In Jim Cook's Archive


The Federal Reserve is doing everything in its power to expand credit. New schemes are floated weekly. All the so-called solutions are inflationary. In addition, the treasury is giving everyone money. Soon they will be throwing it out of helicopters. This is how a country destroys the value of its currency.

The central bank controls the issuance of money (and credit). There’s no competition. This monopoly on money allows politicians to pay the bills for ever-expanding social programs and military escapades. It’s called inflating. If government spends too much, they cover the deficit by printing or creating new money. Without inflating, you can’t pass out money to stimulate the economy. Without inflating, social programs can’t expand. Thus the creation of new money became an indispensable ingredient to the goals of populist politicians. Easy money aids the spread of liberal policies and big government. Inflating and socialism go hand in hand – you can’t have one without the other.

It’s now come to the point where we must either inflate or face deflation and a credit collapse. We are not going to take the necessary, but bitter, deflationary medicine now. However, the consequences are serious. London Times Editor William Rees-Mogg wrote, “Inflation gradually pushes the whole community towards speculation, since ordinary life begins to require speculator’s skills.” The free market thinker, Henry Hazlitt summarized, “In a free enterprise system, with an honest and stable money, there is dominantly a close link between effort and productivity, on the one hand, and economic reward on the other. Inflation severs this link. Reward comes to depend less and less on effort and production, and more and more on successful gambling and luck.”

Hazlitt continues, “It is not merely that inflation breeds dishonesty in a nation. Inflation is itself a dishonest act on the part of government, and sets the example for private citizens. When modern governments inflate by increasing the paper-money supply, directly or indirectly, they do in principle what kings once did when they clipped coins. Diluting the money supply with paper is the moral equivalent of diluting the milk supply with water. Notwithstanding all the pious pretenses of governments that inflation is some evil visitation from without, inflation is practically always the result of deliberate governmental policy.”

Mr. Hazlitt concluded his case against inflation. “It is harmful because it depreciates the value of the monetary unit, raises everybody’s cost of living, imposes what is in effect a tax on the poorest….wipes out the value of past savings, discourages future savings, redistributes wealth and income wantonly, encourages and rewards speculation and gambling at the expense of thrift and work, undermines confidence in the justice of a free enterprise system, and corrupts public and private morals.”

Another great monetary thinker, Elgin Groseclose, explained the process we’ve employed in America for many decades. “By mortgaging the future, pledging the productive power of unopened mines, uncut forests, unbuilt factories and unborn generations, a tremendous demand may be created for wares already produced in the markets.”

When you hear the media, Hollywood radicals and left-wing politicians renouncing business, it brings to mind Henry Hazlitt’s explanation. “A period of inflation is almost inevitably also a period when demagogy and an antibusiness mentality are rampant. If implacable enemies of the country had deliberately set out to undermine and destroy the incentives of the middle classes to work and save, they could hardly have contrived a more effective set of weapons than the present combination of inflation, subsidies, handouts, and confiscatory taxes that our own politicians have imposed upon us.”

If the monetary authorities keep expanding credit, there comes a time when too many people no longer want to hold the money. They want to exchange it for goods and assets. Quite suddenly prices begin to run away and nobody wants to hold dollars because they are depreciating too fast. The late economist Hans Sennholz said this. “The ultimate destination of the present road of political fiat is hyperinflation with all its ominous economic, social, and political consequences. On this road, no federal plan, program, incomes policy, control, nationalization, threat, fine, or prison can prevent the continuous erosion and ultimate destruction of the dollar.”

These days the Fed feverishly pumps out additional money and credit to forestall a collapse. Newsletter editor Dan Denning described this perverse predicament. “The scope of the debt problem in America hasn’t been fully understood. The single distinguishing feature of the current version of American capitalism is credit creation. So much debt has been created in the last twenty years that it requires huge amounts of new credit simply to keep the system liquid. The necessity for ever-larger amounts of credit to keep the system liquid weighs on the ability of the Fed to reflate. It’s like pouring more and more water in the bathtub with a big hole in the bottom.”

It’s interesting to read what the economist Andrew Dickinson White wrote about the great French inflation in the 18th century that destroyed the currency and economy of France, and compare his comments with today. “Whenever a great quantity of paper money is suddenly issued, we invariably see a rapid increase of trade. The great quantity of the circulating medium sets in motion all the energies of commerce and manufacturers; capital for investment is more easily found than usual, and trade perpetually receives fresh nutriment.”

He describes the consequences. “There arose the clamor for more paper money. At first, new issues were made with great difficulty; but, the dike once broken, the current of irredeemable currency poured through; and swollen beyond control. It was urged on by speculators for a rise in values; by demagogues who persuaded the mob that a nation, by its simple fiat, could stamp real value to any amount upon valueless objects. As a natural consequence, a great debtor class grew rapidly, and this class gave its influence to depreciate more and more the currency in which its debts were to be paid. The government now began, and continued by spasms to grind out still more paper; commerce was at first stimulated by the difference in exchange; but this cause soon ceased to operate, and commerce, having been stimulated unhealthfully, wasted away. Manufacturers at first received a great impulse; but, ere long, this overproduction and overstimulus proved as fatal to them as to commerce.

“A still worse outgrowth was the increase of speculation and gambling… For at the great metropolitan centers grew a luxurious, speculative stock-gambling body, which, like a malignant tumor, absorbed into itself the strength of the nation and sent out its cancerous fibers to the remotest hamlets. At these city centers abundant wealth seemed to be piled up. In the country at large there grew a dislike of steady labor and a contempt for moderate gains and simple living.

Mr. White continued, “… how easy it is to issue it; how difficult it is to check its overissue; how seductively it leads to the absorption of the means of the working men and men of small fortunes; how heavily it falls on all those living on fixed incomes, salaries, or wages; how securely it creates, on the ruins of the prosperity of all men of meager means, a class of debauched speculators, the most injurious class that a nation can harbor – more injurious, indeed, than professional criminals whom the law recognizes and can throttle; how it stimulates overproduction at first and leaves every industry flaccid afterward; how it breaks down thrift and develops political and social immorality.”

It’s going to get crazier, wilder and looser. That’s because inflating requires more and more inflating. According to the economist Ludwig von Mises, “Because an inflationary policy works only as long as the yearly increments in the amount of money in circulation are increased more and more, the rise in prices and wages and the corresponding drop in purchasing power will go on at an accelerated pace.”

All the paper money that ever existed in the world, prior to what we use now, inevitably became worthless. Hundreds of paper currencies in scores of countries wound up in the wastebasket. As Voltaire once noted, “Paper money always returns to its intrinsic value – zero.” One of the definitions of money is that it’s a store of value. That’s not the case with our dollar. It continues to lose value. Who can make a convincing case that it won’t wind up like other worthless paper currencies? In their book, The Coming Collapse of the Dollar,James Turk and John Rubino point out, “Whether ancient or modern, monarchy or republic, coin or paper, each nation descends pretty much the same slippery slope, expanding government to address perceived needs, accumulating too much debt, and then repudiating its obligations by destroying its currency.”

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