Ordinary people do not need an economist to tell them what the word “money” means.
Baroness Thatcher described it quite succinctly as a medium of exchange
and a storer of value. To the ordinary person, money is what you can
spend now and something that you can still spend after it has been
in the bank for a while.
For almost a hundred years, governments have been gradually destroying
the ability of money to store value. If we spend trillions of dollars
bailing out every troubled industry in the United States, the destruction
will be complete.
Gold and silver coins have been money for several thousand years.
Modern economies have needed more money than could be provided by precious
metals alone, even when the gold coins of slow economies circulated
in faster ones, as did Spanish gold coins in Nineteenth-Century America.
The additional money supply was provided by banks, either as paper
bank notes representing a promise to pay gold or as credits and debits
on the banks’ records. In addition, the government circulated
certificates backed completely by actual gold or silver in the government’s
hands, as well as notes promising to pay gold to act as a more convenient
form of money than coins.
The banks responded to market forces in creating the money supply.
The creation of the Federal Reserve System changed this relationship.
Federal Reserve banks were given a monopoly on issuing paper money
not backed by actual precious metals. This did not harm the people’s
money at first because every Federal Reserve note could be changed
into some gold or silver certificates, and the government would change
every $1 bill into real silver coins. The Federal Reserve System’s
first big mistake was not to make money more plentiful and thereby
cause inflation; it was to make money scarcer and thereby cause a depression.
Franklin Roosevelt and the Congress during his administration took
three major steps to deprive the people of their money. They made it
illegal to use gold as money domestically, they decreased the gold
value of the dollar, and they made contracts to protect creditors from
decreases in the gold value of the dollar unenforceable. Federal Reserve
notes could still be changed into what the government called “real
money” — that is, $1 silver certificates — and foreign central
banks could still redeem their Federal Reserve notes in gold.
Although we experienced huge inflation during the Truman presidency,
the silver value of the dollar survived, and we still honored our money
in gold when demanded by foreign governmental central banks. Under
Eisenhower, this system was made fairly stable.
During the 1960s and 1970s there were more attacks on the people’s
money. Silver coins were replaced with base metal coins, $1 silver
certificates were replaced with $1 Federal Reserve note, $5 United
States notes disappeared, and Federal Reserve notes no longer had a
promise to redeem them in “real money” printed on them.
Finally, we stopped redeeming our money in gold, even for foreign central
banks. In other words, we broke the last ties between our money and
something of tangible value.
During the 1980s and 1990s, many scholars, even very conservative
ones, argued that we did not have a problem — as long as the national
deficit did not grow so fast that it required the creation of too much
new money, and the money supply did not grow significantly faster than
the economy. This was a departure from two old beliefs: that over the
several-year period of an economic cycle, budgets should be balanced,
and that after a war the government should pay back the money it borrowed
to finance the war.
Largely because of budget surpluses in the late 1990s, we stayed out
of real trouble until quite recently. The problem with running continuous
deficits so long as we do not do it too much and cause a dangerous
increase in fiat money is that eventually we will have an emergency
and have to create inflation to cope with it. This is the reason governments
used to sell war bonds in time of war to patriotic citizens and buy
them back in time of peace, so the entire war debt was not permanently
added to the national debt.
One of the worst things that can happen to an economy is for its
money to lose value so fast that it ends every day worth less than
it was in the morning. When the national debt exceeds the gross domestic
product for a year and the interest paid by the government begins to
get out of control, governments usually must either fight their way
out of bad inflation with painful belt tightening or face the kind
of hyperinflation in which the value if the money drops every hour.
Either way, the people come out of it with the value of their savings
It now seems likely that we are going to “rescue” or “bail
out” various industries to the tune of a least a trillion dollars
and maybe several trillion. We cannot squeeze too much more money out
of the taxpayers without causing a painful slowdown in an already troubled
economy. There does not seem to be any real will in Washington to make
big budget cuts. The inevitable result is going to be an increase in
the money supply well in excess of the established target, a truly
harmful increase in the interest payments on the national debt, and
a drop in the value of the dollar so dramatic that it will complete
the destruction of the people’s money.
The Confederate Lawyer column is copyright © 2008
by Charles G. Mills and the Fitzgerald Griffin Foundation, www.fgfBooks.com.
All rights reserved.
Charles G. Mills is the Judge Advocate or general counsel for the
New York State American Legion. He has forty years of experience in
many trial and appellate courts and has published several articles
about the law.
See his biographical sketch and additional columns here.
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