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Throughout history,
governments have fought against the use of sound money. In 1912, Ludwig von Mises identified the reason for this:
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.[1]
Governments can only wring
so much money from their citizens through taxation without inciting civil
disobedience, so they make friends with bankers, who have a way of making
money appear from nowhere. The money they create isn't sound, but
almost no one cares. For politicians, it's sound enough; it provides them
with claim tickets to market wealth, which is all they want. Sound money
would not cooperate in this manner. It does not emerge from central-bank
policy decisions.
The classical gold standard
is often cited as an example of a sound monetary system. It may have been the
best system ever devised, but it existed at the pleasure of government
— it was, in other words, a fiat gold standard. As Guido Hulsmann has written, the international gold standard was
a cartel agreement between governments. Cartels protect the interests of
cartel members at the expense of nonmembers, including the general public.
By the early 1880s, the
countries of the West and their colonies all over the world had adopted the
British model [under which gold was made a monopoly legal tender]. This
created the great illusion of some profound economic unity of the western
world, whereas in fact the movement merely homogenized the national monetary
systems. The homogeneity lasted until 1914, when the central banks suspended
their payments and prepared to finance World War I by the printing press.[2]
Governments and bankers hate
gold because its supply cannot be inflated on command. They work hard to
establish and retain a monetary system under their control that can respond
quickly to their demands for inflation — or what today is called
"accommodation." World War I provides a tragic case in point.
Making Green by Turning the Countryside Red
The ones who profited from
the war had little in common with the men who fought it. The fighting was
left mostly to young conscripts, many millions of whom were killed or
wounded. The ones who profited knew their way around Washington.
If monetary sovereignty had
resided with the market instead of with government, the war would not have
been fought. Or if it had started, it would have ended much sooner. Sound
money had to die before men could die in such large numbers
When war got underway in
August of 1914, the European belligerents immediately stopped redeeming their
currencies in gold and started issuing debt. Needing a lucrative market for
their bonds, England and France selected the House of Morgan in the US to act
as their sales agent. The money acquired from bond sales then returned to Mr.
J.P. Morgan when the governments purchased war materials, rewarding him with
commissions on both the sales and the acquisitions. Furthermore, many of the
companies with which Morgan did business were part of his own vast domain.
The pacifist J.P. Morgan,
who said, "Nobody could hate war more than I do," was raking in
huge profits keeping the Allied war machines cranking out death and
destruction overseas. Total purchases during the war reached $3 billion,
bringing the House of Morgan $30 million in commissions alone. As G. Edward
Griffin writes, referencing Ron
Chernow's work on the House of Morgan,
Morgan offices at 23 Wall
Street were mobbed by brokers and manufacturers seeking to cut a deal. The
bank had to post guards at every door and at the partners' homes as well.
Each month, Morgan presided over purchases which were equal to the gross
national product of the entire world just one generation before.[3]
Ralph Raico
writes,
The United States became the
arsenal of the Entente. Bound now by financial as well as sentimental ties to
England, much of American big business worked in one way or another for the
Allied cause. … The Wall Street Journal and other organs of the
business elite were noisily pro-British at every turn, until we were finally
brought into the European fray.[4]
For the political class, the
war provided an enormous boost to state growth and prestige. Historian
Joseph Stromberg writes,
As casualties grew by the
thousands — soon to be millions — the belligerent powers chose to
fight on rather than rethink the war. Both sides beamed propaganda at their
own people and neutrals. The Allies were much better at it. Rulers everywhere
framed ambitious "war aims."
The war saw massive
state-building at the expense of civil society, individual liberty, and free
markets. Each state "planned" its economy. To justify the
sacrifices, governments promised new social programs. (Death now, equality
later?) "War socialism" became the order of the day. Labor leaders
served on economic planning boards. Inflation hid the war's monetary costs.
Historian Howard Zinn reports that "In the first three
months of war, almost the entire original British army was wiped out."
As the war stalemated on the Western Front, men on both sides were dying by
the tens of thousands for a few feet of scorched earth.
To the commanding generals,
conscripts were sacrificial fodder.
In July 1916, British
General Douglas Haig ordered eleven divisions of English soldiers to climb
out of their trenches and move toward the German lines. The six German
divisions opened up with their machine guns. Of the 110,000 who attacked,
20,000 were killed, 40,000 more wounded. … On January 1, 1917, Haig was
promoted to field marshal.[5]
In the trench warfare of
World War I, the dead never left the scene.
The line of trenches
stretching from Switzerland to the English Channel was littered with the
remains of perhaps one million men. … Those buried would reappear
during bombardments, and be reinterred, at times to help support, quite
literally, the trenches in which they had fought. Many soldiers recalled the
stench of decomposition, and the swarms of flies on corpses, especially
during the summer months. Everyone execrated the rats.[6]
Even with Britain imposing a
starvation blockade against Germany that
eventually killed 750,000 German civilians, the Allies were in danger of
losing the war. Using a fleet of newly developed submarines, Germany was
destroying Allied shipping at the rate of 300,000 tons per week. By war's end
the U-boats had sunk over 5,700 ships. In early 1917, the Allies were facing
the prospect of asking Germany for peace terms.[7]
Wilson Bails Out Wall Street
For Wall Street, peace was
not an option. With the possibility of Allied bonds going into default,
investors would incur a loss amounting to $1.5 billion. Commissions, as well
as the profits from selling war materials, would be lost. The Treasury could
make direct grants to the Allies, but only if the US abandoned its
"neutrality" and entered the war.[8] Following Wilson's address to Congress, it did so
officially on April 6, 1917.
