The Revolution: A Manifesto
Ron Paul (2008)
Every election cycle we are treated to candidates who promise us "change," and 2008 has been no different. But in the American political lexicon, "change" always means more of the same: more government, more looting of Americans, more inflation, more police-state measures, more unnecessary war, and more centralization of power.
Real change would mean something like the opposite of those things. It might even involve following our Constitution. And that's the one option Americans are never permitted to hear. (ix)
In late 2006, a number of friends and colleagues urged me to consider running for president. I was a reluctant candidate, not at all convinced that a sizable enough national constituency existed for a campaign based on liberty and the Constitution rather than on special-interest pandering and the distribution of loot.
Was I ever wrong. (4)
Foreign aid only inhibits salutary reforms . . . reforms that any true friend of Israel is eager to see. As a matter of fact, the Institute for Advanced Strategic and Political Studies in Jerusalem argues that "foreign aid is the greatest obstacle to economic freedom in Israel." (35)
Though written constitutions "may be violated in moments of passion or delusion," wrote Thomas Jefferson in 1802, "yet they furnish a text to which those who are watchful may again rally and recall the people."
Whether we are yet emerging from our own moment of disorientation after 9/11 is difficult to say. I believe, though, that enough Americans are taking a sober second look at what we have allowed our country to become, especially since that terrible day, that the Constitution may yet reemerge as a document to which the people may be rallied and recalled. (41)
Jefferson's approach to the Constitutionwhich he adamantly believed could be understood by the average person and was not some secret teaching that had to be divined by immortals in black robeswas refreshingly simple. If a proposed federal law was not listed among the powers granted to Congress in Article I, Section 8, then no matter how otherwise attractive it seemed, it had to be rejected on constitutional grounds. If it were especially wise or desirable, there would be no difficulty in amending the Constitution to allow for it. And according to Jefferson we should always bear in mind, to the extent possible, the original intention of those who drafted and ratified the Constitution: "On every question of construction, carry ourselves back to the time when the Constitution was adopted, recollect the spirit manifested in the debates, and instead of trying what meaning may be squeezed out of the text, or invented against it, conform to the probable one in which it was passed." (45)
During my public life I have earned the nickname Dr. No, a reference to my previous occupation as a physician combined with my willingness to stand against the entire Congress if necessary to vote no on some proposed measure. (I am told I have been the sole "no" vote in Congress more often than all other members of Congress put together.) As a matter of fact, I don't especially care for this nickname, since it may give people the impression that I am a contrarian for its own sake, and that for some reason I simply relish saying no. In those no votes, as in all my congressional votes, I have thought of myself as saying yes to the Constitution and to freedom. (49-50)
In 2002, as war with Iraq loomed, I proposed that Congress officially declare war against Iraq, making clear that I intended to oppose my own measure. The point was to underscore our constitutional responsibility to declare war before commencing major military operations, rather than leaving the decision to the president or passing resolutions that delegate to the president the decision-making power over war. The chairman of the International Relations Committee responded by saying, "There are things in the Constitution that have been overtaken by events, by time. Declaration of war is one of them. There are things no longer relevant to a modern society. We are saying to the president, use your judgment. [What you have proposed is] inappropriate, anachronistic; it isn't done any more."
What a relief that we have people in our government who will keep us posted on which constitutional provisions they have decided are no longer "relevant"!
Now, didn't Congress authorize the war in Iraq after all? No, and certainly not in a manner consistent with the Constitution. Congress has no constitutional authority to delegate to the president the decision regarding whether to use military force. That power was consciously and for good reason put in the hands of the people's elected representatives in the legislature. (53-4)
If the federal courts refuse to abide by the Constitution, the Congress should employ this constitutional remedy. By a simple majority, Congress could strip the federal courts of jurisdiction over abortion, thereby overturning the obviously unconstitutional Roe. At that point, the issue would revert to the states, where it constitutionally belongs, since no appeal to federal courts on the matter could be heard. (I have proposed exactly this in H.R. 300.) (60-1)
We have come to consider it normal for nine judges in Washington to decide on social policies that affect every neighborhood, family, and individual in America. One side of the debate hopes the nine will impose one set of values, and the other side favors a different set. The underlying premisethat this kind of monolith is desirable, or that no alternative is possibleis never examined, or at least not nearly as often as it should be. The Founding Fathers did not intend for every American neighborhood to be exactly the samea totalitarian impulse if there ever was oneor that disputes over competing values should be decided by federal judges. This is the constitutional approach to deciding all issues that are not spelled out explicitly in our founding document: let neighbors and localities govern themselves.
