The Making of an International Monetary Crisis; P. Stevens

In 1968 a "two-tier" gold mar ket was established in the midst of a run on . Treasury go ' eserves. In 17 the two-tie iment fai the face new nds for e U.S em bargoe ld and a owed the dol lar to seek its own level on the free market. The making ofan international monetary crisis Mr. Stevens is a freelance writer who special izes in the field of economics. 233 234 THE FREEMAN April Further Devaluation Meanwhile, only fourteen months after the Smithsonian Agreement was reached, the dollar was brought under new selling pressure and was again forced to devalue (a total of almost 20 per cent in under two years), and the free market price of gold soared to nearly $100 an ounce, making the official price and the now mythical "two-tier" system look embarrass ingly unrealistic. The most immediate and visible cause of the 1971 international monetary crisis can be traced di rectly to an excess supply of dol lars which have been accumulating in foreign central banks. These dollars, some· $60 billion, were at one time theoretically claims on U. S. gold. But over the years, U. S. gold reserves (now about $10 billion) have become conspic uously inadequate to meet foreign demand for gold convertibility.

At present, the major problem confronting economic and mone tary Policy Makers is: "What is to be done with the approximately $60 billion held by the central banks of the western world?" Policy Makers have instituted one stop-gap measure after an other in order to buy the time necessary to solve this problem and to reach agreement on long term monetary reform. Agreement on monetary reform will be the basis for the development of a new international monetary sys tem, tentatively scheduled to be established by the International Monetary Fund (IMF) in the near future. But before one can determine which reforms are necessary for a successful future monetary sys tem, one must know what mone tary policies caused the past sys tem to fail. Today'sPolicy Makers have re fused to identify the most funda mental cause of the 1971 interna tional monetary crisis; they have never wanted to know which mon etary theories and policies led to the excessive and disrupti ve amounts of dollars that now flood the world, for the answer is: their own monetary theories and domes tic policies of artificial money and credi t expansion. If one wishes to project the kinds of policies that will be employed internationally and the effects they will produce in the future, one need only to look at the monetary theories held by today's Policy Makers and their effects when implemented in the past.

Monetary Theory: Past During the nineteenth century the free world was on what was called the classical gold standard. It was a century of unprecedented production. More wealth and a 1973 THE MAKING OF AN INTERNATIONAL MONETARY CRISIS 235 greater standard of living was achieved and enjoyed by more peo ple than in all the previous history of the world. The two conditions most responsible for the great in crease in wealth during the nine teenth century were competitive capitalism and the gold standard: Capitalism because it provided a social system where men were free to produ,c!e and own the results of their labor; the gold standard be cause it provided a monetary sys tem by which men could more readily exchange and save the re sults of their labor. While capitalism afforded men the opportunity to trade in the open market which led to economic prosperity, the gold standard pro vided a market-originated medium of exchange and means of saving which led to monetary stability.

But because neither competitive capitalism nor the gold standard were ever fully understood or prac ticed, there existed a paradox dur ing the nineteenth century: a se ries of disruptive economic and monetary crises in the midst of a century of prosperity. These crises can all be traced to excessive supplies of money and credit. T~e U.S. panics of 1814, 1819, 1837, 1857, 1873, 1893, 1907 and the international monetary crises of 1933 and 1971 all have one thing in common: excessive supplies of money and credit. The fact is that no monetary crisis in history has ever resulted from a lack of money and .credit. Every monetary crisis can· be traced to excessive supplies of money and credit. Where does this money and credit come from? Under a gold standard, the amount of money in circulation is the amount of gold circulating among individuals or held in trust by banks. All claims to gold (e.g.

dollars) are receipts for gold and are fully convertible into a specific amount of gold. If the claims to gold are circulating, .the gold can not. The money supply is deter mined in the open market - by the same factors that determine the production of any and all commodi ties - the· factors of supply, de mand, and the costs of production. Thus the only way to increase wealth under such a market-origi nated monetary and economic sys tem is through the production of goods or services. No Curb on Governments But the world never achieved a pure gold standard. While indi vid uals opera ted under a classical gold standard with the conviction that production was the only way to gain wealth, they allowed their government to become the excep tion to this rule. Government produces nothing. During the nineteenth century it 236 THE FREEMAN April operated mostly on money it taxed from its citizens. As government's role increased, so did its need for money.

