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  Shortly after the war, wage and price controls were removed and consumer prices advanced sharply, which also must have contributed to her concern. Retail prices were rising as a consequence of the inflation to finance the war.

  My grandmother was devout and knew the Bible. She had read Genesis 47:15: “So when the money failed in the land of Egypt and in the land of Canaan, all the Egyptians came to Joseph and said, ‘Give us bread, for why should we die in your presence? For the money has failed.’”

  Our current problem was well established, even in ancient Egypt. Debased currencies fail. Governments cannot manage money.

  Although the destruction of the dollar has been slow and insidious, deep concern existed even before President Nixon, in 1971, eliminated what remained of the gold standard. During the Korean War, inflation was a serious enough concern, just as it had been during the 1970s, to disguise it with wage and price controls.

  Today’s politicians in Washington, oblivious as usual to the dangers of inflation, show no concern for the dollar or the operations of the Federal Reserve. They are, instead, terrified of deflation. Think of what the word deflation means. Defined as a declining money stock, deflation can actually be economically clarifying. It causes banks to tighten up their lending standards and encourages businesses to run tighter operations. It can put the squeeze on government, as it becomes more costly to service the debt. None of these is a regrettable trend.

  Another definition of deflation concerns a falling price level. This is another way of saying that your money becomes more valuable over time. That is not something to regret, either. Business can operate and thrive under these conditions: look at the software and computer industries since the 1980s. And if we look back at the last quarter of the nineteenth century, increased purchasing power (deflation) was accompanied by the greatest period of economic growth in world history, with the benefits of capitalism spreading to all sectors of society.

  So I do not believe deflation is a threat. In fact, we would be lucky to face such a “threat”! The real threat we face is the opposite. The concern my grandmother expressed may have been overblown and early, but we as a nation are setting the stage for “the money going bad,” German-style. We may be getting closer to that day than anybody realizes.

  The janitor at our grade school in Greentree, Pennsylania, was an interesting character. He was seen as a bit of an old sage, at least by me. Others who attended that school will remember Willy (William Foley). He was chief cook and bottle washer for the entire building—no assistants. That is, except in the summer months when a few of us got jobs scrubbing walls and windows and painting. We were all of twelve or thirteen years old, and I’m sure child labor laws were never on anyone’s mind. Our early wages were surely less than a dollar, since at that time I also worked in a drugstore for 35 cents an hour. My experience in the drugstore paid off surprisingly well by the time I got to college and secured the manager’s job at the Bullet Hole, the coffee hangout for students at Gettysburg College.

  The experience working for Willy and listening to his philosophizing was stimulating. In a way, he probably taught me as much about life as any of my teachers. He could easily be a candidate for the most unforgettable character I have ever met.

  He talked about life struggles, but he also acted as a policeman of sorts. Though a “mere” janitor, he had some discipline authority, or at least bad behavior could easily be reported to higher authorities. But that’s where he excelled, cautioning us, advising us, and mostly protecting us from stern discipline if certain events were to become known to the principal. The principal was a World War I veteran whose voice reflected exposure to poison gas in the fighting. He also believed in harsh corporal punishment. So most of us saw Willy as a trusted friend.

  I recall one subject on which Willy did a bit of ranting. The “bankers” were the source of our problems, and I heard the charge more than once. I had no idea what he was talking about, and for years afterward wondered about it. Unfortunately, I didn’t know enough to quiz him. But as the years went by, I surmised a few things.

  Willy was old when he came to our school—it was a retirement job for him. He told stories of once being a glass blower and indicated that it was a high-paying job and allowed him to buy a fancy horse-drawn rig. Obviously, this was before automobiles.

  In thinking back, I decided he may well have been old enough to vote in 1896. Maybe he was influenced by William Jennings Bryan’s populism and attacks on bankers. After many years, because I never forgot the charge that the bankers caused all our economic and political problems, I decided he was a product of the Populist-Progressive Era of the late 1800s and the early 1900s.

