roosevelt's monstrous actions in 1933, "dollars" issued
by the Federal Reserve, and deposits by the Fed and its member banks,
have no longer been redeemable in gold. Bank deposits are redeemable
in Federal Reserve Notes, while Federal Reserve Notes are redeemable
in nothing, or alternatively in other Federal Reserve Notes. Yet,
these Notes are our money, our monetary "standard," and
all creditors are obliged to accept payment in these fiat notes,
no matter how depreciated they might be.
In addition to cancelling the redemption of dollars into gold, Roosevelt
in 1933 committed another criminal act: literally confiscating all
gold and bullion held by Americans, exchanging them for arbitrarily
valued "dollars." It is curious that, even though the Fed
and the government establishment continually proclaim the obsolescence
and worthlessness of gold as a monetary metal, the Fed (as well as
all other central banks) clings to its gold for dear life. Our confiscated
gold is still owned by the Federal Reserve, which keeps it on deposit
with the Treasury at Fort Knox and other gold depositaries. Indeed,
from 1933 until the 1970s, it continued to be illegal for any Americans
to own monetary gold of any kind, whether coin or bullion or even
in safe deposit boxes at home or abroad. All these measures, supposedly
drafted for the Depression emergency, have continued as part of the
great heritage of the New Deal ever since. For four decades, any
gold flowing into private American hands had to be deposited in the
banks, which in turn had to deposit it at the Fed. Gold for "legitimate" non-monetary
purposes, such as dental fillings, industrial drills, or jewelry,
was carefully rationed for such purposes by the Treasury Department.
Fortunately, due to the heroic efforts of Congressman Ron Paul it
is now legal for Americans to own gold, whether coin or bullion.
But the ill-gotten gold confiscated and sequestered by the Fed remains
in Federal Reserve hands. How to get the gold out from the Fed? How
privatize the Fed's stock of gold?
Privatizing Federal Gold
The answer is revealed by the fact that the Fed, which had promised
to redeem its liabilities in gold, has been in default of that promise
since Roosevelt's repudiation of the gold standard in 1933. The Federal
Reserve System, being in default, should be liquidated, and the way
to liquidate it is the way any insolvent business firm is liquidated:
its assets are parceled out, pro rata, to its creditors. The Federal
Reserve's gold assets are listed, as of October 30, 1991, at $11.1
billion. The Federal Reserve's liabilities as of that date consist
of $295.5 billion in Federal Reserve Notes in circulation, and $24.4
billion in deposits owed to member banks of the Federal Reserve System,
for a total of $319.9 billion. Of the assets of the Fed, other than
gold, the bulk are securities of the U.S. government, which amounted
to $262.5 billion. These should be written off posthaste, since they
are worse than an accounting fiction: the taxpayers are forced to
pay interest and principle on debt which the Federal Government owes
to its own creature, the Federal Reserve. The largest remaining asset
is Treasury Currency, $21.0 billion, which should also be written
off, plus $10 billion in SDRs, which are mere paper creatures of
international central banks, and which should be abolished as well.
We are left (apart from various buildings and fixtures and other
assets owned by the Fed, and amounting to some $35 billion) with
$11.1 billion of assets needed to pay off liabilities totalling $319.9
billion.
Fortunately, the situation is not as dire as it seems, for the $11.1
billion of Fed gold is a purely phoney evaluation; indeed it is one
of the most bizarre aspects of our fraudulent monetary system. The
Fed's gold stock consists of 262.9 million ounces of gold; the dollar
valuation of $11.1 billion is the result of the government's artificially
evaluating its own stock of gold at $42.22 an ounce. Since the market
price of gold is now about $350 an ounce, this already presents a
glaring anomaly in the system.
Definitions and Debasement
Where did the $42.22 come from?