The Policy Makers knew that gold stood in the· way of govern ment spending, that direct con fiscation of wealth via taxation was unpopular,. So Policy Makers advocated a way of indirectly tax ing productive men in order to finance both government programs and the increasing government bureaucracy necessary to imple ment those programs. The method was to increase the money supply. Since government officials were not about to go out and mine gold, they had to rely on an artificial increase. Although the methods of artificial monetary expansion varied, the net effect re mained the same: an increase in the claims to goods in circulation and a general rise in commodity prices. The layman called this phe nomenon "inflation." This resulted invariably in monetary crises and economic depressions. Capitalism and gold got the blame for these crises, but the blame was undeserved. Why then were capitalism and the gold standard not exonerated from this unearned guilt? Why were these two great institutions tried .and sentenced to death by the slow strangulation of govern ment laws? The verdict must read: "Found guilty due to inadequate defense."

The few whispers of defense from a handful of scholars were easily drowned out by every poli tician who argued for more gov ernment controls and regulations over the economy; by every pro fessor who argued for the redistri bution of private wealth and for government to provide for the wel fare of some group at the expense of another; by every businessman and his lobbyist who argued for government to subsidize his busi ness or industry while protecting him from foreign competitors; by every economist who advocated that government should "stimu late" the economy; and by every media spokesman who argued that the public should vote for policies of government intervention. These, and men like them, made up an army of educators. The Policy Makers They were the "intellectuals" who promoted theories that could not exist without the governmen tal expropriation of private funds; who sponsored, advocated, or en couraged government policies that would victimize men (taxation), deceive and defraud men (infla tion) , and turn men against one another (the redistribution of pri vate wealth). They were the men who provided government with the 1973 THE MAKING OF AN INTERNATIONAL MONETARY CRISIS 237 theoretical ammunition necessary to disarm men of their rights. They educated the public on the "bless ings" of government intervention, and were the ones. directly or in directly responsible for all the sub sequent coercive government ac tions and all of their economically disruptive efFects.

They were (and still are) the Policy Makers. Policy Makers damned capital ism and the gold standard as be ing inherently unstable. They at tributed capitalism's productive booms to government's interven tion into the economy, and the government-made busts to the gold standard and the "greed of man." Such distortions of truth could not be sold to the public easily. A united attack on common sense was necessary in order to obscure the virtues of freedom and the meaning of money. The Process of Confusion The Policy Maker led that at tack.Armed with the slogans of a con man, he slowly obscured the obvious and concealed the sensible, cloaking monetary and economic theories in graphs, charts, and statistics, until men doubted their own ability to deal with the now esoteric problems of economy and state. But the American public had great confidence in the integrity of their public leaders and trusted the knowledge of experts in the fields of higher learning, and so they accepted the conclusions of their Policy Makers.

The Policy Maker had made his first and most important move to ward institutionalizing govern m~nt int~rv~ntion and his theories of artificial monetary expansion into the American way of life: he convinced the American public that men needed government protection from the "natural" depressions of capitalism and the monetary crises "inherent" in the gold standard. Policy Makers had to do a lot of talking to convince men that the most productive system ever known to them was the cause of depressions. They had to do even more talking to convince men that the precious metal freely chosen and held as money was the cause of monetary depreciation and the source of bank insolvency. It took a lot of talking, but when they had finished, men were convinced. They were convinced that their minds their own eyes - had been deceiv ing them. They were convinced tha t the way to freedom was through greater controls and more restrictions, and that paper was as good as gold.

While the attack· on capitalism was subtle and implicit, condem nation of the gold standard was open and explicit.

238 THE FREEMAN April Condemnation of Gold The reason for the Policy Mak er's condemnation is that, even though governments never really adhered to it, the gold standard placed limits on the amount of artificial money and credit a gov ernment could create. Money and credit expansion was always brought to a quick end because banks and governments had to re deem their notes in gold. Redemp tion was the major obstacle in the way of the Policy Maker's dream of unlimited artificial money cre ation, unlimited spending. The Policy Maker learned how to obtain in a matter of minutes the purchasing power of 50 pro ductive men working 50 weeks. He learned of the plunder and loot that a button on a printing press would provide. But it would not be until the twentieth century that he would convince the government to eliminate gold and convince men of the "virtues" of legal counter feiting. The Policy Maker had to destroy man's idea of property in order to entice men with dreams of unearned wealth. He had to per suade men of the "merits" of mon etary redistribution and govern ment handouts.