The Founding Fathers would be astonished to observe how politicized our society has become, with every matter on which people differ becoming a federal issue to be resolved in Washington. Jefferson warned, "When all government, domestic and foreign, in little as in great things, shall be drawn to Washington as the center all power, it will render powerless the checks provided of one government on another; and will become as venal and oppressive as the government from which we separated." Are we listening? (62)
If our government were scrupulously faithful to the Constitution, we would not need to be especially concerned when a person who represents a philosophy different from our own takes political office. Our Constitution delegates relatively few tasks to the federal government, so it should almost be a matter of indifference who is elected. We wouldn't have to worry that a social policy of which we disapproved would be imposed on our neighborhood at the whim of the new president and his court appointees, or that more of our money would be stolen to fund yet another government boondoggle. And we would also be spared the spectacle of countless American individuals and corporations frantically donating to candidates for political office during election years in order to reserve a place on the federal gravy train if their favorite should win. (66)
Consider a single, almost trivial example of government favoritism: sugar quotas. The United States government limits the amount of sugar that can be imported from around the world. These quotas make sugar more expensive for all Americans, since they now have fewer choices as a result of diminished competition. The quotas also put at a competitive disadvantage all those businesses that use sugar to produce their own products. That's one reason that American colas use corn syrup instead of sugar: American sugar, thanks to the quotas, is simply too expensive. (And it's also a reason that colas in other countries taste so much better.)
The number of people who work in the American sugar industry is of course very small when compared to the American population as a whole. How, then, did they manage to get a government policy enacted that harms the vast bulk of their fellow citizens? The answer is that the benefits are concentrated while the costs are dispersed. The small number of people who work in the sugar industry benefit substantially from the quota. It makes sense for the sugar industry to employ professional lobbyists first to get and then to continue this concentrated flow of benefits.
On the other hand, since the costs of these policies are spread out across the entire American people, the cost to any one purchaser of sugar or products containing sugar is very minor. It makes no sense for the general public to marshal resources to lobby for the repeal of the program; it is hardly worth their time even to be informed about it. Each consumer might pay an extra fifty to one hundred dollars per year thanks to the programa pittance compared to what industry earns from it, and not nearly enough to make it worthwhile to hire lobbyists or launch any serious effort to abolish it. And so the tendency is for this fleecing of the public to get worse and worse: the concentrated benefits it brings are too hard to resist, but the dispersed costs are too small to justify any effort against it.
Multiply this modest example by about a million, to account for the countless other predatory schemes that special interests have imposed on our economy, and you have some idea of the impact of legal plunder.
If we believe in liberty, we must also remember what William Graham Sumner called "the forgotten man." The forgotten man is the one whose labor is exploited in order to benefit whatever political cause catches the government's fancy.
The type and formula of most schemes of philanthropy or humanitarianism is this: A and B put their heads together to decide what C shall be made to do for D. The radical vice of all these schemes, from a sociological point of view, is that C is not allowed a voice in the matter, and his position, character, and interests, as well as the ultimate effects on society through C's interests, are entirely overlooked. I call C the Forgotten Man .....
They therefore ignore entirely the source from which they must draw all the energy which they employ in their remedies, and they ignore all the effects on other members of society than the ones they have in view. They are always under the dominion of the superstition, of government, and, forgetting that a government produces nothing at all, they leave out of sight the first fact to be remembered in all social discussionthat the state cannot get a cent for any man without taking it from some other man, and this latter must be a man who has produced and saved it. This latter is the Forgotten Man.
Once government does become involved in something, intellectual and institutional inertia tends to keep it there for good. People lose their political imagination. It becomes impossible to conceive of dealing with the matter in any other way. Repealing the new bureaucracy becomes unthinkable. Mythology about how terrible things were in the old days becomes the conventional wisdom. Meanwhile, the bureaucracy itself, with a vested interest in maintaining itself and increasing its funding, employs all the resources it can to ensuring that it gets a bigger budget next year, regardless of its performance. In fact, the worse it does, the more funding it is likely to getexactly the opposite of what happens in the private sector, in which those who successfully meet the needs of their fellow men are rewarded with profits, and those who poorly anticipate consumer demand are punished with losses.
