Economic Outlook

Article Tools

Print

E-mail

Comments

RSS

WHEN PAPER IS KING

What we've had since that breakdown is a constant withering away of the value of all currencies in terms of gold. The floating-rate system has given complete control of the value of each currency to the respective governments ... so it should come as no surprise that the past decade has seen a marked jump in the world's average annual rate of inflation, and that the threat of world trade wars is greater now than at any time since the last regime of floating exchange rates ... the Depression—ridden 1930's. Nor is it an accident that our country's highest, most accelerated rate of inflation has occurred since 1971, when the U.S. went over completely to flat (nonredeemable) money. Since then, gold prices have increased twentyfold ... the consumer price index has gone up 128% ... and the annual trade deficit 1,146%.

The climax of this policy came in October 1979, when—as a result of international pressure, weakness of the dollar, gold at $600 an ounce, and silver at $25 an ounce—the Federal Reserve started concentrating more on decreasing the money supply (which has been growing three times faster than the real economy) than on holding down interest rates.

Now, because there's no long-term trust in money, the world is precariously dependent on short-term debt with high interest rates. The unprecedented cost of borrowing money has made it unlikely that a group of 22 nations, which—together—owe American banks more than $52 billion, will be able to pay their debts. This is forcing taxpayers of rich lands to subsidize loans to poor countries, so that they—in turn—can repay commercial banks. For a decade these banks have made reckless loans, because they believed—until recently—that they could make higher—than—ordinary interest income by financing risky investments ... which, if they went bad, would be repaid either by tax money sent to replenish the treasuries of bankrupt governments or (indirectly) through more inflation.

Then, in 1980, the Federal Reserve System obtained legal authority to monetize such debts by buying foreign bonds guaranteed by the countries' governments. More than $2 billion in Federal Reserve notes was issued upon such collateral in 1982, including some backed by Italian lira bonds.

Jim Davidson, founder and chairman of the National Taxpayers Union, wrote in a recent issue of Reason: "The mechanism is in place for a worldwide inflation of unprecedented proportions.... If the choice is narrowed to one of two alternatives—printing money at whatever rate necessary to preserve the entire world's debt structure or falling into a deflationary collapse—the government will print money."

And it's already happening. In order to lower interest rates (temporarily, at least), the Federal Reserve has, since the closing months of '82, gone back to the policy of increasing the money supply. Bank reserves plus currency held by the public (a sum that economists refer to as M1) grew by less than $3 billion between January and July of 1982. But from August through November, they increased by nearly $24 billion ... and by $600 million in the second week of December alone, bringing our M1 to over $475 billion. Such increases, however, can only postpone the all but inevitable monetary collapse waiting in our future, unless—as Jim Davidson has suggested—"we use the present crisis as an opening for real reform".

RSS | Comments | E-mail | Print