Old Swiss Proverb
By Tom Dillin, Published in the Sandpoint Reader, January 20, 2011 and the Capitalist Papers, March 4, 2011
We shall be governed either by ourselves, under a Constitution, or else we shall be governed by the new kind of master invented in our day, the bureaucrat, and by the impenetrable web of rules that he fabricates and enforces. Let us stand together against the rule of bureaucracy, and for liberty and the Constitution. - Larry P. Arnn, President of Hillsdale College Imprimis, November 2010The role of money is mostly portrayed as the instrument of greed, instead of its more prominent role as a daily instrument of freedom. When a worker spends his money, the purchase is a vote of support for another worker’s product or service. The transaction is an exchange of value given freely and received with confidence and good faith. Every day 1.5 million Idahoans vote with their dollar bills for the success or failure of products, services, churches, charities, investments, and political causes. This is a remarkable social achievement and a loving way to build a community; it is coined freedom in action.
Bad Money is Paper Serfdom
However, if any part of this voluntary interaction between individuals is interfered with, including the value of money, then freedom itself is threatened. The value of money is reduced by printing too much. When this happens, it follows that the worker’s earnings and life savings have also been devalued and dishonored. This bad money is fiat paper serfdom for it steals the blood, sweat, and tears of labor, intellect, and frugality for future happiness. Increasing the supply of fiat paper is similar to “clipping” coins by the Greek and Roman governments, a little here and there won’t be missed. Both result in money being worth less.
Today, in plain sight, our coined freedom is being “clipped” by the Federal Reserve System (Fed). Since the beginning of the Fed, in 1913, the U.S. Dollar (USD) has steadily lost buying power. Idahoans must ask, why have we allowed the Fed to confiscate 95% of the value of our good money? Is serfdom so hard to visualize? We cannot build a safe, prosperous, and free community on a fraudulent foundation of bad money.
A Little History
The story behind the move from good to bad money is very simple. The Fed abandoned gold and silver for fiat paper. The long history (since 700 B.C.) of gold and silver is proof that this bimetal approach is the most honest and successful monetary system ever created.
History also tells us that fiat paper is the most dishonest and unsuccessful system. Fiat systems eventually collapse. The collapse may come after a long period of increasingly volatile booms, busts, high interest rates, and double digit price increases. It has happened in Germany, Chile, Argentina, Peru, Yugoslavia, and Zimbabwe in modern times.
Plenty of Excuses for Bad Money
The proponents tell us not to worry; some countries have managed to get along just fine with 10-40% inflation rates for many years; this is what perpetual deficit spending does to a country.
The Fed blames Congress for the “budgetary” problem. “Follow PAYGO,” the 1990 pay-as-you-go federal law, Alan Greenspan testified repeatedly. He failed to point out that fiat paper money enables perpetual deficits.
Congress blames the business cycle, greedy businessmen, wage-cost push, and the Fed for not printing enough bad money to solve the bad money problem.
Deficit spending would automatically be curtailed and bad money would disappear, if we returned to gold and silver. To spend more than you make is a basic human weakness; gold and silver money has always kept that weakness in check.
Why Bad Money?
Governments are ensnared into bad money policy because they finance a myriad of government programs demanded by special interest groups. They know the cost is beyond the country’s means, but politicians love to “help” people, be liked, and get reelected. The consequences are overlooked, especially those that pertain to budgeting and sound economics.
The globalists also make demands for bad money in order to finance their wars, foreign corporate adventures, and the military-industrial complex. Politicians go along because they are afraid that they will appear unpatriotic, if they oppose America’s wars. Or they will be considered selfish, if they oppose “helping” poor countries.
Bankers favor bad money because they are in control and put themselves at the front of the line for new money. The first to spend bad money into a good money market has tremendous advantages because he can take advantage of the lower prices. They also earn interest on loans created out of nothing but the cost of paper and ink.
And finally, John Maynard Keynes gave us the most sinister reason for bad money, “"There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." (The Economic Consequences of the Peace, 1919)
The Idaho Sound Money Task Force
The Idaho Sound Money Task Force is a group of citizens and state legislators, who are concerned about the failure of the Fed and the fallout of inflationist policy on every citizen of Idaho. A solution must be found before our current monetary crisis becomes unmanageable. If we wait, it will lead to panic decision making during a period of social and economic unrest.
Prognosis
The task force does not know exactly how our current predicament will unfold, but we think Idaho will experience double-digit inflation rates, much higher interest rates, higher taxes, a return to the wage and price controls of the 1960s and 1970s, and greater government intrusion into the daily lives of our citizens.
Proposed Solution
To solve this systemic problem we need to understand the problem and, most important, have a sense of how a good system should work. The statists are already at work to replace the current failed system with another just as bad, or worse.
The task force has reached a reasoned proposal that does not violate the principles of freedom and sound economics. Our sound money bill for 2011, The Idaho Constitutional Tender Act, is sponsored by Representative Lenore Barrett (R-Challis). Please ask your state representative to support Representative Barrett in this bipartisan effort.
