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More specifically, Figure 2 shows
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In 1800-1807, the PP of the dollar
rose by 16% (i.e., from $1.00 to $1.16). This period
almost perfectly coincided with the presidency
(1801-1809) of Thomas Jefferson and his policy of “hard
money,” continuous cuts to taxation and expenditure, and
resolute reduction of the national debt.
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In 1808-1819, PP decreased by 30%
(i.e., from $1.16 to $0.81). During these years, the
U.S. fought the War of 1812 – and incurred much
inflation, taxation and government expenditure, and
added greatly to the national debt. The inflation
culminated in the Crisis of 1819.
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In 1820-1833, PP increased 88% (i.e.,
from $0.91 to $1.75). During this period, “hard money”
presidents governed; hence taxes and government
expenditures fell. Andrew Jackson, who abolished the
Second Bank of the United States (a forerunner of the
Fed) and repaid all but $38,000 of the national debt,
was most notable in this regard.
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In 1834-1837, PP fell 22% (i.e., from
$1.69 to $1.32). This period coincided with the
inflationary distortions of state-chartered banks. The
liquidation of these distortions (and many of these
banks) culminated in the Crisis of 1837.
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In 1838-1861, PP increased 43% (i.e.,
from $1.32 to $1.89). The national debt stood at $15m
when James K. Polk took office in 1845. Fortunately, he
was a hard-money and a low-tariff man; alas, and like
Jefferson and Jackson, he was also a continental
expansionist. He coveted California and Mexico’s other
northern provinces; and to obtain them he resorted to
war. The Mexican War (1846–47) increased America’s
national debt four-fold (to $65m). The next presidents,
Taylor and Tyler, were Whigs; the Whigs were
predecessors of the mercantilist Republican Party; as
such, they were indifferent to government expenditure
and debt. Under their administrations (Taylor died
shortly after taking office), debt ballooned to $80m by
1851. Fortunately, his successor was a Jeffersonian
Democrat – and therefore a staunch practitioner of free
trade, hard money and frugal government. The last of the
Jeffersonians, Franklin Pierce, retired two-thirds of
the national debt, such that it fell to $30m (an amount
less than 5% of GDP) when he left office in 1857.
Neither in absolute amount nor as a percentage of GDP
would the national debt ever again fall so low.
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In 1862-1865, PP plummeted 41% (i.e.,
from $1.89 to $1.11). These years coincide almost
perfectly with the War to Prevent Southern Independence
(1861-1865), during which the U.S. Government abandoned
the gold standard and undertook a hitherto unprecedented
program of inflation, taxation, expenditure and
borrowing.
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In 1866-1901, PP increased 83% (i.e.,
from $1.11 to $2.04). During these years, America
returned to the gold standard and Grover Cleveland, its
greatest president since Jackson (and thus staunch
defender of hard money), held office (1885-1889 and
1893-1897). Cleveland doughtily opposed inflation,
imperialism, high tariffs and subsidies to business,
farmers and veterans. He also vetoed legislation more
frequently than any president up to that time. The
Crisis of 1893 occurred between Cleveland’s two terms of
office. In 1902-1913, PP decreased 16% (i.e., from $2.04
to $1.72). During these years, called the “Progressive
Era” in the U.S., the government’s expenditure and
taxation rose, as did its regulation of the economy.
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In 1914-1920, PP plummeted 51% (i.e.,
from $1.72 to $0.85). In 1913 the Federal Reserve System
commenced operations and in 1917 the U.S. Government
intervened in the First World War. As a result, there
occurred a hitherto unprecedented (that is, bigger than
the Civil War) program of inflation, taxation,
expenditure and borrowing.
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In 1921-1932, PP increased 55% (i.e.,
from $0.85 to $1.32). The Harding and Coolidge
administrations (we will see that Harding was by far
America’s greatest president of the 20th century)
slashed taxation and expenditure and repaid a
significant portion of the national debt.
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Since 1933, PP has decreased 94%
(i.e., from $1.32 to $0.08). During these years, in
order to finance the New Deal’s endlessly rising welfare
at home and almost continuous warfare abroad, both the
U.S. Government and Fed have followed a policy of
incessant high inflation (greatly facilitated by the
abandonment of the currency’s link to gold), high and
rising taxation and exponentially growing government
expenditure and borrowing. As a result, in mid-2010
America’s national debt reached $13 trillion (“on
balance sheet”) and up to $100 trillion (“off balance
sheet”) – which means that the U.S. Government is
effectively bankrupt.(4)
America’s bankruptcy is the New Deal’s legacy; as such
(and next only to Abraham Lincoln and Woodrow Wilson) it
makes Franklin Roosevelt the worst president in U.S.
history.
