There is nothing new to be discovered about the operation of paper money. There is no new invention possible for making it "as good as gold," no new device conceivable for making it elastic, no difficulty connected with it which has not been experienced, no phenomenon of its development for which we have not abundant analogies...Each new issue will produce, only for a time, ease and apparent prosperity , to be followed in a few years by a new crisis and new distress, then a new issue, and so on over again. Reform will then be no longer possible, and we must run the course to its end, in which the paper disappears as ignominiously as the continental notes.
-William Graham Sumner, A History of American Currency, 1873
This bill came out of the hands of the Administration ostensibly for the purpose of correcting the diseased state of our paper currency, by restraining and curtailing the over issue of banking paper; and yet it came prepared to inflict upon us the same evil; being itself nothing more than simply a paper-making machine....The disease, it is said, under which the people labor, is the banking fever the States; and this is to be cured by giving them the banking fever of the United States.
-Senator William H. Wells, Annals of Congress, 1816. as quoted in The Mystery of Banking by Murray N. Rothbard
“The trifling economy of paper, as a cheaper medium, or its convenience for transmission, weighs nothing in opposition to the advantages of the precious metals… it is liable to be abused, has been, is, and forever will be abused, in every country in which it is permitted.”
-Thomas Jefferson, Letter to John W. Eppes, 1813
Amidst the justifiable media hysteria and the predictably impetuous actions of ignorant politicians you might be tempted to believe the current financial crisis is in some way unprecedented. You would be wrong. As the above quotes indicate, the current "crisis" is wholly precedented.
I must admit that I had bought into the notion that the curse of paper money is a relatively new phenomena at least as opposed to the relative stability of some form of 19th century gold standard. What I have discovered in just a brief review of the history of money and banking in the United States is that this country has been plagued by paper money since its inception (and even before in the colonial period), although, it is certainly much worse now than it was. (In fact, I believe the extent of government intervention in banking and the debasement of the currency is in direct proportion to the intellectual demise of Western civilization. This implies that the intellectual demise began earlier than I even thought.)
I will not attempt to even sketch the history here although I am happy to list some references for anyone that is interested. Suffice to say that all of the financial "panics" and "crises" of the 19th century which bear remarkable similarity to our modern crises were the result of temporary departures from gold. The main point I want to make in this post is philosophical more than economic. In fact, the point is that the economics of paper money, inflation, and the boom bust cycle have been understood for two hundred years and certainly well understood for over one hundred years. More fundamentally, the idea that wealth can not be artificially obtained, i.e, that value can not be created without effort is certainly a concept that has been understood at least since the principle of conservation of energy was discovered in the 19th century. Perhaps not surprisingly, before this principle was understood at least on a scientific basis, alchemy was widely practiced throughout the civilized world. One of the Holy Grail's of alchemy was the so-called philosopher stone:
The philosopher's stone is a legendary substance, supposedly capable of turning inexpensive metals into gold; it was also sometimes believed to be an elixir of life, useful for rejuvenation and possibly for achieving immortality. For a long time, it was the most sought-after goal in Western alchemy. In the view of spiritual alchemy, making the philosopher's stone would bring enlightenment upon the maker and conclude the Great Work.
Seriously, what is the difference in principle between belief in a "philosopher stone" and the belief that fiat money, i.e., money not redeemable in precious metals or anything other than itself which can be created virtually out of thin air, has value above its worth in paper? This belief is utterly absurd and is equivalent philosophically to the belief that lead can be turned to gold or that one can turn water into wine or a river into milk, etc. Yet, this belief is the basis for the entire modern banking system!!
Here, yet again, we see a principle to which I have referred frequently in this blog. I'm referring to Ayn Rand's principle that all evil at root is caused by attempts to violate the law of identity or to cheat reality. For example, in a previous post, Wishing for Non-A, I used this principle to explain that the desire for socialized medicine or "universal health care" is at root simply a wish that medicine were free, i.e, that doctors do not require payment for their service and that drug companies can magically continue to find life saving cures.
In the present context, the principle is even more obvious. Wealth must be produced. Prosperity is the result of productivity. In other words, people actually have to do work to make hamburgers, i-pods, automobiles, artificial hearts, air conditioners, and the like. As people become more productive, i.e, able to make more things with less effort, the value of an hour of work increases, i.e., you can buy more stuff with your labor. Productivity is what creates real wealth and increases real wages. Capital investment through savings is what fuels ingenuity and productivity.
Printing paper with fancy ink and stamping a 10 or 20 on it does not create these things nor does it make anyone more productive. However, the process of creating fake money destroys capital in myriad ways and creates the boom bust cycle as has been well documented on this site. Is it surprising that an attempt at faking reality has destructive consequences? Does lying, cheating, and stealing have destructive consequences?
The Federal Reserve system is a legalized counterfeiting operation. Such a system enables the federal government to spend without limit and to pass the tab on in the form of price increases and the reduction of real wages. This system allows the government and the American people to temporarily indulge in the illusion that they can have their cake and eat it too. Do you want Social Security and Medicare? Sure we can pay for it and lower your taxes. Do you want a Space Shuttle? Sure, we can pay for it, lower your taxes, and not increase interest rates. Do you want to spread democracy in the Middle East? Sure, we can pay for it, lower your taxes, not increase interest rates, and retain the value of the dollar. How about foreign aid to Africa, education, national parks, highways, libraries, Bill Clinton's limousine, Al Gore's private jet, arts funding, midnight basketball, museums, subsidies to farmers, college loans, housing subsidies, public radio and TV, aid to hurricane victims, aid to victims of victims, aid to victims of farmer's college loans, etc. etc. SURE, in the short run we can afford it. Well, we are now all living through the long run.
And what is the response of the American people to this extravagant fraud? If you stop spending I will be mad since we must help the farmers and the students and the Africans. But, if you raise my taxes to pay for this I will be mad. And if you have to borrow it that is fine, but don't allow interest rates to increase or I will be mad. And if you have to print the money that's fine, but if the price of gas, milk, food, cars, houses, stamps, art, sport's tickets, and evening gowns all go up then I will be mad. Intellectually bankrupt academics provide ivory tower justifications for this nonsense and power lusting politicians gleefully enable the fantasy.
The issue of whether we should abolish the Federal Reserve system and return to a gold standard is not an arcane economics debate over the best way to "allocate scarce resources" as some modern economics textbook might have you believe. It is an issue of reality vs. fantasy, civilization vs. chaos, or life vs. death. Fundamentally, capitalism is a system of justice, i.e., a system in which each person is rewarded to the extent of their productivity. Money is simply a medium of exchange that must be something real. To be forced to exchange anything of value for a piece of paper (backed only by the government's ability to expropriate money from taxpayers in the future) is a monumental injustice and an evasion of reality that would make die-hard believers in the philosopher stone blush. Here is a simple explanation by someone who clearly understood the issue:
Today, people are beginning to understand that the government’s account is overdrawn, that a piece of paper is not the equivalent of a gold coin, or an automobile, or a loaf of bread—and that if you attempt to falsify monetary values, you do not achieve abundance, you merely debase the currency and go bankrupt.