Take arts funding, for example. Some Americans appear to believe that there would be no arts in America were it not for the National Endowment for the Arts (NEA), an institution created in 1965. They cannot imagine things being done any other way, even though they were done another way throughout our country's existence, and throughout most of mankind's history. While the government requested $121 million for the NEA in 2006, private donations to the arts totaled $2.5 billion that year, dwarfing the NEA budget. The NEA represents a tiny fraction of all arts funding, a fact few Americans realize. Freedom works after all. And that money is almost certainly better spent than government money: NEA funds go not necessarily to the best artists, but to people who happen to be good at filling out government grant applications. I have my doubts that the same people populate both categories. (72-5)
To get an appreciation for the difference between public and private administration in terms of bureaucracy and cost-effectiveness, consider this. The Brookings Institution's John Chubb once investigated the number of bureaucrats working in the central administration offices of the New York City public schools. Six telephone calls finally yielded someone who knew the answer, but that person was not allowed to disclose it. Another six calls later, Chubb had at last pinned down someone who knew the answer and could tell him what it was: there were 6,000 bureaucrats working in the central office.
Then Chubb called the Archdiocese of New York, to find out the figure there. (The city's Catholic schools educated one-fifth as many students as did the government-run schools.) Chubb's first telephone call was taken by someone who did not know the answer. Here we go again, he thought. But after a moment she said, "Wait a minute; let me count." Her answer: 26. (76-7)
Now, whatever its moral and philosophical attractiveness, the free economy I have just proposed, in which no one is allowed to use government power to loot anyone else, is sometimes criticized as a "pro-business" philosophy that favors the well-to-do. This criticism could not be more off target. As I have said, businessmen, too, want special favors from government and lobby energetically for all kinds of wealth transfers to themselves. Very rarely does a business owner come to my congressional office to congratulate me on my fidelity to the Constitution. They come by because they want something, and what they want is usually not authorized by the Constitution. (77)
I cannot finish a discussion of looting without mentioning the income tax. In another chapter I explain my opposition to the military draft, an institution based on the idea that the government owns its citizens and may direct their destinies against their will. The income tax implies the same thing: government owns you, and graciously allows you to keep whatever percentage of the fruits of your labor it chooses. Such an idea is incompatible with the principles of a free society.
Robert Nozick, the renowned twentieth-century political philosopher, minced no words when it came to the taxation of earnings from labor. How, he demanded to know, was this any different from forced labor? In America, the average citizen in effect does unremunerated work for the various levels of government for the equivalent of six months out of the year. People who favor this system should be honest about what they are saying: we have the right to force you to work against your will. Strip away the civics-class platitudes about "contributions" to "society," which are mere obfuscations designed to engineer the people's consent to the system, and that is what the income tax amounts to. (78)
What we should work toward, however, is abolishing the income tax and replacing it not with a national sales tax, but with nothing. Right now the federal government is funded by excise taxes, corporate income taxes, payroll taxes, the individual income tax, and miscellaneous other sources. Abolishing the income tax on individuals would cut government revenue by about 40 percent. I have heard the breathless claims about how radical that isand compared to the trivial changes, we are accustomed to seeing in government, I suppose it is. But in absolute terms, is it really so radical? In order to imagine what it would be like to live in a country with a federal budget 40 percent lower than the federal budget of 2007, it would be necessary to go all the way back to . . . 1997.
Would it really be so hard to imagine living in 1997 again? In return, we would have an economy so robust and dynamic that it would doubtless shatter even my own optimistic expectations. And we would once and for all have repudiated the totalitarian assumptions at the heart of the income tax. (79-80)
In the days before Medicare and Medicaid, for instance, the poor and elderly were admitted to hospitals at about the same rate they are now, and received good care. As a physician I never accepted Medicare or Medicaid money from the government, and instead offered cut-rate or free services to those who could not afford care. Before those programs came into existence, every physician understood that he or she had a responsibility toward the less fortunate, and free medical care for the poor was the norm. Hardly anyone is aware of this today, since it doesn't fit into the typical, by-the-script story of government rescuing us from a predatory private sector. Laws and regulations that inflated the cost of medical services and imposed unreasonable liability standards on medical professionals even when they were acting in a volunteer capacity later made offering free care cost prohibitive, but free care for the poor was common at a time when America wasn't so "governmentish" (to borrow a word from William Penn). We have lost our belief that freedom works, because we no longer have the imagination to conceive of how a free people might solve its problems without introducing threats of violencewhich is what government solutions ultimately amount to. (85)
The story behind the creation of the HMOs is a classic illustration of what economist Ludwig von Mises once said: government interventions create unintended consequences that lead to calls for further intervention, and so on into a destructive spiral of more and more government control. During the early 1970s, Congress embraced HMOs in order to address concerns about rising health care costs. But it was Congress itself that had caused health care costs to spiral by removing control over the health care dollar from so many consumers in the 1960s, and thus eliminating any incentive to pay attention to costs when selecting health care. Now, Congress wants to intervene yet again to address problems caused by HMOs, the product of still earlier interventions.
