Hostile Takeover: Resisting Centralized Government's Stranglehold on America

by Matt Kibbe

  INFLATED SCRUTINY

  THE GENERAL PUBLIC OFTEN VIEWS MONETARY POLICY AS A COMPLEX, technical field that is better left to the experts. That’s exactly how the Washington establishment and its czar culture like it. But monetary policy came into the spotlight in 2008, when the financial collapse revealed, as long-battling reformers like Paul had been warning for years, that the “experts” were more concerned with protecting their interests and the interests of the crony capitalists of Wall Street than in defending the taxpayers. Suddenly the American people became interested in the complicated world of monetary policy, learning how it has been used over the years to manipulate markets for the benefit of big banks and big government. They’re focusing, correctly, on the Federal Reserve, demanding that the agency come under greater scrutiny, and that we abandon policies that use money as a tool for the elites, and instead pursue alternative monetary policies that focus on creating a standard of value.

  Just a few short years ago, hardly anyone except Paul was questioning the Federal Reserve. The financial meltdown of 2008, and the decentralization of information, changed that, and not a moment too soon.

  In the wake of a secretive trillion-dollar bailout by the Fed, where the central bank purchased toxic assets at home and abroad to save certain favored banks and shift the burden to taxpayers (and anyone who holds dollars, for that matter), the American people started to take notice. Congress ordered an audit—albeit a watered-down one. Suddenly the Fed saw the political need to be—or at least appear to be—more transparent, and Fed chairman Ben Bernanke claimed that increasing transparency and accountability would be the highlights of his chairmanship.2 This was a response to public pressure, but it smacked of damage control, not a shift in policy. Regardless, the American people are now paying attention to the elephant in the room, Fed responsibility for the boom and bust of financial crises and the bailout culture that has grown over the past century.

  The expansive monetary policies of government central banks have reaped disastrous consequences for both the U.S. and global economies. Europe, in particular, faces serious economic challenges brought on by an attempt to set monetary policy without regard to fiscal differences among member nations. Unfortunately, many U.S. banks have risky exposures in these debt-strapped countries and many are now hoping that the Fed and the International Monetary Fund will bail out their bad bets. Haven’t we been here before? Easy money and too much government spending and meddling and another financial crisis that will surely rival the 2008 meltdown. The boom and the bust, and American taxpayers are once again left holding the bag.

  WHERE DOES MONEY COME FROM?

  THOUGH WE ALL USE MONEY EVERY DAY, MOST OF US PROBABLY DON’T often sit down and think about what makes money work. If you are like most folks, you might never have thought to ask the question until you saw Keynes and Hayek rap on YouTube. Or maybe you just knew, without anyone needing to point out the obvious, that creating trillions in money and credit out of thin air to pay for bailouts and unfunded government promises was a really bad idea. Something didn’t add up.

  Against all plausible expectations, Ben Bernanke made it cool to debate monetary policy. Go figure.

  Money comes from the same process of people acting and interacting that generates knowledge, coordination of plans, and societal progress. In order to understand the extent of the damage done by the Fed and our national monetary policies, we have to answer a seemingly simple question: “What is money?” The answer to this question immediately revisits a now common theme you will immediately recognize. Sound money emerges freely, from the bottom up. The destruction of sound money, and the collateral damage that ensues, is inevitably imposed from the top down.

  At the simplest level, money is a medium of exchange. Forms of money used by different societies have changed over time, but the basic goal of money is to facilitate transactions in the market. You can trace the origins of money (and virtually every other good) back to the subjective values of individuals interacting in the marketplace. In essence, money is an unintended consequence of individuals pursuing their self-interest. Its use and purpose is defined from the bottom up, by people trading and interacting. We need money for markets to work. Remember that the Marxist conception of socialism was the complete elimination of money and exchange.

  The first thing to notice about money is that it’s different from many other elements of the market in that it permeates the whole market order. Any changes in the money supply will have an impact on the entire economy. If an imbalance between supply and demand for money arises, the effect is upon the economy as a whole. This is different from the case of a commodity, where supply and demand can be adjusted by the individuals engaged in exchange without disturbing other markets. To use an example, a shortage of steel would lead to an increase in its price, signaling consumers to reduce their use, while encouraging producers to identify additional sources of steel or cheaper substitutes. The price mechanism forces people to adjust their behavior. An imbalance between the supply and demand of money, on the other hand, has far more significant implications for the economy, with the potential for creation of depressions or hyperinflations that dramatically affect economic output.

  For Carl Menger, Ludwig von Mises, and others in the Austrian School, the value of money is determined in the same way the value of other goods is determined—subjectively. Individuals desire money because it facilitates the exchange process. Other standard characteristics of money—a unit of account, a store of value—are secondary to the importance of providing a medium of exchange. Money is valued for its ability to be exchanged for final goods. This poses a challenge for economists, because how I value money will rely on how others value money. I will value money because I know that others value it and will exchange goods and services for it. It appears that individuals value money because the group values money, but the group values money because individuals do. It’s a chicken-and-egg question with far-reaching ramifications.

