Chapter VIII:
What Really Goes on in the U.S. Economy

The corruption of Watergate has shown the American people some of the moral rot which infests our government. But Watergate is only the tip of the iceberg. The failure of successive presidents to end the steady risein prices is not the result of incompetence or of the difficulty of the problem; without the active support of the Government the bankers could not expand their issues of paper money. Almost every president since FDR has played a game of betrayal and deceit. They have deliberately and consciously worked to further the interests of the aristocracy — while maintaining a public image of being on the side of the people.

John F. Kennedy, our beloved martyred President, was a perfect example of the leader who maintains a liberal image but follows policies on behalf of the aristocracy. Kennedy’s rather small budget deficits in the early 1960s aroused considerable conservative opposition. But the bankers knew how to get around that. Working with investment banker Henry Cabot Lodge in a bipartisan effort, Kennedy, step by step, got us involved in a war in Vietnam.

The Pentagon Papers have revealed the deliberate deceit which occurred at that time. We now know that the United States did not enter the Vietnam War in response to North Vietnamese aggression as Lyndon Johnson claimed in July of 1965. In fact the U.S. had been engaged in attacks against North Vietnam ever since February 1964 via the covert operation 34A.

Liberal critics have soundly condemned the entire Vietnamese operation, but they miss one central point: Motive. Much has been written about false theories and immoral policies. But the Vietnam War was not a mistake, not for the men who led us into it. It was the war which gave us the large budget deficits and huge paper money expansion of the late 1960s and quieted conservative opposition to these unsound fiscal policies.

As the issues of paper money increased in the late ‘60s, we got a chance to see the invariable effects of basing a society on the principle of something for nothing.

Between 1965 and 1968 there was a wild period of emotionalism in the stock market. All kinds of gamblers and promoters appeared with wild get-rich-quick schemes. There was a growth in crime and drug use; there was massive social unrest; there was conscription for a foreign war; there was a diminution in individual freedom; the depreciation of the currency caused a decline in real wages; there was a growth of giantconglomerates. The typical effects of a paper money system were upon the nation.

As has been previously described, the paper money issues of the late ‘60s showed that the aristocracy had gone too far for its own good. The New Breed of wild-eyed promoters and gunslingers arose to give it a challenge, and it was necessary to hold back on the paper money for a while to destroy these new challengers.

The newly elected Nixon administration complied with the wishes of the corporate establishment. Even before the new administration had been sworn in, the Federal Reserve had moved to stop the issues of paper money. Total increase in the money supply in 1969 was only 2%.

Without the stimulus of paper money there was a sharp setback for big business. The stock market fell sharply. From 1970 to 1971 corporate profits dropped 10%. GNP turned down. By the middle of 1970 the big business interests were hurting badly. The Penn Central railroad collapsed. At one point, Chrysler and several big airlines were just a few weeks away from bankruptcy. The New York Stock Exchange itself was teetering on the brink.

The New York Stock Exchange had established a fund to reimburse the customers of any member firm which went bankrupt. This was necessary for the Exchange because had any substantial number of customers lost their money through a brokerage house failure, then people would have deserted the market in droves. It is hard enough in the market with the risks one takes in stocks (where there is opportunity for profit) without having to take further risks on your brokerage house. Yet by mid-1970, this fund was empty. The head of the NYSE spent the summer of 1970 running around the country patching up failing brokerage houses and arranging mergers. Had one major brokerage house failed and the customers not been reimbursed, millions of people would have left the stock market. Their selling would have further depressed the price of stocks and thrown more brokerage houses into bankruptcy causing the exodus to accelerate. Only a few people in the country realized it, but in the weeks after the Penn Central failure, American capitalism was on the verge of a major disaster.

(A parenthetical remark: On March 26, 1970, by surveying the paper money situation for the preceeding year, I was able to predict a 10-15% drop in corporate profits (DJI) and up to 5% drop in industrial production for the year 1970.64 Actual results: 4% drop in industrial production; 10½% drop of corporate profits in the DJI. There was no Keynesian economist whose predictions were anywhere near as good. Pierre Rinfret, one of the top Nixon economists had gone around the country in 1969 saying, There ain’t gonna be no recession. The Friedmanites were better. They at least knew that there would be a recession, but they completely underestimated its magnitude.)

But by mid-1970, the New Breed had been totally destroyed. When the Penn Central bankruptcy occurred, the establishment became alarmed. The declared intention of the Nixon administration had been to stop inflation, and this had not been accomplished by mid-1970. But with the New Breed out of the way the road was clear for another round of paper money.

