In recent issues of the Chalcedon Report we have been investigating America's central bank, the Federal Reserve Bank and America's (first) and (second) Banks of the United States.
Our objective in this issue is to further evaluate Federal Reserve activities, ask some very pertinent questions, and then to give some clear-cut answers. Our first concern is, has the Federal Reserve Bank been helpful or detrimental to the economic prosperity and freedom of the American people? Note that the Constitution of the United States gives Congress no legitimate power to charter a central bank. Second, is it possible, and would it be beneficial, to do away with the Federal Reserve? And third, is it practical to reinstate a bonafide gold-coin standard? How could this be accomplished, and would doing so benefit the ordinary working man?
The FRB — Helpful or Hurtful?
There is little doubt, when we view the overall picture, that freedom-loving people will judge the influence of the Federal Reserve to have been detrimental to both the economic and political welfare of the American people.
As I mentioned in the first article of this series, three revolutionary political actions (the 16th and 17th amendments, and the Federal Reserve Act) practically guaranteed the future growth of a monolithic political bureaucracy in Washington, D.C., and the eventual undermining of the American Republic — in short, the growth of political tyranny. During the first decade of the 1900s the average American went about his personal and economic life almost blissfully unaware of the existence of the Federal Government, and that is the way our founding fathers planned it to be. But, today we are painfully aware of oppressive taxation, massive federal deficit spending, and unending streams of federal edicts, rules, and regulations that constantly emanate from the 80-plus federal agencies, from the White House, and/or from the U.S. Supreme Court. This is not how our founding fathers planned our Republic to function. It stifles individual freedom and initiative!
The Federal Reserve began operating in 1914, just in time to be used as a money-creating machine to involve our country in an European war in which we had no legitimate interest. Our involvement started by the selling of war materials for cash to the European combatants (but mostly to the Allies because Great Britain dominated the seas). When the Allies' funds gave out, American industries and their unionized workers exerted political pressure on Congress to pass a bill allowing credit sales, which the Federal Reserve assisted through its credit-creating ability. Behind-the-scenes forces then colluded to draw America into World War I.1
Ever since WWI, the Federal Reserve has served as an open-ended money-creating machine to help finance America's involvement in every subsequent foreign war, military action, and internal meddling in other countries' domestic affairs. Now we have the recent move of the current presidential administration again to attack Iraq, and the Federal Reserve has helped through its ability to monetize debt (Ed., to print more money), to help finance more than 50 years of so-called "foreign and military aid" payments and subsidies to foreign countries. This foreign aid amounts to multi-billion dollars every year, and these dollars — which are wrested from American citizens through a combination of tax levies and fiat-created dollars supplied by the Federal Reserve — are used as bait to induce foreign political tyrants to follow policies that meet the approval of whatever political clique happens to be in control of the White House and Congress.
The Fed has also come to serve as an international lender of last resort, at American taxpayers' expense, to foreign countries whose poor management of finances and economic policy leads them to call for help, such as Mexico, Brazil, Venezuela, Russia, Thailand, Malaysia, and Japan. A recent report states that the Federal Reserve (with its fiat money-creating ability) has purchased (i.e., monetized) over the last twelve months almost $70 billion of our national debt. Thus, with the Fed's help, the federal government in one year has added almost $460 billion to total federal debt, which now stands at $6.4 trillion!2
Wherever American dollars are so lavishly spread through foreign aid and Federal Reserve bailouts, American troops and military bases soon follow. The United States of America now has a military presence in 140 countries: we have major foreign bases in 36 countries, 260,000 military personnel permanently stationed overseas, and another 50,000 afloat with major U.S. carrier groups. In total, we have more than 800 large and small military bases overseas.3
The record of history shows where we are headed. When the ancient Roman republic deviated from the republican principles that made it a great nation, at first it expanded as a world-wide power, but then degenerated into a corrupt imperialist nation that exerted tyrannical hegemony over much of the then-known world. England also deviated from its founding republican principles, and likewise degenerated into a corrupt world-wide imperial power; it became "Great Britain." Our American Republic is now following the same route toward degenerate imperialism that Rome and England took. The common denominator for all three nations is the disenfranchisement of the common man through unlimited taxing power coupled with the ability of rulers to impose fiat money on citizens. In the case of England and the United States, the imposition of fiat money was facilitated by the money-creating ability of their central banks.