Now that HMOs are all but universally unpopular, the very politicians who brought them to us are joining the bandwagon to denounce them, hoping the American people will forget, or never be told, that the federal government itself virtually mandated HMOs in the first place. The tax code excludes health insurance from taxation when purchased by an employer, but not when purchased by an individual. In addition, the HMO Act of 1973 forced all but the smallest employers to offer HMOs to their employees. The combined result was the illogical coupling of employment and health insurance, which often leaves the unemployed without needed catastrophic coverage. As usual, then, government intervention into the market caused unintended, undesired consequences, but politicians blame the HMOs instead of the interventions that helped create them. Consumer complaints about insurers and HMOs compel politicians to draft new laws and more regulations to curry voter favor. More regulations breed more costs, limiting more choices, causing more anguishand the cycle continues. (88-9)
When Senator George McGovern retired from public life, he became the proprietor of a small Connecticut hotel called the Stratford Inn. Two and a half years later, the inn was forced to close .. After his experience running his own business, former Senator McGovern had the honesty to wonder about the merits of the regulations that, truth be told, he himself had helped to implement. "Legislators and government regulators must more carefully consider the economic and management burdens we have been imposing on U.S. business," he said. He continued:
As an innkeeper, I wanted excellent safeguards against a fire. But I was startled to be told that our two-story structure, . which had large sliding doors opening from every guest room to all-concrete decks, required us to meet fire regulations more appropriate to the Waldorf-Astoria. A costly automatic sprinkler system and new exit doors were items that helped sink the Stratford Innitems I was convinced added little to the safety of our guests and employees. And a critical promotional campaign never got off the ground, partly because my manager was forced to concentrate for days at a time on needlessly complicated tax forms for both the IRS and the state of Connecticut.
[ . . . ]
He concluded: "If I were back in the U.S. Senate or in the White House, I would ask a lot of questions before I voted for any more burdens on the thousands of struggling businesses across the nation." That is an important lesson: government intervention into the economy cannot be assumed to be good and welcome and just.
But that is how it is portrayed in too many of our American history classrooms. It is not unusual for American students to find their textbooks telling them that injustice was everywhere before the federal government, motivated by nothing but a deep commitment to the public good, intervened to save them from the wickedness of the free market. Alleged "monopolies" dictated prices to hapless consumers. Laborers were forced to accept ever lower wages. And thanks to their superior economic position, giant corporations effortlessly parried the attempts of anyone foolish enough to try to compete with them.
Every single aspect of this story is false, though of course this version of our history continues to be peddled and believed. I don't blame people for believing itit's the only rendition of events they're ever told, unless by some fluke they have learned where to look for the truth. But there is an agenda behind this silly comic-book version of history: to make people terrified of the "unfettered" free market, and to condition them to accept the ever-growing burdens that the political class imposes on the private sector as an unchangeable aspect of life that exists for their own good. (91-3)
Prosperity comes not just from economic freedom at home, but also from the freedom to trade abroad. If free trade were not beneficial, it would make sense for us to "protect jobs" by buying only those goods produced entirely in our own towns. Or we could purchase only those goods produced on the streets where we live. Better still, we could restrict our purchases to things produced in our own households, buying all our products only from our own immediate family members. When the logic of trade restriction is taken to its natural conclusion, its impoverishing effects become too obvious to miss. (94-5)
In spite of my strong support for free trade, I have felt compelIed to oppose many of the trade agreements that have appeared in recent years. For instance, although I was not in Congress at the time, I opposed both the North American Free Trade Agreement and the World Trade Organization, both of which were heavily favored by the political establishment. Initial grounds for suspicion was the sheer length of the text of these agreements: no free-trade agreement needs to be 20,000 pages long. (95)
In one case, the WTO sided with the Europeans against American tax law, which offered tax breaks to American companies doing business overseas. . . .
What this meant, in plain English, was that high-tax Europe, upset at lower-tax America, decided that the way to level the playing field was to force America to raise her taxes. Pascal Lamy, the trade czar of the European Union, actually visited with influential members of Congress in order to determine whether a new tax bill was being crafted to his satisfaction. If Mr. Lamy, a member of the French Socialist Party, had been unsatisfied with the changes made to our tax code, he threatened to unleash a European trade war against U.S. imports. In effect he was a foreign bureaucrat acting as a shadow legislator by intervening in our lawmaking process. And to no one's surprise, Congress raced to comply with the WTO ruling that American tax rules must be changed in order to bring them into harmony with "international law."
