[Excerpted from What Has Government Done to Our Money?]
To
understand the current monetary chaos, it is necessary to trace briefly the
international monetary developments of the 20th century, and to see how each
set of unsound inflationist interventions has collapsed of its own inherent
problems, only to set the stage for another round of interventions. The
20th-century history of the world monetary order can be divided into nine
phases. Let us examine each in turn.
Phase I: The Classical Gold
Standard, 1815–1914
We can look back upon the
“classical” gold standard, the Western world of the 19th and early 20th
centuries, as the literal and metaphorical Golden Age. With the exception of
the troublesome problem of silver, the world was on a gold standard, which meant
that each national currency (the dollar, pound, franc, etc.) was merely a name for a certain definite weight of gold. The “dollar,” for example, was
defined as 1/20 of a gold ounce, the pound sterling as slightly less than 1/4
of a gold ounce, and so on. This meant that the “exchange rates” between the
various national currencies were fixed, not because they were arbitrarily
controlled by government, but in the same way that one pound of weight is
defined as being equal to sixteen ounces.
The international gold
standard meant that the benefits of having one money medium were extended
throughout the world. One of the reasons for the growth and prosperity of the
United States has been the fact that we have enjoyed one money throughout the large area of the country.
we have had a gold or at least a single dollar standard within the entire
country, and did not have to suffer the chaos of each city and county issuing
its own money, which would then fluctuate with respect to the moneys of all the
other cities and counties. The 19th century saw the benefits of one money
throughout the civilized world. One money facilitated freedom of trade,
investment, and travel throughout that trading and monetary area, with the
consequent growth of specialization and the international division of labor.
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It
must be emphasized that gold was not selected arbitrarily by governments to be
the monetary standard. Gold had developed for many centuries on the free market
as the best money; as the commodity providing the most stable and desirable
monetary medium. Above all, the supply and provision of gold was subject only
to market forces, and not to the arbitrary printing press of the government.
The
international gold standard provided an automatic market mechanism for checking
the inflationary potential of government. It also provided an automatic
mechanism for keeping the balance of payments of each country in equilibrium.
As the philosopher and economist David Hume pointed out in the mid-18th
century, if one nation, say France, inflates its supply of paper francs, its
prices rise; the increasing incomes in paper francs stimulate imports from
abroad, which are also spurred by the fact that prices of imports are now
relatively cheaper than prices at home.
At
the same time, the higher prices at home discourage exports abroad; the result
is a deficit in the balance of payments, which must be paid for by foreign
countries cashing in francs for gold. The gold outflow means that France must
eventually contract its inflated paper francs in order to prevent a loss of all
of its gold. If the inflation has taken the form of bank deposits, then the
French banks have to contract their loans and deposits in order to avoid
bankruptcy as foreigners call upon the French banks to redeem their deposits in
gold. The contraction lowers prices at home, and generates an export surplus,
thereby reversing the gold outflow until the price levels are equalized in
France and in other countries as well.
It is true that the
interventions of governments previous to the 19th century weakened the speed of
this market mechanism, and allowed for a business cycle of inflation and
recession within this gold-standard framework. These interventions were
particularly: the governments’ monopolizing of the mint, legal tender laws, the
creation of paper money, and the development of inflationary banking propelled
by each of the governments. But while these interventions slowed the
adjustments of the market, these adjustments were still in ultimate control of
the situation. So while the classical gold standard of the 19th century was not
perfect, and allowed for relatively minor booms and busts, it still provided us
with by far the best monetary order the world has ever known, an order which
worked, which kept business cycles from getting out of hand, and which enabled
the development of free international trade, exchange, and investment.1
Phase II: World War I and After
If
the classical gold standard worked so well, why did it break down? It broke
down because governments were entrusted with the task of keeping their monetary
promises, of seeing to it that pounds, dollars, francs, etc., were always
redeemable in gold as they and their controlled banking system had pledged. It
was not gold that failed; it was the folly of trusting government to keep its
promises. To wage the catastrophic war of World War I, each government had to
inflate its own supply of paper and bank currency. So severe was this inflation
that it was impossible for the warring governments to keep their pledges, and
so they went “off the gold standard,” i.e., declared their own bankruptcy,
shortly after entering the war. All except the United States, which entered the
war late, and did not inflate the supply of dollars enough to endanger
redeemability.