This emphasizes how the very existence of the Federal Reserve has been used to get our country involved not only in costly foreign wars, but also in the internal affairs of the majority of countries in the world. The very existence of a central bank lets political and financial leaders draw citizens into what seems to be an easy way of financing wars and foreign intrigues through readily supplied credit, rather than facing the painful need to immediately raise taxes. This is exactly how the Federal Reserve Bank has been used by political and financial leaders in America. In short, the Federal Reserve has served as a tool to help transform America from the independent, free-trade Republic envisioned by George Washington and our other founding fathers into what it is now — an international military and financial empire which many knowledgeable people (indeed, even former President George H. W. Bush) now refer to as the "New World Order."
American imperialism has produced a dire financial situation of which most Americans are not aware — inflationary bubbles. The speculative inflationary bubble created by the Federal Reserve during the 1990s caused our domestic stock market boom, just as did the speculative bubble it created in the late 1920s, and with the same delayed deflationary result. Many Americans who temporarily felt enriched while the stock market soared are now feeling the pain of plummeting stock prices. But this time, Americans are not alone. Many foreigners also hold U.S. government bonds and securities of American companies. As security prices and bonds fall because of the weakening dollar in the international market, foreign holders of these bonds and equities will be strongly motivated to sell their U.S. holdings and invest their funds in bonds and equities denominated in foreign currencies which are rising relative to the dollar. Or they will invest in gold.
As I write, the Euro, which is partially backed by gold, is now strengthening relative to the dollar. The Swiss Franc is also strengthening; and over the last year, gold has risen from $256 an ounce to over $350. People who worry about the declining value of the dollar — as the Fed turns to new waves of monetary creation in a vain attempt to stave off the inescapable deflationary pressures that always follow inflationary central bank polices — will increasingly turn to "safe havens" denominated in stronger foreign currencies or gold.
The resulting free-market changes in relative prices is what causes central bankers all over the world to fear and detest the discipline that a gold-based money system imposes on them. This explains why governments all over the world impose fiat money on their citizens so they will not have the legal right to exchange government-issued money for gold.
But some governments are beginning to change policies. For instance, China, which has a fiat currency, has recently allowed Chinese citizens to purchase gold in the free market. And some Arab nations are now in the process of instituting a gold-based monetary unit, the Dinar, which is to be used in settling international payments among Arab nations. Who knows? These changes could bring pressure on the United States to return to a gold-based dollar! This would be good news because — as I have long taught my students — "Power is where the gold is." If the civil rulers have a monopoly on gold (as existed in these United States of America from 1933 [FDR] until 1973), then power rests in the hands of civil rulers. But when gold is widely held by the people, then power rests in the hands of the public, and they are then able to limit the power wielded by civil rulers.
But one thing is still missing in our country. American citizens still do not have the power to overrule the grandiose spending plans of rulers based on fiat money; that is, they still do not have the legal right to "cash out" of their total dollar holdings whenever they wish. The only thing they can do is to buy something from someone else who is still willing to hold the fiat dollars created by the Federal Reserve. This requires no discipline of civil rulers. What is still needed, then, is to denominate the dollar legally in gold and thereby restore to American citizens the crucially important right to force the Treasury and the banks to cough up gold in exchange for Federal Reserve Notes upon demand. This would allow citizens to stop using play money and escape to the safe haven of gold. Remember the maxim, "Power is where the gold is!" And then ask yourself, Is it better for such power to rest in the hands of widely dispersed citizens all over the country? Or is it better to continue as we do today, where the official ownership of gold rests in the hands of the central government? And, before you answer, remember that the Federal Reserve Bank has, during 90 years of operation, never been audited!
Somehow American citizens must be rescued from the open-ended taxing and spending powers that our political rulers are able to wield against us, thus undermining our God-given freedom and self-responsibility. What better way to do this than by returning to first principles of limited government as expressed in the Articles of Confederation? Let us impose a firm limit on taxation that will keep voracious government bureaucracies lean and hungry, the way protective watchdogs should be. Why not renew the very workable system of requisitions that Patrick Henry so loved about the Articles of Confederation? That is, let us once again set up the States as a protective barrier between the people and the central government!
Then, let us also eliminate the Federal Reserve and return to a sound money system. In short, let us return to a gold-coin monetary system and to a banking system that is not based on fractional reserves. Basically, we need a banking system based on 100-percent reserves, like the savings and loan associations and savings banks were before they were brought into the Federal Reserve System.
An Historical Example of Central Bank Collusion: 1924-1929
After World War I, England attempted to return to a gold standard, but in doing so the monetary authority pegged the pound at a pre-war price that did not reflect the war-time monetary inflation and the higher price levels that followed. The result was that British citizens started using pounds to purchase American bonds to receive higher interest. This generated a flow of gold from Britain to the United States. So, in 1924, Montagu Norman, President of the Bank of England, contacted Benjamin Strong, President of the Federal Reserve Bank of New York, who at that time served as head of the Federal Reserve System. Strong was a protégé of J.P. Morgan; and, going back to the mid-1800s, the House of Morgan had longstanding ties to the Rothschild international banking interests in England.
