Mr. Ross is an Oregon commentator and writer especially concerned with new developments in human freedom.
This is my first letter to you since arriving “incognito” several weeks ago here on The Paper Planet. When you suggested that traveling to this planet for the summer would be good experience for a student working toward his economics degree, I had no idea why you felt that way. I should have guessed. Given all the “experiments” with fiat monetary systems in which the nations of Earth have chosen to engage, “The Paper Planet” is indeed a good nickname for the place.
It would be an understatement for me to say I’m astonished. The extent of the mental contortions in which most of Earth’s economists are willing to engage in order to justify pa per money schemes strikes me as incredible. The extent of the deceptions and coercion in which the politicians are willing to indulge strikes me as downright barbaric! But, as one of our own great economists once stated, “The economists provide the seeds of monetary policies; the politicians merely sow.” In that case, I suppose many of Earth’s economists are equally guilty of barbarism.
But enough of my moralizing. Here is a summary of what I have observed. (Please understand, Professor—these observations are taken largely from my notes as I made them. I have not had time to formally organize my writing yet. Nevertheless, the pattern should be clear.)
As you know, all of the truly civilized planets have long ago adopted “hard money” standards—standards based generally on precious metals, usually gold, due to its store of value qualities of rarity, divisibility, relatively steady demand, and durability. Gold exists in normal amounts on Earth and would therefore be the logical choice for a monetary standard here.
However, despite actual experiences with the virtues of gold, almost all nations have abandoned this metal in favor of fiat paper currencies. The first purpose I set myself was to find out why.
The most common argument against a gold standard seems to be that it is “too limiting” to a nation’s economy. Inasmuch as all planets’ histories show that hard money standards are growth-promoting, I could not understand this claim at first.
Limiting Aspects of Gold
The key to comprehension of this amazing contention is to define what the Earthlings mean by “too limiting.” Apparently it has two major meanings—economic and political. Often, on The Paper Planet, they are inextricably intertwined.
First, the economics.
A fiat standard of money can give the impression that it is possible to “force feed” an economy in order to achieve continuously high levels of stable growth. This force feeding is done by printing money in vast quantities and often involves subsidized interest rates. The idea is to give people more incentive to spend money and less. incentive to save. And, indeed, this process does result in abnormal growth—for short periods of time.
But a couple of severe problems soon occur. More money in circulation (because the printing of money inevitably continues to exceed the rate of production of goods and services) results in a depreciation of purchasing power. This, in tandem with disincentives to save, erodes the capital base of a nation. Less capital—less quality capital, I should say—means less business investment, which means less growth and employment. This eventually leads to an economic contraction called a “recession.”
Strangely, one of the early aims of fiat systems was to prevent recessions! How this was to be accomplished is very vague—never adequately explained in all of Earth’s economic literature. Personally, I believe that because such force feeding policies are in total violation of several economic laws, it is not at all surprising no one has been able to clearly explain the policies. At first, I thought that perhaps Earthmen were inordinately prone to wishful thinking. But that is not the case. What they are prone to is politics.
That brings us to the second interpretation of the phrase, “too limiting.”
One of the hallmarks of our galaxy’s civilized worlds is their universal restriction on money-tampering. I confess that until I visited The Paper Planet, I had a very incomplete understanding of the reason for this restriction. I want you to know, Professor, that I have thoroughly corrected that gap in my knowledge. A hard money system keeps a
check on politicians; it is their excesses that a gold standard limits. I have found that when a politician on Earth complains that hard money is “too limiting,” it is simply his way of saying that he has reasons to embezzle the populace’s wealth. Perhaps, Sir, that sounds a bit harsh; but in fact, that’s what it all boils down to.