The British figures show remarkably
similar trends. Between 1803 and 1815, Britain fought major
wars in Europe and North America, incurred much inflation,
taxation and government expenditure, and added greatly to
its national debt. As a result, the pound’s PP fell. It
subsequently recovered all of its losses and more: by 1822,
its PP stood 22% higher than it did in 1800. During the next
90 years – which was a time of free trade, the “hard
money” of the classical gold standard, low taxation, small
and balanced budgets and therefore of a government small
enough to fit inside the constitution – the pound’s PP
remained astonishingly stable. As in America and Australia,
so too in Britain: the First World War was a turning point
for the significantly worse. During the War, when the Bank
of England assumed its modern guise as the state’s financier
and manager of the economy rather than a mere custodian of
sound money, the PP of the pound plummeted 62% (i.e., from
£1.39 in 1914 to £0.53 in 1920). As in America and Australia,
so too in Britain: PP then rose by 60% (i.e., to £0.85) in
1936. Finally, in Britain as well as Oz and the U.S., the
Great Depression provided a seemingly permanent turn for the
dramatically worse: since 1936 the pound’s PP’s has
virtually disappeared – to £0.02 (just one fiftieth of its
PP in 1800!) in 2010.
There’s a pattern here, which subsequent chapters will
corroborate. So – ironically – does research conducted under
the Fed’s imprimatur! A study by two economists at the
Federal Reserve Bank of Minneapolis concluded that
“commodity money” standards (namely a classical gold
standard, which subsequent chapters will define and describe)
consistently outperform “fiat” standards. Analysing data
over many decades and from a large number of countries,
Arthur Rolnick and Warren Weber found that “every country in
our sample experienced a higher rate of inflation in the
period during which it was operating under a fiat standard
than in the period during which it was operating under a
commodity [i.e., gold] standard.”(5)
Other members of the establishment are more forthright.
According to Benn Steil and Manuel Hinds of the Council of
Foreign Relations, “the imposition of national [fiat] monies
remains one of the most potent tools available to
governments to extract wealth from their populations and to
exercise political control over them.”(6)
Mainstream economists have long recognised – and some have
overtly celebrated – this brute fact. In The Economic
Consequences of the Peace (Harcourt, Brace & Howe, 1919,
p. 236), for example, John Maynard Keynes gloated
there is no subtler, no surer means of
overturning the existing basis of society than to
debauch the currency. The process engages all the hidden
forces of economic law on the side of destruction, and
does it in a manner which not one man in a million is
able to diagnose.
More specifically, we will see that
welfare and warfare – and the vast amounts of inflation
required to finance them – inevitably weaken and eventually
destroy the currency’s purchasing power. The inflation that
necessarily underpins what we will call the welfare-warfare
state enriches the privileged few; it also foments the
financial crisis on Wall Street that becomes the economic
crisis on Main Street. Conversely, soundly-based money, low
and falling government expenditure, as well as the
reductions of taxation and inflation, augment the currency’s
purchasing power – and also encourage peace at home and
abroad, soundly-based growth and prosperity.
Today, the Australian and American dollars, British pound,
etc., buy vastly fewer goods and services than they once did;
at the same time, wages in these and most other Western
countries have risen – but at a relatively sluggish pace
since the 1970s. The result is that – subject to a
critical caveat – standards of living rose at a rather
robust pace in the three decades after the Second World War,
but at a significantly slower pace since the 1970s. What’s
the caveat? In recent times families have been obliged to
take drastic action to protect their standards of living.
During the 19th century, women (whether single or married)
undertook paid work because economic necessity obliged them
to do so. By the 1950s, however, relatively few married
women worked outside the home. Prosperity had advanced to a
point where a single income often sufficed to provide a
family with a middle class standard of living. That reality
didn’t last long. The campaign waged since the 1970s to
convince women that they are economically equal to men – and
have, therefore, every right to join their husbands in the
workplace, thereby creating a society in which, by the
1980s, most middle-class homes earned two paycheques – has
served as a cover with which to mask the eroding standard of
living over the last 50 years. Today’s middle-class
Americans, Australians, Britons, etc., live much better than
their parents or grandparents did because they enjoy the
benefits of myriad and momentous technological advances
and because both partners must work. Most families could
not service the mortgage, periodically buy a new car and
regularly take holidays, etc., on one income. In the 1950s,
membership of the middle class often required only one
salary; today, it usually requires two.
