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The Forerunner

Honest Money

By Editorial Staff
Published February 1, 1994

By Robert M. Metcalf

Inflation – the continual, apparently never-ending rotting away of the value of our money – constitutes an enormous overhanging danger to our nation, to our civilization. Inflation has been a contributor in bringing down past civilizations. At some point, we’re going to see a climax in our own situation.

“Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency … Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and it does it in a manner which not one man in a million is able to diagnose.”

Those true and profound words came from the earlier (and sounder) John Maynard Keynes himself, in his 1919 book The Economic Consequences of The Peace.

Even long before the foundations of society are completely undermined, inflation of the money supply is an important means of manipulation and control by which the few dominate the many: the socialistically-inclined “elitists” controlling the heights of society.

For much of history, a thick cloud of ignorance has enveloped money. But this situation is changing; growing numbers of people now hunger to see why social evils exist. We search for the truth and strive to bring about needed change. As for probing in monetary affairs, in our day we have witnessed such tragic results of ever-mounting inflation in so many nations that we urgently want to get at causes and corrections. In each nation’s basic institutional ways, including its monetary system, we discern right actions under Moral Law itself, and wrong ones. And these actions translate into results – either good or evil.

What Is Money?

To understand inflation we must first understand money. Why such a thing as money? The exchange of goods and services by direct barter is burdensome and very inefficient. To replace such cumbersome means of trade, men were given this insight: use a commodity having a value of its own to exchange for goods or services. Money, then, is obviously a medium of exchange; its first attribute. Next, to serve well, money had to be an effective measure (standard) of value; hence, its second attribute; third, money had to serve as a store of value – a commodity which could be saved for future use. These, then, are the three qualities of money: (1) a medium of exchange, (2) a measure or standard of value, and (3) a store of value. These three attributes must be kept clearly in mind when considering the breakdown of a nation’s monetary system.

In examining the basic characteristic of money – a measure or standard of value – the measuring unit is the denominated monetary unit. When men first went beyond direct barter, they searched for commodities having value of their own, as well as stability in value, to serve as media of exchange and as measures and stores of value. They found that the precious metals, gold and silver, were the most nearly ideal monetary commodities. (Silver can serve very satisfactorily as the single monetary metal; it was so set by Congress in 1792 as the standard money of the United States and served as our monometallic standard until the demonetization 81 years later, called the “Crime of 1873.” Actually, with much justification, the term “silver” could be substituted for “gold” when the latter is used alone hereafter in this article.)

In mankind’s search, gold was revealed as the most nearly ideal monetary commodity. Gold has certain inherent qualities which make it the ideal measure of value: (1) a high value of its own, (2) an intrinsic value which remains relatively constant, because in any given short-term period only a minute percentage of the world’s gold stock could be newly-minded; (3) gold is durable, workable, easily portable, beautiful and recognizable. (Silver and a few other metals of lesser value also emerged as acceptable money, especially for coinage.)

Honest Money: A Value Of Its Own

There are “money substitutes” such as bills, notes, and bank credit papers – but they are only representations of the real money, which is the money commodity. History tells us two facts: money is a commodity given value in the marketplace, and whoever holds civil authority in a nation will be strongly tempted to manipulate or alter the value of that money commodity. Temptation must be eliminated as far as human resourcefulness can accomplish it. Thus the discipline of an absolutely unchangeable gold standard is a necessity (gold, it must be stressed, serves as a disciplinary agent; it is not to be an idol.)

Politicians and economist/apologists go as far as possible to convince people money substitutes are “real” money. These skillful practitioners want printed paper in the form of bills, notes or bank credit thought of as “money,” because it is then easier to manipulate the monetary system and dilute the value of people’s money and their savings in any form where denominated in dollars (fixed-value investments).

Sophisticated rationalizations are created for techniques of deficit spending, for taking away the gold backing of the monetary unit, and for stimulating bank lending in non-productive purposes. All is done to justify inflation and its temporarily and seemingly high popularity with the majority of the electorate. The most obvious debauchery of the monetary unit in early times was the clippage (shaving) of the realm’s coins by unscrupulous rulers. Today, there are subtler methods of eroding the value (purchasing power) of what we use as “money.”

Fractional Bank Reserves

Centuries ago, people began the practice of depositing their gold with a goldsmith for safekeeping. In return, the goldsmith would issue a certificate attesting to the amount of gold on deposit. It soon became convenient and popular to use “gold” certificates as a media of exchange (a substitute for gold). Thus began the legitimate practice of banking: the safekeeping, borrowing and lending of the real money commodity (gold or silver).