But,
apart from the United States, the world suffered what some economists now hail
as the Nirvana of freely-fluctuating exchange rates (now called “dirty
floats”), competitive devaluations, warring currency blocs, exchange controls,
tariffs and quotas, and the breakdown of international trade and investment.
The inflated pounds, francs, marks, etc., depreciated in relation to gold and
the dollar; monetary chaos abounded throughout the world.
In
those days there were, happily, very few economists to hail this situation as
the monetary ideal. It was generally recognized that phase II was the threshold
to international disaster, and politicians and economists looked around for
ways to restore the stability and freedom of the classical gold standard.
Phase III: The Gold-Exchange
Standard (Britain and the United States) 1926–1931
How to return to the Golden
Age? The sensible thing to do would have been to recognize the facts of
reality, the fact of the depreciated pound, franc, mark, etc., and to return to
the gold standard at a redefined rate: a rate that would recognize the existing
supply of money and price levels. The British pound, for example, had been
traditionally defined at a weight which made it equal to $4.86. But by the end
of World War I, the inflation in Britain had brought the pound down to
approximately $3.50 on the free foreign-exchange market. Other currencies were
similarly depreciated. The sensible policy would have been for Britain to
return to gold at approximately $3.50, and for the other inflated countries to
do the same. Phase I could have been smoothly and rapidly restored. Instead,
the British made the fateful decision to return to gold at the old par of
$4.86.2
They
did so for reasons of British national “prestige,” and in a vain attempt to
reestablish London as the “hard money” financial center of the world. To
succeed at this piece of heroic folly, Britain would have had to deflate
severely its money supply and its price levels, for at a $4.86 pound British export
prices were far too high to be competitive in the world markets. But deflation
was now politically out of the question, for the growth of trade unions,
buttressed by a nationwide system of unemployment insurance, had made wage
rates rigid downward; in order to deflate, the British government would have
had to reverse the growth of its welfare state. In fact, the British wished to
continue to inflate money and prices. As a result of combining inflation with a
return to an overvalued par, British exports were depressed all during the
1920s and unemployment was severe all during the period when most of the world
was experiencing an economic boom.
How could the British try to
have their cake and eat it at the same time? By establishing a new
international monetary order which would induce or coerce other governments into inflating or into going
back to gold at overvalued pars for their own currencies,
thus crippling their own exports and subsidizing imports from Britain. This is
precisely what Britain did, as it led the way, at the Genoa Conference of 1922,
in creating a new international monetary order, the gold-exchange standard.
The
gold-exchange standard worked as follows: The United States remained on the
classical gold standard, redeeming dollars in gold. Britain and the other
countries of the West, however, returned to a pseudo-gold standard, Britain in
1926 and the other countries around the same time. British pounds and other
currencies were not payable in gold coins, but only in large-sized bars, suitable
only for international transactions. This prevented the ordinary citizens of
Britain and other European countries from using gold in their daily life, and
thus permitted a wider degree of paper and bank inflation. But furthermore,
Britain redeemed pounds not merely in gold, but also in dollars; while the
other countries redeemed their currencies not in gold, but in pounds. And most
of these countries were induced by Britain to return to gold at overvalued
parities. The result was a pyramiding of United States on gold, of British
pounds on dollars, and of other European currencies on pounds — the
“gold-exchange standard,” with the dollar and the pound as the two “key
currencies.”
Now
when Britain inflated, and experienced a deficit in its balance of payments,
the gold-standard mechanism did not work to quickly restrict British inflation.
For instead of other countries redeeming their pounds for gold, they kept the
pounds and inflated on top of them. Hence Britain and Europe were permitted to
inflate unchecked, and British deficits could pile up unrestrained by the
market discipline of the gold standard. As for the United States, Britain was
able to induce the United States to inflate dollars so as not to lose many
dollar reserves or gold to the United States.