  Although William Jennings Bryan was hardly a champion of our cause, he was a fan of Andrew Jackson’s and early on was an enemy of central banking. In his “Cross of Gold” speech, Bryan shouted: “What we need is our Andrew Jackson to stand, as Jackson stood, against the encroachments of organized wealth!” Bryan credited Jackson with having destroyed “the bank conspiracy and saved America.”

  Bryan was no libertarian, but his attack on powerful banking interests should make us aware of the historical precedent for protests against these elites. Today’s building coalition that is attacking current central banking operations might even be more radical; it is certainly more educated.

  So far, the leadership of the Republicans and the Democrats has resisted any attack on the Federal Reserve, but that will probably change as blame for our current financial crisis can and should be laid squarely at the feet of the Fed. The money issue is once again becoming a key political issue.

  In an Economics 101 class at Gettysburg College, a bit of a revelation hit me when I discovered that most money was not money at all, but rather money substitutes. The economy thrives, I was told, on all of us circulating checkbook paper credits kept on a log at the bank. In my sheltered life, I thought we worked for money, paid our bills in money, and when we had too much on hand, we saved it in a bank and it earned interest. That’s what I did with my pennies and quarters earned from lawn mowing and delivering papers and milk.

  But now, it was explained to me, the bank only had to have a fraction of the actual money on hand. I was told this facilitated economic growth through the concept of fractional-reserve banking. It made me question, but surely not enough, the system the professor was now explaining to me. In a way, it seemed to be a pretty neat trick.

  My first reaction might have been something like Paul Begala’s startling discovery, while serving in the Clinton administration, regarding executive orders: “Stroke of the pen, law of the land, kinda cool.” Begala, of course, was ecstatic over the remarkable shortcut for passing laws by keeping Congress from interfering with the legislative process. That’s how those who benefit from inflation must feel about the Federal Reserve System—“kinda cool.”

  The banks certainly enjoy the benefits of the current monetary system and the principle of fractional-reserve banking. Just like Begala, the recipients of the benefits that come from the fraudulent system of money are pleased with a shortcut to acquiring that money. Even after their scheme to enrich themselves falls apart, as it inevitably does, their expectations remain the same. They claim they provide an invaluable public service and deserve continued support from the public treasury. But this time it is happening more directly, through direct taxpayer-supported bailouts. Once this principle is established, the line grows longer and nearly everyone demands assistance.

  The seeds of financial distrust were sown decades ago, as I discovered in a college class in the 1950s. The corrupt system lasted a long time, but now payback is upon us.

  In the 1960s, I discovered the writings of economists such as Ludwig von Mises, F. A. Hayek, Murray N. Rothbard, and Hans F. Sennholz. I gradually found the answers I had been searching for. Even for the experts, it literally took centuries to fully understand the nature of money and the business cycle. Unfortunately, those in charge of our government and banking system are
still denying the truth regarding money that was discovered many decades ago.

  While I was serving in the U.S. Air Force and stationed at Kelly Air Force Base as a flight surgeon, my next-door neighbor, a fellow physician, taught me something practical about the system. He understood hard money and was also influenced by his Mormon faith, which taught him self-reliance and frugality. I found out that on a regular basis he was sending off and buying uncirculated silver dollars. At the time, silver was still under $1.21 an ounce, and therefore the incentive to buy and melt silver dollars for their silver content did not exist. But he did, however, pay a premium over the normal value. Although the added cost was very small, it seemed a little strange to me that somebody would pay $1.05 for a silver dollar that could be obtained at the bank for $1.00 for routine purchases. The 5 percent extra was the cost for getting an uncirculated coin.

  My friend’s instincts were right about stocking up on silver dollars. It was not too many years later, in 1965, that silver was removed from the coinage. Even LBJ’s claim that he would mint so many Kennedy half-dollars that the market would become saturated and force the coins to stay in circulation was wrong. He didn’t understand Gresham’s law (that money overvalued by the government will drive out money that is undervalued by the government), and the more he minted, which turned out to be a record number, the faster they were removed from circulation. Since silver never dropped below $1.21 an ounce, the Kennedy silver half-dollar never circulated to any degree.

