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Corruption Incarnate: Fiat Money

I met R.J. Rushdoony at a 1962 summer conference sponsored by the Intercollegiate Society of Individualists (I.S.I.), which is now called the Intercollegiate Studies Institute.

  • Gary North,
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I met R.J. Rushdoony at a 1962 summer conference sponsored by the Intercollegiate Society of Individualists (I.S.I.), which is now called the Intercollegiate Studies Institute. I had previously corresponded with him about his use of Ludwig von Mises’ book, Human Action. In 1960 I had decided to explore the relationship between what the Bible says about economics, and then compare it to what Mises said.

At that two-week conference, Professor Hans Sennholz of Grove City College spoke daily on economics for one week. In his speech, he talked about Gresham’s Law: “Bad money drives good money out of circulation.” He said that he was collecting silver dollars in preparation for a silver coin shortage. He said that the price of silver would soon make a silver dollar’s silver worth more than the face value of the coin. They would then rapidly go out of circulation.

I took that prediction to heart. The following June, the week of my graduation from college, President Johnson signed into law a bill that ended the convertibility of silver certificates into a fixed quantity of silver. I knew that this was an indication that Sennholz’s prediction was about to come true.

A few weeks later, I moved to Palo Alto, where I had been hired as a summer intern by the Center for American Studies. Rev. Rushdoony worked for this libertarian “think tank,” back before research institutes were called think tanks. He succeeded in persuading the Center to hire me. I was paid $500 a month, which was the equivalent of $3,000 a month today, but with lower Social Security taxes. It was a lot of money for a new college graduate. I was paid to read books — the best job I ever had or have had since then. I read a lot of books: Mises, Hayek, Röpke, Rothbard, Van Til.

Rev. Rushdoony invited me to live for free at his home. All I had to do was rake weeds on Saturdays. It was a great deal. I was able to save every dime. Literally. I took my paycheck to the bank each month and bought silver dimes. By the end of the summer, I had over $1,000 in dimes.

I sold the coins to my parents. I took the money and went off to Westminster Theological Seminary in Philadelphia. There, I read about a problem on the regional turnpikes. Silver coins were beginning to disappear. Every Sunday evening, turnpike agents went to churches and bought all the silver coins that had been collected that day.

In 1964, the clad coins were introduced: copper with silver laminates. That year, it was the clad Kennedy 50-cent piece, which was 40% silver. In 1965, it was across the boards: no silver in any coins.

Gresham’s Law had held true, as it always does: “When a civil government enforces the exchange ratio (price) between two currencies, the artificially overvalued currency drives out of circulation the artificially undervalued currency.” Gresham’s Law is a specific application of the economic law governing price controls. Monetary inflation had driven silver coins out of circulation.

Three Forms of Inflation

In the ancient world, profit-seeking individuals or the civil government inflated the currency by adding cheaper base metals to gold or silver. The prophet Isaiah warned: “Thy silver is become dross, thy wine mixed with water” (Isa. 1:22).

Here is the heart of the matter: the desire to get something valuable for something base. The seller of goods or services believes that he is obtaining something of value (silver), when he is actually obtaining something less valuable (copper). This fraud is accomplished through deception.

Isaiah used the metaphor of a debased precious metal to convey a spiritual truth: the rulers of the nation were corrupt.

Thy princes are rebellious, and companions of thieves: every one loveth gifts, and followeth after rewards: they judge not the fatherless, neither doth the cause of the widow come unto them. (Isa. 1:23)

There is a more efficient, less costly, way to inflate. After the introduction of printing in China, sometime around the year 1000, the use of paper currency by the wealthy classes increased. The money supply seems to have remained stable until the era of the Mongols, in the late 1200s. Under them, monetary inflation became government policy. From 1260 to 1309, the paper currency depreciated almost to zero.[1]

The third form of inflation is the modern version. Money is issued by fractional reserve banks. A fractional reserve bank is a bank that lends out money that has been placed on deposit by savers, yet also offers the depositor the right to get his money back at any time. Of course, this promise cannot be kept during a bank run, when too many depositors demand the return of their money. To reduce the likelihood of bank runs, governments set up central banks, usually privately owned, which can legally create money that in turn can be loaned to commercial banks that are facing a bank run. This reduces the public’s panic.

The central bank is granted a government-established legal monopoly of original credit creation. It then buys the government’s debt, creating the money out of nothing to make the purchase. When spent by whoever gets paid by the government, this newly created money multiplies as it moves through the economy. With a 10% reserve ratio of monetary reserves to bank deposits, for each $100 in debt purchased by the central bank, a total of $900 in commercial bank credit comes into existence. This process is called the monetization of debt. The central bank can legally monetize any asset, but gold and government debt are the main currency reserves.

Why Civil Governments Inflate

There is a universal reason why civil governments inflate: politicians want to spend more money than the state takes in by taxing or borrowing from the general public. So, they debase the currency.