The
point of the gold-exchange standard is that it cannot last; the piper must
eventually be paid, but only in a disastrous reaction to the lengthy
inflationary boom. As sterling balances piled up in France, the United States,
and elsewhere, the slightest loss of confidence in the increasingly shaky and
jerry-built inflationary structure was bound to lead to general collapse. This
is precisely what happened in 1931; the failure of inflated banks throughout
Europe, and the attempt of “hard money” France to cash in its sterling balances
for gold, led Britain to go off the gold standard completely. Britain was soon
followed by the other countries of Europe.
Phase IV: Fluctuating Fiat
Currencies, 1931–1945
The world was now back to the
monetary chaos of World War I, except that now there seemed to be little hope
for a restoration of gold. The international economic order had disintegrated
into the chaos of clean and dirty floating exchange rates, competing
devaluations, exchange controls, and trade barriers; international economic and
monetary warfare raged between currencies and currency blocs. International
trade and investment came to a virtual standstill; and trade was conducted
through barter agreements conducted by governments competing and conflicting
with one another. Secretary of State Cordell Hull repeatedly pointed out that
these monetary and economic conflicts of the 1930s were the major cause of
World War II.3
The
United States remained on the gold standard for two years, and then, in
1933–1934, went off the classical gold standard in a vain attempt to get out of
the depression. American citizens could no longer redeem dollars in gold, and
were even prohibited from owning any gold, either here or abroad. But the
United States remained, after 1934, on a peculiar new form of gold standard, in
which the dollar, now redefined to 1/35 of a gold ounce, was redeemable in gold
to foreign governments and central banks. A lingering tie to gold remained.
Furthermore, the monetary chaos in Europe led to gold flowing into the only
relatively safe monetary haven, the United States.
The chaos and the unbridled
economic warfare of the 1930s points up an important lesson: the grievous political flaw (apart from the economic problems)
in the Milton Friedman-Chicago School monetary scheme for freely-fluctuating
fiat currencies. For what the Friedmanites would do — in the name of the free market — is to cut all
ties to gold completely, leave the absolute control of each national currency
in the hands of its central government issuing fiat paper as legal tender
— and then advise each government to allow its
currency to fluctuate freely with respect to all other fiat currencies, as well
as to refrain from inflating its currency too outrageously. The grave political
flaw is to hand total control of the money supply to the Nation-State, and then
to hope and expect that the State will refrain from using that power. And since
power always tends to be used, including the power to counterfeit legally, the
naivete, as well as the statist nature, of this type of program should be
starkly evident.
And
so, the disastrous experience of phase IV, the 1930s world of fiat paper and
economic warfare, led the US authorities to adopt as their major economic war
aim of World War II the restoration of a viable international monetary order,
an order on which could be built a renaissance of world trade and the fruits of
the international division of labor.
Phase V: Bretton Woods and the
New Gold-Exchange Standard (the United States) 1945–1968
The
new international monetary order was conceived and then driven through by the
United States at an international monetary conference at Bretton Woods, New
Hampshire, in mid-1944, and ratified by the Congress in July, 1945. While the
Bretton Woods system worked far better than the disaster of the 1930s, it
worked only as another inflationary recrudescence of the gold-exchange standard
of the 1920s and — like the 1920s — the system lived only on borrowed time.
The new system was
essentially the gold-exchange standard of the 1920s but with the dollar rudely
displacing the British pound as one of the “key currencies.” Now the dollar,
valued at 1/35 of a gold ounce, was to be the only key
currency. The other difference from the 1920s was that the dollar was no longer
redeemable in gold to American citizens; instead, the 1930’s system was
continued, with the dollar redeemable in gold only to foreign
governments and their central banks. No private individuals, only governments,
were to be allowed the privilege of redeeming dollars in the world gold
currency.
In
the Bretton Woods system, the United States pyramided dollars (in paper money
and in bank deposits) on top of gold, in which dollars could be redeemed by
foreign governments; while all other governments held dollars as their basic
reserve and pyramided their currency on top of dollars. And since the United
States began the postwar world with a huge stock of gold (approximately $25
billion) there was plenty of play for pyramiding dollar claims on top of it. Furthermore,
the system could “work” for a while because all the world’s currencies returned
to the new system at their pre-World War II pars, most of which were highly
overvalued in terms of their inflated and depreciated currencies. The inflated
pound sterling, for example, returned at $4.86, even though it was worth far
less than that in terms of purchasing power on the market. Since the dollar was
artificially undervalued and most other currencies overvalued in 1945, the
dollar was made scarce, and the world suffered from a so-called dollar
shortage, which the American taxpayer was supposed to be obligated to make up
by foreign aid. In short, the export surplus enjoyed by the undervalued
American dollar was to be partly financed by the hapless American taxpayer in
the form of foreign aid.