This outrageous affront to our national sovereignty was of course predictable when we joined the WTO. During congressional debates we were assured that entry into the organization posed no threat to our sovereignty. (97-8)
Now, while free trade should be embraced, foreign aid should be absolutely rejected. Constitutional, moral, and practical arguments compel such a view. Constitutional authorization for such programs is at best dubious. Morally, I cannot justify the violent seizure of property from Americans in order to redistribute that property to a foreign governmentand usually one that is responsible for the appalling material condition of its people. Surely we can agree that Americans ought not to be doing forced labor on behalf of other regimes, and that is exactly what foreign aid is.
For those who find arguments like these abstract and remote, there is a more practical argument against foreign aid. International welfare has not worked any better than domestic welfare, despite the trillions spent in each case. Foreign aid, however pure the intentions that may have motivated it, has been a reactionary device by which truly loathsome leaders have been strengthened and kept in power. Trillions of dollars later, the results of development aid programs are so bad that even the New York Times, which admits nothing, has acknowledged that the programs haven't worked. No wonder Kenyan economist James Shikwati, when asked about development aid programs to Africa, has been telling the West, "For God's sake, please just stop." (99)
I would choose freedom even if it meant less prosperity, but thankfully we do not face such a choice. (100)
Let's quit pretending that we don't know how to make people prosperous, when the evidence is all around us. (100)
In 1820, over 80 percent of the world's population lived in what the literature calls "extreme poverty." By 1950 that figure was 50 percent. By 1992 it was down to 24 percent. (In the United States, poverty declined consistently from 1950 until 1968, when supposedly antipoverty programs first began to receive significant funding. Since then, the poverty figures have stagnated in spite of trillions of dollars spent.) (101)
This is one reason I was so skeptical when friends urged me to run for president. There are far more interest groups lobbying in Washington for special benefits and privileges than most Americans can imagine. I do not oppose just this one or that one. I oppose the whole apparatus, the whole immoral system by which we use government to exploit our fellow citizens on behalf of our own interests. For someone like me to win, there would have to be enough Americans who believed in freedom to be able to offset the combined power of interest groups that have grown accustomed to treating the people as a resource to be drained for private gain. Were there really enough people for that task?
What moves me the most when I think about my supporters in my presidential campaign are the staggering efforts and creative energiesextraordinary and unprecedented, as far as I can seethat they expended on behalf of a message that promised them no special benefits, no loot taken from their fellow men. The message promises only freedom, and no special privileges for anyone. No one is surprised that people donate to a political campaign in the hopes of receiving some special favor if the candidate wins. I was quite surprised, on the other hand, at how many would donate, volunteer, and vote in pursuit of nothing other than freedom, and the prosperity it naturally brings. (107)
The federal government has not shown us that it failed to detect or prevent the September11 attacks because it lacked the powers over our lives that it was granted under the Patriot Act.
We now know that plenty of red flags that should have alerted officials to the hijackers' plot were ignored. That was a matter of government ineptness, not a lack of surveillance power. Our officials had the evidence. They simply failed to act on it. And they then turned around and exploited their own failure as an excuse to crack down on the American people, demanding new powers that would have done nothing to prevent 9/11. Only government could get away with such a transparent sham. (115)
The hallowed right of habeas corpus has also been a casualty of the war on terror. The Military Commissions Act of 2006 gives the president the power to detain people indefinitely and to deny the accused any real opportunity to answer the charges against them. It is anti-American at its core. The name of the Act can give the misleading impression that anyone targeted under it can at least bring his case before a military commission. That is not so. If the president wants to punish an accused "enemy combatant," he may bring him before such a commission. But he need not, and if he'd rather that the person remain in prison forever, he is free to adopt that course instead. (120)
Toward the end of 2007, Senator Jeff Sessions declared, "Some people in this chamber love the Constitution more than they love the safety of this nation. We should all send President Bush a letter thanking him for protecting us." What kind of sheep must politicians take Americans for if they expect us to fall for creepy propaganda like this? (125)
The war on terror, therefore, has had dangerous and undesirable domestic consequences. So has the war on drugs. Saying so doesn't win any popularity contests: people's opinions on this issue are so deeply and fervently held that it can be very difficult to persuade them to revisit the evidence dispassionately.
