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Decline of the U.S.:

Sound Money

by Mary Miller, KI Executive Analyst

The Federal Reserve Bank Note may soon have monetary competition within the United States, as a growing number of individual states are looking for economic salvation from fiat money—currency with no intrinsic worth that the government has decreed legal tender.

There is growing concern among state governments that history is being ignored. When more currency is created than can be absorbed by the productive “real” economy, inflation results. As economist, Judy Shelton wrote in 2009:

Inflation is the enemy of capitalism, chiseling away at the foundation of free markets and the laws of supply and demand. It distorts price signals, making retailers look like profiteers and deceiving workers into thinking their wages have gone up. It pushes families into higher income tax brackets without increasing their real consumption opportunities.

Essentially, if capitalism is to be preserved, it cannot be accomplished through the continued diluting of the value of money. States are seizing their opportunity to stand in the gap of the possible collapse of the dollar through the U.S. Constitution; Article 1, Section 10, Clause 1:

No State shall enter into any treaty, alliance or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make any thing but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any title of nobility.

The desire of the states to return to foundational gold and silver tender is initiating many “sound money” legislative actions.

Sound Money

One of the greatest proponents of the sound-money principle was Austrian economist, Ludwig von Mises. In 1912, he wrote:

The sound-money principle has two aspects. It is affirmative in approving the market’s choice of a commonly used medium of exchange. It is negative in obstructing the government’s propensity to meddle with the currency system...It is impossible to grasp the meaning of the idea of sound money if one does not realize that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of right.

To state it bluntly, today’s Austrian economists consider our current monetary order “a serious threat to the free societal order.”

Central Banks

How did we get here? In a nutshell, central banks.

Interestingly, the primary author of America’s Declaration of Independence and third President, Thomas Jefferson, once said:

If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations which grow up around them will deprive the people of all property until their children wake up homeless on the continent their fathers conquered.

That conclusion feels ever more real today.

Initially, central banks were made politically independent to prevent politicians from trying to trade off benefits resulting from an inflation-induced, short-term, cyclical upswing from the debasing of the means of payments (money or legal tender).

Secondly, central banks were explicitly assigned the goal of maintaining “price level stability.” Inflation is universally viewed as a societal evil, and a “stable price level” is conducive to improving growth and increasing the number of jobs.

However, the economic philosophies of John Maynard Keynes infiltrated the mechanics of government and central banking. Foundational Keynesian economic theories and the resulting econometrics have grown into a monstrosity that bears little resemblance to the warning in Proverbs 20:10 (NKJV): “Diverse weights and diverse measures, They are both alike, an abomination to the LORD.”

In his main work, The General Theory of Employment, Interest, and Money, Keynes advocated enlightened government intervention over unregulated laissez-faire policies. The Keynesian analysis of how monetary and financial arrangements affect the economy has formed the basis of subsequent activist governmental fiscal and monetary policy.

The synopsis on the back cover of Keynes “A Tract on Monetary Reform” aptly illustrates the acceptance of his theories.

This treatise, written in 1923, by the renowned proponent of deficit spending, is devoted to the need for stable currency as the essential foundation of a healthy world economy. Keynes (1883 – 1946) recommends the implementation of policies that aim at achieving stability of the “commodity” value of the dollar rather than the gold value. Keynes’s brilliant, clear analysis of the world monetary situation at the beginning of the twentieth century, with his many suggestions and his masterful elucidation of economic principles, stands as a vital primer for anyone interested in developing a better understanding of basic economics and its sociopolitical implications.

Those “sociopolitical implications” look much different today. Having abandoned the sound-money principle, central banks have forced down the interest rate over time, by strongly expanding credit and money supply. This led to asset price inflation and misallocation of scarce resources, inducing the cyclical “boom and bust” swings.

As we have experienced, allowing the credit supply growth to systematically outpace income growth, our overall debt-to-GDP ratios increased over time. While this scenario can play out over a long period of time, it is not economically sustain-able. Through a web of failed decisions, the Federal Reserve Bank (central bank) and the U.S. Treasury (government) are inexplicably entwined.

What Mises knew historically is what we are experiencing today. Eventually, the debasing of the currency via inflation is accepted as the only way to remove debt obligations. Mises wrote, “In the opinion of the public, more inflation and more credit expansion are the only remedies against the evils which inflation and credit expansion have brought about.”

This “more of the same” philosophy is evident in every speech given by Ben Bernanke, Federal Reserve Chairman. In fact, he would even have us believe the Federal Reserve Bank is still “independent” of the government. In a February 3rd speech, he pushed back against the suggestion of an audit of the Fed as it would violate the “bedrock principle of central banking.”

Bernanke stated, “Central banks that are independent in their decision-making provide a much better outcome than a central bank whose decisions are dictated by short-term political considerations.” His comments simply fueled states’ suspicions as to the validity of the Fed’s monetary policies and actions to date.

Sound Money Legislation

In America, we are quickly reaching the point in which our monetary policies are unsustainable. However, our Founders left us with one “escape clause”—the ability to create gold and silver coin within each state.

Due to the instability of the Federal Reserve System, proposals for states and their citizens to adopt an alternative currency consisting of gold or silver, or both, are receiving increasing attention as evidenced by bills that have been or are being introduced in the States of Georgia, Idaho, Indiana, Montana, New Hampshire, South Carolina, Utah, and Virginia. Others are expected to follow suit.

In light of the possible financial debacles that lie ahead of us, it is imperative that we not only bring ourselves under sound fiscal policies, but that we pray for and encourage our government to do the same.

This includes unraveling ourselves from the tentacles of the failed monetary policies. As Larry P. Arnn, President of Hills-dale College, said on September 17, 2010:

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.

And, in a greater calling, shall we all stand together with a heart for God and eyes Heavenward as was exhibited by David so appropriately in Psalm 15:1-5:

LORD, who may abide in Your tabernacle? Who may dwell in Your holy hill? He who walks uprightly, and works righteousness, and speaks the truth in his heart; He who does not back-bite with his tongue, nor does evil to his neighbor, nor does he take up a reproach against his friend; In whose eyes a vile per-son is despised, But he honors those who fear the LORD; He who swears to his own hurt and does not change; He who does not put out his money at usury, Nor does he take a bribe against the innocent. He who does these things shall never be moved.

Psalm 15:1-5

Keynes, John Maynard. A Tract On Monetary Reform. New York, NY: Prome-theus Books,  2000 (originally published London : Maxmillan, 1924).
Keynes, John Maynard. The General Theory of Employment, Interest and Money. First Harvest/Harcourt, Inc. edition, 1964 (originally published 1953)
Mises, Ludwig von. The Theory of Money and Credit. New Haven. Yale Uni-versity Press Edition, 1953.
Polleit, Thorsten. The Principle of Sound Money. Mises Daily, July 10, 2007, http://mises.org/daily/2623.
Shelton, Judy. Capitalism Needs a Sound-Money Foundation. Wall Street Journal, February 11, 2009, http://online.wsj.com/article/SB123440593696275773.html.

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