The Central Problem
The Fed practices a fiat, fractional reserve monetary system. Fiat money has no intrinsic value, no gold or silver backing, and the supply can be increased or decreased by decree. Fractional reserve policy authorizes member banks to loan more money than they have on deposit. Both of these failed concepts inflate or deflate our currency depending upon the ease or tightness of policy in place at the time. These decisions are made in secret by a few appointed decision makers, with neither adequate nor independent audits.
Political and business pressures on such an artificial system lean toward the less frightening inflationary alternative, a policy most evident today with Quantitative Easing (QE1 and 2). The Fed pressured (in some cases panicked) our congressmen into this highly inflationist policy by telling them the alternative, an economic depression, was unthinkable.
“Quantitative Easing” is a politically correct way of saying printing money, inflating money, creating money, issuing money, debasing money, debauching money, reducing the value of money, or just more bad money. This nice sounding phrase is meant to sugar coat irresponsible inflationary actions by the Fed. The massive size of QE1 and 2, accompanied by lack of accountability, has created a confused and fearful citizenry, and for good reason.
In Human Action, page 428-429, Ludwig von Mises says there are three points policy makers must consider with an inflationist policy:
- It results in overconsumption and malinvestment; it squanders capital and impairs the marketplace.
- It does not remove the necessity of adjusting production and locating resources based on market realities rather than artificial government edicts. It merely postpones painful adjustments and makes them more difficult to resolve.
- Inflation cannot be employed as a permanent policy because it will result in a breakdown of the monetary system.
Underlying America’s prosperity has been a stable money supply brought about by the U.S. Constitution and the gold and silver policies of classical economics (now called the Austrian school of economics). Starting in 1913, we gradually moved away from classical hard money economics. The move from gold and silver to fiat paper money was gradual at first, accelerated under President Franklin Roosevelt, and then completely converted in 1971 by President Richard Nixon, who with no pretense proclaimed, “We are all Keynesians now.”
John Maynard Keynes and the Dark Side
President Nixon’s historic speech didn’t tell us about the dark side of Keynesian economics. Today, with no more natural checks and balances, decision-making is centralized in one all-powerful Fed. Chairman Ben Bernanke has used this power to increase the adjusted monetary base to unprecedented levels. Would Keynes approve or would he say we have reached a destructive level of monetary growth? QE1 and 2 are highly inflationary. We are approaching a critical socially disruptive stage with massive amounts of money unsparingly rained upon favored corporations and special interests.
The explosion of paper currency has reached an exponential level of growth (see chart). This largess is mercantilist, unchecked by common sense or fair play, and portends hyperinflation, instability, more bailouts, and price disequilibrium.
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1971 Nixon closes the gold window, supply accelerates 2008 QE1 the Fed more than doubles the monetary base 2011 QE2 the Fed to add $600 billion (off the chart) |
The Fed is a Mercantilist Banking System
Mercantilism is the use of the state to fulfill personal or corporate objectives. The use of public policy to improperly comingle private self-interests with public tax dollars and politically inspired legal loopholes, allows the individual or corporation to obtain influence that would otherwise not be feasible. Wherever there have been seats of power, there has been mercantilism, which eventually corrodes the process of the state and reduces individual freedom, especially, the right to property. As Thomas Jefferson said in a prescient letter to John W. Eppes in 1813, “It is a question; whether the circulation of paper, rather than of specie (gold and silver coin), is a good or an evil…I believe it to be one of those cases where mercantile clamor will bear down reason, until it is corrected by ruin.” In a letter to John Taylor in 1816, Jefferson continued, “I sincerely believe…that banking establishments are more dangerous than standing armies, and that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale.”
Confiscation of Property
The current system, under the Fed, exposes Idaho and her citizens and businesses to the chronic depreciation of the USD. This loss of purchasing power amounts to the incremental confiscation of their property without just compensation, in violation of Article I, Section 10, Clause 1 of the U.S. Constitution, and the Due Process Clause of the Fifth Amendment.
Gold and Silver Guarantee Price Stability
As long as the USD was tied to gold and silver the Fed could not increase the money supply without increasing the supply of gold and silver. This is very important because new mine production and the growth rate of goods and services each average about the same increase over time, a highly useful natural balance. Money created in excess of the gross national product is bad money.
Too much money chasing too few goods and services are the cause of rising prices. Greatly inflating the money supply is the cause of hyperinflation.
Price increases are not the actions of greedy corporations. Once the public stops misplacing blame on the private business sector and realizes that excess fiat money is the real cause of price inflation, we will have made a great leap forward to solve our monetary problem.
Absolute Power Corrupts Absolutely
Why doesn’t the Fed follow Milton Friedman’s recommendation that they simple adopt a constant (slow) growth rate for a monetary aggregate and be done with it? This would certainly reduce the volatility of money supply and solve the wide swings between inflation and deflation (economic bubbles and busts). To answer this question, we have to look at human nature and the arrogance of power.