The essence of a gold standard is that the monetary unit (the "dollar," "franc," "mark," etc.)
is defined as a certain weight of gold. Under the gold standard,
the dollar or franc is not a thing-in-itself, a mere name or the
name of a paper ticket issued by the State or a central bank; it
is the name of a unit of weight of gold. It is every bit as much
a unit of weight as the more general "ounce," "grain," or "gram." For
a century before 1933, the "dollar" was defined as being
equal to 23.22 grains of gold; since there are 480 grains to the
ounce, this meant that the dollar was also defined as .048 gold ounce.
Put another way, the gold ounce was defined as equal to $20.67.
In addition to taking us off the gold standard domestically, Franklin
Roosevelt's New Deal "debased" the dollar by redefining
it, or "lightening its weight," as equal to 13.714 grains
of gold, which also defined the gold ounce as equal to $35. The dollar
was still redeemable in gold to foreign central banks and governments
at the lighter $35 weight; so that the United States stayed on a
hybrid form of international gold standard until August 1971, when
President Nixon completed the job of scuttling the gold standard
altogether. Since 1971, the United States has been on a totally fiat
paper standard; not coincidentally, it has suffered an unprecedented
degree of peace-time inflation since that date. Since 1971, the dollar
has no longer been tied to gold at a fixed weight, and so it has
become a commodity separate from gold, free to fluctuate on world
markets.
When the dollar and gold were set loose from each other, we saw
the closest thing to a laboratory experiment we can get in human
affairs. All Establishment economists--from Keynesians to Chicagoite
monetarists--insisted that gold had long lost its value as a money,
that gold had only reached its exalted value of $35 an ounce because
its value was "fixed" at that amount by the government.
The dollar allegedly conferred value upon gold rather than the other
way round, and if gold and the dollar were ever cut loose, we would
see the price of gold sink rapidly to its estimated non-monetary
value (for jewelry, dental fillings, etc.) of approximately $6 an
ounce. In contrast to this unanimous Establishment prediction, the
followers of Ludwig von Mises and other "gold bugs" insisted
that gold was undervalued at 35 debased dollars, and claimed that
the price of gold would rise far higher, perhaps as high as $70.
Suffice it to say that the gold price never fell below $35, and
in fact vaulted upward, at one point reaching $850 an ounce, in recent
years settling at somewhere around $350 an ounce. And yet since 1973,
the Treasury and Fed have persistently evaluated their gold stock,
not at the old and obsolete $35, to be sure, but only slightly higher,
at $42.22 an ounce. In other words, if the U.S. government only made
the simple adjustment that accounting requires of everyone--evaluating
one's assets at their market price--the value of the Fed's gold stock
would immediately rise from $11.1 to $92.0 billion. From 1933 to
1971, the once very large but later dwindling number of economists
championing a return to the gold standard mainly urged a return to
$35 an ounce. Mises and his followers advocated a higher gold "price," inasmuch
as the $35 rate no longer applied to Americans. But the majority
did have a point: that any measure or definition, once adopted, should
be adhered to from then on. But since 1971, with the death of the
once-sacred $35 an ounce, all bets are off. While definitions once
adopted should be maintained permanently, there is nothing sacred
about any initial definition, which should be selected at its most
useful point. If we wish to restore the gold standard, we are free
to select whatever definition of the dollar is most useful; there
are no longer any obligations to the obsolete definitions of $20.67
or $35 an ounce.
Abolishing the Fed
In particular, if we wish to liquidate the Federal Reserve System,
we can select a new definition of the "dollar" sufficient
to pay off all Federal Reserve liabilities at 100 cents to the dollar.
In the case of our example above, we can now redefine "the dollar" as
equivalent to 0.394 grains of gold, or as 1 ounce of gold equalling
$1,217. With such redefinition, the entire Federal Reserve stock
of gold could be minted by the Treasury into gold coins that would
replace the Federal Reserve Notes in circulation, and also constitute
gold coin reserves of $24.4 billion at the various commercial banks.