Why hasn’t this de facto erosion of living standards
angered people? They’ve maintained a material standard of
living that exceeds their forebears’ because technological
advances, a more advanced division of labour and a vastly
heavier load of debt play such important roles in their
lives. They know something that academics and politicians
apparently don’t: the re-entry of women into the paid
workforce is usually not some advanced and noble achievement
of equality; as it was before the 1950s, it’s once again a
brute economic necessity. It’s an essential feature of
modern society because it’s an inevitable consequence of the
central bank’s gradual destruction of the dollar’s
purchasing power. The middle class, in short, has been
fleeced. Many of its members know it, but don’t quite know
how. If a woman wishes to work outside the home, bless her
and more power to her (see in particular Proverbs 31:
11-25), but let’s not pretend that it’s a moral breakthrough.
And let’s reject outright the nonsense that it’s a
consequence of allegedly enlightened attitudes and a benefit
of the modern welfare state. Instead, let’s identify it for
what it is: a consequence of misguided monetary institutions
and poor monetary policies.
In this book we will reason to the conclusion that there’s
only one sensible thing to do with central banks such as the
Reserve Bank of Australia: abolish them and consign them to
the dustbin of history. The mainstream will shriek in horror
at this “radical” conclusion. The real question (which, of
course, they refuse to ask) is: why not rid ourselves
of an institution that has almost completely destroyed the
currency’s purchasing power and has exacerbated the cycle of
boom and bust – particularly when free market arrangements
have shown that money need not lose its purchasing power,
and that they can actually increase it significantly over
long stretches of time?
We’re Radical, But They’re Extremist – and Their Banks
Are Rotten to the Core
“A central bank … must grow like a living organism within
the environment provided by the financial and economic
system in which it exists; its practices and structure must
evolve in response to the needs and demands of that system.”
So wrote H. C. “Nugget” Coombs, the first Governor of the
RBA, in 1951.(7)
I don’t think he appreciated either the significance or the
true meaning of those words. This is because “a central bank,”
as Vera C. Smith wrote in her classic The Rationale of
Central Banking and the Free Banking Alternative (1936),
“is not a natural product of banking development. It is
imposed from outside or comes into being as the result of
Government favours. This factor is responsible for marked
effects on the whole currency and credit structure which
brings it into sharp contrast with what would happen under a
system of free banking from which Government protection was
absent.” In light of Smith’s insight, Coombs unintentionally
affirmed one of this book’s principal findings – namely that
central banks exist not in order to cater the needs of the
general population, but rather to serve (i.e., finance) the
state that creates them. As a result, and as we shall see, a
small number of “insiders” gains handsomely and the mass of
“outsiders” loses heavily.
We will also demonstrate from first principles and in simple
language that
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For centuries, fractional reserve
banks – which we’ll define and describe in detail, and
which comprise virtually all contemporary banks – have
misappropriated depositors’ funds and counterfeited
money. Contemporary monetary institutions, practices and
policies, in other words, are built upon a foundation of
“legalised” fraud.
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For this reason, and also as a
consequence of their inherent illiquidity, fractional
reserve banks are at all times, and not just during
financial and economic crises, bankrupt. Without the
constant and active intervention of the state in general
and its central bank in particular, their bankruptcy
would be plain for all to see.
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Central banks don’t fight
inflation: they manufacture and maintain it.
These days, only the actions of commercial and central
banks can create inflation. The legislation and
regulations that underlie the banking system inflate the
boom that inevitably busts.
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The state has embedded its protections
of commercial banks so deeply within legislation and
regulations – in other words, it has extended such
enormous privileges to banks for such a long time – that
virtually nobody now recognises bankers for what they
have always been: massively featherbedded white-collar
wharfies.
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When examined in the light of
Christian theology (particularly of St Augustine of
Hippo, St Thomas Aquinas, Bishop Nicolas Oresme and
Popes Pius XI and John Paul II), central and fractional
reserve banking is certainly deeply immoral and likely
anti-Christian.
This book’s premises and conclusions are
radical in the proper sense of the term – they dig to
the roots and sources of the monetary sickness that pervades
Western societies. We will start from first principles and
justify our logic and evidence every step of the way. But
our approach and results are emphatically not extremist:
by highlighting current arrangements’ pervasive violations
of traditional legal principles and rights to private
property, we will see that today’s defenders of the
status quo are the real extremists. (...)
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