  So where does money get its value? For Mises, the individual’s subjective evaluation was the source of all value for all goods, including money.

  To solve this quandary, Mises developed a “regression theorem,” drawing from Carl Menger’s insight into the origins of money.3 Menger proposed that money emerged from a barter society, an inefficient process that forced people to seek out commodities that were highly tradeable.4 In effect, money solves the problem of the double “coincidence of wants.” That is, in a barter system, I must find someone who has what I am seeking and who is also interested in obtaining my goods. But what if I can’t find such a person? It can be very inconvenient. But if there is some other thing that many people are willing to use as a medium of exchange, and if I have enough of that thing, then I will find it easier to obtain what I’m seeking. I should be able to find someone who will gladly accept that thing, in exchange for the thing I want. As a result of this indirect exchange process, eventually one commodity emerges as the dominant and most readily accepted commodity, and thus becomes a form of currency, or money, for the society. Thus, the ultimate source of value for money can be found by examining the original use value. For example, cattle were a form of money for many centuries. But cattle, though they make good wallets, unfortunately don’t fit into very many. Can you imagine buying a plane ticket with a cow? It could prove cumbersome.

  While Menger claimed that money evolved from the bartering process, Mises worked backward, looking at the value of money today, and tracing its value back to when the money was traded as a commodity. Mises observed that we only know about money based on what it was worth yesterday. So, instead of a circular flow between objective exchange value and subjective use value, we have a spiral that goes back in time. Fortunately, this spiral does not regress infinitely; the spiral stops when a stage is reached where money has a use value other than as money. Gold, for example, may be used in jewelry and industrial processes, and is exchanged as a commodity for such purposes. This exchange process is where the valu
e of money is generated.

  In his classic book, The Theory of Money and Credit, Ludwig von Mises wrote that money is the most marketable commodity.5 Many societies somehow found commodities that everyone accepted in exchange for whatever was sold. Throughout history, people have used countless commodity items as money, such as shells, beads, rice, and even alcohol. Cigarettes are still used as commodity money in U.S. prisons.6 The most popular form of commodity money has always been precious metals.

  The free market has repeatedly chosen gold and silver as money. These precious metals are seen to have value, and people easily accept gold or silver as payment. Gold and silver have been used as money for at least four thousand years.7 One of the most attractive characteristics of gold and silver is that they cannot be manufactured on demand by government. “The amount of gold in the market is limited by the profitability of mining it out of the ground,” writes economics professor Richard Ebeling of Michigan’s Northwood University. When linked to gold, “the quantity of money, therefore, is controlled by the market forces of supply and demand.” This means that governments cannot manipulate the quantity or value of money as a means of financing more government.8

  This original use value and the spontaneous emergence of money solves the so-called circularity problem—money has a value that originates historically from the point where the commodity was used for other things. Money is a spontaneous order that evolves over time arising purely from free exchange among individuals as they pursue their self-interest. No government mandates or decrees are required to create money to facilitate exchange. Money is the unintended consequence of individuals all pursuing their self-interest.9

  THE BOOM AND BUST

  LIKE ALL ECONOMISTS, AUSTRIANS AGREE THAT AN INCREASE IN THE money supply can generate an increase in the price level; however, unlike monetarists, Austrians do not believe in a strict, mechanical relation between the price level and the money supply. There is a causal relationship, but that is all we can say. This difference leads to important divergent views on inflation. For monetarists, the money supply and money demand are aggregates, so their description of inflation leads monetarists to assume that a change in the money supply leads to a uniform change in the price level, affecting all market participants equally.

  The Austrians offer a different view of the impact that changes in the money supply can have on economic decisions; this view examines the transmission mechanism for changes in the money supply. When new money enters the market, it is not introduced evenly across the board. There is an injection effect, with money entering the market at certain points and then spreading throughout the economy. Individuals close to the source of the injection will see the effects first, providing them with definite advantages. It is as if they are receiving new money for nothing. In turn, the spending patterns of these individuals will determine the next round of recipients, as the expansion pushes through the economy. These subsequent individuals may benefit from the “new” money as well, but as the process continues, prices are eventually bid up by people who believe that they are wealthier than they really are. Unfortunately, those at the bottom of this process will be paying higher prices without receiving any new money. Ultimately, everyone is paying higher prices and no one is better off, because the currency has been artificially inflated.

  In other words, when the Fed creates money out of thin air, it corrupts the primary function of money as a standard of value. It violates an implied contract across society that a dollar is worth a dollar. These distortions send bad price signals, encourage bad investments, and create bubbles. Take, for example, the artificial boom in housing prices of the past decade. Many people at points of entry, such as mortgage bankers and investment banks that bet big on mortgage-backed securities, cashed in. Many homeowners, herded into inflated mortgage contracts by Fed-expanded credit, tax incentives, government-subsidized loans through Fannie and Freddie, and mandates like the Community Reinvestment Act, were left holding the bag. The “bag,” as it were, was filled with phony government money.

