Gold, Peace, and Prosperity

The Birth of a New Currency

Ron Paul

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Chapter Index

Page numbers appear in blue: 5, 7, 9, 10, 11, 12, 13, 14, 15, 16, 17, 18, 19

[5] Dedication


To Carol, whose love and support
are more precious than gold.

[9] Foreword


In this short pamphlet, Congressman Ron Paul has written one of the most enlightening explanations of inflation that I have ever read.  It is both a history and an analysis.  That history goes back further than our Revolutionary War, but as a continuous narrative it begins, as it should, in 1913 and 1914.


In the first of those years the United States passed the Federal Reserve Act, which in addition to providing only a fractional gold cover for Federal Reserve notes and deposits, made it possible for the commercial banks to borrow from the newly created Federal Reserve Banks.  They could thus increase their own loans, and therefore the “money supply” they could bring into being.  This made inflation possible; but this fact was not generally recognized as long as gold convertibility of the outstanding paper currency was maintained.


What happened in 1914 was more obvious and more dramatic.  World War I broke out; and the belligerents instantly suspended gold conversion of their currencies.  Each nation did that for “self protection.”  Each belligerent knew that other countries would be unlikely to accept its paper currency at par, or would in any case immediately turn it in for gold.  So each belligerent kept its gold supply as a final reserve, to be paid out only when other countries would accept no other means of payment.


After World War I, the belligerents eventually returned to a gold standard; but meanwhile they had enormously expanded their paper currency and raised their “price levels,” and so were to suffer the drastic commodity price collapse of 1920 to 1921, and the crisis of 1929 to 1933.


But I do not wish to trench here on Dr. Paul’s excellent account.  When he comes to analysis, he shows that inflation is always the result of an increase in the money supply, either encouraged or initiated by government action.  He not only points [10] out that this money supply increase must be halted if we are to escape even greater economic devastation, but he makes clear why we are altogether unlikely to halt the increase until we return once more to a real gold standard.


One of the great merits of Congressman Paul’s account is that it avoids all technicalities, and enables the reader to recognize step by step what has happened to us and how we can return to monetary and economic sanity.


Henry Hazlitt

[11] Preface


Ron Paul is a most unusual politician—in many ways.  In the first place, he really knows what he’s talking about.  He is not only for the gold standard.  He knows why he is for it, and he is familiar with the most advanced and complex economic insights on the true nature of inflation, on how inflation works, and how inflationary credit expansion brings about booms and busts.  And yet Ron has the remarkable ability to take these complex and vital insights and to present them in clear, lucid, hard-hitting terms to the non-economist reader.  His economics is as sound as a bell.


But, even more important, Ron Paul is an unusual politician because he doesn’t simply pay lip service to moral principles.  He believes in moral principles in his mind and heart, and he fights for them passionately and effectively.  High on his set of moral principles is the vital importance of individual freedom, of the individual’s natural right to be free of assault and aggression, and of his right to keep the property that he has earned on the free market, and not have it stolen from him by confiscatory taxes and government regulations.


Ron Paul, in short, is that rare American, and still rarer politician, who deeply understands and battles for the principles of liberty that were fought for and established by the Founding Fathers of this country.  He understands that sound economics, moral principles, and individual freedom all go together, like a seamless web.  They cannot be separated, and they stand or fall together.


Ron Paul understands that all three parts of this system of liberty have been under grave attack for decades, and that the main problem is the federal government itself.  The government has systematically eroded and invaded property rights, has piled on ever higher taxes, ever more onerous regulations, and, most sinister because most hidden, has eroded the value of the dollar [12] and of all of our savings through inflation.  Ron Paul is an unusual politician because he is not content to shrug his shoulders, to “go with the flow,” as Californians say, or to go along in order to get along.  He is a man of honor as well as a man of principle, and so he has, ever since he got into politics, been doing something about it.  He has fought, sometimes single-handedly, for our liberties and for our savings.