The Federal Reserve System would be abolished, gold coins would now
be in circulation replacing Federal Reserve Notes, gold would be
the circulating medium, and gold dollars the unit of account and
reckoning, at the new rate of $1,217 per ounce. Two great desiderata--the
return of the gold standard, and the abolition of the Federal Reserve--would
both be accomplished at one stroke. A corollary step, of course,
would be the abolition of the already bankrupt Federal Deposit Insurance
Corporation. The very concept of "deposit insurance" is
fraudulent; how can you "insure" an entire industry that
is inherently insolvent? It would be like insuring the Titanic after
it hit the iceberg. Some free-market economists advocate "privatizing" deposit
insurance by encouraging private firms, or the banks themselves,
to "insure" each others' deposits. But that would return
us to the unsavory days of Florentine bank cartels, in which every
bank tried to shore up each other's liabilities. It won't work; let
us not forget that the first S&Ls to collapse in the 1980s were
those in Ohio and in Maryland, which enjoyed the dubious benefits
of "private" deposit insurance.
This issue points up an important error often made by libertarians
and free-market economists who believe that all government activities
should be privatized; or as a corollary, hold that any actions, so
long as they are private, are legitimate. But, on the contrary, activities
such as fraud, embezzlement, or counterfeiting should not be "privatized";
they should be abolished.
This would leave the commercial banks still in a state of fractional
reserve, and, in the past, I have advocated going straight to 100
percent, nonfraudulent banking by raising the gold price enough to
constitute 100 percent of bank demand liabilities. After that, of
course, 100 percent banking would be legally required. At current
estimates, establishing 100 percent to all commercial bank demand
deposit accounts would require going back to gold at $2,000 an ounce;
to include all checkable deposits would require establishing gold
at $3,350 an ounce, and to establish 100 percent banking for all
checking and savings deposits (which are treated by everyone as redeemable
on demand) would require a gold standard at $7,500 an ounce.
But there are problems with such a solution. A minor problem is
that the higher the newly established gold value over the current
market price, the greater the consequent increase in gold production.
This increase would cause an admittedly modest and one-shot price
inflation. A more important problem is the moral one: do banks deserve
what amounts to a free gift, in which the Fed, before liquidating,
would bring every bank's gold assets high enough to be 100 percent
of its liabilities? Clearly, the banks scarcely deserve such benign
treatment, even in the name of smoothing the transition to sound
money; bankers should consider themselves lucky they are not tried
for embezzlement. Furthermore, it would be difficult to enforce and
police 100 percent banking on an administrative basis. It would be
easier, and more libertarian, to go through the courts. Before the
Civil War, the notes of unsound fractional reserve banks in the United
States, if geographically far from home base, were bought up at a
discount by professional "money brokers," who would then
travel to the banks' home base and demand massive redemption of these
notes in gold.
The same could be done today, and more efficiently, using advanced
electronic technology, as professional money brokers try to make
profits by detecting unsound banks and bringing them to heel. A particular
favorite of mine is the concept of ideological Anti-Bank Vigilante
Leagues, who would keep tabs on banks, spot the errant ones, and
go on television to proclaim that banks are unsound, and urge note
and deposit holders to call upon them for redemption without delay.
If the Vigilante Leagues could whip up hysteria and consequent bank
runs, in which noteholders and depositors scramble to get their money
out before the bank goes under, then so much the better: for then,
the people themselves, and not simply the government, would ride
herd on fractional reserve banks. The important point, it must be
emphasized, is that at the very first sign of a bank's failing to
redeem its notes or deposits on demand, the police and courts must
put them out of business. Instant justice, period, with no mercy
and no bailouts.
Under such a regime, it should not take long for the banks to go
under, or else to contract their notes and deposits until they are
down to 100 percent banking. Such monetary deflation, while leading
to various adjustments, would be clearly one-shot, and would obviously
have to stop permanently when the total of bank liabilities contracted
down to 100 percent of gold assets. One crucial difference between
inflation and deflation, is that inflation can escalate up to an
infinity of money supply and prices, whereas the money supply can
only deflate as far as the total amount of standard money, under
the gold standard the supply of gold money. Gold constitutes an absolute
floor against further deflation.
