Of Gold and Empire

For those confused by the linkage between two of Ron Paul's major issues–antiwar and pro-gold–economist Steve Horwitz explains the connection in the January/February issue of The Freeman with a historical review of the links between federal intervention in the currency system and war.

Some excerpts that tell the tale:

Governments that can either create money directly or use regulation to force banks to provide the resources will be able to conduct war more often and with less political resistance than those that cannot.

…….

In 1863 the federal (Union) government for the first time offered charters for individual banks. With charters came regulations, one of which was the requirement that bank-issued currency be backed with U.S. government bonds. Whenever a federally chartered bank wanted to give its customers paper currency, it had to purchase such bonds, whose face value slightly exceeded the value of the currency and then present them to the Comptroller of the Currency in Washington, who then printed the bank's notes……Interestingly, when the federal government first offered the charters, almost no banks signed up; they kept their state charters because the federal charters offered no advantages and some minor disadvantages. Not content to lose that way of financing the war, Congress quickly passed a 10 percent tax on the banknotes of state-chartered banks….. Between the original bond-collateral requirements and punitive tax on the state-chartered banks, the federal government used its power over the monetary system to ensure a market for bonds to pay for the Civil War.

…………

The Johnson administration made a conscious decision to finance the Vietnam War
through inflation rather than higher taxes….At the time Federal Reserve Notes held by foreign central banks were still redeemable in gold at the Fed. As a result of the inflation (depreciating dollar) of the late 1960s, the Fed saw a massive flow back of Federal Reserve Notes from foreign governments, which began to reduce U.S. gold holdings. This drain of gold reserves led President Nixon to close the "gold window" in 1971, breaking the last remaining link between the dollar and gold. With excess supplies of money no longer generating any direct negative economic consequences for the Fed, the even-greater inflation and macroeconomic disorder that characterized the rest of the 1970s and '80s were no surprise.

Thus the need to finance the Vietnam War led to increased government control over money, which led to macroeconomic disorder (much as we saw in the late nineteenth-century banking panics), which in turn led to calls for more government intervention.

A reason roundtable on the Federal Reserve in the Bernanke era, featuring Milton Friedman and Ron Paul, among others.

Horwitz reviewed Theodore Burczak's Socialism After Hayek in reason's July 2007 issue.