Inflation, as Ron Paul points out, is caused by the government’s continual creation of new money, by what amounts to its system of legalized counterfeiting.  But, if that is so, why not simply urge the government to stop the creation of money?  Why not point out to our rulers the bad consequences of their actions?  But Ron Paul realizes that this kind of education, or even pressure, is not going to work by itself.  For we are dealing not simply with ignorant or misled people; we are dealing with a pernicious system.


Let us put it this way: give any man or group power, and it will tend to use that power.  If the power is inherently abusive, then that power will be abused.  Our present system gives to the federal government and its Federal Reserve System the unlimited power to counterfeit.  The problem is that if the Fed has the power to counterfeit, it will inevitably use that power.  Why?  Because the power to counterfeit is too tempting.  The power to create money means that it is far more tempting to print it than to work for it.  It means that the counterfeiter can pay his debts, spend more money, give more money to his friends and associates.  In the case of government, the power to counterfeit means that government’s debts can be paid without levying taxes, that government spending can increase, and that political allies can be purchased and maintained.


The power to counterfeit is the power to abuse.  It is not enough to urge the government to use it more moderately.  The power must be taken away.  Counterfeiting is fraud, and no one [13] should have the right to counterfeit, least of all government, whose record of counterfeiting throughout history is black indeed.  Money and banking must be separated from the State, just as Church and State are separated in the American tradition, just as the economy and the State should be separated.


Vital to this necessary reform is the return to a money which is a useful product produced by the free market itself.  In every society7, people on the market voluntarily arrive at one or two commodities which are the most useful to use as a money.  For thousands of years, gold has been selected by countless societies as that money.  The only alternative to a market commodity-money is what we unfortunately have now: paper tickets issued by the government and called “money.” Since the paper tickets—dollars, francs, pounds sterling, or what have you—are issued by the government, the government can issue any amount it arbitrarily chooses.  Counterfeiting is built into the system, and hence so is inflation and eventual destruction of the currency.


The only genuine solution to the evil of inflation, then, is to separate money from the State, to make money once again a market commodity instead of a fiat ticket issued by the central government.  The dollar must once again be what is was originally until it was, in effect, nationalized.  The dollar must once again be simply a name for a unit of weight of gold coin.  Only this kind of fundamental reform will cure the ravages of inflation.  Because Ron Paul is one of the few men in public life who truly understands the problem and is willing to fight to cure it, it is truly a pleasure for me to write the preface to this booklet.


Murray N. Rothbard

[14] Acknowledgements


I am grateful to the supporters of the Foundation for Rational Economics and Education, Inc., whose generosity made the publication of this booklet possible.  Thanks are also due to my administrative assistant, Lew Rockwell, for his help in preparing the essay for publication.


Ron Paul

[15] Impending Social Strife?


The greatest threat facing middle and working class Americans is our depreciating paper currency.


At least when the kings of old debased their coinage, by adding copper to the precious metal, there was still some objective value to the resulting money.1  But as economist David Ricardo observed almost two centuries ago, when money costs nothing, it will become worth nothing.2


“Government,” said Ludwig von Mises, “is the only agency that can take a useful commodity like paper, slap some ink on it, and make it totally worthless.”3


Today, thanks to 67 years of central bank control over the money supply, we face an economic and political crisis greater than any we have faced before.


We probably will see widespread civil disorder in the 1980s, as a direct result of our faltering economic system.  The dollar has been damaged by decades of interventionism, and Congress has legitimized depreciation of the dollar and forced redistribution of wealth through corporate and social welfare schemes.


All aspects of the interventionist system threaten freedom and social peace, but money is the major issue, since it is the lifeblood of all economic transactions.  If we are to reverse the trends of the past six or seven decades, honest money and monetary debasement must become top concerns of ordinary Americans.


The late Martin Gilbert, head economist for a Swiss bank, was a convert to the gold standard.  Among his employees was a young manual worker.  “Once a month,” said Gilbert, “he took part of his pay and bought a gold coin for his wife.  I remonstrated with him about it once, and he said, ‘Look, don’t you Americans come over here and try to tell us how to live.  I go [16] home and I give that coin to my wife, and I tell her, “If something happens to me, and to the bank and all the governments, you can go into the countryside and give it to a farmer, and with that coin you can eat for a week.” ’  I came around to the opinion that he knew something I didn’t know.”