“Since
1971, the market price of gold has never been below the old fixed price of $35
an ounce.”
There
being plenty of room for inflation before retribution could set in, the US
government embarked on its postwar policy of continual monetary inflation, a
policy it has pursued merrily ever since. By the early 1950s, the continuing
American inflation began to turn the tide of international trade. For while the
United States was inflating and expanding money and credit, the major European
governments, many of them influenced by “Austrian” monetary advisers, pursued a
relatively “hard money” policy (e.g., West Germany, Switzerland, France,
Italy). Steeply inflationist Britain was compelled by its outflow of dollars to
devalue the pound to more realistic levels (for a while it was approximately
$2.40).
All this, combined with the
increasing productivity of Europe, and later Japan, led to continuing
balance-of-payments deficits with the United States. As the 1950s and 1960s
wore on, the United States became more and more inflationist, both absolutely
and relatively to Japan and Western Europe. But the classical gold-standard
check on inflation — especially American inflation
— was gone. For the rules of the Bretton Woods game provided that the West
European countries had to keep piling up their reserve, and even use these
dollars as a base to inflate their own currency and credit.
But as the 1950s and 1960s
continued, the harder-money countries of West Europe (and Japan) became restless
at being forced to pile up dollars that were now increasingly overvalued
instead of undervalued. As the purchasing power and hence the true value of
dollars fell, they became increasingly unwanted by foreign governments. But
they were locked into a system that was more and more of a nightmare. The
American reaction to the European complaints, headed by France and DeGaulle’s
major monetary adviser, the classical gold-standard economist Jacques Rueff,
was merely scorn and brusque dismissal. American politicians and economists
simply declared that Europe was forced to use
the dollar as its currency, that it could do nothing about its growing
problems, and therefore the United States could keep blithely inflating while
pursuing a policy of “benign neglect” toward the international monetary
consequences of its own actions.
But
Europe did have the legal option of redeeming dollars in gold at $35 an ounce.
And as the dollar became increasingly overvalued in terms of hard money
currencies and gold, European governments began more and more to exercise that
option. The gold-standard check was coming into use; hence gold flowed steadily
out of the United States for two decades after the early 1950s, until the US
gold stock dwindled over this period from over $20 billion to $9 billion. As
dollars kept inflating upon a dwindling gold base, how could the United States
keep redeeming foreign dollars in gold — the cornerstone of the Bretton Woods
system?
These
problems did not slow down continued US inflation of dollars and prices, nor
the United States policy of “benign neglect,” which resulted by the late 1960s
in an accelerated pileup of no less than $80 billion in unwanted dollars in
Europe (known as Eurodollars). To try to stop European redemption of dollars
into gold, the United States exerted intense political pressure on the European
governments, similar but on a far larger scale to the British cajoling of
France not to redeem its heavy sterling balances until 1931. But economic law
has a way, at long last, of catching up with governments, and this is what
happened to the inflation-happy US government by the end of the 1960s. The
gold-exchange system of Bretton Woods — hailed by the US political and economic
establishment as permanent and impregnable — began to unravel rapidly in 1968.
Phase VI: The Unraveling of
Bretton Woods, 1968–1971
As
dollars piled up abroad and gold continued to flow outward, the United States
found it increasingly difficult to maintain the price of gold at $35 an ounce
in the free gold markets at London and Zurich. Thirty-five dollars an ounce was
the keystone of the system, and while American citizens have been barred since
1934 from owning gold anywhere in the world, other citizens have enjoyed the
freedom to own gold bullion and coin. Hence, one way for individual Europeans
to redeem their dollars in gold was to sell their dollars for gold at $35 an
ounce in the free gold market. As the dollar kept inflating and depreciating,
and as American balance-of-payments deficits continued, Europeans and other
private citizens began to accelerate their sales of dollars into gold. In order
to keep the dollar at $35 an ounce, the US government was forced to leak out
gold from its dwindling stock to support the $35 price at London and Zurich.