If there was a monetary rule of conduct among men during the days of the semi-gold standard it was: the man who desires to gain wealth must earn it, by producing goods or their equivalent in gold. It was in this spirit and by this golden rule of conduct that men could and did operate in the mone tary and economic spheres of so ciety. Consequently, they achieved the most productive and beneficial era that mankind had ever known. But what they never identified or challenged was the opposing monetary rule of conduct advo cated by their Policy Makers: the government that aims to acquire wealth must confiscate it - or counterfeit its equivalent in paper claims. Evolution of the Theory The gold standard limited arti ficial monetary expansion and in doing so, it limited artificial eco nom,ic expansion. The Policy Maker considered this great virtue of the gold standard to be its maj or vice.

The Policy Maker saw that arti ficial monetary expansion had led to economic booms. He also saw that at the end of every artificial boom· there occurred a financial panic and depression. The Policy Maker ignored the cause of financial panics, he SRW only their effects - bank runs and the demand for gold redemption. He ignored the cause of economic depressions, he saw only that the boom had ended. Reversing cause and effect, the Policy Maker con eluded: eliminate gold redemption 1973 THE MAKING OF AN INTERNATIONAL MONETARY CRISIS 239 and the financial panics would stop; eliminate the gold standard and the boom would never end. The Policy Maker had to make another major move toward insti tutionalizing government interven tion and his theories of artificial monetary expansion into the American way of life: he had to divorce the idea of nalional pro duction from the idea of indiv'id ualproductivity.

Ignoring the fact that the in dividual was the source of produc tion, he convinced men that in the name of "social prosperity," gov ernment could and should "stim ulate" the economy and "encour age" national production; while at the same time he advocated income taxation to penalize individuals for being productive. Implicit in this doctrine is the idea that produc tion is a gift of state, the result of government guidance; and that individual productivity is a sin, the result of human greed. Men were subtly offered a false alternative: the "permission" to produce and be taxed directly through government confiscation; or the "luxury" of an artificial boom, to be taxed indirectly through inflation. The American people rej ected both alternatives (and still do to day) yet saw no other acceptable course of action - the intellectual opposition was still too weak to provide them with one. Thus, by default, they accepted both alter natives "to a limited degree." An income tax should be levied "only on those who could afford it,"

while the government "should steer the economy on a prosperous course." How was the economy to be "steered"? By supplying unending paper reserves to a regimented banking system and compelling bankers to keep interest rates arti ficially low. But in 1913 it was too early to sell the public on the "vir tues" of the direct confiscation of gold. But the time was "right" for the takeover of the banking sys tem. A monetary revolution was in store for America. Fractional Reserve Banking In the name of "economizing" gold (which allegedly was not in sufficient supply to be used as money), Policy Makers advocated a fractional reserve system. A frac tional reserve system would by law set a ratio at which gold must be held .to back legal tender notes. While fractional reserve banking had always been practiced by banks and condoned by govern ments, the Policy Maker formal ized and legitimized it through the Federal Reserve System domesti cally and the gold exchange stand ard internationally.

What the Federal Reserve Sys240 THE FREEMAN April tern and the gold exchange stand ard had in common was a central banking system that used as re serves both gold and money sub stitutes (such as demand deposits, fractionally backed Federal Re serve notes, commercial paper the oretically convertible into various commodities, and government se curities backed by the taxing power of the government). These reserves - gold and the money sub stitutes - served as a base for monetary expansion. Gold was no longer the sole re serve asset: it was now supple mented by paper reserves. The government exercising a monopoly on the issuance of paper money could designate what should com prise the monetary reserves. Hence, redemption was now not only in gold, but also in money substitutes. In this way a pyra miding of money and credit ex pansion could take place without the automatic limitations imposed by the gold standard.

By the 1920's the Federal Re serve System had grown and in creased its power and controls, which enabled it to increase the money supply and reduce interest rates for longer periods of time. The Federal Reserve Board suc ceeded in implementing its easy money policies. The problem now was that money and credit became so easy to obtain that it spilled over into the stock market and other investment areas. The government became alarmed over this wild speculation, raised interest rates sharply, and slammed on the monetary brakes - but it was too late. The day came (that inevitable day) in October 1929 when the Law of Causality pre sented its bill. Men found that their profits were merely paper profits, that their prosperity was an illusion. The stock market crashed. Men suddenly realized that on the other side of the coin of credit there ex isted debt. Industries fought to become "liquid"; everyone tried to get hard cash. But the hard cash - the gold - was insufficient to cover the outstanding claims.