The People Are Demanding an End to Inflation


The recent chaos in the money markets is telling us that the world is rejecting the American dollar as a reserve currency, and agreeing with the young man in Martin Gilbert’s story.  Tragically, there is probably little future for the dollar, or dollar-denominated assets.


Because all other nations are inflating and therefore destroying their currencies, trading foreign currencies to protect against the ravages of a depreciating currency is also becoming less attractive.  The alternative, as it has been throughout history, is to seek and hold real money: gold and silver.


Fifty years of systematic monetary destruction now threaten the existence of our constitutional republic.  The American people are frightened by what they see, and they are demanding that the inflation stop.  More citizens are realizing that Congress and the Federal Reserve have generated a flood of paper money with no intrinsic value.


It is rare to find anyone today who believes that wealth can come out of a printing press.  The corporate bailouts, guaranteed loans, government contracts, and welfare gimmicks all have failed, and the people can no longer be duped.


Politicians who have been in office for too many years, and have therefore lost touch with the people, pay no heed to the [17] rising clamor for money of real value.  But the old scapegoats no longer work.  Blaming Arabs, businessmen, labor unions, or consumers for rising prices doesn’t drown out the steady hum of printing presses running 24-hours-a-day, ballooning the money supply, and thereby debasing every dollar previously printed.


Congress alone is responsible for inflation, and Congress alone can stop it.  It has shirked its responsibility for decades, but events are making a continuation impossible.  It is time now to prepare for monetary reform.

Depreciation Is Nothing New

A gold bezant, the major trading coin

of Byzantium.


In Marco Polo’s great book of travels, he talks about a coin called the bezant circulating in Kublai Khan’s Mongol Chinese empire.  The emperor, like the vast majority of politicians, found the lure of paper money irresistible.  In his case, however, it was money printed on pieces of mulberry tree bark.  The same disastrous effects, seen everywhere else in history, followed.  Prices increased, and the gold bezant took on increasing importance [18] for the people as the government debauched the irredeemable fiat currency.  Abuse of paper money helped lead, notes Antony Sutton, to the expulsion of the Mongol dynasty from China.  Government demands that the people accept printed mulberry bark as equivalent to metallic money had no effect.


The bezant, however, was minted not by the Chinese, but by the Byzantine Empire.  For ten centuries Byzantine coins were accepted all over the world, and Byzantium dominated trade for thousands of miles in every direction from Constantinople.  Even the royal accounts of medieval England, says Dr. Sutton, were kept in bezants.  The Byzantine Empire only declined when it debased the bezant, adding more cheap alloys and removing gold.

“Not Worth a Continental”

U.S. paper Continental currency.


[19] In more recent times, to finance our Revolutionary War, the Continental Congress issued paper money in great quantities.  Over a period of about four and a half years, the Continental currency fell from a value of one paper dollar per one gold dollar, to about 1,000 to one.


William Gouge, writing in 1833, quotes one member of the Continental Congress:  “Do you think, gentlemen, that I will consent to load my constituents with taxes, when we can send to our printer, and get a wagon load of money, (25 sheets) of which will pay for the whole?”4


Most of the burden, Mr. Gouge notes, fell on the patriots, “as it was in their hands the paper depreciated.  The Tories, who had from the beginning no confidence in it, made it a rule to part with it as soon as possible.”5  Those who trusted the Congress were destroyed; the cynics were not.  As a result of this paper money inflation, wrote one of our earliest economists, Pelatiah Webster, “frauds, cheats, and gross dishonesty are introduced, and a thousand idle ways of living attempted in the room of honest industry; economy, and diligence, which have heretofore enriched and blessed the country….6


“While we rejoice in the riches and strengths of our country, we have reason to lament with tears of the deepest regret, the most pernicious shifts of property which the irregularities of our finances introduced, and the many of thousands of fortunes which were ruined by it; the generous, patriotic spirits suffered the injury: the idle and avaricious derived benefit from said confusion.”7


The phrase “Not worth a Continental” records the fate of this paper currency.