The fraud of fractional reserves first occurred when a goldsmith realized that all those who had deposited with him were never likely to claim their gold at the same time. Therefore, he would engage in a bit of deceit. He could issue gold certificates representing more than the amount of gold on deposit, and enrich himself by charging interest on the fraudulent certificates. Like the ancient goldsmith, today’s banker who issues a money substitute (credit) not fully backed by funds on deposit, is creating something out of nothing. In doing so, he is creating something of value for himself at the expense – by dilution of the value of their monetary assets – of every other holder of cash or savings funds or fixed-value investments at that time. It may be done by the local banker in utter innocence, as is the typical case today after so many centuries of accepted practice. The same money debauchery applies when the government prints and issues paper currency (or bonds or notes) not backed by monetary metal.

One of the basic rules of banking under an honest monetary system is as follows: maintain a 100 percent reserve ratio of the money commodity to the money substitutes issued (bills, bank credit, government bonds, notes, etc.); to maintain anything less than a 100 percent reserve ratio amounts to fraudulent action on the part of the issuer of monetary obligations or paper currency, whether that issuer be a bank or government.

The dilution of the value of money by government and banks usually occurs in this manner: suppose the total U.S. money stock (including the money substitutes) is increased by 10 percent in any given year. If total goods and services available for purchase during that period increase only three percent over the previous year, the net increase in the money stock would be seven percent (to buy those goods and services). What happens? The purchasing power (value) is then cut by seven percent for each previously existing dollar. Why? Because the value of the original money stock was diluted by the net increase of the seven percent in the total money stock. The reduction in the value of each dollar may not be reflected immediately to that full extent in the marketplace prices because of a slower money velocity, movement of money out of the nation from a trade deficit, and delays in pricing changes, but the cutting of the dollar’s value will show up in time.

What would a continuing seven percent rate of inflation do to our dollars? In ten years, inflation would rot away their value by one-half, debauchery on a huge and tragic scale. Worse yet was the 10 percent inflation averaged from 1977 to 1981.

For the banker or the government, that “something of value” created out of nothing is a new asset – make-believe money the banker can lend and the government can spend. For the consumer and the taxpayer, for someone with savings, such a scheme is a cruel deception. Should we not call it theft?

Some will argue fractional reserve banking is sound as long as the reserve ratio remains fixed, and money substitutes are issued only against goods being manufactured or marketed. The weight of moral evidence favors those who contend anything less than a 100 percent reserve ratio is wrong; the perpetuation of a wrong once committed is continued disobedience to the Moral Law. Good morals and successful economics are faithful companions.

Money Supply Size

Contrary to popular belief, there’s no need for “a steadily-increasing money supply to support an enlarging economy.” Such a theory is completely fallacious. So long as money (gold, silver, or whatever’s accepted as solid money) can be divided into sufficiently small units usable in all transactions, a stable money supply is sufficient. Besides the coined money, there are of course the money substitutes: devised for such dividing and ease in handling.

The 100 percent reserve ratio, of course, protects those holding the money substitutes holders. In fact, if the money supply were to remain relatively fixed, and the value of the monetary unit were to become steadily more valuable in terms of all other goods and services, the result would be salutary: greater savings, increased investments, the build-up of capital goods, and an increase in the standard of living. The periodical “boom-and-bust” cycle could be eliminated altogether. Only the fractional reserve system allows such balloonings and subsequent shrinkages of the money stock in these cycles. Malinvestment by speculation can occur in such cycles; and we well know the harm and even personal suffering taking place in depression phases. A relatively stable money stock would not only bring a greater rise in the standard of living than in recent times, it would also tend to cause the yearned-for cycle-free economic stability.

Even if the money supply were to be decreased slowly making a possible return to full-gold backing, a “beneficent circle” resulting from increased savings and investment would emerge instead of the vicious circle of the inflation process. (See the steps outlined at the end of this article for the recommended transition phase.)

No Government Borrowing

Government deficit-financing through the banking system, without backing the money commodity, is simply another way to create something out of nothing (make-believe money). Such a device is as inflationary as creating unbacked printing press (fiat) money. All government expenditures must be fully covered by taxation; there must be no deficit financing whatsoever. Where government is held within its proper bounds, governmental expenditures will be small and comprise only a minor fraction of total national income.

The proper governmental functions are protection against external enemies; protection of society, life, liberty, property, contract, health, safety and morals; preserving order and the rule of law; rendering justice; and performing those few functions where the entire population is served indiscriminately and where there is no practical manner in which to pay for them except by taxation – streets, roads, etc. The other needs – education, help for the less fortunate, health care, etc. – must be organized and financed outside the bounds of government.

The Beneficent Cycle

During the 19th century, outstanding economic growth occurred in America, because of two primary factors: (1) a favorable economic climate generated by a society whose morally-directed people were hardworking, frugal and charitable, and (2) a morally-constituted civil government followed non-inflationary monetary policies while protecting its citizens’ right to own, use and develop private property. However, in many recent decades, government has almost constantly pursued inflationary policies; incentives to save and invest have been (and are now being)systematically undermined. Such periods of persistent inflationary practices produce distressing consequences. Leapfrogging prices, wages, and interest rates – which some believe to be the causes of inflation – are but dire results of more and more make-believe money being created by monetary authorities or sponsored entities.