First, American business began to cry cost push inflations. What they meant by this was that labor was demanding higher wages, which was of course true. However, it was not true that these higher wage demands were the cause of higher prices. As we have seen, the wages of labor lagged sharply behind prices during the business boom of 1965-1969. This gave the workers additional bargaining power in enforcing their demands. So labor was indeed able to enforce higher wages in 1970, but this was not at the expense of higher prices. It was at the expense of lower profits. So far from boosting prices, a gain in real wages generally occurs as the depreciation starts to slow. This is what happened from 1969 to 1971 as the rate of increase in the consumer price index fell from 6% to 3½%.

The aristocracy’s solution to this dilemma was to resume the issues of paper money and restrict the wages of labor through price and wage controls. In 1971 and 1972 the money supply advanced at a rate of 8% per year. Corporate profits surged ahead; wages, after rising as a result of the recession, began to fall back again.

Because people have accepted the banker myth that a depreciation of the currency is inflation, i.e., a rise in goods, they believe that this rise in goods can be prevented by imposing price ceilings on goods. This is thetheory behind price controls. Make a law that the price of a good cannot rise.

But goods are not rising; instead it is money which is falling; so such laws do no good. If you freeze the price of a good in terms of a depreciating currency, then you are forcing its price to fall in real terms.

Consider what would happen if a law were passed which forced the price of potatoes to fall? At first it would ‘only cause grumbling from the potato growers. Then, as the price fell by a larger amount, they would become seriously alarmed. At some point all of their profit would be gone, and they would be selling potatoes at a loss. Before this point was reached, clearly, they would curtail their production. The result would be a shortage of potatoes.

And this is the inevitable result of price and wage controls. When they are imposed at a time of a depreciating currency, they cause shortages. This leads to black markets. Shortages of meat, paper, wheat and, of course, oil, as well as many other less well known items which occurred in 1973, merely reestablish this truth.

When the Nixon administration imposed price and wage controls on the American economy in August of 1971, it knew that such controls do not work. At that time Herbert Stein of the Council of Economic Advisers said to Dr. Murray Rothbard, Don’t worry Murray; Dick knows they won’t work.65

At least price and wage controls do not work in the manner represented to the public. They do not prevent the depreciation of the currency. But they do work in a completely different manner. They convince the public that steps are being, taken to stop inflation. They keep up the pretense that the Government is a government of the people, responsive to the popular will.

The adoption of price and wage controls by the Nixon administration in 1971 was a cynical measure declaring to those who understand economics that Nixon had decided for the continued depreciation of the currency andwas looking for a way to assuage the inevitable public protest. Price and wage controls, therefore, should not be regarded as an anti-inflationary measure. They should be regarded as just the opposite. Their purpose is not to stem the rise in prices, which the administration pretends is being caused by some strange, outside force. Their purpose is to fool the public so that the continued issues of paper money can go on and on.

The housewives who boycotted meat in March of 1973 wielded a great deal of political power. Their united weight can topple almost any politician. But their action in the meat boycott was foolish and futile. The condition which they were protesting (had they sense enough to know it) was the fact that the aristocracy had robbed them through the depreciation of the currency. They were poorer and they had to do without. To voluntarily give up some of the goods which they could not have anyway is not a solution.

The reason meat prices rose sharply in early 1973 was that there was less meat. There were fewer goods for the common person because these goods had been taken by the aristocracy (as per the big rise in corporate profits in 1972 and 1973, for example). average American worker had to consume less in 1973 because there was less for him to consume. An organized refusal to consume (which is what a boycott is) is not defiance of this condition; it is subservience. A march on the regional Federal Reserve Banks would have been a more effective protest. Nixon’s imposition of controls was particularly cynical because he knew what causes prices to rise. As he said in his 1968 campaign for election: When federal expenditures are enormously more than federal revenues, the politicians pursuing popularity through inflation turn to the Federal Reserve system and create money — literally out of thin air. To finance the Treasury, the Federal Reserve system has expanded the money supply at a breathtaking rate. During 1967, the money supply grew at 7 percent, the fastest rate of growth in the entire period since World War II.66 But as long as the people do not know, the Government will continue to follow policies which benefit the banks and corporate interests. The housewives' plea to the President to do something was based on the assumption that, however incompetent, the President was fundamentally trying, to solve their problem. This is false. The President is the main agent by whichthey are robbed. The increase in the money supply of 8% per year over 1971-72 was the cause of their distress in 1973.

What these women need is some economic education. Were that same force which was applied to the meat boycott to be applied to a demand for ending paper money, the budding aristocracy in America would be smashed.

