In 1933, Franklin D. Roosevelt issued an executive order demanding
that any American holding gold turn it over to the banks, which would
then hand it over to the government. Now, in 1999, a Federal Reserve
official has floated the idea of doing the same thing (in effect) to
paper dollars. It’s proof that economic ignorance and disregard for
liberty is boundless among our monetary regulators.
The New Dealers theorized that gold hoarding was preventing economic
recovery. If people would stop stuffing their incomes in their
mattresses, and instead spend it on goods and services, the economy
would start to boom and prices would rise. They dreamed up this
convoluted theory fully three years before John Maynard Keynes
systematized it in a grand treatise.
What’s the problem with the theory? First, the recovery was not being
forestalled by low prices. In fact, the high rates of unemployment can
be attributed to labor prices being kept too high by artificial means.
Second, the depression wasn’t caused by lack of consumer spending or
hoarding; it was brought on by a prior inflation of the economy and
worsened by the interventionist policies of Hoover. Third, people
weren’t “hoarding”; they were being frugal, and the confiscation of gold
was a disastrous step that only further undermined confidence.
The legal basis of FDR’s action was a World War I era law, dusted off
for use in peacetime. It was called the Trading With the Enemy Act, but
holders of gold found out that the real enemy was FDR. Those who
resisted the order were subject to fines, even jail. Those who protested
were called communists. And those who complied to the point of sending
their jewelry to the president were heralded as national heroes.
The plan concocted by an official of the Federal Reserve, as reported
has a similar rationale with a high-tech twist. Marvin Goodfriend, a
senior vice president at the Richmond branch of the Fed, suggested that
all bills contain a magnetic strip. The strip would carry information
about the last time the bill entered the banking system. When the bill
was finally deposited, if the expiration date had passed, a “carry tax”
would be imposed on the depositor.
Never mind that it would be impossible to know that the person
turning in the bill had held it the entire time. Much of the cash that
floats around the economy goes from hand to hand without ever entering the
banking system. Why should the last person to hold the hot potato have
to pay the tax? Aside from this practical difficulty, the theory behind
the idea is economically absurd and totalitarian at its root.
Paying the tax would only be the beginning. Knowing the way these
things work, anyone holding cash too long would immediately go on a
government list as a possible hoarder and therefore enemy of the people.
Audits, investigations and who knows what else would follow. The
prospects for branding normal, frugal people as money launderers or tax
evaders is enormous.
Oddly, the rationale for the plan is exactly the same as FDR’s,
except that it is not depression but the prospect of deflation that
makes the Fed nervous. When prices are going up quickly, people have the
incentive to spend their paper money on hard goods that, in relative
terms, keep their value. When prices are flat, people are more inclined
to hold on to their dollars. The Fed somehow thinks this is a bad thing:
people should put their money in the bank where it can be used as the
basis of credit expansion.
This is only persuasive if you believe prosperity can be created via
the printing press. In truth, prosperity comes from capital built on
savings. One worrisome trend of our time is the dramatic decline in the
savings rate. Whether savings takes place in or out of the banking
system, it is necessary for long-term economic expansion. Why, then,
would they want to place a tax on cash savings?
Really, this plan amounts to a kind of internal currency controls —
a tactic typical of totalitarian governments. In the case of FDR, his
confiscation of gold nullified all gold contracts and nationalized the
money stock. As Thomas P. Gore told FDR at the time, “Why, that’s just
plain stealing, isn’t it, Mr. President?”
It would be stealing, too, if the Federal Reserve taxed and penalized
Americans merely for holding on to dollars. In the broader context, this
trial balloon is part of a long running war on bank privacy and cash, as
explained by Richard Rahn in “The End of Money and the Struggle for
Financial Privacy.” It is precisely the war on bank privacy that causes
so many Americans and people around the world to hold and deal in cash,
and long for the day when money goes completely cyber.
The biggest mistake a free society can make is allowing the
government to control the money. Herein lies the merit of a pure gold
standard. When the government can’t destroy the money, it has a tough
time destroying liberty. But today, money is entirely political, an
instrument of state power and subject to endless manipulation by banking
elites. They tell us what it’s worth, and when and for how long we can
hold it. That’s just plain stealing, isn’t it?