The Great Depression The Policy Maker succeeded in implementing his theories, yet all of the consequences that his the ories were to have eliminated con fronted him once again - this time to a far greater degree. This was the Grea,t Depression; this was the monetary crisis that not only forced an entire national banking system to close its doors, but was of international dimensions. The dollar was in trouble not only at home, but also abroad. What to do? The Policy Maker had the "an swer." He viciously condemned gold and capitalism for causing 1973 THE MAKING OF AN INTERNATIONAL MONETARY CRISIS 241 the crisis and advocated even greater policies of money and credit expansion in order to "stim ulate" the economy; more govern ment controls, more government regulations, more and higher taxes were the "answer." Men were asked to patriotically give up their gold in order to save the nation's credit. It was a time of emergency, so Americans complied. They did not know that they would never see their gold again, that taxes would continue to rise higher and higher, and that inflation would become a way of life.

The Policy Maker had to do a lot of talking to convince men of the "evils" of gold and capitalism. He had to do a lot of talking, but when he was finished, men were convinced. They were convinced that nothing less than the direct confiscation of wealth and a vigor ous credit expansion could save the nation. Devaluation in J934 ... In 1934, Franklin D. Roosevelt with one stroke of the pen confis cated the entire gold stock of America. When government held the gold and the citizens held only paper, the government reduced the value of the paper by over 40 per cent, raising the official dollar "price" of its gold holdings. (The Policy Maker had learned that credit expansion meant debt creation, but showed governments how to default on their debts by deval uing the monetary unit in relation to gold and other currencies.) The U. S. was now on a fiat standard domestically, and again in the name of "economizing" gold, the government printed new mon ey against its total stock of newly acquired gold. Deficit spending be came a way of life and government borrowing became so insatiable that any mention of paying off the national debt was smeared as un realistic and regressive in light of the "virtues" of continued mone taryexpansion. (The Policy Maker had learned that borrowing meant debt accumulation, but showed the government how to "amortize" its debts by charging its citizens in direct and hidden taxes.) Domestically the fiat standard has failed miserably. It was de signed to "economize" gold and provide a stable dollar. Since 1913, the dollar has lost approximately 75 per cent of its purchasing pow er. The fractional gold cover has been progressively reduced, and transferred to cover obligations abroad. That gold reserve has been reduced from $25 billion to $10 bil lion through demands for redemp tion by foreign governments which finally forced the U.S. to close the doors of its central bank. (The central bank was supposed to be a bank of last resort. The run on the 242 THE FREEMAN April Treasury's gold amounts to the largest and most prolonged bank run in the history of any nation.) Bretton Woods Meanwhile, internationally, in 1944 a "new" system was estab lished - the Bretton Woods sys tem. During the Bretton Woods era Policy Makers adopted policies of vigorous credit expansion as a panacea for the world's problems.

The instrument of credit used was the dollar. In its role as reserve currency, the dollar was consid ered "as good as gold" and served as a supplement to world gold re serves. In the name of world li quidity, dollars would be furnished as needed to replenish and build up world reserves. The dollar was envisioned as a stable yet ever expanding reserve currency. In this spirit, dollars poured forth on demand via U.S. deficits in the form of foreign aid, loans, and military expenditures. Foreign demand for dollars never ceased, nor did the expansion of money and credit, until the world found itself in the midst of an inflation ary spiral which turned to reces sion and ended in an international monetary crisis: the dollar incon vertible, dropping in value, an un desirable credit instrument and in effective reserve currency. The dollar was again devalued, while gold soared in value, reaching new highs. And through all this, Policy Makers have been screaming the same old theories: "Gold is a barbarous relic! It ought to be eliminated completely!

What we need is more liquidity . . . more money and credit!" What more can the Policy Mak er do? The Theory Projected There is a causal link between history and future events - the link is theory. A theory is a policy or set of ideas proposed as the basis for hu man action. To the extent that a theory furthers man's life it is a practical basis for human action and therefore a good theory. To the extent that a theory destroys man's life it is impractical, self defeating, and therefore a bad theory. A sound monetary theory, if em ployed, will facilitate trade and economic growth, while an un sound monetary theory will lead to monetary crises and economic dis ruptions. The Policy Maker has been charged with providing theoretical ammunition to government. To the Policy Maker's great discredit he has learned nothing about mone tary theory in the last two cen turies, save how to employ more sophisticated techniques of credit expansion. He has rejected the 1973 THE MAKING OF AN INTERNATIONAL MONETARY CRISIS 243 lessons of history through self-in duced blindness and has made him self deaf and dumb to rational eco nomic analysis. He sees nothing except his precious theories of ar tificial monetary expansion.