Prices, wages and interest rates react in ratchet-like fashion to increases in the money supply, but adjust unevenly, and unfairly. Speculators and money-changers may temporarily prosper in an inflationary environment, but the elderly on fixed-incomes and fixed-savings suffer great deprivation; they serve as a glaring example of the gross immorality of permitting government an inflationary monetary policy. When the government engages in deficit spending and finances those deficits by creating new “money,” it insidiously steals purchasing power from its citizens – and those who suffer most are the ones who can least afford it.

On the other hand, when a non-inflationary policy is followed, the value of money will tend to grow and there is real incentive to save and invest in wealth-producing business activities. When not sabotaged by the government’s inflationary policies, a free market economy (stewardship) automatically produces an unbroken process of steadily lowered consumer prices. This results from general industrial and commercial productivity, tending to rise more rapidly than the production of “money” (with increasing difficulty in extracting money commodities – gold, silver, etc. – from the earth or ocean).

The “benefit cycle” is as follows: a relatively stable money stock, based on a sound commodity money, will tend to cause the value of the monetary unit to rise steadily. In turn, money will increase in value, so there’s a strong incentive to save. Savings institutions then invest a great part of those savings in capital goods and the return on those investments goes back to individual savers. This systematic investment in capital goods leads to greater productivity and an increasing Gross National Product (GNP) with a higher standard of living. This strong growth in productivity, in conjunction with slower growth in the money stock, will give greater value to the monetary unit. The results are an on-going growth/prosperity trend, producing an ever-rising standard of living.

The Return to Sound Money

How can we as a people turn from the present inflation-prone system of money-by-government-fiat and move toward a sound 100 percent gold-based banking system? If there comes to be sufficient recognition that these truths must be acted upon, how can our inflation way-of-life be eliminated? With much of our society’s structure erected on this false foundation, and with countless millions of innocent participants held captive, can there be hope for a successful return to honest money? While man my be inclined to resist undue governmental intervention, his flawed and imperfectible nature all too often succumbs to calculated political promises of a free lunch and cradle-to-the-grave security.

Since money pervades every aspect of society, any corrective steps must be taken carefully and judiciously to ease the transition and avoid unnecessary economic shocks. But it can be done, gradually and persistently. The following actions would seem to be the most logical (and we hope such steps will be taken before a severe crisis brings on a fascistic regime jeopardizing our basic freedoms, justice and good order):

A) Stop all lending by financial institutions of any funds not deposited for savings purposes. An exception: loans made for the movement of goods in production or the marketing process, those to be phased out over a five-year period.

B) In two years, following the implementation of A, void the charter of the central bank (in the U.S., this of course being the Federal Reserve Bank). Where a sound banking system exists in a nation, there is no need whatsoever for a central bank. It is truly “an engine of inflation,” as many informed observers have rightly called it, even before its chartering in 1913.

C) Mandate that the federal budget be in balance by the third fiscal year. The comparatively small expenditures of the very limited government (which we once had and to which we must return) can easily be covered by modest taxation of the citizens. Even adding urgently needed annual payments on the national debt as well as taxes for the funding thereof will be far from the burdensome ones they are today.

D) By Constitutional amendment, define the monetary unit in terms of gold by weight. One ounce of gold equals “X” dollars, this to become effective at the end of a five-year period at which time the value of gold shall be determined and fixed by the then free market price.

E) Remove the civil government from all money issuance, coinage and handling activities. Limit functions in this realm to a legitimate role: rendering justice. In monetary affairs, government shall supervise private banks to carry out their proper and moral operations. (The history of banking has repeatedly shown a periodic lack of public safety and a capacity and temptation for improper manipulation of the money supply; careful supervision by governmental authorities is required.)

F) After the five-year period and when the value of the dollar is defined in terms of gold (see D), prohibit creation of any money substitute by any party – bank, government or otherwise – unless that substitute (certificate, note or bank credit) is 100 percent backed by gold on deposit with the issuer. Exception: small-change coins made of lesser metals would be approved, provided the value of their metal content was substantially in proportion to gold’s defined value for that coin in each case (half-dollar, quarter, dime, etc.).

The aforementioned actions would, of course, require constitutional amendment-type steps. (Actually, the constitution of a nation should have a considerable portion thereof non-amendable: where basic protections of life, liberty, property and other moral law rights are involved – and these money-protecting provisions are of this nature.)

As outlined above, these actions to establish a sound monetary system are so far-reaching, compared with what we now have, that surely we shall have to undergo some form of crisis to bring them about. But our disobedience to the moral law, and our departure from sound and right ways are generally moving us steadily toward that climax of our troubles.

Let us work mightily to educate our people and prepare them.

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