The Fed Facilitates the Biggest Theft in History

“Gold and Liberty” is the title of a book/pamphlet (145 pages) by Richard M. Salsman written in 1995.  It was sent to me recently by a very sharp securities consultant and fellow conservative type.  I should modify that.  Glenn is not so much a conservative as, I think, he wants our government to butt out and let us have our freedoms back.  He understands risks and rewards.  Like me, I’m not sure he understands why our government should regulate and restrict everything in life except its spending.

Salsman is a strong supporter of the gold standard and free banking.  He believes in the discipline of the gold standard and the superiority of markets (free banking) making decisions rather than ‘god-like’ central planners.

He is very hard on central banking.  For example, “Over the centuries, the kinds of government operations in most need of central bank financing have changed.  The earliest central banks tended to be formed at times of war when government did not want to overtax a citizenry from which it expected patriotic support.  Central banks still tend to inflate during wartime today.  However, in the past century they expanded to support the massive deficit-spending associated with the welfare state.  Central banking powers have expanded through most of the 20th century, together with the expansion of deficit spending, welfare functions, and central planning.”

Salsman finds that Central Banks have failed at almost everything they have been tasked to do.  “The Federal Reserve was established in 1913 to prevent instabilities that were attributed to the private banking system.”  He argues that what instabilities in currency and banking were the result of government intervention into the banking system.

Central Banker scheming to take your Money

He concludes that, “Central banking has ‘succeeded’ in only one function, in its original function, as the financier of gigantic government.  Central banks are bankers to unlimited governments, governments that spend more than they have been able or willing to levy in taxes on the populace. The advantages of being able to avoid paying for expanded government by taxing voters are obvious.  The disruptive effects of such intervention, such as price inflation or reckless banking, can be blamed on ‘greedy’ businessmen and bankers.  Constitutionally limited and creditworthy governments do not need central banks.  They are able to finance their operations in a free market with ready access to the private credit system.” (emphasis is mine)

I have often thought that a return to the gold standard would provide the discipline to keep government under control.  It would prevent the massive deficits now run up by almost every government on earth.  If every government debt would have to be paid in gold, every nation would soon have no gold as it would all be held by the individuals and companies who had provided services to the government.  Then the governments would have to go to the private investor market and sell investors on bonds that could only be backed by future tax revenue.  With a gold standard, how could they spend a trillion dollars they don’t have, like the 111th Congress has done in the past two years?

To me the most telling lines in the book come from none other than Alan Greenspan.  Though he served as Chairman of the Fed (the government’s chief banker) from 1987 to 2006, he truly understood what the Fed was all about.  Witness this quote from Geeenspan in 1967, from the book:

“The oppostion to the gold standard in any form – from a growing number of welfare-state advocates – was prompted by a much subtler insight; the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state).  Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide  variety of welfare schemes. A substantial part of the confiscation is effected by taxation.  But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale…. But government bonds are not backed by tangible wealth, only by the government’s promise to pay out of future tax revenues, and cannot be easily absorbed by the financial markets….  Government deficit spending under a gold standard is severely limited.  The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit.  They have created paper reserves inthe form of government bonds which – through a complex series of steps – the banks accept in place of tangible asses and treat as if they were an actual deposit, i.e.,  as the equivalent of what was formerly a deposit of gold.  The law of supply and demand is not to be conned.  As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise…. In the absence of a gold standard, there is no way to protect savings from confiscation through inflation.  There is no safe store of value.  If there were, the government would have to make its holding illegal, as was done in the case of gold….  Deficit spending is simply a scheme for the hidden confiscation of wealth. Gold stands in the way of this insidious process.  It stands as the protector of property rights.” (emphasis is mine)

Are a few central bankers really better at creating a stable economy or would a disciplined marketplace based on a gold standard do a better job?

I’m glad I took the time to read the book and will look for other Salsman titles to round out my understanding of  the views of the Objectivists.  Maybe the first will be to find a copy of the Intellectual Activist  from 2004-2005 to read the first four parts, by Salsman, “The Cause and Consequences of the Great Depression.”