Today's Policy Maker sees him self as participating in an evolu tion of the international monetary system comparable in "impor tance" to the role his intellectual ancestor played in evolving the gold standard into the gold ex change standard. And if by evolu tion the Policy Maker means a series of changes in a given direc tion, this is a correct description of his role. But it is the wrong di rection. And it has been the wrong direction for over a century. Given the monetary theories held by today's Policy Makers who are concerned with international monetary reform, one can expect a change only in the method and degree of monetary expansion not a change in direction. Each time the Policy Maker has seen his monetary theories imple mented he has blinded himself to their effects. Each time a monetary or economic crisis has occurred he has refused to identify the cause, blaming it on the so-called "busi ness cycle" which he insists is an inherent weakness within capital ism and which invariably causes depressions. But there is no such thing as a "business cycle" that causes depressions - only a cycle of continuous government inter vention into the 'economy, provid ing newly printed money that causes inflation, malinvestment, overconsumption, the misalloca tion of resources - distortions and mistakes that, when liquidated, are called, depressions.

There is nothing in the' nature of capitalism and the free market to cause such crises. If economic history has tended to repeat itself, it is because the Policy Maker has been guiding human action and government policies along a circu lar theoretical course that has been tried and has failed - again and again and again. IIIf at first you don't succeed . . ." The spectacle of billions of in convertible dollars frozen in the vaults of central banks has brought on cries of condemnation over the dollar's credibility as a reserve currency. The Policy Maker's theory of a stable yet artificially ever-expand ing reserve currency has failed. ,Policy Makers are willing to admit this freely. The failure, of course, was not theirs - it was "all gold's fault." The Policy Maker avoids dealing with the problem by insist ing that there is too little gold in existence instead of too many claims to gold outstanding.

The "solution" to the problem 244 THE FREEMAN April (if the Policy Maker remains con sistent) will be to evolve the inter national monetary system from. a system in which an ever-expand ing reserve currency provided the world with credit and liquidity, to a system in which an ever-expand ing reserve "asset" will fill that role. Like the dollar, this reserve "asset" will amount to circulating debt, i.e. something owed rather than something owned. It will be a nonmarket instrument, deriving its acceptability from government cooperation and decree, "immune from the laws of the free market and outside the reach of greedy speculators." Where will this "asset" come from? Under the Bretton Woods system, dollar reserves were fur nished by the U.S. central bank. Both the bank and the "asset" failed. The next step is to create a world bank (a larger bank of last resort) controlled by an interna tional organization (the IMF) with the power to create a new "asset," independent of any single government's monetary policy.

As a supplement to gold and like the dollar before it, this "asset" should be a credit instrument. Un like the dollar, it would have the backing of an entire world of cen tral banks. The "asset" should be ever-expanding and should provide both liquidity and stability. In short, "as good as gold." The SDR: lias good as gold ll again! Special Drawing Rights (SDR's), or "paper gold" as it is sometimes referred to by those who can keep a straight face, was introduced to the international monetary system in 1967. It was a time when the dollar was under suspicion and gold was increasingly demanded. In order to "economize" gold, the IMF issued a new reserve "asset" (SDR's) to supplement gold and take pressure off the dollar. The SDR is a bookkeeping entry, de fined in gold yet non-convertible into gold. It serves the same func tion as gold since it is a reserve, but unlike gold, it can be created by a stroke of the pen.

U.S. Policy Makers have chosen the SDR as the reserve "asset" most likely to succeed in replacing gold. But just as the dollar was supposed to be as good as gold and was not, the SDR, even if made tangible and convertible into gold and/ or other currencies, will suffer the same demise. The Policy Maker has chosen to ignore the fact that there is no fundamental difference between an artificially ever-expanding reserve currency and· an artificially ever expanding reserve "asset" - both are inflationary and therefore self destructive. But the real threat is not that the SDR may fail as the dollar did in bringing monetary stability.

