Hostile Takeover: Resisting Centralized Government's Stranglehold on America (25 page)

In other words, when the Fed creates money out of thin air, it corrupts the primary function of money as a standard of value. It violates an implied contract across society that a dollar is worth a dollar. These distortions send bad price signals, encourage bad investments, and create bubbles. Take, for example, the artificial boom in housing prices of the past decade. Many people at points of entry, such as mortgage bankers and investment banks that bet big on mortgage-backed securities, cashed in. Many homeowners, herded into inflated mortgage contracts by Fed-expanded credit, tax incentives, government-subsidized loans through Fannie and Freddie, and mandates like the Community Reinvestment Act, were left holding the bag. The “bag,” as it were, was filled with phony government money.

“True,” says Mises, “governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks.”
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These are all ways that the Federal Reserve injects new money into the economy. “They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late,” he predicts. The inevitable corrections are painful, leaving people poorer. More often than not, the first victims of this boom and bust are those on the lower rungs of the economic ladder. Like so many self-professed “well-meaning” public policies, the net effect of government “help” aimed at allowing the working poor to own homes leaves them worse off, stripped of their savings. But some savvy, well-connected mortgage banker, positioned at a privileged “injection point,” and armed with a long contact list of friends in high places in Washington, D.C., comes out of the crisis fat and happy. In fact, he may even receive a bonus for the misery he helped create.

Attempts by government to inject still more money into the economy, to prop up the bad decisions created by the last cycle of easy money and to repair the real economic pain caused by the boom-bust cycle, leads to more sustained pain, inflation, and economic stagnation. To quote Rick Santelli’s famous Rant Heard ’Round the World, “Did you hear that, President Obama?” How about you, Chairman Bernanke?

PROGRESSIVELY CENTRALIZED

M
ONEY DOES NOT ORIGINATE WITH GOVERNMENT.
I
T ARISES NATURALLY
from market forces. But power-hungry governments invariably come along and try to take control of money creation. For example, Executive Order 6102, signed by President Franklin D. Roosevelt in early 1933, made it a criminal offense for an individual to own large amounts of gold.
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With this step—monopolizing gold—the federal government effectively made itself the creator and controller of our money supply. A dollar is, in effect, a contract between you and the federal government. The government issued the contract. In the past, the government promised you an amount of gold for a piece of paper, and vice versa. Now, unfortunately, the government has breached the contract (by breaking the link to gold) and is controlling the value of money to support its own spending binges, bailouts, and manipulations of markets.

We are required by law to use the paper dollar as money. Thus the U.S. dollar has become a “fiat currency,” meaning that it is backed by absolutely nothing but the government’s promise, potentially worth nothing more than the paper it’s printed on. Unlike gold or other currencies whose value is based on supply and demand, the U.S. dollar has value only because the government says it does. The value of that little green piece of paper is guaranteed by the “full faith and credit of the United States.” Or in other words: “Trust us.”

History demonstrates that fiat currencies typically fail, with an average life expectancy of just twenty-seven years.
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In the words of Detlev Schlichter, author of
Paper Money Collapse—The Folly of Elastic Money and the Coming Monetary Meltdown
: “Complete paper money systems are always creations of the state, never the outcome of private initiative or the free market. All paper money systems in history have, after some time, experienced growing financial instabilities, economic volatility, and an accelerating decline in money’s purchasing power. All of them ultimately failed.”
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Although FDR broke the link between the dollar and gold for U.S. citizens in 1933, the U.S. government continued to back the dollar with gold in transactions with other nations. In the midst of World War II, with the help of John Maynard Keynes, governments came together in Bretton Woods, New Hampshire, to plan for postwar currency stability through a system in which all currencies would be linked to the U.S. dollar via fixed exchange rates, and the dollar would be backed by U.S.-held gold. Central banks could come to the U.S. “gold window” and trade pieces of paper for little bits of yellow metal, just as citizens could once do.

But the gold-based Bretton Woods system only lasted till 1971, when it utterly collapsed, never to rise again. Why? Because the United States had been running a serious deficit, due to a massive surge in government spending. Uncle Sam had been using the privileged position in the global economy given him by Bretton Woods to spend like a drunken sailor in an upscale brothel. The costly Vietnam War and President Lyndon Johnson’s Great Society programs drained the gold from Fort Knox. To avert the crisis, on August 15, 1971, President Nixon defaulted. He radically changed the global monetary system by suspending the convertibility of the U.S. dollar into gold. He shut the “gold window” to the world’s banks, and thereby severed the final link tying the U.S. dollar—and the global economy—to anything more valuable than a promise. He should have made an effort to dramatically cut government spending. Instead, he opted for what turned out to be a colossal monetary error.

Since that day four decades ago, the U.S. dollar has been a pure fiat currency. The decision to end the gold exchange standard is remembered as the “Nixon Shock,” and it still holds enormous ramifications for every single American today. Separating the link between U.S. dollars and gold eliminated important restraints on the government’s ability to manipulate the money supply. Nixon made other mistakes that cemented a different legacy in Americans’ minds. Otherwise, he’d be getting much of the blame for our current problems.