When Strong arrived in London, Montagu Norman explained the unwanted loss of gold and asked Strong to follow a loose monetary policy to make interest rates fall in America. Strong agreed and is reputed to have quipped, "We will give a 'coup de whiskey' to the stock market!" This collusive meeting of central bankers was the beginning of the deliberately induced stock market bubble which started in 1924 and ended on "Black Thursday," October, 1929. The stage for the stock market crash was finally set when the Federal Reserve Board suddenly raised the discount rate by a massive 20 percent (from five percent to six percent) in August, 1929. The FRB raised the discount rate because Board members had become alarmed at the intense speculative fever their planned monetary inflation had generated. Note that while central bankers can pump new, unearned money into the economy, they cannot control where it will be spent! Much of the new money ends up in the stock market and in real estate during inflationary bubbles where prices then soar upwards!
Many textbooks blame the speculative fever of the Roaring Twenties on the greed of the business community, thus artfully diverting rightful blame from the Federal Reserve Board for an inflationary monetary policy that could only lead to a harmful deflationary crash when a proximate cause was triggered to set the crash in motion. It was the inflationary monetary boom of 1924 -1929 that set up the house of cards. But it was the massive 20-percent increase in the discount rate that actually triggered the Crash of 1929. It is important to remember that all of these adverse results were the effect of international monetary collusion between the FRB and a foreign central bank, the Bank of England.
The most accurate statement that can be made about the Federal Reserve is that, since its birth in 1913, economic boom/bust cycles have been even more numerous and much more severe than before. What better reason can we find for terminating this ultra-expensive and economically deleterious tool of centralized monetary control?
An Update to 1985-1987
In the fall of 1985, the "Group of Five" (U.S.A., Britain, France, W. Germany, and Japan) met in Japan and announced that they would engage in international monetary cooperation with the objective of lowering interest rates in the United States. I took the Wall Street Journal clipping that carried the announcement and explained to my students:
Look what our monetary authorities are doing. Under the guise of "international monetary cooperation" they are recreating the exact scenario that Benjamin Strong did in 1924 when he agreed with Montagu Norman, head of the Bank of England, to follow a "loose" monetary policy in these United States to help Britain stay on the gold-reserve standard. This is the beginning of a stock market boom which will probably end the same way the one ended in 1929. Back then it took about five years for the boom to end in a crash. Who can say how long this one will last? My guess is that the boom-bust will occur in a shorter time span because of the speedier communications we now have in this computer age.
Two years later (August 1987), the Federal Reserve Board once again raised the discount rate by a whopping 20%, from five-percent to six-percent! I was also teaching a course in Investments that year, so I explained how changes in the discount rate affect prices in the stock market. Then I said, "This is the beginning of a bear market." About 10 days later, on October 19, 1987, the Dow Jones Industrial Average dropped an unprecedented 528 points. (There is usually a delay between announcements of cuts in discount rates and the following price action in the market place.) Since the 1987 crash, the Federal Reserve Board has quietly been pumping new money into the market whenever stock prices slump, while publicly presenting itself as following a non-inflationary monetary policy. It was this constant FRB creation of new fiat money to sustain the stock market that created the speculative bubble of the 1990s and the subsequent bear market we are now experiencing.
What about a Gold-Coin Standard without the Federal Reserve?
It is not absolutely necessary to do away with the Federal Reserve in order to return to a gold-coin standard that guarantees citizens the right to convert paper money into gold coins upon demand. But it is certainly prudent to eliminate the FRB when setting up a gold standard. Why? Because the Federal Reserve, like all central banks, has a natural antipathy to being subjected to the financial discipline that a gold-coin standard imposes on bureaucratic money controllers. By nature it seeks to be in control of the people rather than being controlled by the people! Remember the maxim, "Power is where the gold is!" It is not at all incorrect to state that the Federal Reserve and central banks in other countries cooperated in undermining the gold standard with intent to impose fiat money standards on the people.
There are certainly many banks in our wonderful country of America that can stand in the gap to fulfill, in the competitive free market, and at lower costs, the current functions of the Federal Reserve. I, for one, would place much more confidence in a truly competitive private banking system than in a government-created central bank monopoly! Harmful monopolistic control of the monetary system is absent in a free-banking system with no central bank. In addition, the prohibition of fractional-reserve banking puts borrowers on the same footing as savers. How? It prevents borrowers from obtaining newly created, unearned money from bankers. Thus, borrowers are not able to obtain unearned money to spend in competition with the earned money that savers must rely on. This, then, would be truly honest banking with truly honest money!