A crisis of confidence in the
dollar on the free gold markets led the United States to effect a fundamental
change in the monetary system in March 1968. The idea was to stop the pesky
free gold market from ever again endangering the Bretton Woods arrangement.
Hence was born the “two-tier gold market.” The idea was that the free gold
market could go to blazes; it would be strictly insulated from the real monetary action in the central banks and
governments of the world. The United States would no longer try to keep the free-market
gold price at $35; it would ignore the free gold market, and it and all the
other governments agreed to keep the value of the dollar at $35 an ounce
forevermore.
“The
two-tier system moved rapidly toward crisis — and to the final dissolution of Bretton
Woods.”
The
governments and central banks of the world would henceforth buy no more gold
from the “outside” market and would sell no more gold to that market; from now
on gold would simply move as counters from one central bank to another, and new
gold supplies, free gold market, or private demand for gold would take their
own course completely separated from the monetary arrangements of the world.
Along
with this, the United States pushed hard for the new launching of a new kind of
world paper reserve, Special Drawing Rights (SDRs), which it was hoped would
eventually replace gold altogether and serve as a new world paper currency to
be issued by a future World Reserve Bank; if such a system were ever
established, then the United States could inflate unchecked forevermore, in
collaboration with other world governments (the only limit would then be the
disastrous one of a worldwide runaway inflation and the crackup of the world
paper currency). But the SDRs, combatted intensely as they have been by Western
Europe and the “hard-money” countries, have so far been only a small supplement
to American and other currency reserves.
All
pro-paper economists, from Keynesians to Friedmanites, were now confident that
gold would disappear from the international monetary system; cut off from its
“support” by the dollar, these economists all confidently predicted, the
free-market gold price would soon fall below $35 an ounce, and even down to the
estimated “industrial” nonmonetary gold price of $10 an ounce. Instead, the
free price of gold, never below $35, had been steadily above $35, and by early
1973 had climbed to around $125 an ounce, a figure that no pro-paper economist
would have thought possible as recently as a year earlier.
Far from establishing a
permanent new monetary system, the two-tier gold market only bought a few years
of time; American inflation and deficits continued. Eurodollars accumulated
rapidly, gold continued to flow outward, and the higher free-market price of
gold simply revealed the accelerated loss of world confidence in the dollar.
The two-tier system moved rapidly toward crisis — and to the final dissolution
of Bretton Woods.4
Phase VII: The End of Bretton
Woods: Fluctuating Fiat Currencies, August–December 1971
On
August 15, 1971, at the same time that President Nixon imposed a price-wage
freeze in a vain attempt to check bounding inflation, Mr. Nixon also brought
the postwar Bretton Woods system to a crashing end. As European central banks
at last threatened to redeem much of their swollen stock of dollars for gold,
President Nixon went totally off gold. For the first time in American history,
the dollar was totally fiat, totally without backing in gold. Even the tenuous
link with gold maintained since 1933 was now severed. The world was plunged
into the fiat system of the 1930s — and worse, since now even the dollar was no
longer linked to gold. Ahead loomed the dread spectre of currency blocs,
competing devaluations, economic warfare, and the breakdown of international
trade and investment, with the worldwide depression that would then ensue.
What
to do? Attempting to restore an international monetary order lacking a link to
gold, the United States led the world into the Smithsonian Agreement on
December 18, 1971.
Phase VIII: The Smithsonian
Agreement, December 1971–February 1973
The
Smithsonian Agreement, hailed by President Nixon as the “greatest monetary
agreement in the history of the world,” was even more shaky and unsound than
the gold-exchange standard of the 1920s or than Bretton Woods. For once again,
the countries of the world pledged to maintain fixed exchange rates, but this
time with no gold or world money to give any currency backing. Furthermore,
many European currencies were fixed at undervalued parities in relation to the
dollar; the only US concession was a puny devaluation of the official dollar
rate to $38 an ounce. But while much too little and too late, this devaluation
was significant in violating an endless round of official American
pronouncements, which had pledged to maintain the $35 rate forevermore. Now at
last the $35 price was implicitly acknowledged as not graven on tablets of
stone.