But revisit it we must. We seriously mistake the function of government if we think its job is to regulate bad habits or supplant the role of all those subsidiary bodies in society that have responsibility for forming our moral character. Our misplaced confidence in government has once again had exceedingly unpleasant results. ''A barrage of research and opinion," writes economist Dan Klein, "has pounded [the drug war] for being the cause of increased street crime, gang activity, drug adulteration, police corruption, congested courts and overcrowded jails. Drug prohibition creates a black-market combat zone that society cannot control." (125)
In one area, at least, those who had favored the prohibition of alcoholic beverages had been honest: the Constitution does not authorize the federal government simply to ban these substances. When alcohol prohibition was implemented, everyone understood that it required a constitutional amendment. And so in order to ban certain kinds of drugs, the Harrison Tax Act of 1914 simply levied prohibitively high taxes on them. No one would pay such high taxes, so anyone caught in possession of the substances targeted by the act was accused not of mere possession, which was not criminalized, but of tax evasion.
Here I intend to focus on the especially interesting history of federal marijuana prohibition. A substantial motivation behind it, which is evident all over the debates on the subject, was a contempt for Mexicans, with whom marijuana use was widely associated at the time. On the floor of the Texas Senate, one state senator declared: ''All Mexicans are crazy, and this stuff is what makes them crazy," Similar statements could be heard in numerous states around the country. Harry Anslinger, who headed the federal government's Bureau of Narcotics, said that "the primary reason to outlaw marijuana is its effect on the degenerate races." That was not unusual: Anslinger made comments like that as a matter of routine. (127-8)
The other expert who testified was William Woodward, who represented the American Medical Association. He denounced the legislation as medically unsound and the product of ignorance and propaganda. "The American Medical Association knows of no evidence that marihuana is a dangerous drug," he said. To which one congressman replied, "Doctor, if you can't say anything good about what we are trying to do, why don't you go home?"
In Congress, the entire debate on national marijuana prohibition took about a minute and a half.
"Mr. Speaker, what is this bill about?" asked a congressman from New York.
"I don't know," came the reply. "It has something to do with a thing called marihuana. I think it's a narcotic of some kind."
Then a second question from the congressman: "Mr. Speaker, does the American Medical Association support this bill?"
The AMA opposed the bill, as we've seen. But the Speaker replied, "Their Doctor Wentworth [sic] came down here. They support this bill 100 percent."
And with that untruth ended the entire congressional debate on the prohibition policy. (128-9)
That is how black markets work: prohibiting something that is highly desired does not make the desire go away but merely ensures that the supply of that good is provided in the most dangerous and undesirable manner possible, and endows criminal sectors of society with additional wealth and power. (131)
As I have said, the government does not own you and neither does it own your children. It is bad enough that some parents find themselves forced to pay for an education they not only will not use for their children, but whose content they deeply oppose from a philosophical or religious point of view. (I've sometimes wondered why those who would never dream of forcibly taking people's money to pay to support a religious belief they do not share have no hesitation at all in taking their money to support an educational philosophy they do not share.) (133)
More half-measures will only prolong the inevitable day of reckoning. It is long past time for Americans to look beyond the snake oil salesmen whose monetary system has destroyed the value of our dollar and seek wisdom instead from the free-market economists who spent much of the twentieth century warning about exactly the kind of money we have right now. The more knowledge the American people have, the more likely is our return to a sensible monetary system. As John Adams wrote to Thomas Jefferson in 1787, ''All the perplexities, confusions, and distress in America, arise, not from defects in their Constitution or Confederation, nor from a want of honor or virtue, so much as from downright ignorance of the nature of coin, credit, and circulation." (138)
Throughout most of American history the dollar has been defined as a specific weight in gold. Until 1933, in fact, 20 dollars could be redeemed for one ounce of gold. But that year, the U.S. government went off the gold standard, and henceforth American currency would be redeemable into nothing. The government actually confiscated Americans' holdings of monetary gold, nullified even private contracts that called for payment for a good or service in gold, and declared the dollar no longer redeemable into gold by American citizensbut made allowances for redemption by foreign central banks at 35 dollars an ounce, a devaluation of the dollar from its previous ratio of $20.67 an ounce. And even this tenuous link to gold was severed in 1971, when Richard Nixon declared that within a year, at the $35 exchange rate, we would not have an ounce of gold remaining. Other governments had begun to realize that the dollar, which was being massively inflated, was losing its value, and more and more were demanding gold in exchange for dollars. At that point Nixon officially closed the gold window, so that not even foreign central banks could get gold for dollars. In so doing, he cut the dollar's last lingering tie to gold. (140)
Where does the Fed get the money to buy the bonds? It creates it out of thin air, simply writing checks on itself and giving them to banks. If that sounds fishy, then you understand it just fine. (141)