My supporting evidence:
Paper money systems always lead to inflation—and politicians always manage to construct tax systems to take advantage of this fact. As people demand higher wages to offset the erosion of their purchasing power, they are “pushed into higher tax brackets,” meaning, they are taxed at increasingly steeper rates. The more taxes the politicians have at their disposal, the easier it becomes for them to “buy” the favors of special interest groups. Politicians are quite careful to buy these favors quietly (at least in the early stages of a fiat system—later on they can become embarrassingly brazen about it)—that is, they do not admit what they are doing. Instead, they use euphemisms as, “the public interest,” “the common good,” “the welfare of the people,” “aiding the local economy,” and “watching out for the folks back home.”
Each special interest group (and almost everyone belongs to some such group inasmuch as it is natural for people to have special interests in certain things) finds it almost impossible to resist taking these favors from the politicians because the favors represent wealth far and above what any individual group believes it could otherwise acquire as quickly on its own. To justify acceptance, the recipients of this inflation-gener-ated tax largess also have euphe misms, the more common of which are, “If we [or I] don’t accept it, someone else will,” and, “We’re just getting back a little of what we already paid in [in taxes].” As you can see, Sir, it is a very vicious cycle—and, I might point out, has historically led to the downfall of nation after nation on this planet.
Paper Money Policies
A few lines back, I mentioned the fact that paper money has (especially in the late Twentieth Century, the current hundred-year calendar period on Earth) been adopted partly on the idea that its judicious (!) use could prevent recessions. In light of The Paper Planet’s brief recent historical experiences with hard money, this idea needs special attention. Flying in the face of evidence, modern politicians on Earth seem convinced that under a gold standard the “ups and downs” of an economy are much more severe than under a fiat standard. All I can say to this, Sir, is that whatever standard of judgment is at play is, to twist the meaning of an Earth colloquialism, “out of this world”—because it certainly hasn’t come out of our hard money worlds!*
* Although hard money has limited recent experience, it was quite extensively used in more ancient Earth—for example, as Why Gold? (Exposition Press, 1974) author, Leslie Snyder, wrote of the Byzantine Empire, “The bezant [unit of currency] was minted at a standard of 65 grains of fine gold for 800 years . . . So determined were the empire’s rulers to maintain the integrity of their money that they required all bankers and others through whose hands money passed to take an oath never to file, clip or debase coins in any manner. The penalty for any violation of this oath: the offender’s hand was cut off.” This, unfortunately, was the longest recorded use of an uncorrupted gold standard. Even in the ancient world, gold standards did not long remain inviolate from the tamperings of politicians.
The facts: Under periods of hard money standards on The Paper Planet (a good example is the late Nineteenth Century in the geographical area called “The United States of America”), inflation-deflation had been up and down about two per cent (averaging out to zero, of course), while in the late Twentieth Century—paper money times—inflation has steadily increased from lows of two per cent in the immediate post-World War II period to highs of nearly 15 per cent in the late 1970s!
While some argument might be made that growth rates have been a little higher under the paper money system than under the gold standard (four or five per cent during “boom” times for the former, three or four per cent for the latter), the picture is quite distorted. Fiat cur rencies so disrupt the accounting procedures of the economy that the argument is specious at best—and does not take into account the higher, productivity-advancing technologies which leapt into existence in the 1970s; the subtle, but vast erosion of incentives to save—which, as mentioned earlier, plays havoc with a nation’s future productivity; the enormous burdens of taxes which the inflation created, resulting in virtually no rise in the standard of living for nearly a dozen years.
As a student of economics, Professor, I admit I’m compelled to ask, “If fiat currencies really produce higher economic growth—as their advocates maintain—then why have living standards stagnated during the period of most explosive money growth?” Keep in mind, Sir, that these facts pertain to the nation which is thought to be the best off economically of all the major nations of The Paper Planet.
Already I miss my homeworld. I cannot help but wistfully reminisce on the differences in everyday life at home and here on Earth.
At first, I was going to leave these reminiscences out of my letter. However, upon serious reflection, I believe they have instructive value—at least, they did for me; I’m sure you’re already aware of these differences, Sir, or you never would have suggested this visit to Earth. So, bear with your Humble Student.