In 1973 we again entered a period of restraint in the money supply. However, this was restraint only by comparison with the wild years of 1971 and 1972. The growth of the money supply in 1973 was approximately 5%, a rate higher than that of all but the most expansionary years in American history.

This time the aristocracy did not wait for a major corporation to go bankrupt. When President Ford took office upon the Nixon resignation, his first order of business was to end this period of restraint. For this purpose Ford called a major conference of the economic priesthood for the month of September 1974. There was much disagreement among these distinguished authorities on all of the various fine points of their craft, but there was one recommendation which was virtually unanimous: This was for easing of credit by the Federal Reserve.

As readers of this book already know, the way the Federal Reserve eases credit is by supplying Federal Reserve bank notes to the private banks, which in turn create additional money in the process of making loans. Easing of credit is a euphemism for a further increase in the production of paper money. The September conference was ostensibly called to find a solution to the problem of rising prices. The solution agreed upon by the economic priesthood was to step up the rate of issues of paper money. By a unique coincidence, the Federal Reserve announced that it had adopted just this solution in late August, shortly before the conference met.

In early 1975 the Ford administration gave up even the pretext of trying to stop the depreciation and adopted a radical Keynesian program. The Federal Budget deficit for fiscal 1976 was projected at 60 billion dollars. Members of the priesthood called for the creation of record amounts of new money. As this book goes to press, it is a safe, if pessimistic, conclusion that during this cycle the banks will surpass even the eight percent increase in paper money of 1972.

It does not require a great understanding to predict the destruction of America in the next few generations. It simply requires knowledge of two events — the abandonment of the domestic gold standard on March 6, 1933, and the abandonment of the international gold standard on August 15, 1971.

The abandonment of the domestic gold standard and the declaration of Federal Reserve notes as legal tender in 1933 paved the way for major issues of paper money, which have by this time caused a large depreciation of our currency along with its attendant evils; crime, social unrest, war, a decrease in freedom and a shift of wealth from the poor to the rich. But during the period prior to 1971, there was a restraint on the issues of paper money. For most of this time, foreigners had the right, denied to Americans, to demand that their Federal Reserve notes be redeemed for gold. This always served as a check on the issue of paper money because, via international trade, foreigners were acquiring American dollars, and if this money started to depreciate too rapidly, they would turn it in for gold. This threat of a foreign run on the central bank's gold stock served to restrain the Federal Reserve from excessive issues of paper money.

But on August 15, 1971, President Nixon refused to honor even this right. The U.S. currency is now unrestricted paper. And there is no bar to as many issues of paper money as the aristocracy finds expedient. If the period from 1933 to 1971 was a period of mild currency depreciation, then the period from 1971 on will be a period of rampant currency depreciation.

To one trained to see, the meaning of the actions of August 15, 1971, was clear. The meaning of the gold embargo was to remove the check on paper money represented by potential foreign claims on our gold. The meaning of price and wage controls was to serve as a sop to divert public attention and convince people that the President really wanted to stop the rise in prices. These were the two steps which were necessary to clear the way for unrestricted issues of paper money.

To one trained to see, it was obvious as of August 16, 1971, that the decision had been made for paper money. Unless this decision is reversed, it will lead to the destruction of the United States.

The effects of a currency depreciation are not taught in our schools. But they are a common occurrence throughout history. For example, the Civil War currency depreciation — the product of the legal tender laws of 1862 and the borrowing for the war was described by Clarkson Nott Potter to the Supreme Court as follows:

Who can deny that a whole community is being demoralized, as under such a system of paper money communities everywhere and at all times have been demoralized? Who can deny that men will do now what they would have shrunk from ten years ago, before this system existed? When the wicked prosper, other men make haste to do likewise. And now not from the cities only, but from every part, men seek the great marts to try their fortunes in the ventures of the hour, hoping to gather where they have not strewn. Gambling in stocks, with the dangerous combinations it invites, and the corruption which it encourages, has become general; so that it is deemed venial to artificially inflate or depress prices, to create fictitious values by forced scarcedness or undue depression by combined attacks. And whatever danger may come to the public debt of this great country, will come, not from the unwillingness of the people to pay; not from their want of ability to pay but will come, if it should come at all, from the recklessness of a people carrying out their schemes upon the waves of an inflated currency, and from the demoralization which such speculation produces.How can it be expected that this people will make the sacrifices necessary to enable their government to keep its pledged faith, when it has not only failed to keep its own faith with its creditors, but has filled its coffers from the sale of licenses to men to wrong, each other by short payments, and has made haste to ratify, by the decision of its supreme tribunal, the constitutionality and righteousness of such a course?67

This was 100 years ago, but how very like the present. Potter is talking about the likes of Jay Gould, Jim Fisk and Daniel Drew. But he could be talking about our own Allen Klein, Fred Mates or Bernard Comfeld.