  “True,” says Mises, “governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks.”10 These are all ways that the Federal Reserve injects new money into the economy. “They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late,” he predicts. The inevitable corrections are painful, leaving people poorer. More often than not, the first victims of this boom and bust are those on the lower rungs of the economic ladder. Like so many self-professed “well-meaning” public policies, the net effect of government “help” aimed at allowing the working poor to own homes leaves them worse off, stripped of their savings. But some savvy, well-connected mortgage banker, positioned at a privileged “injection point,” and armed with a long contact list of friends in high places in Washington, D.C., comes out of the crisis fat and happy. In fact, he may even receive a bonus for the misery he helped create.

  Attempts by government to inject still more money into the economy, to prop up the bad decisions created by the last cycle of easy money and to repair the real economic pain caused by the boom-bust cycle, leads to more sustained pain, inflation, and economic stagnation. To quote Rick Santelli’s famous Rant Heard ’Round the World, “Did you hear that, President Obama?” How about you, Chairman Bernanke?

  PROGRESSIVELY CENTRALIZED

  MONEY DOES NOT ORIGINATE WITH GOVERNMENT. IT ARISES NATURALLY from market forces. But power-hungry governments invariably come along and try to take control of money creation. For example, Executive Order 6102, signed by President Franklin D. Roosevelt in early 1933, made it a criminal offense for an individual to own large amounts of gold.11 With this step—monopolizing gold—the federal government effectively made itself the creator and controller of our money supply. A dollar is, in effect, a contract between you and the federal government. The government issued the contract. In the past, the government promised you an amount of gold for a piece of paper, and vice versa. Now, unfortunately, the government has breached the contract (by breaking the link to gold) and is controlling the value of money to support its own spending binges, bailouts, and manipulations of markets.

  We are required by law to use the paper dollar as money. Thus the U.S. dollar has become a “fiat currency,” meaning that it is backed by absolutely nothing but the government’s promise, potentially worth nothing more than the paper it’s printed on. Unlike gold or other currencies whose value is based on supply and demand, the U.S. dollar has value only because the government says it does. The value of that little green piece of paper is guaranteed by the “full faith and credit of the United States.” Or in other words: “Trust us.”

  History demonstrates that fiat currencies typically fail, with an average life expectancy of just twenty-seven years.12 In the words of Detlev Schlichter, author of Paper Money Collapse—The Folly of Elastic Money and the Coming Monetary Meltdown: “Complete paper money systems are always creations of the state, never the outcome of private initiative or the free market. All paper money systems in history have, after some time, experienced growing financial instabilities, economic volatility, and an accelerating decline in money’s purchasing power. All of them ultimately failed.”13

  Although FDR broke the link between the dollar and gold for U.S. citizens in 1933, the U.S. government continued to back the dollar with gold in transactions with other nations. In the midst of World War II, with the help of John Maynard Keynes, governments came together in Bretton Woods, New Hampshire, to plan for postwar currency stability through a system in which all currencies would be linked to the U.S. dollar via fixed exchange rates, and the dollar would be backed by U.S.-held gold. Central banks could come to the U.S. “gold window” and trade pieces of paper for little bits of yellow metal, just as citizens could once do.

  But the gold-based Bretton Woods system only lasted till 1971, when it utterly collapsed, never to rise a
gain. Why? Because the United States had been running a serious deficit, due to a massive surge in government spending. Uncle Sam had been using the privileged position in the global economy given him by Bretton Woods to spend like a drunken sailor in an upscale brothel. The costly Vietnam War and President Lyndon Johnson’s Great Society programs drained the gold from Fort Knox. To avert the crisis, on August 15, 1971, President Nixon defaulted. He radically changed the global monetary system by suspending the convertibility of the U.S. dollar into gold. He shut the “gold window” to the world’s banks, and thereby severed the final link tying the U.S. dollar—and the global economy—to anything more valuable than a promise. He should have made an effort to dramatically cut government spending. Instead, he opted for what turned out to be a colossal monetary error.

  Since that day four decades ago, the U.S. dollar has been a pure fiat currency. The decision to end the gold exchange standard is remembered as the “Nixon Shock,” and it still holds enormous ramifications for every single American today. Separating the link between U.S. dollars and gold eliminated important restraints on the government’s ability to manipulate the money supply. Nixon made other mistakes that cemented a different legacy in Americans’ minds. Otherwise, he’d be getting much of the blame for our current problems.

  Fiat currencies grant central bankers and politicians flexibility and discretion—a veritable blank check. This is not a good thing for the American people, because more flexibility means more power for the central authority. Unlike the gold exchange standard, there is no limit on the amount of money the government can print. As a result of the government’s abuse of this power, the dollar has lost 80 percent of its value since 1971, meaning today’s dollar is worth less than 20 cents compared to the stronger pre-Nixon dollar.14 The price of gold, which is essentially a reflection of the dollar’s weakness, has risen to all-time highs.15