This is a policy of deception: a variation of silver into dross. The public cannot perceive any difference between money created a year ago and money created today. It all looks the same. The public nevertheless trusts the government to protect the public’s interest. This is naive. Politicians protect their own interests. So do central bankers. In our day, an economic philosophy supporting monetary inflation is almost universal. With the exception of the Austrian School of economics (Mises, Rothbard), all economists favor the expansion of the money supply: Keynesians, monetarists (Chicago School), supply-side, rational expectations school, and public choice theory economists. A little monetary inflation, we are told, “lubricates” the economy. Furthermore, only the Austrian School favors a completely private banking system, completely private coinage, and no legal tender laws, i.e., compulsory currency acceptance.

Economists do not trust the free market in this area of economic life. They may accept free market theory for almost every other area of the economy, but not money and banking. They are convinced that voluntary contracts and exchange are insufficient to provide a predictable, reliable, and efficient monetary system. They argue that politicians are less reliable than profit-seeking monopolists — central bankers and commercial bankers — but even politicians are said to be more reliable than the free market. Yet they rarely explain the logic of their position. They just assure their audience that central banks are for the public good, and then they go on to explain how the bank deposit system works.

The lone exception was Murray Rothbard (1926–1995). He showed how the fractional reserve banking system works. Then he called the system immoral: a form of theft. No other academic economist I am aware of has ever said this in print. Rothbard wrote a textbook on money and banking, but it had to be published by an obscure book publishing company that soon went out of business. Fortunately, the book is available for free online: The Mystery of Banking (1983). I wrote the Foreword for the online edition. (See

Politicians want a guaranteed market for the government’s debt. A central bank is the lender of last resort. Governments can put pressure on central bankers to enter the market and buy the government’s debt at rates below what the free market would demand from the government.

The central bank creates money “out of thin air” to buy this debt. The government spends it into circulation. Then the recipients deposit this newly created money in their banks. Then they spend it: checks, debit card, and online payment. But so do the people who borrow money from these banks. It’s two for one! That is to say, it is the fractional reserve banking system. The money multiplies through the banking system as each recipient deposits his money. Only if the individual withdraws actual paper currency or coins does the money multiplication process cease.

Prices rise in response to the newly created money.

Why Inflation Is Immoral

Consider counterfeiting. Why is it immoral? Because someone sells a base asset that is disguised as a valuable asset. The counterfeiter usually prints up paper currency, but he could also issue phony gold coins. He is attempting to buy something for nothing.

So what? Who is hurt? All those people who now face slightly higher prices because of the effects of the newly created counterfeit money. If everyone were to counterfeit money, the economy would go hyper-inflationary. So, the government makes this illegal. It closes entry into this briefly lucrative industry.

The government then grants a legal monopoly to a special interest industry, fractional reserve banking: the right to do what counterfeiters are not allowed to do. What is universally admitted to be damaging to the public interest when done privately and with open entry is said to be the essence of rational modern monetary policy when done privately but with restricted entry: a very special, special-interest group.

Many years ago, I included a cartoon in my book on price controls. It is a drawing of a counterfeiter. On the wall, there is a chart. The downward-sloping chart is labeled “value of money.” The upward-sloping chart is labeled “price of paper.” The upward-sloping chart has just intersected the downward-sloping chart. The counterfeiter yells, “Stop the presses!”

Today, there is not much paper and ink used in the creation of fiat money. Digits are much cheaper. The presses never get stopped.

When the newly created money is spent, the spender buys at prices that are based on yesterday’s money supply. But today’s money supply is larger. The person is able to buy at yesterday’s lower prices, but as the new money comes into competition with the existing money supply, prices rise. That is to say, the monetary unit declines in value. It has to. There is greater supply facing the same demand. Whenever you have a rising supply and flat demand, the sale price of the supplied item falls. Otherwise, the market will not clear. There will be an excess supply waiting to be bought.

Those who get early access to the newly created money are winners. Those who are latecomers are losers. Prices have risen. They could have bought the items cheaper, earlier. There is a re-distribution of wealth to early spenders from late spenders.

Those citizens who trust the government to protect them tend to hold on to the depreciating money. Those citizens who refuse to trust the government tend to spend the newly created money before it depreciates. In short, nice guys finish last. Why? Because of government monetary policy and fractional reserve banking.

The Federal Reserve System

There is very little criticism of the Fed. The books that are critical are only rarely written by trained economists. Most of the critical books are critical of the Fed for not having inflated the dollar, 1930–32. This was Milton Friedman’s argument in his co-authored book, A Monetary History of the United States (1963). Friedman’s book made his reputation within the economics profession. It was this book that was the basis of his Nobel Prize in economics.

In that same year, 1963, Murray Rothbard’s book appeared, America’s Great Depression. He argued that the Great Depression took place because of inflationary monetary policies by the Bank of England and the Federal Reserve, 1926–29. His book was ignored by the entire economics profession. Only in 1983, when Paul Johnson relied on it to explain the Depression in his bestselling history book, Modern Times, did Rothbard’s book even have marginal influence in the academic world.

The standard history textbooks do not tell the story of the origin of the Fed. Readers are not told that plans for the Fed were made by a small group of men, who knew each other but who used only their first names, just in case they were ever asked to testify in court about their scheme. They rode on a train in late 1910 that left a New Jersey train station late at night to take them to Georgia, where they took a boat to Jekyll Island, the private island owned by some of America’s richest men: J.P. Morgan, William Rockefeller, and others. There they met for a week.