It
was inevitable that fixed exchange rates, even with wider agreed zones of
fluctuation, but lacking a world medium of exchange, were doomed to rapid
defeat. This was especially true since American inflation of money and prices,
the decline of the dollar, and balance-of-payments deficits continued
unchecked.
The
swollen supply of Eurodollars, combined with the continued inflation and the
removal of gold backing, drove the free-market gold price up to $215 an ounce.
And as the overvaluation of the dollar and the undervaluation of European and
Japanese hard money became increasingly evident, the dollar finally broke apart
on the world markets in the panic months of February–March 1973. It became
impossible for West Germany, Switzerland, France and the other hard money
countries to continue to buy dollars in order to support the dollar at an
overvalued rate. In little over a year, the Smithsonian system of fixed
exchange rates without gold had smashed apart on the rocks of economic reality.
Phase IX: Fluctuating Fiat
Currencies, March 1973–?
With
the dollar breaking apart, the world shifted again, to a system of fluctuating
fiat currencies. Within the West European bloc, exchange rates were tied to one
another, and the United States again devalued the official dollar rate by a
token amount to $42 an ounce. As the dollar plunged in foreign exchange from
day to day, and the West German mark, the Swiss franc, and the Japanese yen
hurtled upward, the American authorities, backed by the Friedmanite economists,
began to think that this was the monetary ideal. It is true that dollar
surpluses and sudden balance-of-payments crises do not plague the world under
fluctuating exchange rates. Furthermore, American export firms began to chortle
that falling dollar rates made American goods cheaper abroad, and therefore
benefitted exports. It is true that governments persisted in interfering with
exchange fluctuations (“dirty” instead of “clean” floats), but overall it
seemed that the international monetary order had sundered into a Friedmanite
utopia.
But
it became clear all too soon that all is far from well in the current
international monetary system. The long-run problem is that the hard-money
countries will not sit by forever and watch their currencies become more
expensive and their exports hurt for the benefit of their American competitors.
If American inflation and dollar depreciation continues, they will soon shift
to the competing devaluation, exchange controls, currency blocs, and economic
warfare of the 1930s.
But
more immediate is the other side of the coin: the fact that depreciating
dollars means that American imports are far more expensive, American tourists
suffer abroad, and cheap exports are snapped up by foreign countries so rapidly
as to raise prices of exports at home (e.g., the American wheat-and-meat price
inflation). So that American exporters might indeed benefit, but only at the
expense of the inflation-ridden American consumer. The crippling uncertainty of
rapid exchange-rate fluctuations was brought starkly home to Americans with the
rapid plunge of the dollar in foreign-exchange markets in July 1973.
Since
the United States went completely off gold in August 1971 and established the
Friedmanite fluctuating fiat system in March 1973, the United States and the
world have suffered the most intense and most sustained bout of peacetime
inflation in the history of the world. It should be clear by now that this is
scarcely a coincidence. Before the dollar was cut loose from gold, Keynesians
and Friedmanites, each in their own way devoted to fiat paper money,
confidently predicted that when fiat money was established, the market price of
gold would fall promptly to its nonmonetary level, then estimated at about $8
an ounce.
In
their scorn of gold, both groups maintained that it was the mighty dollar that
was propping up the price of gold, and not vice versa. Since 1971, the market
price of gold has never been below the old fixed price of $35 an ounce, and has
almost always been enormously higher. When, during the 1950s and 1960s,
economists such as Jacques Rueff were calling for a gold standard at a price of
$70 an ounce, the price was considered absurdly high. It is now even more
absurdly low. The far higher gold price is an indication of the calamitous
deterioration of the dollar since “modern” economists had their way and all
gold backing was removed.
