The Social Costs of Fed Error

A strong and stable society requires a basic bond between government and its citizens.  This is a foundational bond.  A bond that cements trust between government and citizens, and allows for a sustained, beneficial return shared equally between each.  This is a building block for a long-term, healthy society.  That bond is honest money.  Money that does not change in value.  Money that is neither subject to inflation or deflation.  This is government’s promise to the citizenship that a dollar earned will be worth a dollar in value.  That a dollar today will retain the same value at any time in the future.  That government will remain honest with its citizens, and can demand in return that citizens’ are honest in their remittances to fund government.  Without this bond, trust is lost and over time society begins to fray.  Over a long enough period, society will breakdown.

What is honest money?  Money linked to something real whose value does not change.  Over the history of mankind, gold has proven that its value remains stable.  When governments link their currency with gold, their currency’s value remains as good as gold.  Great Britain began their gold standard in 1694 and it lasted until 1914.  Over this period prices remained stable.  Great Britain built an empire.  The value of the British currency was so stable and trusted that in 1751 the Bank of England issued Consol bonds—bonds of unlimited duration or perpetual bonds.  Hamilton put the U.S. on a gold standard in 1789 and it lasted with minor deviations until Nixon ended Bretton Woods in 1971.  This monetary foundational bond established between our Founding Fathers and its citizenship for over two centuries, propelled the U.S. to the top of the global economic pyramid.  By the mid 19th century, every major nation was on a gold standard.  This was a period of tremendous global growth, industrialization, and progress.  The world’s citizens enjoyed a rare era of governments promoting honest money, and the returns rebounded in rapid advancement of the human race.

Adam Ferguson in his excellent book, When Money Dies, describes the societal effects of the death of honest money under Weimar Germany’s hyperinflation.  Weimar Germany was a hyper-advanced laboratory of the effects of dishonest money, but its tale is no less applicable to the slow death of honest money which the world is in the process of experiencing today.  The death of honest money in Weimar Germany resulted in various segments of society benefiting or being hurt in unequal degrees.  Speculators initially benefited while the rapid inflation wiped out pensioners and savers.  Organized unions were able to negotiate relief while salaried employees, small business owners, and individuals bore the brunt of the inflation.  Weimar hyperinflation eventually turned society against each other.  Starving city dwellers attacked rural farmers who withheld their production from the marketplace as the currency became worthless.  Speculators, many of whom were Jewish, were blamed for profiting and this set the stage for what was to come a decade later.  The end result of Weimar Germany’s hyperinflation was complete societal breakdown.

Today we are witnessing the slow motion breakdown of societies.  We are at the 45 year mark of the world’s experiment with dishonest money.  This began in 1971 when Nixon ended the international monetary system established at Bretton Woods in 1944. Prior to 1971, there has never been a period in history where all nations severed their currency’s link with gold.  Today, all governments that issue currency backed by nothing other than the whim of central bank managers are cheating their citizens of the fruits of their labor and reneging on the societal bond of honest money.  The Federal Reserve has a stated goal of 2 percent annual inflation.  Compounded over 20 years, 2% inflation is a 50% monetary devaluation.  The Fed has stated its policy goal is to cheat Americans out of 50% of their earnings and savings over the next two decades.  Unfortunately, a clueless Fed that has admitted it no longer understands inflation is certain to make things much worse.  With such stated policy, why should citizens in return not use any method possible to shelter their devalued income and savings from the clutches of dishonest government.  Society breaks down with this cause and effect.      

This is not an argument that a return to a gold standard is a cure-all for society’s ills.  But a return to honest money, coupled with sane fiscal policy of low taxes and limited government, will return economic growth.  Economic growth lifts all boats, which is a pressure relief valve for society.  Societal tensions built-up over 45 years of dishonest government monetary policy that unfairly selects winners and losers, pits the haves against the have-nots, and cheats citizens of the fruits of their labor, can begin to normalize.

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