If the supply of Mickey Mantle baseball cards were suddenly to increase a millionfold, each individual card would become almost valueless. The same principle applies to money: the more the Fed creates, the less value each individual monetary unit possesses. (142)
All right, some may say, prices may indeed rise, but so do wages and salaries, and therefore inflation causes no real problems on net. This misconception overlooks one of the most insidious and immoral effects of inflation: its redistribution of wealth from the poor and middle class to the politically well connected. The price increases that take place as a result of inflation do not occur all at once and to the same degree. Those who receive the new money first receive it before prices have yet risen. They enjoy a windfall. Meanwhile, as they spend the new money, and the next wave of recipients spend it, and so on, prices begin to rise throughout the economywell before the new money has trickled down to most people. The average person is now paying higher prices while still earning his old income, which has not yet been adjusted to account for the higher money supply. By the time the new money has made its way throughout the economy, average people have all this time been paying higher prices, and only now can begin to break even. The enrichment of the politically well connectedin other words, those who get the newly created money first: government contractors, big banks, and the likecomes at the direct expense of everyone else. These are known as the distribution effects, or Cantillon effects, of inflation, after economist Richard CantilIon. The average person is silently robbed through this invisible means and usually doesn't understand what exactly is happening to him. And almost no one in the political establishment has an incentive to tell him. (142-3)
When the value of Americans' savings is deliberately eroded through inflation, that is a tax, albeit a hidden one. I call it the inflation tax, a tax that is all the more insidious for being so underhanded: most Americans have no idea what causes it or why their standard of living is going down. Meanwhile, government and its favored constituencies receive their ill-gotten loot. The racket is safe as long as no one figures out what is going on. (143-4)
But there is another, more significant way in which these kinds of measurements of "inflation" are designed to obscure rather than reveal. Ludwig von Mises used to say that governments will always try to get people to focus on prices when thinking about inflation. But rising prices are a result of inflation, not inflation itself. Inflation is the increase in the money supply. If we understood inflation that way, we would instantly know how to cure it: simply demand that the Federal Reserve cease increasing the money supply, By focusing our attention on prices instead, we are liable to misdiagnose the problem, and we are more apt to accept bogus government "solutions" like wage and price controls, as in the 1970s. (144-5)
When the Federal Reserve artificially lowers rates, on the other hand, it systematically misleads investors and encourages unsustainable economic booms. F. A. Hayek's Nobel Prize in economics, which was awarded to him in 1974, had to do with exactly this: showing how central bank manipulation of interest rates and money cause havoc throughout the economy, and set the stage for an inevitable bust. (146)
Prosperity cannot be created out of thin air by a central bank. . . . I was delighted to learn that comedian Jon Stewart, when he had former Fed chairman Alan Greenspan on his program, asked him why we needed a Federal Reserve, and why interest rates couldn't simply be set freely on the market. That was a great question, the sort of question noncomedians in America never seem to ask, and Greenspan sputtered around for a response. Even Greenspan supporters were shocked to observe how poorly he responded to a simple question about the very purpose of the institution he headed for nearly two decades. (147)
Few Americans during his tenure knew that Greenspan had once been an outspoken advocate of the gold standard as the only monetary system that a free society should consider. Not long after my return to Congress in the election of 1996, I spoke with Greenspan at a special event that took place just before he was to speak in front of the House Banking Committee. At this event congressmen had a chance to meet and have their pictures taken with the Fed chairman. I decided to bring along my original copy of his 1966 article from the Objectivist Newsletter called "Gold and Economic Freedom," an outstanding piece in which he laid out the economic and moral case for a commodity-based monetary system as against a fiat paper system. He graciously agreed to sign it for me. As he was doing so, I asked if he wanted to write a disclaimer on the article. He replied good-naturedly that he had recently reread the piece and that he would not change a word of it. I found that fascinating: could it be that, in his heart of hearts, Greenspan still believed in the bulletproof logic of that classic article?
Shortly afterward, I decidedperhaps a bit mischievouslyto bring up that article and the arguments raised in it during a subsequent Greenspan appearance before the Committee. But the Federal Reserve Chairman was less sympathetic to those arguments when I raised the subject out in the open. He replied that his views had changed since that article was written, and he even advanced the preposterous assertion that the Fed did not facilitate government expansion and deficit spending. (147-8)
The gold standard has historically been a bulwark against inflation. It is politically manipulated money such as we have had since the 1930s that causes our inflation. That should not be unexpected, or difficult to understand. The supply of gold is relatively fixed and grows only modestly. But in a free economy, capital investment leads to ever-greater productivity, and the ability to produce more and more goods over time. So with gold relatively stable on the one hand and the supply of goods growing by leaps and bounds on the other, the gold will tend to be worth more and more, and the prices of these goods will be lower and lower.