On the homeworld, under our gold standard, businessmen have an enormous advantage over those here on The Paper Planet. The gold standard creates a climate of great stability and confidence in the future. Here, the erosion of money’s value (as well as the periodic bouts of high interest rates when they are politically allowed to reflect inflation) creates an atmosphere of fear—fear of economic crashes and recessions, of renewed periods of stagnation, and of reduced purchasing power. These factors lead to other fears, especially fear of protectionism (and thus contracted trade and international ill will), which has often—I shudder to think of how often—led to war as the more tyrannical nations began to prey on the perceived corruption and weakening of the fabric of their wealthier neighbors. Often the attacks against their neighbors were used to distract attention from the tyrannies’ own terrible economic problems.
On the homeworld, entrepreneurship is a constant, normal, exciting part of our lives. With the stability of a hard money system (which, of course, helps keep taxes down) it is possible for most people, with a very few years of work, to raise enough capital to start their own busi nesses. This has resulted in virtually no forced (i.e., government-caused) unemployment.
It is hard to imagine a system under which individuals do not have the option of easily switching careers through entrepreneurship choice; it is almost impossible to imagine a system under which the people have come to expect government to take care of them when they are out of work, or forcefully “protect” their jobs by preventing businesses from failing (by law, no less!); it is downright distasteful, Sir, to see people who have become so depen dent on government expropriation of their neighbors’ wealth! Yet, that is exactly the kind of systems that dominate The Paper Planet. It is the kind of horrid dehumanization which happens from institutionalization of fiat currencies.
Related to the previous paragraph, on the homeworld, we have no concept of “social security”—a system almost universally accepted on Earth as a way of guaranteeing that no one will be without means of support in his or her old age.
Reasons for Social Security
There are several reasons why this so-called “security system” has evolved as a direct result of paper currencies:
(1) With the loss of the entrepreneurship choice, it is impossible for most of the Planet’s people to effectively generate large enough quantities of capital wealth to provide for their later years.
(2) The high tax rates generated by a fiat standard discourage savings even by a life-long wage earner; thus the non-entrepreneur, the person who doesn’t like being an entrepreneur, is stripped of his means of self-provision. (This varies from nation to nation on The Paper Planet. In the United States, more than any other major nation, it would still be possible—though barely—for average wage earners to provide for their persona] retirements, if they were allowed to keep the money which is now taxed for Social Security and instead put it into private retirement plans of their choice. There is a move in that direction now, but I fear that unless the paper money system is abandoned, the trend will grind to a halt.)
(3) The fiat system has so undercut the self-confidence of the people that it has largely instilled in them an actual (I believe inhuman) desire to be taken care of by government. That is a sad, sad state of affairs to witness, Sir. The horrible thing is, the more the government caters to this dependency, the worse it gets. In a perversion that perhaps best illustrates how serious the situation has become, most people now think of Social Security as a right!
On the homeworld, even simple, everyday things are easier to accomplish than on The Paper Planet. A good example would be the way my wife is able to deal with our family’s financial needs. Because prices are so stable (of course, they actually fall a bit each year), she is able to logically, confidently plan our home’s future. As most families do on the homeworld, we can reasonably project when we’ll be able to buy new furniture, purchase a new family vehicle or new entertainment/communications equipment, acquire a finer home, and so forth.
More importantly to us, we know that we’ll be able to finance our two children’s education (presuming they want our help—little Suzy and Johnny are showing signs of dedicated independence!). Sir, did you know that on Earth, most graduate students cannot even consider starting families for years? They are simply too poor to do so. I cannot imagine suffering the poverty they endure; I don’t know what I would have done without the option of free-lancing work for homeworld financial institutions while going to college; it’s wonderful to be able to earn enough money to raise a family and pay for my education out of such part-time work—truly an indication of how a hard money system raises living standards!
