This article originally appeared in the Mises Institute.
No one today talks about the death penalty for debasing gold or silver coins as established by section 19 of the Coinage Act of 1792, nor do they usually bring up Article 1, Section 10 of the Constitution, which authorizes only “gold and silver Coin a Tender in Payment of Debts.” Instead, we’ve come so far as to establish a “gold standard” for the monetary policy of inflating currency at roughly two percent per annum to be carried out solely by the Federal Open Market Committee of the Federal Reserve System.
When we glance between the lines, we see that the Fed holds a monopoly of money creation. And since the government no longer regards gold or silver as money but instead issues paper bills or their electronic equivalent (not as substitutes for real money but as money itself), the United States is in the strange position of being a counterfeiter, and a monopoly counterfeiter at that.
Without the enforced promise of note redemption, the currency exposes itself to multiplication without restraint. An economy needs a generally accepted medium of exchange, and one would arise naturally over the course of trade. A state, given its nature as a predatory institution since it funds itself by force, needs a monetary unit it controls exclusively, with the ability to increase its quantity quickly to deal with its perpetual crises.
Debasement Reaches Fruition
One of the great “achievements” of modern states is their ability to hide the debasement of their currency. Before the printing press made its debut, tyrants had to debase actual money by diluting the precious metal content or falsifying the imprint of a coin. Modern technology, along with elaborate legerdemain, has hidden the counterfeiting process from the public. The rest are bought off or ignored.
The Fed employs hundreds of PhD economists and a host of researchers and support staff. It also
doles out millions of dollars in contracts to economists for consulting assignments, papers, presentations, workshops, and that plum gig known as a “visiting scholarship.” . . .
Being on the Fed payroll isn’t just about the money, either. A relationship with the Fed carries prestige; invitations to Fed conferences and offers of visiting scholarships with the bank signal a rising star or an economist who has arrived.
Fortunately, not everyone is an economist in that sense.
One of the appeals of cryptocurrency is the limit on the number of monetary units. Not only is inflation impossible, but deflation, a gradual lowering of prices, naturally results from market productivity. The theory that a growing economy needs a constant influx of dollars was blown up by the unprecedented prosperity of the late nineteenth century in which prices dropped. In today’s debt-based economies, “deflation” is a dirty word, the “it” to be avoided at all costs lest the house of cards collapses.
The Fed in a Fight for Its Life
Today, the Fed is in the unenviable position of dealing with government’s latest war on the economy during the orchestrated covid vax onslaught and its sorry attempt to rebuild the economy by means of a Woke agenda that places ideology above everything.
Apparently, the Fed’s goal is reducing the inflation seen at the gas pumps and grocery stores. And it would be nice if housing were affordable again too. The metric everyone watches is the federal funds rate, which the “best and brightest” of the Federal Open Market Committee influences with guesses about the money supply. The Fed will do whatever it takes to stop people from talking about inflation.
The Fed’s fight against inflation is akin to a drunk trying to get back on the wagon with a full commitment to get off again. Worst of all, the drunkard is driving the vehicle in which we’re all passengers.
Inflation, here defined as an imposed increase in the money supply, common to all counterfeiting and common to all states, will eventually bring an economy to its knees. Here are a few reasons why:
- More dollars mean each one buys less, putting upward pressure on prices. Because of the dollar’s loss of purchasing power, fewer people can afford admission to the market’s bounty.
- A depreciating dollar discourages savings. Millions of investment neophytes take to the stock market trying to protect themselves against the Fed’s printing presses.
- As prices rise a semantic shift takes place. Inflation becomes price inflation. As businesses raise prices, the government can step in as the avenging angel and place ceilings on increases. The public doesn’t understand the shortages that result, or how the ceilings encourage consumption and retard production. Shortages lead to quotas which foster black markets and violent crime.
- Higher prices mean some industries find themselves at a disadvantage with foreign competitors, sending them to Washington for relief. Tariffs and quotas spark retaliation—the Smoot-Hawley Tariff of 1930 being a poster child for President Herbert Hoover’s failing, worsening already bad economic conditions worldwide.
- Inflation raises nominal incomes, putting people in higher tax brackets. Wealth is lost through depreciating dollars, and what remains is taxed away at a higher rate.
- Fed monetary policies keep people working much later in their careers because they can’t afford to live off their deteriorating pensions.
- Because the government often gets the new money first, it can fund controversial measures such as wars and bailouts. Government puts the funding on its charge card, prompting the alchemy of debt monetization. We get the bill, of course, but we never see it itemized because it’s spread over everything else that we buy.
- Government may pose as the savior of a group of voters they’ve impoverished, such as the elderly, by subsidizing their medical expenses. New entitlements create the need for more revenue, which fuels more inflation.
- As Ludwig von Mises observed, “Under inflationary conditions, people acquire the habit of looking upon the government as an institution with limitless means at its disposal: the state, the government, can do anything.” Through deficit spending the state will devour limited resources trying to maintain this illusion.
- Inflation is undemocratic by a wide margin:
The American economist Frank Fetter once observed that the unhampered market economy resembles a grass-roots democratic process. One penny, one market vote. From this point of view, the imposition of fractional-reserve notes through legal-tender laws creates market votes out of nothing. The bankers and their clients (usually the government in the first place) have many more votes than they would have had in a free society.
- Inflation creates the dreaded business cycle. Murray Rothbard notes that with the publication of Wesley Mitchell’s book Business Cycles in 1913, attention was brought to the occurrence of business cycles but not their explanation. But Mitchell, along with Karl Marx, had an enormous influence on business cycle studies. Earlier, David Ricardo and the Currency School “first realized that boom-bust cycles are caused by disturbances of the free market economy by inflationary injections of bank credit, propelled by government. These booms themselves bring about a later depression, which is really an adjustment of the economy to correct the interferences of the boom.”
Economic booms created distortions that were later corrected by the depressions. This was deeply disappointing to detractors of capitalism who thought boom-bust was “a sickness of the free market.”
Governments have of necessity been experts in the art of stealing. Inflation (counterfeiting) is their highest art form because it is insidious. Fortunately, it is not sustainable.