By Gary North
March 18, 2011
Do you trust men with guns and badges to provide long-term economic growth? Or do you trust the free market?
When push comes to shove — recession — most people trust guns and badges far more than they trust the free market.
Do you trust the Federal Reserve System to maintain prosperity? Or would you prefer to trust gold coins held by millions of Americans?
Most Americans and virtually all professors of economics trust the Federal Reserve System.
That was not true in 1913, the year Congress voted (just before the Christmas recess) to create the Federal Reserve System.
There is a way to avoid recessions, argued Ludwig von Mises in 1912: (1) the gold coin standard and (2) no government licensing of fractional reserve banks.
We never did have both. No nation did in modern times. Ever since World War I broke out in August 1914, we lost the gold coin standard in Europe. We lost it in the United States in 1933, when Roosevelt stole the nation’s gold coins by fiat decree. In short, the entire world has rejected Mises’ argument.
Gold-Hating Special Interest Groups
There are four main groups of critics of the gold coin standard: the greenbackers, the politicians, the academics, and the investment elite.
The “greenbackers” began their propaganda early, in the 1870s. They defend fiat money that is controlled by Congress. These self-taught promoters of government fiat money are monetary statists. They include lawyer Ellen Brown and Bill Still, producer of “The Money Masters” video. They have no influence in Congress or academia, because they oppose fractional reserve banking. But their system relies on people with guns and badges to support legal tender laws. In Brown’s case, she has now come out in favor of Bernanke’s QE2 policies. She is Bernanke’s major cheerleader on the Right.
What is their motive? They want big government. They come to the far Right and the far Left with the same argument: private fractional reserve banking is bad, because it makes big banks rich. They come with the same solution: “Trust Congress.” Trust it to do what? To spend fiat money to create a vast welfare state.
They are all Leftists, but they recruit on the Right by an appeal to the sin of envy: “Let’s bust the bankers by law!” They are statists. They parade as conservatives when they pitch the Right.
Just like the greenbackers, the politicians want cheap money, so that they can spend more than they take in by direct taxation, which is always unpopular. The central bank guarantees to buy government debt at low rates. This lets politicians borrow more money on behalf of taxpayers than would otherwise have been the case, since high rates make it more costly to go into debt. This is why politicians have universally created central banks with a monopoly of control over money.
Then there are the vast majority of academics all over the world. They are apologists for the prevailing system. They are paid to support it. They take the king’s shilling, and they do the king’s bidding.
Some of these academics are paid directly by the state as faculty members in tax-funded, state-licensed, accredited universities. Others are paid indirectly as faculty members in private universities that are protected from competition by means of accreditation systems that are backed up by laws against unaccredited institutions that use the word “university.”
Every accredited university is part of a cartel. This is why universities are not price competitive. This is why they can afford to grant tenure — a practice unknown in the private sector.
There is an army of academic critics of Mises’ argument that the free market should be trusted to provide economic planning, and that people backed up by other people carrying guns and badges should not be trusted. In this army are thousands of state-trained and state-accredited economists, who assert that they believe in the free market. When push comes to shove, they don’t.
In the entire academic profession, all over the world, there is not a single textbook in economics that says that central banking is conceptually and operationally a cartel-enforcement institution for privately owned large banks: an anti-free market institution. There never has been such a textbook. Every economics textbook separates the chapter on cartels from the chapter on central banks. Neither chapter refers the reader to the other chapter.
This is not random. This is a crucial part of the arrangement between the national government and the bankers’ cartel in every nation. The academic cartel joins with the bankers’ cartel to screen out any suggestion in a textbook that either of these state-licensed cartels is in fact a cartel. “You scratch my back, and I’ll scratch yours. You promote the right of my agents to carry guns and badges, and I’ll promote yours.”
Finally, there is the investment elite. They want a safety net for bad investments they have recommended. They also want leverage: debt-funded, high-return speculation. They want to be on the winning side of “moral hazard.” This is what central banking gives them.
Members of these four special-interest groups hate the gold coin standard. They hate it for the same reason: it transfers economic authority from the cartels to private citizens. In short, it offers no guns or badges to the government.
