Statism, Inflation, and the Fed

by Jacob G. Hornberger
Nov. 17, 2010

As the statists debate the future impact of the Fed’s latest inflationary binge, it’s important that we keep the big picture in mind.

This is what the Fed has done since it was established in 1913. Decade after decade, it has inflated the money supply in order to enable big-spending federal officials to spend money to their heart’s content.

Most federal officials have a voracious and insatiable desire to spend other people’s money. The way that the federal government ordinarily gets the money it spends is by collecting it in taxes. The problem, of course, is that public officials always want to spend more than they’re collecting in taxes. But they don’t want to raise taxes to collect the difference because people get angry when their taxes are raised, which could mean “bye, bye” to the public official, who, of course, thinks of nothing else but reelection.

So, the solution is to simply borrow the difference between what is being collected in taxes and what is being spent in welfare-warfare programs. The problem, however, is that the desire to spend quickly exceeds the amount being borrowed. Moreover, the debt must ultimately be paid off.

That’s where the central bank — the Federal Reserve — comes in. It cranks up the printing presses, printing massive amounts of new money that is used to pay off the government’s debt and to cover new spending programs.

Yes, I know what the statist will say: “Oh, no, Jacob. The Fed was established to bring stability and order to the monetary system.”

That’s a joke. It’s just part of the life of the lie and the life of delusion that statists live. The only purpose of the Federal Reserve is to enable federal officials to spend to their heart’s content without raising taxes.

Why is the paper dollar worth about a nickel compared to its value in 1913? Because the Federal Reserve, decade after decade, has inflated the money supply, thereby debasing the value of the dollar. And each time they inflated, statists have said the same thing they’re saying now: “Oh, it’s just a temporary fix. It’s just a short-term stimulus. We can return to normal after the economy is stimulated.”

But things never return to normal. The constant debasement of the dollar has remained a permanent feature of American life.

Why do Americans no longer use gold and silver coins in their everyday transactions, as they did for more than 100 years? It’s because of the Federal Reserve. The Fed has inflated the money supply so massively since 1913 that it no longer makes sense to use a silver quarter to make a purchase since it is worth much more than twenty five cents in debased paper money.

The statists tell us that all this inflation is a good thing. They are wrong. A debasement of the currency is never a good thing. For one thing, inflation is a tax, only a secret, surreptitious tax. Nobody can predict in advance who is going to be the one who pays this tax, but some people inevitably will. Second, the injection of new waves of newly printed money send false signals into the marketplace, leading consumers and investors to make perverse decisions. The housing debacle is a good example of that phenomenon.

Our country was founded on the concept of sound money. That was why the American people used gold, silver, and copper coins as their official money for more than a century. It’s not a coincidence that the following phrase appears in the Constitution: “A state shall not … make anything but gold and silver coin a legal tender in payment of debts.”

Unfortunately, the statists prevailed with their big spending schemes, first with the creation of the Federal Reserve, followed by the abolition of the gold standard, followed by their confiscation of gold, followed by their nullification of gold clauses in contracts, followed by their decades of big spending, and accompanied by the massive inflationary binges to accommodate the big spending.

There is only one solution to all this monetary statism. Ditch the Federal Reserve entirely. Abolish it, along with all legal-tender laws. Separate money and the state, in the same way our ancestors had the wisdom to separate religion and the state.
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Jacob Hornberger is founder and president of The Future of Freedom Foundation.