CHAPTER IX: The Solution to the Impoverishment Which Threatens You
The real threat to the country from paper money stems from the fact that the longer the system operates the more people try to join the paper aristocracy; its appetite gets bigger, more inefficiencies creep into it, and it needs to issue more paper money to make the same profits. In the early 1960s,it was content with a 1-2% increase in money each year. By the late '60s, it wanted a 5-7% increase. In 1972, it exceeded 8% increase, and in the late '70s, it hit 8% for several years running. In 1983, the bankers increased the money supply by 9.3%, and in 1986 they hit 18.6%. Similarly, the periods between the large money expansions -- the so-called tight money periods -- have also been going up. In the 1950s, they would actually reduce the money supply for a short time. In the tight-money of 1969, the money supply grew by only 2%. But the tight-money of the mid-'70s saw the money supply grow by over 4%, and the tight-money of 1981-82 was caused by more than a 6% growth.)
The history of other paper money countries shows the same pattern. The issues of money start off slow, but they keep going faster and faster. At the end it is not unusual for prices to double every month. There is a story told of the great depreciation of the German mark in 1923-24. Two children took a wheelbarrow of money to the store to buy bread. Standing in line, they left the wheelbarrow for a moment to see whether the price had gone up. When they returned, they had been victimized by a thief; but the thief had not stolen their money; he had dumped out the money and stolen the wheelbarrow.
The Movement Begins
When the gold standard was abandoned in 1933, hard money advocates were reassured by the requirement of a 40% gold backing for the Federal Reserve note. But when this backing requirement got in the way of further expansion, it was reduced to 25%. When the 25% requirement got in the way of further expansion (in 1968), it too was eliminated. When the Bretton Woods System of international gold convertibility interfered with the paper money expansion of 1971-72, it was torpedoed. Every long range device to mollify sound money advocates and to convince them that in the long run the creation of new money would be ended was terminated precisely when it threatened to take effect.
For a long time the supporters of sound money were deceived by these long range measures, and no effective political action was launched. But in 1972, after the abandonment of the Bretton Woods System on August 15, 1971, several movements to restore hard money were started. Most prominent among these were the Committee for MonEtary Reform and Education, the National Committee to Legalize Gold and the author's group, the Committee to Reestablish (later changed to Establish) the Gold Standard.
From its beginning in the early 1970s, the gold standard movement was plagued by the Keynesian belief that the gold standard was a conservative position. This belief was so widespread that conservatives with only vague and fuzzy notions about money would decide that they ought to be for gold. They would join pro-gold movements, making the Keynesian theory a self-confirming hypothesis. Not only did this discredit the movement in the public's eye, but many of these conservatives actively opposed the gold standard1 because it conflicted with the interests of their Wall Street and banker friends. Their opposition was more effective coming from within.
The opposite problem occurred when a genuine sound money supporter was taken in by the Keynesian myth and believed that he, being a gold advocate, ought to be conservative. In addition to Henry Hazlitt, a good example of this type was Ludwig von Mises, one of the great economic thinkers of this century. Von Mises was conservative enough to serve on the board of the John Birch society, but being old enough to remember the old political categories, he called himself a liberal until his death. Jesse Helms, Phil Crane, Steve Symms and the late Larry MacDonald appear to be in the same camp.
The Committee on Monetary Research and Education was an older group of genuinely sound money people who never questioned that they were supposed to be conservative. They would not admit that a gold standard was their goal but simply posed as an educational group. Of course, the Keynesian intellectuals do not need any education. Those people understand the essence of the issue (in their own terms) and have chosen to side with the bankers. This is not a choice they can admit publicly. Instead, they pretend to disagree with the CMRE on philosophical grounds. This was not effective in getting the issue off dead center.
The National committee to Legalize Gold was a direct action group, operated by younger people, and it quickly succeeded in its limited goal of legalizaing gold ownership. This was intended as a first step to establishing a full gold standard. Unfortunately, after achieving this first step in 1974, it fell apart, with the mainstay of the group moving into the conference business and reaping profits from the gold bubble of the late 1970s. This group was also taken in a conservative direction; it kept getting bound up with apologists for the old South African Government2 and with Wall Street speculators and bankers (the very people who -via Foster and Catchings -- gave us the Keynesian ideology). It thus became perverted, and by the late 1970s many gold coin dealers, advisors, etc. were admitting that an actual gold standard would put them out of business.
The intellectual force behind the gold conferences was Harry Browne, author of How You Can Profit from the Coming Devaluation. Browne's knowledge of economics is excellent, but his bias against political action led him into a major error. Browne argued that it was possible to protect one's self from the depreciation of the currency by clever financial planning (such as, in the early 1970s, owning gold).