1973 THE MAKING OF AN INTERNATIONAL MONETARY CRISIS 245 The threat is in the damage SDR's can do if developed within a for mal system. Just as the dollar re placed gold as the primary asset, SDR's have a very real potential for further diminishing the role of gold, and in doing so changing the entire nature and inflationary po tential of the IMF. The most controversial question in monetary reform today centers around the respective roles of gold and SDR's. While the U.S. has taken an anti-gold position, France has been said to have taken a pro gold position in opposition to U.S. proposals. But if one checks the theories held by the Policy Makers of the governments involved, the "pro-gold" opposition looks ab surdly weak. The Mythical Pro-gold Governments The U.S. wants a lesser role for gold, holding that SDR's can serve as a measurement of currency val ue, act as a credit instrument, earn interest, and absorb dollars. In ef fect the U.S. position would elimi nate gold's major role without eliminating gold. SDR's would not only become the standard of value for all currencies, they would re place gold as redemption instru ments.

The "opposition" (mainly France) wants gold as the major reserve asset in which all currency values are measured. While the U.S. proposes that excess dollars be "absorbed" by an IMF issuance of SDR's, France proposes instead that the official "price" of gold be raised sufficiently high to convert excess dollars in central banks. Superficially, it would appear that there are two opposing posi tions being taken: one anti-gold, one pro-gold. However, both posi tions are anti-gold standard, hence anti-gold as a reserve asset. A gold standard requires that governments limit the currencies they print to the supply of gold they possess - and this is considered out of the question by today's gov ernment leaders. They insist on the "right" to inflate. "Pro-gold" European governments have, time and time again, inflated their cur rencies, then devalued. To advo cate arbitrarily raising the "price"

of gold is as much an attempt to use gold as a fiat reserve asset as is the U.S. position. While the U.S. would increase reserves by printing "assets" to cover present and future money and credit needs, France would in crease reserves by raising the "price" of gold to cover the arti ficial money and credit previously created. And this is the common denominator that links the two ap parently opposing positions: their basic agreement, in principle, that the artificial creation of money and credit is essential to any monetary 246 THE FREEMAN system. Disagreement only arises over the method to be used in deal ing with excessive monetary ex pansion, i.e., debt. There are no pro-gold govern ments in existence today, only pro inflation governments. The differ ence between governments is only in the degree of monetary expan sion and the freedom of gold own ership a government permits.

II Amortize ll or Default: the False Alternative So, basically, monetary reform boils down to the following two al ternatives: the "pro-gold" coun tries advocate defaulting on for eign debts via devaluation; the "anti-gold" countries advocate "amortizing" foreign debts via artificial reserve expansion. (The kind of "amortization" that is con sistent with the Policy Makers' theories amounts to a method of constantly refinancing government debt below the market rate of in terest. Given the past record of government, the principal may never be repaid in full or in real money terms.) The third alternative is simply to not create debts that govern ments are unable or unwilling to repay. The third alternative is for governments to stop arbitrarily creating debt instruments such as the dollar in its role as reserve currency, and the SDR. These instruments and the currencie~ printed against them invariabb depreciate and cause monetary crises. The third alternative would mean returning to the gold stand ard which, in today's "enlight ened" era and within our "evolv ing" economic structure, is consid ered "passe" and "old-fashioned."

Thus, in the present political context, monetary reform will con sist of devaluation (and/ or reval uation more recently) and default on debts, or artificial reserve ex pansion and the "amortization" of debts or, more probably, a combi nation of both. What is the difference between default and "amortization?" Consider the example of a man whose expenditures have for some time been exceeding his income. He has in effect been running a deficit. He finds himself with more short-term claims against him than he has liquid assets. If he refuses to liquidate assets and finds a way to default on his short-term claims, the loss falls directly on his credi tors. (When governments default on their creditors, they call it de valuation.) But what if the man refinances his short-term obligations by printing IOU's far in excess of his assets, and offers interest on this new "medium of exchange"? What if this new "medium of exchange"

is then used as an "asset" by cred1973 THE MAKING OF AN INTERNATIONAL MONETARY CRISIS 247 itors who, in turn, print IOU's against it and distribute these as direct claims to goods? Here the loss falls on all those who are in the domain of the coun terfeiters, and who must suffer the effects of artificially rising prices. (When the government thus cre ates fiat money in this way, they call the process "amortization".) From this example, the follow ing conclusion can be drawn rela tive to governments: any form of debt default falls squarely on the shoulders of the creditors, Le., on the citizens of creditor govern ments. Any form of debt "amorti zation", however, falls indiscrimi nately on the shoulders of all those individuals within the monetary sphere of those governments par ticipating in an international monetary system of debt "amorti zation." No ring of international counterfeiters has ever been, or could ever be, more of a threat to individuals and their wealth than is the IMF in its move toward in ternational monetary "reform."