If this proposal seems harsh on the banks, we have to realize that
the banking system is headed for a mighty crash in any case. As a
result of the S&L collapse, the terribly shaky nature of our
banking system is at last being realized. People are openly talking
of the FDIC being insolvent, and of the entire banking structure
crashing to the ground. And if the people ever get to realize this
in their bones, they will precipitate a mighty "bank run" by
trying to get their money out of the banks and into their own pockets.
And the banks would then come tumbling down, because the people's
money isn't there. The only thing that could save the banks in such
a mighty bank run is if the Federal Reserve prints the $1.6 trillion
in cash and gives it to the banks--igniting an immediate and devastating
runaway inflation and destruction of the dollar.
Liberals are fond of blaming our economic crisis on the "greed
of the 1980s." And yet "greed" was no more intense
in the 1980s than it was in the 1970s or previous decades or than
it will be in the future. What happened in the 1980s was a virulent
episode of government deficits and of Federal Reserve-inspired credit
expansion by the banks. As the Fed purchased assets and pumped in
reserves to the banking system, the banks happily multiplied bank
credit and created new money on top of those reserves.
There has been a lot of focus on poor quality bank loans: on loans
to bankrupt Third World countries or to bloated and, in retrospect,
unsound real estate schemes and shopping malls in the middle of nowhere.
But poor quality loans and investments are always the consequence
of central bank and bank-credit expansion. The all-too-familiar cycle
of boom and bust, euphoria and crash, prosperity and depression,
did not begin in the 1980s. Nor is it a creature of civilization
or the market economy. The boom-bust cycle began in the eighteenth
century with the beginnings of central banking, and has spread and
intensified ever since, as central banking spread and took control
of the economic systems of the Western world. Only the abolition
of the Federal Reserve System and a return to the gold standard can
put an end to cyclical booms and busts, and finally eliminate chronic
and accelerating inflation.
Inflation, credit expansion, business cycles, heavy government debt,
and high taxes are not, as Establishment historians claim, inevitable
attributes of capitalism or of "modernization." On the
contrary, these are profoundly anti-capitalist and parasitic excrescences
grafted onto the system by the interventionist State, which rewards
its banker and insider clients with hidden special privileges at
the expense of everyone else.
Crucial to free enterprise and capitalism is a system of firm rights
of private property, with everyone secure in the property that he
earns. Also crucial to capitalism is an ethic that encourages and
rewards savings, thrift, hard work, and productive enterprise, and
that discourages profligacy and cracks down sternly on any invasion
of property rights. And yet, as we have seen, cheap money and credit
expansion gnaw away at those rights and at those virtues. Inflation
overturns and transvalues values by rewarding the spendthrift and
the inside fixer and by making a mockery of the older "Victorian" virtues.
Restoring the Old Republic
The restoration of American liberty and of the Old Republic is a
multi-faceted task. It requires excising the cancer of the Leviathan
State from our midst. It requires removing Washington, D.C., as the
power center of the country. It requires restoring the ethics and
virtues of the nineteenth century, the taking back of our culture
from nihilism and victimology, and restoring that culture to health
and sanity. In the long run, politics, culture, and the economy are
indivisible. The restoration of the Old Republic requires an economic
system built solidly on the inviolable rights of private property,
on the right of every person to keep what he earns, and to exchange
the products of his labor. To accomplish that task, we must once
again have money that is produced on the market, that is gold rather
than paper, with the monetary unit a weight of gold rather than the
name of a paper ticket issued ad lib by the government. We must have
investment determined by voluntary savings on the market, and not
by counterfeit money and credit issued by a knavish and State-privileged
banking system. In short, we must abolish central banking, and force
the banks to meet their obligations as promptly as anyone else. Money
and banking have been made to appear as mysterious and arcane processes
that must be guided and operated by a technocratic elite. They are
nothing of the sort. In money, even more than the rest of our affairs,
we have been tricked by a malignant Wizard of Oz. In money, as in
other areas of our lives, restoring common sense and the Old Republic
go hand in hand.
Murray N. Rothbard (1926-1995) was professor of economics at the
University of Nevada, Las Vegas. This is reprinted with permission
from The Freeman September and October 1995.
