A tale of two quarters

[RonPaulGetsIt]

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All dimes and quarters minted 1964 and prior consisted of 90% silver. All dimes and quarters minted 1965 and after consist of no silver whatsoever.

The quarter on the right is worth $4.15 based on Friday's closing price of silver. The one on the left is worth, you guessed it, 25 cents.

Shortly after the U.S. government removed the silver from its coins, it also removed the gold backing from its dollars (1971). Since then there has been no constraint at all on the growth of government.

Beholden to special interest groups politicians routinely spend more money than they collect and simply borrow the difference by issuing bonds. The Federal Reserve makes sure all the bonds the U.S. government wishes to sell are successfully auctioned off. If necessary it will buy them itself with dollars it creates out of nothing. This increases the money supply, dilutes the value of the dollar and causes price to rise. What we are left with is a mountain of debt that must be paid back with interest. The following chart is from the Federal Reserve website and shows the growth of U.S. Treasury debt since the government abandoned gold and silver money.

​

This growth in government debt has financed the massive expansion in the scope and size of the government. It simply would be impossible to consistently spend beyond its means with a gold or silver standard. The metal would leave the vaults and go to settle payment to our debtors. When the metal runs out, the spending would cease.

The above graph does not include the tens of trillions of dollars in unfunded social security and Medicare obligations. The debt is unpayable and will be defaulted on. It can be literally defaulted on such as the Russian bond default of 1998, or it can be defaulted on by paying the nominal dollars back with more and more newly created and progressively less valuable money. Either way the purchasing power of the bondholders will be crushed.

This process of devaluation has been going on relentlessly since the U.S. abandoned the silver and gold standards. The money supply increases and it necessitates more dollars and higher prices to equal the same amount of purchasing power. We see it with all commodities from corn to crude oil.

The 1964 quarter is still the same. It is the dollar that has changed. With the price of silver more than 16 times as high as when the coin was minted it means that in addition to all the onerous income, sales, and other taxes, we have also suffered a massive stealth inflation tax.

There is no free lunch. Spending programs must be paid for one way or another. If it isn’t paid for with taxes it is paid for with a devalued currency. This is to say nothing of the capital gains taxes on any “profits” earned due to inflation driving up nominal prices. If the money supply doubled immediately and equally across the entire economy all prices would double. Those stock prices that doubled would be subject to capital gains taxes, when in actuality their relative value is unchanged.

We have to understand the value of a sound currency. It allows people to save money without having to speculate. It restrains the growth of government. It prevents the theft of purchasing power that occurs with a devalued currency.

As Henry Hazlitt put it in his classic Economics in One Lesson:

Like every other tax, inflation acts to determine the individual and business
policies we are all forced to follow. It discourages all prudence and thrift. It encourages squandering, gambling, reckless waste of all kinds. It often makes it more profitable to speculate than to produce. It tears apart the whole fabric of stable economic relationships. Its inexcusable injustices drive men toward desperate remedies. It plants the seeds of fascism and communism. It leads men to demand totalitarian controls. It ends invariably in bitter disillusion and collapse.

 

[RSLudlum]

The quarter on the right is worth $4.15 based on Friday's closing price of silver. The one on the left is worth, you guessed it, 25 cents.

Actually in keeping the comparisons equal, the 1965 quarter is worth around $0.05 in metal value. But I don't know many people that would sell a quarter for 5 cents.

 

[ILUVRP]

Looking at the chart you can see that in 1971 POTUS Nixon did away with Bretton-Woods agreement so we could pay for VietNam ( thru inflation ) things started going in the $hit can.

 

[Dforkus]

Not entirely even handed I must say..

For instance what would that quarter be worth if it was invested yearly at the 10 year treasury rate, or converted into an index fund...

a heck of a lot more than 25c

have to remain intellectually honest here, I'm just sayin....

 

[xd9fan]

and here is President Johnson's speech that started it:

