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Many people know how to earn money,
but few are aware of what the Federal Reserve System, acting on behalf of
the U.S. Government, is doing to their money. It is inflating and
depreciating the dollar at various rates - at double-digit rates during the
1970s and early 80s and at single-digit rates ever since. The present
dollar is worth no more than 10 cents of the 1970 dollar and 50 cents of
the 1980 dollar.
The reasons and explanations given for
this loss may change over time, but the consequences are always the same. Inflation
covertly transfers income and wealth from all creditors to all debtors. It
dispossessed present creditors of nine-tenths of their 1980 savings and
enriched debtors by the same amount. The dollar savings accumulated since
then have shrunk at lesser rates but are fading away notwithstanding. No
wonder, many victims readily conclude that thrift and self-reliance are
useless and even injurious and that spending and debt are preferable by
far. They may join the multitudes of spenders who prefer to consume today
and pay tomorrow, and they may call on government demanding compensation,
aid, and care in many forms. Surely, the hurt and harm inflicted by
inflation are a mighty driving force for government programs and benefits.
In their discussions and analyses of
various problems, economists usually avoid the use of moral terms dealing
with ultimate principles that should govern human conduct. Ever fearful of
being embroiled in ethical controversies they seek to remain neutral and
"value-free." They do counsel legislators and regulators on the
cost-efficiency of a policy but not on its moral implications. They may
offer professional advice on the efficiency of money management but not on
the morality or immorality of inflationary policies. They dare not state
that inflation is a pernicious form of taxation which most people do not
recognize as such. Authorities of money and banking rather than taxing
authorities redistribute income and wealth under cover of ignorance. Placed
on every person in the form of higher goods prices, the application does
not fall equally and simultaneously on every buyer. The people who receive
the newly created money first may actually benefit as goods prices readjust
rather slowly. Others who receive it later or not at all will have to
tighten their belts. Above all, inflation ravishes the savings of countless
Americans and turns many into prodigal spenders and debtors.
The biggest debtor also is the biggest
inflation profiteer. With some eight trillion dollars in debt, the Federal
Government is by far the biggest winner. In fact, it gains not only from
debt depreciation, which at just three percent amounts to some $240 billion
every year, but also from Federal Reserve money and credit creation that
enables the U.S. Treasury to suffer annual budget deficits of some $500
billion a year. Without the power to inflate and depreciate the dollar at
will, the U.S. Government would be a different institution, like that which
the Founding Fathers had envisioned. But endowed with the power of
inflation it has become an almighty organization that redistributes income
and wealth and refashions the social and economic order.
The primary beneficiaries of the new
order are its own managers: legislators, regulators, and a huge army of
civil servants. They are first in power, prestige, and benefits. Many U.S.
Senators and Congressmen are the admired and esteemed benefactors of
countless petitioners for handouts and favors. They
are revered for every benefit they bestow. And there are the officials of
the Department of Commerce with 7 benefit programs, the Department of
Education with 34 programs, the Department of Energy with 6, the Department
of Health and Human Services with 8, the Department of Housing and Urban Development
with 14, the Department of the Interior with 3, the Department of Labor with 9, the Department of Transportation with 9,
and various government commissions and authorities with another 10
programs. Federal politicians and agents are the wise and virtuous judges
and juries of benefits amounting to more than $1 trillion every year. How
"honorable" would they be, pray tell,
without Federal Reserve assistance in financing the deficits and its power
to print more money?
Evil acts tend to breed more evil
acts. Inflationary policies conducted for long periods of time not only
foster the growth of government but also depress economic activity. Standards
of living may stagnate or even decline as growing budget deficits thwart
capital accumulation and investment that are sustaining the standards. Inflation
misleads businessmen in their investment decisions, which causes much waste
and many bankruptcies. In fact, it is the root cause of the boom-and-bust
cycle which wreaks havoc on economic activity. Indeed, inflation breeds
many evils of which most Americans are unaware.
Since 1971 when President Nixon
abolished the last vestiges of the gold standard and repudiated all
obligations to meet international obligations with payments in gold, the
U.S. dollar has been the dominant world currency. It enables Americans to
buy massive quantities of foreign goods and services, suffering annual
trade deficits of more than half a trillion dollars now, and making payment
in ever depreciating dollars. Foreign central and commercial banks as well
as many foreign individuals are using their dollars with the hope that they
will retain their purchasing-power in the long run. Asian creditors are
holding more than $2 trillion in claims, Japan
and China
alone an estimated $1.5 trillion between them. A dollar depreciation rate
of just 3 percent strips Japan
and China
of some $45 billion in purchasing power every year. They undoubtedly are
suffering such losses in silence because they are mindful of the many
benefits they are receiving from amicable relations with the United States.
American capital is rushing into China, building many plants and
introducing modern technology while some 20,000 young Chinese are studying
at American colleges and universities. At the same time Japanese and
Chinese companies are investing surplus dollars in the United States,
assuming control over American corporations. If the United States
government should ever disrupt this peaceful relationship with
discriminatory trade restrictions and painful barriers, the Asian creditors
may dump some dollar holdings. The dollar crash would be heard around the
globe.
There is no conscience in politics. Economic
policies may be changed, reformed, and readjusted because they are
ineffective, unproductive, and unpopular, but rarely ever because they are
immoral. Debt may be a grievous bondage to an honorable
man, but it may be a "national bond" which, in President
Roosevelt's words,"is owed not only by the
nation but also to the nation." Surely, politicians have a code of laws
to observe and obey, but honesty in matters of debt and money is not one of
them.
If it is true that we cannot do wrong
without suffering wrong, we must brace for more grief to come.
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