James Madison wrote in the Federalist 51, “If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. It is of great importance in a republic not only to guard the society against the oppression of its rulers, but to guard one part of the society against the injustice of the other part...”
Congress has mistakenly empowered the Fed to issue unlimited amounts of legal tender out of thin air to fine tune the economy. Angels do not make up the Federal Reserve Board; humans make mistakes. Economics is not an exact science. Trying to outsmart the invisible hand of the marketplace is like trying to second guess the daily financial decisions of 308 million Americans; notwithstanding the difficulty of being the world’s reserve currency. This is an impossible task. To give a few men this kind of power is unthinkable and dangerous. Lord Acton, who said “Absolute power corrupts absolutely,” must be looking down upon us in horror.
This systemic problem of misplaced power violates the spirit of our forefathers. Where are the checks and balances? Where is the Congressional oversight? Who will guarantee Friedman’s well intentioned “constant growth” solution? The only way to reign in this power is to restore the natural limitations to monetary growth imposed by gold and silver (check) and restore the power to issue money to 308 million Americans (balance).
The Constitutional Tender Act will help stop the corrupting influence of an all powerful Fed by restoring gold and silver money and return the power to issue money to the people.
The Power to Issue Money Belongs to the People
The U.S. Constitution specifies that Congress holds the power to coin money in Article 1, Section 8, Clause 5, but this does not mean Congress can create or issue money. Thomas Jefferson explained that this power is held by the people. The only power held by Congress is to weigh, measure, value, and mint gold and silver given to them by the people and then the mint should give it back to the people from whence it came and to whom it properly belongs.
Constitutional Answers
The U.S. Constitution does not authorize fiat money issued by a central bank, according to Thomas Jefferson one of the most influential of our founding fathers. “The incorporation of a bank and the powers assumed (by legislation doing so) have not, in my opinion, been delegated to the United States by the Constitution. They are not among the powers specially enumerated.” (Thomas Jefferson, Opinion on Bank, 1791)
It is imperative for the State Legislature to guarantee to and provide for constitutional gold and silver tender by exercising:
- Article I, Section 10, Clause 1 of the U.S. Constitution that “No state shall …make anything but gold and silver coin a tender in payment of debts."
- The Tenth Amendment of the U.S. Constitution guarantees the sovereignty and independence of this State and her citizens, inhabitants, and businesses. The absence of gold and silver coin abridges, infringes on, and interferes with the people’s rights, powers, privileges, immunities, and prerogatives as a political community.
- Article 1, Section 3 of the Constitution of the State of Idaho that “…the U.S. Constitution is the supreme law of the land.”
The purpose of The Idaho Constitutional Tender Act for 2011 is to prepare our citizens, businesses, and all levels of state and local government for a monetary crisis by restoring constitutional gold and silver in Idaho, as a voluntary alternative to Federal Reserve Notes (FRNs).
The Fed and its member banks would continue to operate in Idaho as a parallel system. The circulation of FRNs, commonly called USDs or legal tender, would not be inhibited; and, the IRS code, which places a capital gains tax on gold and silver coin, would not be infringed for Idaho citizens and businesses, who do not participate in accordance with the provisions of this Act.
The task force recognizes that it is the responsibility of the U.S. Congress to abolish the Fed and restore constitutional gold and silver to the people. However, the Idaho State Legislature, the Governor, and the State Attorney General must obey the U.S. Constitution, when federal laws contradict Idaho’s constitutional mandate.
Free-Market Banking
The Idaho Constitutional Tender Act is a call for action by the Governor and the State Attorney General to coordinate and defend a private, free-market, constitutional gold and silver monetary system, created by the people, in accordance with the U.S. Constitution. The State Attorney General shall mount a constitutional defense of this Act to protect the state and its citizens against conflicting federal and state banking laws, legal tender laws, and punitive tax codes.
Once the legal barriers are removed, free-market forces would be encouraged to build a working infrastructure, not the government. Entrepreneurs are more experienced and knowledgeable in this field than government officials; they have the expertise to solve and implement the legislative intent of this Act.
Supply of Gold and Silver Not a Problem
There is an adequate supply of gold and silver coins in circulation, in addition to the ongoing production by the U.S. mint to meet the needs of the Idaho Constitutional Tender Act. There is no need for state coinage. State coinage would violate Article 1, Section 8, Clause 5 of the U.S. Constitution.
A Boom for the Idaho Economy, Liberty, and the Rule of Law
Under this Act, companies will be attracted to Idaho to participate in the safety, stability, state legal protections, and tax benefits of a good money State. As a shining beacon of economic and individual freedom, Idaho will prosper under the Act.
Tom Dillin was the former chairman of the Idaho Sound Money Task Force and the current chairman of the Legislative District 1 Republican Central Committee.
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