The frightening Prospect of an International Debt In the past, devaluation and de fault on excessive debt has been the method most used to eliminate debt. But, given an international system of artificial reserve expan sion, the issuance of credit and the "amortization" of debts may be exp'ected to give rise to the specter of an international debt. The possibility of an interna tional debt is not a pleasant one to contemplate. Like a national debt that continues to grow without re straint through continuous refi nancing, an international debt would soon become uncontrollable and self-perpetuating. The victims of such debt "amor tization" must ultimately be indi viduals: taxpayers to the degree that the debt is financed directly or repaid; consumers to the degree that the debt is refinanced indi rectly through the inflationary method of money creation; or creditors if and when (or to the degree that) the debt is ultimately repudiated.

Given the choice between "amor tization" and default as methods of dealing with the problem of debt, and given the inflationary policies that governments are determined to follow, it makes little difference what kind of monetary "reform" is implemented. Our monetary au thorities are only haggling over who should be the victims of their debt creation - foreigners or na tionals. Rational and morally concerned individuals will not cheer their government for shifting the bur den of their debt onto foreign citi zens through the process of debt default and devaluation. On the 248 THE FREEMAN April other hand, given debt "amortiza tion," the citizens of all countries will suffer the inevitable result of more taxation and more inflation. Thus an individual will pay taxes, and on top of that the hid den tax of inflation for domestic progra,ms, and on top of that an inflationary tax for world expen ditu.res, and on top of that the in flationary tax for interest on all inflationary debts both domestic and international.

Toward an International Fiat Reserve System It is not an easy thing to elimi nate gold from a monetary system and replace it with the continuously depreciating promises of paper money and paper "assets." All such money substitutes at one time de rived their value from and were dependent on the market or ex change value of commodities. It takes a lot of time and a lot of talking to convince men to accept artificial values as distinguished from the market-determined values in exchange. In America, Policy Makers have had nearly two cen turies in which to propagate their monetary theories and institution alize them within the policies of state. The result has been a slow erosion and obscuring of gold's role in the monetary systems of man. The monetary system that lies at the end of the Policy Maker's theories is an international fiat re serve system. The foot in the door that opens the way to this system is the SDR.

The U.S. proposal to replace gold with the SDR amounts to just such a proposal. (Whether or not "SDR" is the final name given to a fiat reserve asset· is unimportant. What is important is simply whether that asset derives its val ue realistically or arbitrarily.) But the U.S. knows that governments will not simply give up their gold overnight. And while it is true the so-called "pro-gold" countries have no intention of giving up their gold, the role of gold can be so diminished within the future mon etary system that it will no longer serve as a protection against arti fichU monetary expansion, even to the limited degree that it has in recent years. An "opposition" that is in basic agreement with U.S. theories of artificial credit expan sion cannot be expected to properly defend gold's. role in any future international monetary system. If there is to be a "meeting of the minds" on international mone tary reform, it will come through compromise - and tha t compro mise must lessen gold's role in the future. Worse, if this compromise is achieved, it will establish an un precedented potential for world in flation.

1973 THE MAKING OF AN INTERNATIONAL MONETARY CRISIS 249 International Demonetization What will be the nature of this compromise? Given the theories of world Policy Makers, the most probable compromise would be to issue, as "legal tender" notes, SDR's backed by a fractional amount of gold. The effect of such an agreement will concede to the IMF the power to create reserves and set in motion the unrestricted workings of an international frac tional reserve system. Just as gold was demonetized in the U.S. through the method of fractional reserve banking, the Policy Makers will attempt to de monetize gold internationally. A sequence of events typical of what one might expect from Policy Makers would be for them to ad vocate the establishment of a cel?- tral bank (the IMF) that has the power to create reserve assets, de fine the asset in gold to give it credibility (fractionally backing the asset with a percentage of gold) and, in the name of "econo mizing" gold, increase SDR allot ments, thereby reducing and even tually eliminating the gold back ing, thus facilitating the constant increase in fiat reserves.