Distinguished Members of Congress, ladies and gentlemen:
We are gathered here today for a very rare and historic occasion in our Nation's history.
Before I make some observations that I have made note of here, I want to say to the Congress again, as I do almost daily these days, in the words of the Navy--"Well done."
When I have signed this bill before me, we will have made the first fundamental change in our coinage in 173 years. The Coinage Act of 1965 supersedes the act of 1792. And that act had the title: An Act Establishing a Mint and Regulating the Coinage of the United States.
Since that time our coinage of dimes, and quarters, and half dollars, and dollars have contained 90 percent silver. Today, except for the silver dollar, we are establishing a new coinage to take its place beside the old.
My Secretary of the Treasury, Joe Fowler, is a little stingy about making samples, but I have some here. Joe made sure that I wouldn't put them in my pocket by sending them over here in plastic.
Actually, no new coins can be minted until this bill is signed. So these strikes, as they are called, are coins that we will never use. On one side is our first First Lady, Martha Washington. On the other, a replica of Mount Vernon.
The new dimes and the new quarters will contain no silver. They will be composites, with faces of the same alloy used in our 5-cent piece that is bonded to a core of pure copper. They will show a copper edge.
Our new half dollar will continue our silver tradition. Eighty percent silver on the outside and 19 percent silver inside. It will be nearly indistinguishable in appearance from our present half dollar.
All these new coins will be the same size and will bear the same designs as do their present counterparts. And they will fit all the parking meters and all the coin machines and will have the same monetary value as the present ones.
Now, all of you know these changes are necessary for a very simple reason--silver is a scarce material. Our uses of silver are growing as our population and our economy grows. The hard fact is that silver consumption is now more than double new silver production each year. So, in the face of this worldwide shortage of silver, and our rapidly growing need for coins, the only really prudent course was to reduce our dependence upon silver for making our coins.
If we had not done so, we would have risked chronic coin shortages in the very near future.
There is no change in the penny and the nickel. There is no change in the silver dollar, although we have no present plans for silver dollar production.
Some have asked whether our silver coins will disappear. The answer is very definitely-no.
Our present silver coins won't disappear and they won't even become rarities. We estimate that there are now 12 billion--I repeat, more than 12 billion silver dimes and quarters and half dollars that are now outstanding. We will make another billion before we halt production. And they will be used side-by-side with our new coins.
Since the life of a silver coin is about 25 years, we expect our traditional silver coins to be with us in large numbers for a long, long time.
If anybody has any idea of hoarding our silver coins, let me say this. Treasury has a lot of silver on hand, and it can be, and it will be used to keep the price of silver in line with its value in our present silver coin. There will be no profit in holding them out of circulation for the value of their silver content.
The new coins are not going to have a scarcity value either. The mint is geared to get into production quickly and to do it on a massive scale. We expect to produce not less than 3 1/2 billions of the new coins in the next year, and, if necessary, twice that amount in the following 12 months.
So, we have come here this morning to this, the first house of the land and this beautiful Rose Garden, to congratulate all of those men and women that make up our fine Congress, who made this legislation possible--the committees of both Houses, the leadership in both Houses, both parties, and Secretary Fowler and all of his associates in the Treasury.
I commend the new coinage to the Nation's banks and businesses and to the public. I think it will serve us well.
Now, I will sign this bill to make the first change in our coinage system since the 18th century. And to those Members of Congress, who are here on this very historic occasion, I want to assure you that in making this change from the 18th century we have no idea of returning to it.
We are going to keep our eyes on the stars and our feet on the ground.
________________________________________
Note: The President spoke at 11:21 a.m. in the Rose Garden at the White House. During his remarks he referred to Henry H. Fowler, Secretary of the Treasury.
As enacted, the Coinage Act of 1965 is Public Law 89-81 (79 Stat. 254).
On October 30, 1965, the White House announced that circulation of the new 25-cent piece would begin on November 1. The White House release stated in part, "The new--nonsilver--quarter dollar will be added to the circulation of the traditional 90 percent silver quarter. Both the old and the new quarters are to circulate together.
"Approximately 230 million pieces of the new quarter will be distributed during the week beginning November 1. Initial distribution will be backed by production that will rise from 28 million to 60 million pieces a week during November, and will be still higher thereafter."
________________________________________
Citation: John T. Woolley and Gerhard Peters, The American Presidency Project [online]. Santa Barbara, CA. Available from World Wide Web: http://www.presidency.ucsb.edu/ws/?pid=27108.

 

[PaulFrazee]

The important idea is to limit the federal government's power to generate debt. I doubt, however, that precious metals are the best way to do that.
It makes little sense to tie currency to the availability of one resource. If currency was pegged to gold, and America put out more product than ever before, its currency would still devalue if, say, Zimbabwe stumbled upon a massive natural reserve of gold. That's why currency is meant to be relative to the productive output of a nation.
The past hundred years has shifted from measuring wealth in holdings of aesthetic rarity -- gold, silver -- to holdings of functional utility -- productivity, oil, minerals. The hope is that hoarding becomes less effective than productivity, which means that there are channels to wealth other than plundering neighbors. In practice, we're actually just stealing oil and labor (through third-world sweat-shops) from each other.
Those failings, like the federal taste for debt, can only be defeated by good policy. A gold-standard is trying to do that, but using the wrong means. What's more important is that we recreate our productive capacity by bringing jobs back into our own borders. That will result in a more valuable nation that is able to support itself with less government support. Then we make debt a non-option for the Fed through good policy.
How does that sound?

 

[xd9fan]

it sound completely unrealistic........

which is more stable? a gold/hard money standard or trusting politicians and their policy?

The reason why gold is treated like..well....gold is because it works......unless gold is in a 5-6 thousand year human currency bubble.....it is what chains ones in power from over spending.

telling washington dc to self correct by "good policy"...is pollyanna at best

Good God, The Constitution...is good policy.....how are we doing following that??

 

[cubical]

Paul, I would agree gold isn't perfect, but since we don't live in a Utopian world nothing is. Gold is the best way to (try to) keep politicians honest. If there was a massive discovery of gold somewhere, it would take a lot more energy to get the gold out than it would to print a piece of paper.