And we find the following description of England during the currency depreciation of the Napoleonic Wars:

Nature seemed to make common cause with war and bad finance. The winter of 1812 was extraordinarily severe, and the accidents by flood and fire were numerous. Crimes began to multiply in that accord between physical distress and moral decay so often noticed. Wages were down at starvation point. Spinners had 7s. 6d. per week in a time of high prices for the necessaries of life. The recent introduction of machinery and the extension of the factory system would have caused an inevitable period of pressure on hand workers. Now these causes fell in with others to enhance the distress. The artisans, in striking analogy with our own farmers at the present time, sought their foe in the nearest and most palpable shape in which the bad circumstances of the time pressed upon them. They attacked the machines, burned the factories, and united in riotous disturbances. The corn laws were in full force, and prevented the relief which might have come from other countries in time of scarcity, while manufacturers were entangled in a mesh of restrictions, more ruinous even than Napoleon's Decrees or the Orders in Council.68

Here again we see crime, a decline in real wages, civil unrest, and restrictions on freedom. Throughout history we find the fate of nations attached to the soundness of their currency. The fall of the Western Roman Empire was accompanied by a depreciation of its currency while the Eastern Empire survived. The Ottoman Empire lasted for 800 years with sound money and collapsed half a century after starting its debasement. England, after the Napoleonic Wars, established the pound as a gold currency and attained her period of greatness through the 19th century. But when the attempt to return to the gold standard failed after WWI, England quickly became a second rate country.

The reason for this is that paper money is the principle of something for nothing, and a society founded on the principle of something for nothing can not survive. Money is used by everyone is in our modern society, and when money is corrupted, a corruption enters the bloodstream of our social life. Those who prosper are no longer the Horatio Alger types who prospered in the 19th century and built the country by their own success. They are fly-by-night promoters and gamblers who construct jerry-built conglomerates and know more about public relations than about operations. The beaver has been put out, and in his place is the leech — the man who prospers by taking from others.

When the road to success in a society is by legalized robbery, then the men in that society fall to eating each other. When the wicked prosper, other men make haste to do likewise. That is what we in America are doing now. The evil are eating up the good, and when they have finished with that, they will eat each other.

We have seen how paper money is a system of Robin Hood in reverse. It robs from the poor to give to the rich. And we have seen that one of the ways in which it does this is by robbing the creditor to give to the debtor.

During a period of currency depreciation, businessmen struggle to get into large debtor positions. But they find that banks will not lend very much to small companies. There is therefore a trend toward merger and conglomeration in a period of currency depreciation.

When we study the history of the 17th and 18th centuries periods of paper money we find business dominated by huge multi-national corporations, such as the Hudson Bay Trading Company and the East India Tea Company. In the 19th century — the period of the gold standard — we find business dominated by Jefferson's little man. But in the 20th century, in direct proportion as prices rise, we find the giant corporation and the conglomerate replacing the small businessman. IT&T has come to have almost the same status in the 20th century that the East India Tea Company had in the 18th. It has special relationships high in the government; it intervenes in the internal affairs of foreign countries. Contrast this with the age of the so-called Robber Barons; the fact of the matter is that by 1896, after 30 years of declining prices, most of the railroad system of the nation was in receivership.

To even the most casual observer it is apparent that conglomerates are highly inefficient forms of business organization. The chain of commandfrom top to bottom is too long; incentive gets lost along the way; corporate dead wood accumulates; the heads of the corporation do not know enough about all of the aspects of the business to make intelligent decisions. The reason the conglomerate survives today is because it is head over heels in debt — more in debt than its individual divisions could be were they separate companies. As the currency depreciates, the conglomerate pays off its debts with cheaper dollars.

Because the currency depreciation lowers real wages and because it harms creditors, it leaves both employees and creditors with an income below what the free market would have given them. Both of these groups, therefore, have additional bargaining power which they can use to remedy their situation. It has been — generally recognized that a constant rate of inflation — whatever the rate — would eventually be ironed out by the bargaining process so that all social injustices caused by the currency depreciation would be compensated. For example, if it were generally understood in a society that the currency would depreciate by 10% a year, then creditors could demand an additional 10% added to their rate of interest to compensate for the loss of the principal;workers could demand an additional 10% added to their increase in wages.

