Monday, April 13, 2009

A House Divided: Will Fiat Money or the Free Market End Up on the Ash-heap of History?

On June 8, 1982 Ronald Reagan addressed the Members of the British Parliament at the Palace of Westminster in London.

(Read his full address:

Barely a year as America’s president and presumptive leader of the free world, Reagan had taken office when the West seemed to be in retreat in the face of aggressive Soviet communism. But Reagan saw the inherent weakness in the Soviet position—its economic system. Pointing out various facts about the Soviet economy—for example, that the three percent of agricultural land allowed for private use accounted for one-fourth of Soviet agricultural production—he said, "What we see here is a political structure that no longer corresponds to its economic base, a society where productive forces are hampered by political ones." Reagan referred, of course, to the Soviet’s centrally planned, command economy.

Later in the speech he predicted the demise of the Soviet Union itself, brought about by the failure of its repressive economic system to meet even the simplest needs of the people. Its repressive economic system--that Reagan, in another speech, said actually was the absence of economics--simply was incompatible with man’s very nature. No threat of gulags could make it work. We who lived through those dangerous times were stunned by the following prediction:

"What I am describing now is a plan and a hope for the long term -- the march of freedom and democracy which will leave Marxism-Leninism on the ash-heap of history, as it has left other tyrannies which stifle the freedom and muzzle the self-expression of the people"

Communism on the "Ash-heap of history"! Yes, it had lasted many decades. Yes, it appeared to be as powerful and aggressive as ever. Yes, its people showed no sign of revolt. Yet here was our president predicting its end based upon the fact that its "productive factors are hampered by political ones."

Dare we predict the same thing today regarding our fractional-reserve fiat money banking system, forced upon us by a central bank and manipulated for political purposes rather than safeguarded to ensure our freedom? Is this system, so out of synch with our basically free enterprise economy, doomed to the ash-heap of history, too? Yes. Like Lincoln’s "house divided" we see that the U.S. economy is divided. The means of production are in private hands, yet our money is in government hands. This dichotomy cannot last. Our economy cannot survive half free and half controlled by political factors; it must become all one or all the other. We cannot expect the free half of our economy to survive and flourish as long as our money, which is at least one-half of every transaction, is as unfree as was the worthless ruble of the Soviet Union.

It is our fiat money system that allows our political leaders to "stimulate" voters and "bailout" special interests with the collusion of our supposedly independent central bank. Each monetary expansion to accomplish their unconstitutional actions hampers the free side of our economy all the more. How is it possible for businessmen to plan when the political authorities constantly undermine money’s value? They cannot. The more government expands the money supply the more resources it commandeers for its boondoggle, wasteful, unproductive ventures that sap the ability of private business to secure the resources necessary for true progress.

This is the great un-reconciled and irreconcilable divide within our economic system today. It is the same everywhere—in Europe, Japan, and China. Either our fiat money system will be relegated to the ash-heap of history or our free enterprise system will fail. There really is only one choice, for if we loose our free enterprise system we will suffer the same fate as did the Soviet Union. Even now we see our government moving in steps in the wrong direction. It has demanded veto power over General Motors’ restructuring plans, following GM’s acceptance of government bailout funds. Influential advisors, such as Nobel Laureate Paul Krugman, are demanding that the government nationalize the country’s largest banks. These are ominous signs indeed. But with the fatal consequences of politically run command economies so recently in our memories, why are we even considering such actions? Give us liberty! End the Fed!

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