Ultimately this system would eliminate any objective limitations on monetary expansion, thereby surrendering monetary policy into the collective hands of a world body the monetary heads of which would subjectively decide which nations will be given the "special right" to consume goods and at whose expense. Simply Repetitious This is not a prediction of com ing events. It is simply an example of the methods Policy Makers would most likely advocate in or der to achieve their goal. Notice that there is nothing innovative about the method of creating a fiat instrument, arbitrarily decreeing its value by force, then proceeding through fractional reserve bank ing and monetary expansion to sys tema tically undermine the accept ability it had enjoyed by reason of its gold backing. It has all been done before. These men are not innovators. They are simply repetitious! They would be laughable if they weren't so dangerous. But today's Policy Makers are dangerous. They have the power of government force be hind all the theories they propa gate. And at the end of their the ories awaits chaos.

Given today's political context, an international fiat reserve sys tem must ultimately add to mass ive world inflation as governments are inclined to spend more and more. This must lead to the even tual collapse of the international monetary system and with it the economies of the world.

250 THE FREEMAN Apri The Real Meaning of Monetary Reform Monetary crises are not born from nature, they are made man-made. As long as governments contin ue to adopt policies of inflationary finance, the monetary systems of the world will be in pei'petual dis integration. This disintegration will lead to crises of greater scope and intensity, recurring at shorter intervals, while the meetings on monetary reform become a way of life as Policy Makers offer only variations of their destructive and futile theories. As long as governments con tinue their policies of artificial monetary expansion there can be no such thing as monetary reform. To reform means to abandon those policies which have proven to be unj ust and incorrect. Fundamental monetary reform means that gov ernments would have to abandon their policies of inflationary fi nance. The essence of contemporary monetary policy is the employment of inflationary finance, which means injustice to individuals who must bear the brunt of the default and "amortization" of government debt, and the continuous depreci ation in the value of their curren cies. Further, it means that indi viduals will be forced to suffer the unnecessary and harmful effects of continuous recessions and de pressions.

Until fundamental reform il achieved, the indi vid ual will re, main the source of governmen1 financing. One can easily see thai the source is being more and morE exploited as governments resort tc greater and more extensive polio cies of artificial monetary expan· sion. If fundamental reform does not occur, it is only a matter of time until individuals and private prop erty are squandered in an infla tionary system of waste. In the last analysis, real mone tary reform must consist of re turning to a gold standard. But there are preconditions to be met before a gold standard can be es tablished as a lasting monetary system. Men must understand what money is. They must rediscover why gold is the most effective me diurn of exchange and means of saving. And men must discover what money is not. They must un derstand that by accepting a mon etary unit of value by decree, they are not only condoning theft, but are sanctioning the instrument of their own monetary and economic destruction.

When men have understood this, they will want to return to the gold standard. But the gold standard cannot 1973 THE MAKING OF AN INTERNATIONAL MONETARY CRISIS 251 survive in an economy mixed with socialist controls and vaguely de fined individual freedoms. Men must rediscover the virtues of the gold standard; and men will not rediscover the virtues of the gold standard until they rediscover the virtues of capitalism. Men will not rediscover the virtues of capitalism until they identify the nature of man's rights and the injustices of government-initiated force and coercion. If the gold standard is to return to this country, it will return on the wings of capitalism and not before. If one wishes to fight for eco nomic and monetary stability, one must also fight for capitalism. If one wishes to fight for capitalism, one must fight for man's rights. If one wishes to engage in this fight, the battle lines are clear: one must engage in an intellectual battle to displace the theories held by his intellectual adversaries - the ad vocates of policies based on coercion. II IDEAS ON LIBERTY Benefits oj Money THE EMERGENCE of money was a great boon to the human race.

Without money - without a general medium of exchange - there could be no real specialization, no advancement of the economy above a bare primitive level. With money, the problems of indivisi bility and "coincidence of wants" that plagued the barter society all vanish. The establishment of money conveys another great benefit. Since all excbanges are made in money, all the exchange-ratios are expressed in money, and so people can now compare the mar ket worth of each good to that of every other good. If a TV set exchanges for 3 ounces of gold, and an automobile exchanges for 60 gold ounces, then everyone can see that 1 automobile is "worth" 20 TV sets on the market. These exchange-ratios are prices, and the money-commodity serves as a common denominator for all prices. Only the establishment of money-prices on the market allows the development of a civilized economy, for only they per mit businessmen to calculate economically .... Such calculations guide businessmen, laborers, and landowners, in their search for monetary income on the market. Only such calculations can allo cate resources to their most productive uses - to those uses that will most satisfy the demands of consumers.

MURRAY N. ROTHBARD, What Has Government Done to Our Money?