The Morgan cash flow was
thus saved. The United States extended the Allies' credits(which reverted
back to Morgan to pay off loans), income taxes surged — especially on
the wealthy — and the Fed inflated.
Between 1915 and 1920, the
money supply and prices roughly doubled. Federal deficits were running a
billion dollars a month by 1918 — exceeding the annual federal
budget before the war. The government ran the economy, establishing
prices and priorities while commandeering entire industries, such as
railroad, telephone, and telegraph. The term "civil liberties" was
synonymous with treason; people were encouraged to spy on their neighbors,
and censorship was everywhere. "The government's reign of terror against
'pro-Germans' targeted all who doubted the cause," writes Stromberg.
"So many snoops helped that H.L. Mencken suggested medals."
People were imprisoned for
calling on government to obey the law. Robert Higgs tells us,
In California, the police
arrested Upton Sinclair for reading the Bill of Rights at a rally. In New
Jersey, the police arrested Roger Baldwin for publicly reading the
Constitution.
The government's
"massive propaganda campaign" produced
countless incidents of
intimidation, physical abuse, and even lynching of persons suspected of
disloyalty or insufficient enthusiasm for the war. People of German ancestry
suffered disproportionately.[9]
But in the beginning, there
was a major problem. The US president was calling for American boys to risk
their lives to make the world "safe
for democracy," but very few hands shot up. Perhaps they were
more in tune with progressive Wisconsin Senator Robert M. La Follette, who told
Congress that the poor would be "the ones called upon to rot in the
trenches." In Ralph Raico's words,
In the first ten days after
the war declaration, only 4,355 men enlisted; in the next weeks, the War
Department procured only one-sixth of the men required. Yet Wilson's program
demanded that we ship a great army to France, so that American troops were
sufficiently "blooded."[10]
With the country's youth
showing no interest in dying or killing for corrupt politicians, Wilson
decided to bring out the bayonets. On May 18, 1917, he signed the Selective
Service Act to register over 10 million men, from which over 2.8 million were
drafted.[11] In an apparent bid to make himself and his
administration the inspiration for Big Brother, Wilson added that the draft
was "in no sense a conscription of the unwilling; it is, rather,
selection from a nation which has volunteered in mass."
"Volunteers" who
didn't register got a year in prison, and anyone found obstructing the
conscripting process was subject to a $10,000 fine and 20 years in prison.[12]
According to Wikipedia,
World War I killed over 16 million people, counting
both soldiers and civilians. Another 21 million were wounded. France
Conclusion
If the belligerents' banks
had not been protected by government privilege, the public would have pulled
their gold out. With massive taxation too risky, the four-year war would have
been over in four months.[13] Without the means to pay for
it, the political class would have been denied their war. Fractional-reserve
lending and the abandonment of gold opened the doors to the slaughterhouse.[14]
During the 17th and 18th
centuries, maritime pirates would frequently fly the Jolly Roger to frighten
their victims into surrendering without a fight. The skull and crossbones
superimposed over a black background represented death and plunder. When
Nixon closed the gold window to foreign governments in 1971, the dollar
became a pure fiat-paper money, ideal for legal piracy.
With a fiat-paper dollar
under control of its central bank, the US government and connected
corporations can raid the wealth of dollar holders and fund a world empire
through bribes, intimidation, and war, while the large commercial banks can
inflate to their advantage, knowing that the Fed can and will create enough
dollars to bail them out of trouble.
The dollar itself still
bears a close likeness to the paper medium that once circulated as a
substitute for real money. How much more honest today's dollar would be if it
bore the mark of the Jolly Roger.[15]
Notes
[1] Ludwig von Mises, The Theory of Money and Credit, The
Foundation for Economic Education, Inc., Irvington-on-Hudson, New York, 1971,
p. 414
[2] Jorg Guido Hulsmann,
The Ethics of Money Production, Mises Institute, Auburn, AL, 2008, p. 211
[3] G. Edward Griffin, The Creature from Jekyll Island: A Second Look at
the Federal Reserve, Fourth Edition, American Media, Westlake Village,
CA, 2002, p. 236
[4] Ralph Raico, Great Wars and Great Leaders: A Libertarian Rebuttal,
Mises Institute, Auburn, AL, 2010, p. 25
[5] Howard Zinn, A People's History of the
United States, Chapter 14: War is the Health of the State
[6] J. M. Winter, The Experience of World War I, Oxford University
Press, New York, 1995, p. 146
[7] Creature, p. 238
[8] Creature, p. 239
[9] Robert Higgs, Against Leviathan: Government Power and a Free
Society, The Independent Institute, Oakland, CA, 2004, p. 166
[10] Great Wars, p. 40
[11] Against Leviathan, p. 165
[12] Robert Higgs, Crisis and Leviathan: Critical Episodes in the
Growth of American Government, Oxford University Press, New
York, 1987, pp. 132-133
[13] Garet Garrett, A Bubble That Broke The World, Fraser
Publishing, Burlington, VT, 1996, p. 3
[14] Gary North, The Gold Wars, 2009, p. 23
[15] George Ford Smith, The Flight of the Barbarous
Relic, CreateSpace, 2008
George F. Smith
Read his book : The
Flight of the Barbarous Relic
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