Gold, Peace, and Prosperity

The Birth of a New Currency

Ron Paul

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[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

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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.

Printed in the United States of America.

Photographs courtesy of the Chase Manhattan Archives.

Second printing.