History bears this out. An item that cost $100 in 1913 (when the Federal Reserve Act was passed) would cost $2014.81 in 2006. An item that cost $100 in 2006 would have cost $4.96 in 1913. As we can see, the dollar has lost nearly all its value since the Fed was established. Now, if the gold standard had brought about such an outcome, we would never hear the end of all the howls of outrage. But the Fed does it and ... utter silence. The Fed has managed to insulate itself from the kind of criticism that is normally directed at all other institutions that harm Americans.
And in fact the gold standard did no such thing. People's money increased in value under the gold standard. They were not looted by inflation. An item that cost $100 in 1820 would have cost only $63.02 in 1913.
The Federal Reserve now no longer reports the figures on M3, the total money supply. Spokesmen claim that among the reasons for this change is that it costs too much money to gather these figuresthis from an institution that creates however much money it wants, is off the books, and is never audited. To the contrary, the real reason we don't get these figures anymore, I am certain, is that they are too revealing. They tell us more about what the Fed has been up to and the damage it has been doing to our dollar than they care for us to know. (149-50)
It is this, the Fed's policy of artificially cheap credit, that caused the housing bubble that has caused so many Americans so much grief. Banks, awash in reserves created out of thin air by the Fed, began making mortgage loans to just about anyone. With credit freely available, people bought larger and more expensive homes than would otherwise have made sense. They were set up for disaster, when reality would inevitably reassert itself amid the fantasy world the Fed had created. Using Money Zero Maturity figures, we find that the increase in mortgage debt since the 2001 recession is equal to the Fed's increase in the money supply. That is where the new money went, and it is where the housing bubble came from. (152)
The first practical measure that should be taken is to legalize competition. Restore to Americans their right to use precious metals as a medium of exchangea simple and reasonable initial step if we believe in freedom. It is essential that Americans be given the chance to escape from this system and protect themselves from possible financial ruin, by being able to use gold and silver if they so desire. If anyone would rather continue to transact in the depreciating dollar, he would be free to do so. But anyone who prefers a currency that holds its value and won't become worthless before his eyes just because his government ran the printing press one too many times would have real options.
Right now, various disabilities make it difficult for gold to be used in market transactions. Sales and capital gains taxes on precious metals should be promptly repealed, and the enforceability of gold clauses in private contracts definitively reaffirmed. (154-5)
What if economic law, which the Fed can no more defy than it can repeal the law of gravity, is about to hit the Fed and the American people like a tidal wave, before which little rate cuts here and there are like the tiny umbrella Wile E. Coyote puts over his head to protect himself from falling boulders?
In other words, what if I and other sound-money advocates are right?
If we're wrong, then all we've done is eliminate some taxes on gold and silver. No harm done. But if we're right, we've given the American people a crucial safety net against financial collapse. (155-6)
We cannot solve the problems of inflation with more inflation. We need to ask: How did we get here? What causes these bubbles? Financial bubbles simply happen, the political establishment tells us; these bubbles are an unfortunate but inevitable side effect of a market economy. That is nonsense. But it is convenient nonsense for some people, and that's why it gets repeated so often. It gives the perpetrators of the financial debacle that now confronts us a chance to get off the hook. We shouldn't let them. (156)
Contrary to what many Americans have been taught, a majority, not a minority, of the colonists supported the fight for liberty against Great Britain.*
*John Adams is often misquoted as saying that one third of Americans supported the revolution, one third opposed it, and one third were indifferent. Historians have repeated this incorrect quotation time and again. Adams was in fact speaking of American support for the French Revolution. Historian William F. Marina has shown convincingly that a majority of Americans supported the American Revolution. (157)
Ours is not a fated existence, for nowhere is our destiny etched in stone. In the final analysis, the last line of defense in support of freedom and the Constitution consists of the people themselves. If the people want to be free, if they want to lift themselves out from underneath a state apparatus that threatens their liberties, squanders their resources on needless wars, destroys the value of their dollar, and spews forth endless propaganda about how indispensable it is and how lost we would all be without it, there is no force that can stop them.
If freedom is what we want, it is ours for the taking.
Let the revolution begin. (167)