It is
now all too clear that the world has become fed up with the unprecedented
inflation, in the United States and throughout the world, that has been sparked
by the fluctuating fiat currency era inaugurated in 1973. We are also weary of
the extreme volatility and unpredictability of currency exchange rates. This
volatility is the consequence of the national fiat-money system, which
fragmented the world’s money and added artificial political instability to the
natural uncertainty in the free-market price system. The Friedmanite dream of
fluctuating fiat money lies in ashes, and there is an understandable yearning
to return to an international money with fixed exchange rates.
Unfortunately, the classical
gold standard lies forgotten, and the ultimate goal of most American and world
leaders is the old Keynesian vision of a one-world fiat paper standard, a new
currency unit issued by a World Reserve Bank (WRB). Whether the new currency be
termed “the bancor” (offered by Keynes), the “unita” (proposed by World War II
US Treasury official Harry Dexter White), or the “phoenix” (suggested by The Economist) is unimportant. The vital point is that
such an international paper currency, while indeed free of balance-of-payments
crises (since the WRB could issue as much bancors as it wished and supply them
to its country of choice), would provide for an open channel for unlimited
world-wide inflation, unchecked by either balance-of-payments crises or by
declines in exchange rates.
The
WRB would then be the all-powerful determinant of the world’s money supply and
its national distribution. The WRB could and would subject the world to what it
believes will be a wisely-controlled inflation. Unfortunately, there would then
be nothing standing in the way of the unimaginably catastrophic economic
holocaust of world-wide runaway inflation, nothing, that is, except the dubious
capacity of the WRB to fine-tune the world economy.
While
a world-wide paper unit and central bank remain the ultimate goal of world’s
Keynesian-oriented leaders, the more realistic and proximate goal is a return
to a glorified Bretton Woods scheme, except this time without the check of any
backing in gold. Already the world’s major central banks are attempting to
“coordinate” monetary and economic policies, harmonize rates of inflation, and
fix exchange rates. The militant drive for a European paper currency issued by
a European central bank seems on the verge of success. This goal is being sold
to the gullible public by the fallacious claim that a free-trade European Economic
Community (EEC) necessarily requires an overarching European bureaucracy, a
uniformity of taxation throughout the EEC, and, in particular, a European
central bank and paper unit. Once that is achieved, closer coordination with
the Federal Reserve and other major central banks will follow immediately. And
then, could a World Central Bank be far behind? Short of that ultimate goal,
however, we may soon be plunged into yet another Bretton Woods, with all the
attendant crises of the balance of payments and Gresham’s Law that follow from
fixed exchange rates in a world of fiat moneys.
As we
face the future, the prognosis for the dollar and for the international
monetary system is grim indeed. Until and unless we return to the classical
gold standard at a realistic gold price, the international money system is
fated to shift back and forth between fixed and fluctuating exchange rates,
with each system posing unsolved problems, working badly, and finally
disintegrating. And fueling this disintegration will be the continued inflation
of the supply of dollars and hence of American prices, which show no sign of
abating. The prospect for the future is accelerating and eventually runaway
inflation at home, accompanied by monetary breakdown and economic warfare abroad.
This prognosis can only be changed by a drastic alteration of the American and
world monetary system: by the return to a free-market commodity money such as
gold, and by removing government totally from the monetary scene.
This article is excerpted from What Has Government Done to Our Money? An MP3
audio file of this article, read by Jeff Riggenbach, is available for
download.
—
1.For a recent study of the classical gold
standard, and a history of the early phases of its breakdown in the 20th
century, see Melchior Palyi, The Twilight of Gold, 1914–1936 (Chicago:
Henry Regnery, 1972).
2.On the crucial British error and its
consequence in leading to the 1929 depression, see Lionel Robbins, The Great Depression (New York: Macmillan, 1934).
3.Cordell Hull, Memoirs (New York, 1948), vol. I, p. 81. Also see
Richard N. Gardner, Sterling-Dollar Conspiracy (Oxford: Clarendon Press, 1956),
p. 141.
4.On the two-tier gold market, see Jacques
Rueff, The Monetary Sin of the West (New York: Macmillan,
1972).
Murray N. Rothbard (1926–1995) was dean
of the Austrian School, founder of modern libertarianism, and academic vice
president of the Mises
Institute. He was also editor – with Lew Rockwell – of The Rothbard-Rockwell Report, and appointed
Lew as his literary executor. See his books.
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