The Fed was the brainchild of senior officers of two American banking empires, the Rockefellers’ Chase Manhattan Bank and Morgan’s First National Bank. While rivals, they agreed that there had to be a backup source of emergency money in case there was another bank panic comparable to the panic of 1907.

The central bank legislation was introduced in 1911 by Nelson Aldrich, the Republican Senator from Connecticut. He was correctly perceived as a Rockefeller agent, which was no surprise; he had been a Rockefeller agent for years. His daughter was married to John D. Rockefeller, Jr., and his grandson was named Nelson Aldrich Rockefeller. The legislation did not gain sufficient support in Congress. So, the plan was put on hold until the Wilson Administration took over in 1913. It was then given a new name and passed as the Democrats’ legislation. The best account of this arrangement and its background is found in Part 2 of Rothbard’s book, A History of Money and Banking in the United States (2002).

The official goal of the Federal Reserve System is to preserve a stable currency. If you go to the website of the Bureau of Labor Statistics (, you will find a link labeled Inflation Calculator. Click it. You can then discover how much money it would take today to equal the purchasing power of the same amount of money in any previous year. The first year available, appropriately, is 1913. If you enter 1000 in the box for 1913 and click the Calculate button, you will get a figure close to 20,000. This means that the U.S. dollar has depreciated by about 95% since 1913. But that’s not all! This is after-tax money. You would have to earn a lot more pre-income tax money today than you would have had to earn in 1913.

The first year of the income tax was 1913. The top rate was 7% on incomes over $500,000. Taxes began at 1% on incomes over $3,000 ($60,000 in today’s money). If you made less than $3,000, you owed nothing. The original Form 1040 for 1913 should be viewed by every American taxpayer at least once in a lifetime.[2]

Rushdoony used to say that America’s golden age began after indoor plumbing and ended with the income tax. I would be willing to extend it all the way to 1917, when the United States entered World War I and income tax rates skyrocketed, along with prices.

Larceny in Many Hearts

People think of themselves as debtors. Debtors are always looking for an easy way to pay off their debts. Depreciated money is a politically acceptable way to do this.

The practical problem with this strategy is that most people are creditors. They do not think of themselves as creditors. Worse, they are long-term creditors. They buy life insurance policies with a savings component rather than term life insurance, which is pure death insurance. Others also have pension plans. They have savings accounts. All of these are threatened by rising prices that are the product of monetary inflation. But because so few people are future-oriented, they do not think clearly about what will happen to them in their old age. They do not fear inflation.

The problem is larceny in people’s hearts. They think a little price inflation is convenient when it comes time to write checks to creditors. But someday creditors will write checks to them. Then what will people do?

The Gold Standard

From 1815, at the end of the Napoleonic wars in Europe, until 1914, at the beginning of World War I, European and American governments operated in terms of a gold standard. Only from 1861–65 did the United States go off the gold standard. (The Confederacy never was on it.) The gold standard required governments to redeem their currency with gold at a fixed rate of exchange. Reliable banks also had to redeem gold accounts on demand. This put a barrier on the expansion of credit money: the threat of a run, i.e., gold redemption.

This ended within days of the outbreak of World War I. Commercial banks refused to redeem their obligations. So did governments. Then governments allowed their central banks to demand payment in gold from the commercial banks. In one gigantic vacuum cleaning operation, almost all of Europeans’ gold wound up in the vaults of the central banks, where it has remained. This was theft on a scale inconceivable prior to August 1914. In 1933, President Roosevelt confiscated all gold from Americans. That was the end of monetary freedom in the West.

A gold standard is no more reliable than the government’s willingness to enforce contracts. As that willingness has declined, so have the prospects of a gold standard. Except for gold coins in an economy that uses gold coins as money, there is no gold standard. There is only a paper standard that promises to redeem gold on demand.

Rushdoony warned men not to trust in legal documents in an age of larceny and statism. He had in mind the U.S. Constitution. The warning applies equally well to the gold standard.


A free market creates money. A free market monetary system is more reliable than a government-run monetary system. If the government will enforce a law against fractional reserve banking as part of its anti-fraud statutes, nothing more is needed.

Governments have always asserted sovereignty over money. There is nothing Biblically to indicate that this is mandated by God. There is nothing in logic that identifies money as a mark of civil sovereignty. But governments cannot resist a little larceny: a way to spend more money than it takes in from taxes. And so our silver became dross, our wine mixed with water. Then it was removed altogether: all dross, no silver. Thus, we can be sure:

Our princes are rebellious, and companions of thieves: every one loveth gifts, and followeth after rewards: they judge not the fatherless, neither doth the cause of the widow come unto them. (Isa. 1:23)

  • Gary North

Dr. Gary North (1942-2022), served as the editor of the Journal of Christian Reconstruction from 1974-81. He is the noted author of scores of articles and over thirty books on economics and history. He served as editor for and The Tea Party Economist and was the Director of Curriculum Development for the Ron Paul Curriculum.

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