  Another physician I knew during this time would periodically travel to Las Vegas and bring home a bag of silver dollars. These he got at face value. Silver dollars at the time were still being used in casino slot machines. Wouldn’t that be fascinating, to watch and listen to real silver dollars being used? Credit cards, dollar bills, and tokens—how boring! And I don’t even gamble.

  The monetary event that prompted me to enter politics occurred on August 15, 1971. That Sunday evening, Richard “We are all Keynesians now” Nixon announced the U.S. government would default on its pledge to deliver gold to any foreign government holding U.S. dollars at the rate of one ounce of gold for each $35.

  In addition, wage and price controls were put in place, along with a 10 percent import tariff. Instead of the markets collapsing, as I thought they should, the move was immediately praised by the Chamber of Commerce, and the stock market soared. The problems came a little bit later and lasted for a decade. The stock market rally quickly fizzled.

  This was the third broken promise by our government regarding gold backing to our dollar. Lincoln did it in the Civil War, and FDR did it in 1933 when he confiscated gold from the American people and made it illegal for American citizens to own gold. Roosevelt took the gold at $20 an ounce and promptly revalued it at $35. The citizens lost, the government profited.

  Profits from this process were used to initially fund the Exchange Stabilization Fund, which is still in operation today. It is a slush fund hidden from the scrutiny of the Congress and has already used $50 billion in the current bailout process. It is a self-funding operation, earning enough interest from the Treasury to do at will what they want. Under the law, it is still permitted to meddle in the gold market, which I suspect it does.

  Tragically, the courts supported this illegal theft by Roosevelt from the people and ruled that all private and government promises to pay bondholders in gold were null and void. So much for Article 1, Section 10, which places responsibility on the federal government to protect contracts, not to deliberately break them.

  August 15, 1971, was a major event in the history of the American dollar. In many ways, it was saying the U.S. government was insolvent—it could not meet its monetary commitments. The worldwide run on the American system arrived and the United States refused to pay. A fiat dollar reserve standard replaced the Bretton Woods pseudo-gold standard. There was nothing unexpected here. The failure of Bretton Woods was predicted early on by the Austrian economists, especially Henry Hazlitt, who was writing daily articles for the editorial page of the New York Times. 2 Austrian school economists also knew, even in 1971, that the new paper standard would not provide stability to the financial system.

  The shift to a new monetary regime was an unprecedented experiment in global monetary planning, a wholesale plunge into the world of paper currency. With no backing for the dollar at all, Americans became completely reliant on the Federal Reserve to manage our money and to do so without any outside discipline.

  The chaos was dramatic. The dollar was sharply devalued, and price inflation became a major problem in the decade of the 1970s, as did steadily rising interest rates. But what impressed me most was that the Austrian economists who made predictions a long time ago were proven correct.

  It was the consequences of this event in 1971 that prompted me to decide on a lark in late 1973 to run for Congress in 1974. Texas was still a Democratic state, and had only three Republicans in a delegation of twenty-four congressmen. The district I was running in had never been held by a Republican. In 1974, it remained a Democratic district.

  My first victory didn’t come until a special election in the spring of 1976. At the time, I was just anxious to have a forum in which to talk about monetary policy and its relationship to the inexorable growth of our federal government. I was as surprised as anyone that this effort to spread a message about monetary policy and freedom would lead to a career of sorts in politics.

  I was convinced that if one did not play the role of Santa Claus or errand boy for a district, it would be impossible to win a seat in the U.S. Congress. My wife, Carol, warned me at the time that running for Congress could be dangerous: “You could end up winning.” I dismissed her concern and didn’t anticipate that I had a chance. I was pleasantly surprised.