In short, in a money and banking system without a central bank — and on a gold-coin standard, along with silver being used for subsidiary coins — all banks would simply operate as warehousing institutions to hold people's savings and checking deposits (similar to savings and loan companies and savings banks which did not have, before they were brought under the Federal Reserve, the legal power to create money when extending loans). Such a system would be truly non-inflationary and, in the absence of a central bank, would faithfully protect the purchasing power of the dollar. Remember that, under the regime of the Federal Reserve, we have seen the purchasing value of the 1940 dollar drop to less than four cents — a loss of 96 percent!
How to Return to a Gold-Coin Standard
Returning to a gold-coin standard is a very simple process. We have two historical precedents. Our first return to a gold-coin standard was efficiently accomplished after President Jackson vetoed the recharter bill for the Second Bank of the United States in the 1830s. A return to gold-based money was repeated when we re-instituted the gold standard in 1879. Both times results were salutary, with a subsequent inflow of gold from overseas and increased investment and expanding economic activity domestically.
One way to return to a gold-coin standard would be to choose a general price level from some date in the past, and then adjust current prices so debtors and creditors maintain the same relative position before and after the current price change. For instance, if prices today were 25 times higher than on the date chosen in the past, current prices would be divided by 25, and the gold-content of the dollar would be adjusted accordingly. People's savings and incomes would be lower in dollar amounts, but so would their liabilities and the prices they paid for goods and services in the marketplace. This is a statistical process that can be done quite easily. Doing this would "wring out" the artificial price stimulation that decades of monetary inflation have generated.
An alternative method would be to work with the current general price level (and the monetary inflation that produced it), but only after letting the price of gold float freely for some months without the manipulation of gold prices that the Federal Reserve and other central banks throughout the world have been engaging in for some decades. This would allow the price of gold to seek its true free-market price. Then the gold content of newly minted coins could be determined relative to the honest market price of gold.
All that is needed to make a change is to set a date to close down and liquidate the FRB some months in advance. Various private banks would jump at the opportunity to provide competitive services to those now offered by the FRB; and competition would bring with it unforeseen cost-saving innovations. Remember, the Second Bank of the United States was closed down in the 1830s, and the results were very good. Should we expect less today?
I have always warned my students that when it comes to money they cannot safely put their trust in civil rulers because, as sinners, rulers lie, for political and other reasons. For history has proven civil rulers to be inveterate debauchers of the people's currency. The important change that must take place is to relieve American citizens from the present unconstitutional tyranny of having their monetary unit centrally controlled and steadily debauched at the will of government bureaucracies.
The great, great benefit of a true gold-coin standard is that it puts effective control of money back into the hands of widely dispersed individuals — exactly where it belongs — and out of the hands of centralized controllers who in the past, and up to the present day, have inflicted much harm on our economic and political freedom. With a gold-coin standard, individual citizens would once again have the legal right and the financial ability, as individuals acting unilaterally, to overrule the grandiose deficit-spending plans of civil rulers.4 The twentieth century was a century of constant wars and covert machinations by hidden powers that led to domestic and international political tyranny (socialism/fascism). With a gold-coin standard, the twenty-first century would promise to be a century of widespread peace and prosperity because people's savings, the monetary value of their hard-earned wealth, and the purchasing power of the dollar would all be protected from being plundered by out-of-control politicians and their hired bureaucrats.
1. See the Balfour Declaration, 1917 ("The Avalon Project at Yale Law School," www.yale.edu/lawweb/avalon/mideast/balfour.htm), through which Britain promised Zionists a national home in Palestine as a reward for bringing America into the war on the Allied side, even though Britain had previously promised freedom to the Palestinian Arabs in order to gain their military support in World War I. This was the starting point of the Israeli/Arab unrest in the Mideast today. Also see: Benjamin H. Freedman, "Benjamin Freedman Speaks," June 1995 (www.natvan.com/free-speech/fs956b.html).
2. "News & Views," USAGOLD, January/February, 2003, 4.
4. See my God, Gold, and Civil Government, Chapter 6, entitled "All About Gold,"101-125
- Tom Rose
Tom is a retired professor of economics, Grove City College, Pennsylvania. He is author of seven books and hundreds of articles dealing with economic and political issues. His articles have regularly appeared in The Christian Statesman, published by the National Reform Association, Pittsburgh, PA, and in many other publications. He and his wife, Ruth, raise registered Barzona cattle on a farm near Mercer, PA, where they also write and publish economic textbooks for use by Christian colleges, high schools, and home educators. Rose’s latest books are: Free Enterprise Economics in America and God, Gold and Civil Government.