A little thought will show the opposite. Paper money is a privilege of the bankers (which they share with their friends, the big corporations); it is their privilege to create money out of nothing. They gain unearned wealth from this privilege, and if they gain, then someone else has to lose. If you are not a banker (or a banker's friend) and if you use the bankers' money, then you are one of the losers. If you try to protect yourself by buying gold, then the gold will go up in direct proportion as the currency goes down (in the long run); but it will not yield interest. To get interest on capital they did not create is the bankers' privilege; to be deprived of the interest on the capital you did create is a considerable loss.
Any way we cut it, if the bankers make unearned gains, then the people suffer corresponding losses. For the people to keep what they earn, the bankers' privilege must be taken away. But this privilege is a political favor, gained and kept by political power. Any attempt to end this injustice must confront that fact. It must enter the political arena and end the bankers' privilege to create money, or at least give people the freedom to use an independent money that is not created by the bankers. Harry Browne has now changed his position on political action as he is actively campaigning for the Libertarian Party nomination for President of the United States.
Your author's efforts for a direct gold standard, starting with the Committee to Reestablish the Gold Standard (in 1972) and continuing with the monthly publication, The Gold Bug, (1973) and three books (1976 and 1979), reached 2000 miles across the country and met a responsive chord in a Houston physician, Dr. Ron Paul, who gave up his medical practice to run for Congress. Congressman Paul was just what the gold movement needed, intelligent, highly principled and very committed to sound money.
Even better, Dr. Paul was able to penetrate the conservative onus which Keynes had pinned on the gold advocates and take independent positions on issues.
Working with Senator Jesse Helms and his hard money aide, Howard Segermark, Congressman Paul was able to get the gold standard considered (for the first time since 1933) by getting Congressional approval for a gold commission to study the question of whether the U.S. should adopt such a money system. It was, at least, a start. Although the Gold Commission did not recommend directly putting the country on a gold standard, it did recommend a compromise plan. It recommended a new gold coin which could be used to make gold contracts. In effect it recommended a gold currency to compete with the existing paper currency. The existing system would continue to operate, but alongside, provided both parties to the transaction agreed, this gold coin could be used as money as well. Even gold hater Henry Reuss admitted:
“The whole thing taken together sets up a competitive coinage."3
What Congressman Reuss meant by that was as follows. You remember the story in Chapter IV about your father and how the value of his savings was stolen from him by the bankers through the paper money system. Your father was paid back the 10 dollars that he invested. But it was 10 dollars with much lower value. He was paid back in form, but not in substance, and the bankers and their friends consumed the wealth which he had created.
Your father was ignorant of money. So he listened to the bankers' intellectuals4 and voted for politicians who were banker agents, and these people took away his right to use gold as money or make gold clauses in his pension fund. Keeping the promises in such gold clauses was declared to be “against public policy.” The way was cleared for the bankers and the big corporations to make gigantic profits (which they quickly did),5 but the American working man took a giant step in the direction of serfdom.
What Congressman Reuss meant by a competitive coinage was that people would have the right under current U.S. law to invest, not paper dollars but ounces of gold, ounces of gold which cannot be created out of nothing by the bankers and which will not depreciate over your lifetime. your father could not make an investment in terms of gold, but you can. It is not in your interest to pay gold, but it is in your interest to be paid gold by others -- especially in long term contracts. This is the escape we talked about in the first chapter. A door of freedom has been opened, but it has only been opened for those who understand the gold coin and who know how to use it as money. That is the topic of the remainder of this book.
- How you can join a pro-gold movement and oppose the gold standard will be made clear in Chapter X.
- Pre-l990s South Africa was an excellent example of conservatives who did not favor gold. Despite the fact that it was the world's biggest gold producer, it was an enemy of the gold standard; its citizens had less of a right to own gold than Americans; and it depreciated its paper currency at a faster rate than the U.S. It was also a welfare state with substantially more government intervention in the economy than the U.S. Today South Africa is no more friendly toward gold, but at least the pretense is gone.
- Henry Reuss, Gold Commission meeting, March 8, 1982. This and all subsequent quotes from the Gold Commission meetings are from tape recordings made by the author or from the minutes published by the treasury.
- Specifically, he read newspapers featuring writers who spread the Keynesian rationale for paper money.
- Corporate profits began a major advance dating from the time we left the gold standard. The improvement in workers' wages, a historical feature of the U.S. economy, slowed down and finally stopped.
This material is made available with the generous permission of Howard Katz (1931-2012).