But in such a society, since creditors and workers were not losing, the aristocracy could not gain. To keep its illicit profits the aristocracy must continually increase the rate of paper money expansion, thus increasing the rate of currency depreciation. For example, big business found that a 3½% currency depreciation in 1965 (up from 1% in the early ‘60s) was fine for profits. But a 3½% currency depreciation in 1971 (down from 6% in 1969) was very bad for profits. By 1971 workers were demanding higher wage increases, and creditors were demanding higher interest rates. The only way the aristocracy can continue its profits is by increasing the currency depreciation to a new higher rate (as they did in 1972).

Because of this, people who are retired will find prices rising faster and faster, beyond anyone's capacity to plan. At an 8% annual depreciation the value of money will drop in half in eight years. This means that at that rate a person who provides for a $10,000 annual retirement income at age 65 will have a $5,000 annual income by age 73 and a $2,500 annual income by age 81. Of course, since the rate of currency depreciation willnot remain constant at 8% but will continually accelerate, the only way a man can avoid becoming a ward of the state is by an early death.

Furthermore, since both workers and creditors have additional bargaining power on the free market, the aristocracy funds economic freedom opposed to its interests. When its profits are under pressure, therefore, it will move to use its political power to restrict freedom in economic affairs. (The most recent clear example of this was, as noted, the imposition of price and wage controls in 1971 after corporate profits had fallen by 10% in the previous year.)

But of course freedom is not divisible. As the Communist states demonstrate, you cannot take away people's economic freedom without taking away their freedom in all other areas as well.

This is why the aristocracy is riding a tiger. The American people will not put up with depredations on their freedom. They will not put up with continually rising prices. They will protest and make things too hot for any political party which leads them in this direction.

There is only one way the American people can be led to accept such infringements on their freedom. This is as part of a war emergency. The chart in Chapter III of the value of the U.S. dollar shows a remarkable concurrence between currency depreciation and war. This is not an accident. Paper money and war naturally go together. They have done so ever since the Bank of England was founded as part of a war emergency. It requires no special insight on my part to predict that, unless moves are made in the direction of stopping paper money, the gold embargo of August 15, 1971 will lead to a major war. The aristocracy will have to involve the country in a war to divert the public hostility from itself — or more accurately from policies and politicians it supports — to a foreign enemy. It is a device as old as the centuries.

But the situation is not hopeless. The decision has been made for paper money, but that decision can be reversed. The people who suffer from paper money are by far the majority. AU that is necessary is for them to demand an end to the depreciation of the currency.

People must be given the freedom to reject paper money. The legal tender enactments, which have no constitutional basis, must be repealed by theCongress or declared null and void by the courts. Now that it is again legal to own gold the people will then be able to choose whether they will accept paper money or gold money.

Since the vast majority of people lose under paper money, they are sure to choose gold. This will cause the collapse of the establishment which lives off the labor of others. Then the Federal Reserve System must be abolished, and the old practice of banks of issuing more paper than they have gold with which to redeem it must be classified as fraud and prohibited by law.

The present generation of Americans has been betrayed by its fathers. That generation inherited a free and — prosperous country based on a sound currency where a man could succeed on his own ability. They have passed onto their children a corrupt system based on deceit and exploitation. But the sins of the fathers will be visited upon the children. It is the coming generation which will suffer these ills unless it acquires the understanding to rise up and demand an end to paper money.

This book began with a quotation from Isaiah, and throughout it, the point has been made that currency depreciation and its hosts of attendant evils are not new but have destroyed many cultures prior to our own. Things were no different in Isaiah's time. They did not have paper money, but the kings fashioned fiat money by mixing base metals with the silver.

The prophet reports: In other words:
How is the faithful city become a harlot! it was full of judgment;
righteousness lodged in it; but now murderers.
Thy silver is become dross, Fiat money
thy wine mixed with water: Bad business practices
Thy princes are rebellious, and companions of thieves: Corruption in government
every one loveth gifts, and followeth after rewards: Feeding the rich
they judge not the fatherless, neither doth the cause of the widow come unto them. (Isaiah i:21-23) By oppressing the poor

That society did not listen; it became involved in war and suffered a terrible catastrophe. It is my earnest hope that this book will be successful in imparting sufficient understanding to the American people that a similar fate will not befall us


  1. Howard Katz, The Speculator, March 26, 1970.
  2. This incident was related by Professor Rothard in a speech delivered in early 1972.
  3. Richard Nixon, — A New Direction for America’s Economy, Campaign Pamphlet, July 6, 1968.
  4. Clarkson Nott Potter, Supreme Court Reports, Legal Tender Cases 12 Wall 514.
  5. William G. Sumner, A History of American Currency (New York, Greenwood Press, 1968), pp. 281-82. My emphasis.