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1 A.S.P. — Technically this is wrong.  All value is subjective, and that includes the valuation of hard money.  What is objective is (1) the fact that there is only so much gold on the Earth, as well as (2) its weight on the Earth.

2 A.S.P. — It’s interesting that Paul cites this observation as Ricardo’s, as Ricardo was a proponent of Smith’s labour theory of value.  Today, economists typically adhere to the subjective theory of value—and, indeed, some subjectivism can be found in Ricardo’s work.  I however have been unable to locate any source where Ricardo directly makes this point, but that may perhaps matter little when one considers that the point attributed is necessarily true regardless of whether one adopts Ricardo’s labour theory or Paul’s subjective theory.  Ricardo writes that “if the value of money were to fall, the price of every commodity would rise, for each of the competitors would be willing to spend more money than before on its purchase; but though its price rose 10 or 20 per cent if no more were bought than before, it would not, I apprehend, be admissible to say, that the variation in the price of the commodity was caused by the increased demand for it.  Its natural price, its money cost of production, would be really altered by the altered value of money; and without any increase of demand, the price of the commodity would be naturally adjusted to that new value.”  See David Ricardo, On the Principles of Political Economy and Taxation 3rd ed. (London: John Murray, 1821), p. 461, § 30.4.

3 A.S.P. — I’ve been completely unable to find an original source where Mises said this.  And, as Jeffrey Tucker correctly points out, it doesn’t sound like Mises’s style of writing.  Tucker writes, “It’s clever but lacks the precision of Mises.”

4 A.S.P. — William M. Gouge, Part II of A Short History of Paper Money and Banking in the United States (Philadelphia: T. W. Ustick, 1833), 27.

Gouge is referencing Webster here.  See Footnote D to Pelatiah Webster, An Essay on the Danger of too much circulating Cash in a State, the ill Consequence thence arising, and the Necessary Remedies (Pennsylvania Evening Post, October 5, 1776, under the signature of A Financier).  Webster quotes the congressman as saying, “Do you think, gentlemen, that I will consent to load my constituents with taxes when we can send to our printer and get a wagon-load of money, one quire of which will pay for the whole?”

See also Lawrence W. Reed, “The Times that Tried Men’s Economic Souls” (The Freeman, March 2008).

5 A.S.P. — Gouge, 27.

6 A.S.P. — Gouge, 29–30.  See also Pelatiah Webster, “A Fifth Essay On Free Trade and Finance” (Philadelphia, PA: March 30, 1780).

Webster writes, “For want of the tax, the morality and industry of the people are greatly diminishedFrauds, cheats, and gross dishonesty are introduced, and a thousand idle ways of living are attempted in the room of that honest industry, economy, and diligence which heretofore blessed and enriched this country.  And as an estate in a country of honest, industrious people, is better than in one filled with idle rogues; and as all property is hereby rendered more unsafe and less valuable; it is very easy to see, that the loss of each individual in this respect, will be very considerable, and must, on a very moderate computation, much exceed the tax required to remedy the whole mischief.”

7 A.S.P. — Gouge, 30.  See also Pelatiah Webster, “A Fourth Essay On Free Trade and Finance” (Philadelphia, PA: February 10, 1780).

Writes Webster, “But whilst we rejoice in the riches and strength of our country, we have reason to lament, with tears of the deepest regret, the most pernicious shift of property which the above mentioned irregularities of our finances introduced, and the many thousands of fortunes which were ruined by it; the generous, patriotic spirits suffered the injury; the avaricious and idle derived benefit from the said confusion.”

Copyright © 1981 by the Foundation for Rational Economics and Education, Inc., Post Office Box 1776, Lake Jackson, Texas 77566.

Permission to quote from, or to reproduce liberal portions of, this publication is granted, provided due acknowledgement is made.

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Photographs courtesy of the Chase Manhattan Archives.

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