Fiat currencies grant central bankers and politicians flexibility and discretion—a veritable blank check. This is not a good thing for the American people, because more flexibility means more power for the central authority. Unlike the gold exchange standard, there is no limit on the amount of money the government can print. As a result of the government’s abuse of this power, the dollar has lost 80 percent of its value since 1971, meaning today’s dollar is worth less than 20 cents compared to the stronger pre-Nixon dollar.
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The price of gold, which is essentially a reflection of the dollar’s weakness, has risen to all-time highs.
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Here’s the rub. The government has zero money of its own. It’s not Santa Claus with a Midas touch. It can’t replenish Fort Knox on command. The government has to go out and get money from those who produce the things that make money valuable. When it wants to spend money that it does not have, it can do but three things. 1) It can raise taxes. 2) It can borrow money through the selling of government securities (i.e., promises to repay in the future). Or 3) it can simply print more dollars. Given his penchant for new spending, Barack Obama has gone for the full Monty. But even with all the administration’s new taxes and massive borrowing, printing money is the most destructive practice. It’s also the easiest, essentially a form of taxation without legislation and, at least until recently, little noticed by the public. The inherent complexity of currency manipulation through monetary policy makes it a tempting vehicle for government growth.

Enter the Federal Reserve, a quasi-governmental bank that controls the amount of dollars in the economy. Created in 1913, the Fed has a seven-member board of governors, appointed by the president and confirmed by the Senate. In addition, there are twelve regional Federal Reserve banks. The Federal Open Market Committee (FOMC) is the arm of the Fed that controls monetary policy. It is comprised of the seven members of the board of governors and the presidents of five of the regional reserve banks. The New York Fed is a continuous member of the FOMC; the other reserve banks rotate one-year terms. The FOMC influences interest rates by either buying or selling government bonds. When it wants to increase the money supply, it purchases long-term treasury bonds, which lowers interest rates and pumps more dollars into the economy. When it wants to decrease the money supply, it sells these bonds, which raises interest rates and reduces the number of dollars in the economy.

Most of the time, the denizens at the Fed’s grandiose headquarters on Constitution Avenue in Washington don’t like to admit that their manipulation is essentially a sneaky way to print more money, but occasionally they let the truth slip. In a March 15, 2009, interview on
60 Minutes
, picked up by the researchers at Comedy Central’s
The Daily Show
, Federal Reserve Chairman Ben Bernanke—who now regularly denies that the Fed is printing money—admitted that “to lend to a bank . . . it’s much more akin to printing money than it is to borrowing.” “You’ve been printing money?”
60 Minutes
asks. Bernanke replies: “Well, effectively.”
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This unchecked power gives the Fed monopoly control over our money supply. The more dollars we have in the circulation, the less valuable our money becomes; they are essentially stealing our hard-earned money through a hidden tax.

On the Federal Reserve’s main website, it says that the bank was founded “to provide the nation with a safer, more flexible and more stable monetary system.”
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The Fed’s original mandate was to establish a monetary system and furnish an “elastic currency.” But, as with every government creation, the scope of its power increased over time. In 1977, Congress passed the Federal Reserve Reform Act, which established the Fed’s “dual mandate”: maintaining stable prices and maximum employment. It has failed miserably at both of these stated missions. One reason is that neither mission can be reliably achieved with a printing press. Another is that the dual mandate is premised on faulty economics, introduced at a time when many economists thought there was a trade-off between unemployment and inflation that could be used to guide policy. However, the stagflation of the 1970s and early 1980s proved this theory wrong, as the era was plagued by both high inflation rates and high unemployment.

The goal of the Progressive Era was to increase government control over the economy, replacing the dispersed wisdom of free people with a government of experts empowered to plan a better society from the top down. The creation of a central bank was a key piece of the puzzle, along with a federal income tax. The fateful Federal Reserve bill was passed on the evening of December 22, 1913, when many congressional members were home on Christmas break. This sounds a lot like the dirty tactics used to pass Obamacare in 2010, doesn’t it? It concluded a terrible year for individual liberty, with the Progressive movement achieving some of the most destructive pieces of legislation in American history, including the federal income tax and the creation of the Federal Reserve.

SEXTILLIONS

L
ONG BEFORE HE WOULD CONTRIVE NOTIONS LIKE “AGGREGATE DEMAND,”
even John Maynard Keynes understood that allowing governments to inflate the money supply unchecked would be devastating to a free economy. In by far his best book,
The Economic Consequences of the Peace
, Keynes wrote that “Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some. . . . Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency.”
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It is beyond dangerous for the government to have monopoly power over money creation. Consider Zimbabwe. Back in 1980, one Zimbabwe dollar equalled a U.S. $1.47. Beginning in the early 2000s, the Reserve Bank of Zimbabwe fired up the printing presses to pump massive amounts of new Zimbabwean dollars into their economy to pay off debts to the International Monetary Fund.
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You can guess what happened next. Correct: rampant hyperinflation. In November 2008, Zimbabwe’s annual inflation rate was 89.7 sextillion percent.
20
Does that sound like a made-up number? For future reference, it goes trillion, quadrillion, quintillion, sextillion. The last term is a 1 followed by 21 zeroes. Written out, 89.7 sextillion is 89,700,000,000,000,000,000,000. The inflation rate was so overwhelming that Zimbabwe’s chief statistician, Moffat Nyoni, declared it impossible to calculate.
21

In 2008, the
Los Angeles Times
reported that, “Zimbabwe is about to run out of the paper to print money on.”
22
Zimbabwe printed its first 100-trillion banknote, worth roughly $30 USD, in early 2009.
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Can you imagine walking around with a $100 trillion bill in your pocket? Zimbabwean children would traverse the streets with wheelbarrows full of cash. Tragically, the wheelbarrow was worth more than the mound of money it carried.

The Zimbabwean dollar officially collapsed in April 2009.
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That month, the Freakonomics blog at the
New York Times
reported that “Zimbabwe’s currency has been essentially worthless in-country for months. Now the Zimbabwe dollar is officially worth more on eBay, where collectors can snap up a few trillion-dollar notes for less than $25.”
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Zimbabwe had to ditch its currency and start all over again.