Friedman on the Fed
Consider academia. The archetype of the seemingly pro-free market professors was Milton Friedman. In a recent report, “Milton Friedman’s Contraption,” I went into detail about Friedman’s faith in central banking. His faith was misplaced. He trusted the banking cartel as a concept. He did not reject it as the creation of the United States government. He did not reject it as a cartel. On the contrary, he promoted it avidly and famously.
He recommended that the Federal Reserve System’s Federal Open Market Committee (FOMC) stop planning. He recommended a 3% to 5% per annum increase in fiat money. If the FOMC would just follow his advice, he assured us, there would be stable economic growth and stable prices.
Friedman was terminally naïve. To promote any system of central planning ignores the obvious: this is too much power to entrust to anyone. The bureaucrats always do the wrong thing. What is the wrong thing? This: to prohibit the free market from providing the solution to the problem at hand. The central planners hold power specifically to thwart the free market. This is why the state gives them guns and badges.
Friedman was viscerally committed to Federal Reserve Notes, as Mark Skousen and I learned at a dinner meeting with him back in the late 1990s. I don’t want to spoil your fun. Read about it halfway through this article. It’s about a $20 gold piece vs. a $20 Federal Reserve Note. I did not know what was coming. I was an innocent bystander, not an unindicted co-conspirator.
There are only two conceptual options in monetary theory: a full gold coin standard in which the citizens hold the golden hammers or a system of economic planning in which elite members of the planning bureaucracy hold the digital hammers. There is no third choice. A mixture always leads to inflation, recession, and centralization.
Professional gold-haters reject gold because they do not want the public to hold the hammers. They hate decentralized economic authority. They want people like themselves to have the final say.
The planners will always adopt a policy different from the correct one. What is the correct one? To revoke the legal authority of the nation’s central bank and let the free market replace it. As Ludwig von Mises said, when asked what the government should do to overcome a recession: “Nothing. Earlier.” Friedman spent his entire career advising economists and even the U.S. Treasury (in 1943) on how to plan more efficiently. They followed his advice only when this meant taxing more efficiently and regulating more efficiently. He never caught on to how they were using him.
Is this too harsh? Not at all. In 1942, when 20-year Rockefeller agent, Beardsley Ruml, who was then president of the New York Federal Reserve Bank, proposed Federal withholding taxes, Friedman went to work devising reasons. He was in the Treasury Department. Did the government accept these arguments? Yes. Did Ruml ever ask Friedman’s advice on Federal Reserve policy? No.
In 1963, Friedman offered his now-famous critique of the FED’s policies, 1930–33. He said the FED did not inflate enough. Did academia accept this argument? Of course. Did Bernanke accept it? Yes.
Friedman and Schwartz’s insight was that, if monetary contraction was in fact the source of economic depression, then countries tightly constrained by the gold standard to follow the United States into deflation should have suffered relatively more severe economic downturns. Although not conducting a formal statistical analysis, Friedman and Schwartz gave a number of salient examples to show that the more tightly constrained a country was by the gold standard (and, by default, the more closely bound to follow U.S. monetary policies), the more severe were both its monetary contraction and its declines in prices and output.
He got Friedman’s main message: “gold . . . bad.” Did Bernanke ever follow Friedman’s advice on 2% to 5% money growth? Yes: in 2006–7. Did this create a recession? Yes, just as Austrian economists publicly began saying in 2006, based on the Austrian theory of the business cycle. Did he then abandon Friedman’s slow growth rule and adopt Friedman’s economic crisis policy: a doubling of the monetary base? Yes.
On educational vouchers — his program for the more efficient use of confiscated property tax revenue — the Establishment never bothered to get around to implementing it. The teachers’ union opposes it. “Nice idea in theory, Milton,” academia said, “but it’s just too Utopian. We’ll get back to you on that.” They will, too: whenever private schools constitute a major threat to the teachers’ union, and the government decides to take over the private schools by providing “free” money, along with the regulations that always accompany free money from the government.
Conclusion: the ruling elite always trotted out Friedman when it was convenient, but it ignored him when it wasn’t. In short, it acted in its own self-interest. He was there to help where it counted most: taxation policy and a defense of the legitimacy of central banking and 100% fiat money.
Friedman and all economists other than Austrian School economists hate the idea of a gold coin standard. A lot of them carry this hatred into the financial markets. They hate gold as an investment, not just as a monetary policy. They hate it at all times. They tell people not to buy it when it is cheap. They tell them this after it has doubled, then tripled, then quadrupled.