Faith in the Future
While the spirit of the future, underscored by the constant introduction of thousands and thousands of innovations, permeates the world view of the average citizen of the homeworld and our sister planets, here on The Paper Planet, that spirit is a frustrated, deformed thing, where it exists at all. At home, under the venture-capital-encouraging hard money system, innovations are not abnormal—they are virtually taken for granted! As you know, we all expect that each year we will personally have newer, better products from which to choose. It is a condition which my father and grandfather enjoyed—and their fathers and grandfathers before them for many generations. It is a condition which we regard as one of the great joys of our hard money system. To witness the bountiful fruit of human ingenuity flooding our markets each year—what could be more inspiring to an individual?
I suppose, Sir, that my letter from The Paper Planet would be somewhat incomplete if I did not mention how Earth could, in my view, rid itself of this “paper pestilence.”
Having spent several weeks with Earthlings, and despite their stubbornly uncivilized monetary ways, I have grown rather fond of them. While—as on all worlds—there are evil people scattered about, most Earth people are basically decent, and if given half a chance in the ordinary courses of their lives, show a promising respect for the rights of others. I believe this “gut level” respect could be solidified in a major way if even one nation—especially an influential, large nation—were to return to the discipline of gold. Gold cements the right of property, which in many ways underlies all other rights—hence, the idea that a gold standard would assist in institutionalizing a respect for rights. It would make for a much better planet Earth.
The United States Could Lead
As far as I can tell, the most likely candidate for a return to a hard money system is the United States of America. This nation is still the freest of all the large nations, and has recently undertaken greater discipline of its fiat currency—a currency which, it is important to note, is virtually the “base” or “reserve” currency of all other major, non-totalitarian trading nations.
However, because of the insidious nature of the politics constantly engendered under a fiat money standard, I fear this new discipline cannot last. At least, it will not unless it is underpinned by something more than the resolve of politicians—as attracted as they are to a fiat standard’s “constituency-buying,” special-interest-catering qualities. So, clearly, that underpinning ought to be a hard currency—probably both gold and silver.
Because the United States is also the most advanced nation technologically, and is considered the leading nation of the planet, a return to a gold standard would be the fastest avenue for helping Earth to gain many of the same benefits which we on the homeworld now take for granted. The U.S. lead in technology would allow industry to most rapidly expand under the stability a gold standard would provide; U.S. “leader” status would, by example, and by the greatly increased value of its already respected (though fatally flawed) fiat currency, spread the benefits of a new, hard currency system to the rest of the world. In a sense, the American dollar is the circulatory system of world trade. Putting gold into the system would be like increasing the oxygen-carrying capacity of blood—infusing world trade with new energy and vitality.
Steps Back to Gold
While there are undeniably many ways in which U.S. leaders could accomplish this conversion from a “soft” to a “hard” standard of money, the best way would have to involve these three factors:
(1) Allowing free private ownership of gold (already in effect in America).
(2) Tying the dollar to a specific weight of gold or silver—and allowing people to convert back and forth.
Convertibility is absolutely necessary if the citizens are to have a “veto” over political money-tamper-ing. When citizens can exchange dollars for specific weights of gold or silver, the burden is on the government to refrain from inflating—for if it does reflate, citizens will drain the government’s valuable gold reserves. Of course, when point number three is implemented, private coinage will provide the final check on politicians: taking the gover nance and responsibility for maintaining the integrity of money out of their hands entirely. This, of course, is our system on the homeworld.
(3) Ultimately permitting private coinage of gold and making no laws barring the use of privately minted coins in trade or banking.
Well, Sir, that about wraps it up. I’ll present a more detailed report to you in further letters and in person when I return to the homeworld. Thank you for suggesting my visit to The Paper Planet. It is a visit which will undoubtedly remain as one of the most important experi ences of my life. My only hope is that the residents of this lovely planet Earth learn as much about the nature of their fiat systems as I have. Until they do, I fear they will remain mired in an immature culture and may very well lose an immense amount of the progress they’ve al ready gained.
Your Humble Student