  As significant as the events of the 1970s were, the financial chaos we are now witnessing is much more significant. The fact that the system was held together for longer than many Austrian economists expected only means that the financial bubble, the debt, the malinvestment, and the international imbalances would become that much greater.

  The market made every effort to correct monetary mistakes of these past thirty-seven years. The Federal Reserve was able to minimize the corrections only to guarantee the current BIG ONE down the road. That, of course, means worldwide depression worse than the 1930s, unless we wake up rather quickly.

  Dangerous times are indeed with us, and we will be forced to devise a new monetary system just as we were required to do at the end of the Bretton Woods system. But there is no looking back, no return to the old 1944 agreement. Today, there’s still wishful thinking, but the fiat dollar reserve standard that the world has blindly accepted for more than three decades is dying and the financial structure is disintegrating. What we decide to do now will affect the well-being of American citizens for decades to come. There’s no returning to the fiat dollar standard that evolved after August 15, 1971.

  The 1970s were hectic, and establishment economists were mystified by a stagnant economy and rampant price inflation, prompting a new term to describe the conditions: stagflation.

  Being in Congress in the late 1970s and early 1980s and serving on the House Banking Committee, I met and got to question several Federal Reserve Board chairmen: Arthur Burns, William G. Miller, and Paul Volcker.

  Of the three, I had the most interaction with Volcker. He was more personable and smarter than the others, including the more recent board chairmen Alan Greenspan and Ben Bernanke. In my second tour of congressional duty starting in 1997, I had the opportunity to quiz them.

  In 1980, a major piece of banking legislation, the Monetary Control Act, was passed; many considered it a prelude to the savings and loan crisis in that decade. I expressed my concern to Chairman Volcker at a hearing that reserve requirements could be lowered to zero and the Federal Reserve could buy any asset, including foreign debt.

  Volcker invited me to a private breakfast to dissuade me from my interpretation. Lew Rockwell, my chief of staff
, went with me to the breakfast. Interestingly, we arrived early and were talking with Volcker’s aide when Volcker arrived. Before acknowledging Lew or me, he quickly went to his aide and asked, “What’s the price of gold?”

  At the time, the price of gold was soaring, and there was deep concern about inflation and the dollar’s value on the international exchange markets. I believe central bankers are always looking at the price of gold, because they know what many of us know: in the long term, the best gauge for the soundness of a currency is the gold price.

  The fallacy is that they believe if the gold price can be held in check, even artificially, it conveys confidence in the currency and the banking system. Defying market forces that want a higher price for gold by artificial means can only work temporarily. The market, or the black market if necessary, will always set the real prices of everything. Eventually, artificially fixing the price of gold will break down.

  That’s what happened in 1971. Dumping nearly 500 million ounces of gold at $35 an ounce in the 1960s never stopped the depreciation of the dollar. Still, central bankers were determined to keep a lid on the dollar price of gold. Volcker was called to the Fed to stop the inflation, and obviously he was intensely interested in the price of gold. The gold price was the crucial test for him, since by then the Fed had long given up on pretending it could “fix” the gold price forever. That effort, of course, was abandoned in 1971 with the closing of the gold window.

  Volcker, as an assistant secretary of the Treasury in 1971, expressed great doubt about the wisdom of that particular move regarding gold. Casual conversation with Volcker as recently as 2008 confirmed these concerns, but he assured me that a gold standard was not the answer to today’s problem.

  The breakfast went well, and he was quite cordial. This is not something Greenspan ever invited me to do; nor do I expect an invitation anytime soon to a private breakfast and discussion with Bernanke. At the end of the breakfast, Volcker finally agreed that my interpretation of the language was correct, but assured me he would never lower reserve requirements to that degree or buy up worthless assets. His argument was that the Fed wanted this authority to have free rein in raising reserve requirements at will, as he indeed did with interest rates that broke the back of the raging inflation of the 1970s. As we were leaving, I said that, although I didn’t expect that he would use these extreme powers, who knew if in the future we might just have someone who would. The future is now here.