Why? Because to buy gold is to vote against the Keynesian-planned economy. It is to vote against the Keynesian-dominated central bank. It is a vote against the high-tax, debt-funded government bureaucrats who think they are wiser than the decentralized planning of private citizens in a free market. They hate it because they are part of the self-appointed, self-regulated elite. They want to feather their nests by sending out people with guns and badges to extract wealth from the general public.
Those who own gold are able to evade some of the effects of laws enforced by people with guns and badges. This enrages the elite. It has enraged them in the United States ever since 1791. From Alexander Hamilton to James Madison to Daniel Webster to Henry Clay to Abraham Lincoln to Teddy Roosevelt to Woodrow Wilson to Herbert Hoover to Franklin Roosevelt to today, the gold coin standard has enraged them. They want the citizenry to submit to fiat money, guns, and badges. They want the citizenry to submit to their plans. They are monetary statists because they are statists. They want fiat money because they want guns and badges.
“But Gold Will Fall!”
After the central banks stop inflating, gold will indeed fall. So will everything else except currency, including Treasury bonds. Will this be before the central banks produce hyperinflation? I hope so. If not, gold will fall on the far side of a currency collapse, where the value of a dollar fell to zero value. Gold will never fall to zero value. The dollar could.
“But gold will fall,” the experts tell us. Fall from what? “Today’s unsustainable price.” Did you recommend buying gold before the price got unsustainable. “No.” Why not? “Because gold’s price is always unsustainable.” It was unsustainable at $257 back in 2001. “No, I mean it is unsustainable this high.” How high? “Whatever it is today.” So, gold will fall from where it is today. “Yes,” So, you have shorted gold on the futures market. “No.” Why not? “Because gold might go up.” Why? “Because gold may be sustainable for a while.” How long until it falls? “One of these days.”
Here is their rule: “Buy low, sell high, except when it’s gold. Never buy gold.”
Here is the meaning of this rule: “Believe in the power of the central bank to provide wealth, in good times and better times.”
What about bad times? “There will be no bad times, as long as central banks have the power to create money.”
But unemployed workers are having bad times. “They don’t count.” Why not? “Because they don’t work on Wall Street or in Washington.”
Underwater home owners are having bad times. “Only briefly. Home prices are unsustainable.” You mean they will fall further. “No, I mean they are unsustainable this low.” Why? “Because the Federal Reserve System is pumping in money.”
So, should I buy gold? “No.” Why not? “Because gold’s price is unsustainable.” You mean it will fall. “Yes.” But housing prices will not fall. “Correct.” But they have been falling this year. “This is a temporary correction.” Like the price of gold whenever it falls? “No. When the price of gold falls, it is a return to normal pricing.” So, when the price of gold rises, this is a temporary correction. “Correct.”
It has been rising for over nine years. “It’s a temporary correction.” How long is temporary? “However long it takes for gold to fall.”
Would you favor a policy of the government selling its gold? “No.” Why not? “Because that would require a full audit of the Federal Reserve System.” Why shouldn’t there be an audit of the Federal Reserve System? “Because we must maintain the independence of the Federal Reserve System.” Just as we do with respect to . . . to. . . . what other government agency? “The CIA.” You think the CIA should be independent. “I think the CIA has guns and badges and bombs and poisons, so I don’t mess with the CIA. The CIA gets what it wants.” But so does the Federal Reserve. “This is a good thing.” Why? “Because the Federal Reserve is the source of wealth.” So, digits are wealth. “Yes.”
Gold is wealth. “You can’t eat gold.” You can’t eat digits, either. “You can get people to accept digits in exchange for wealth.” How? “With badges and guns.” Like the CIA. “Now that you mention it, yes.”
There is an intellectual battle between the vast majority of experts and a handful of Austrian School economists. The battle is over which system to trust: one in which individuals buy and sell with their money of choice or with money issued by state-licensed banks that are under the control of the national government.
It is a debate over free market decentralized planning based on private ownership vs. central planning based on government coercion.
It is a debate over gold money or government digital money.
The next time you hear some expert spouting off on the evils or foolishness of gold, mentally imagine a bureaucrat with two uniformed goons with badges and pistols standing at your front door. The bureaucrat says, “I’m from the government, and I’m here to help you.”