 

[Travlyr]

Actually in keeping the comparisons equal, the 1965 quarter is worth around $0.05 in metal value. But I don't know many people that would sell a quarter for 5 cents.

It costs $.05? Does the government make $.20 on each coin? Just curious.

Also, isn't it interesting that they made the new coin so similar to the look of 90% silver. That kind of hides the facts. Sneaky bastards.

 

[PaulFrazee]

Don't assume that Washington is incapable of good policy. Any inability to hold our lawmakers accountable is a failure of the system in other ways than monetary policy. If we stop addressing congress with hostility, and reinvest in the system, perhaps we can rebuild trust with our leaders.

You're suggesting taking decision-making out of the hands of congress to fix the problem. There are times that action is necessary. If our monetary policy is completely inflexible, we'd be incapable of responding to economic shifts, or even attacks. It wouldn't take much to devalue gold in the short term, gain tangible wealth from the devalued US, and then buy gold back up later.

@Travlyr Knock off the conspiracy theories. It looks the same because it's the same measure of currency.

 

[xd9fan]

www.coinflation.com

 

[Travlyr]

www.coinflation.com

Looks like you could literally double your money by saving pre-1982 pennies.

 

[PaulFrazee]

A good investment? Perhaps. A good backing for currency? Not at all.
In fact, the only reason it is a good investment is that it exists outside of the tumult of a currency. If you combined the two, it would become a persistent target for manipulation.

There's another thread talking about the spike in the 1980s. That alone is a great example of why pegging our currency would be disastrous.

Government control of currency is not the problem. It's poor government control. An informed, far-seeing populace wouldn't have let Nixon and his successors put us into debt. We let them, though, because we didn't say no as a nation.
We didn't say no as a nation because our media failed to inform the people.
The media failed to inform the people because it gained more from doing otherwise.

So you see why I say the problem is not with government control. The problem is with the system monitoring government control. We have to get back to an informed republic. Education and a responsible media seems a far more effective measure to me.

 

[georgiaboy]

Don't assume that Washington is incapable of good policy. Any inability to hold our lawmakers accountable is a failure of the system in other ways than monetary policy. If we stop addressing congress with hostility, and reinvest in the system, perhaps we can rebuild trust with our leaders.

You're suggesting taking decision-making out of the hands of congress to fix the problem. There are times that action is necessary. If our monetary policy is completely inflexible, we'd be incapable of responding to economic shifts, or even attacks. It wouldn't take much to devalue gold in the short term, gain tangible wealth from the devalued US, and then buy gold back up later.

@Travlyr Knock off the conspiracy theories. It looks the same because it's the same measure of currency.

Welcome to the forums.

You have a decidedly more optimistic view of Washington's capability for good policy at this point than I do. TARP, stimulus, bailouts, healthcare, rampant spending and inflation, policing the world, the list seems to go on and on. Pegging the currency to gold/silver seems like a simple way to control an organization that has proven over the decades since we went off the standard that they cannot be trusted to reign in their spending habits.

And on the topic of reinvesting in the system, why do you think this forum was created?

 

[PaulFrazee]

I agree completely about this forum. I actually just made a new site myself -- www.open-floor.net. It's not 100% ready for action, but I have high hopes.

Please don't mistake me; I'm not here to disparage this forum. I'm here to engage with you guys and build solutions. This is the kind of stuff we need to be doing. Hopefully, we can formulate real policies to bring to the public. This is the remaining beauty of our republic.

And I do tend to agree with libertarianism more than anything. I don't believe that the metric of more or less government is useful at all. Quantity does not determine quality. However, I do believe in efficiency over bloat. Bloat has the potential to imbalance the system. You guys share my preference toward efficient solutions. Sometimes, however, that does mean government involvement, no matter how badly our trust has been damaged in the past. We have to rebuild the system, not circumvent it.

They haven't reigned in their spending habits because we haven't come close to making them. They're responding to their strongest constituents. Believe me, the people can effect the choices of the lawmakers, but it requires constant work. We have to become their strongest constituents. We do that by knowing exactly what we're talking about, and being loud about it.

Congress needs to reign in the spending. Let's formulate some solutions, and be loud about them. More debt is off the table, and, for the sake of argument, so is the gold-standard. What else have we got?

 

[Travlyr]

I agree completely about this forum. I actually just made a new site myself -- www.open-floor.net. It's not 100% ready for action, but I have high hopes.

Please don't mistake me; I'm not here to disparage this forum. I'm here to engage with you guys and build solutions. This is the kind of stuff we need to be doing. Hopefully, we can formulate real policies to bring to the public. This is the remaining beauty of our republic.

And I do tend to agree with libertarianism more than anything. I don't believe that the metric of more or less government is useful at all. Quantity does not determine quality. However, I do believe in efficiency over bloat. Bloat has the potential to imbalance the system. You guys share my preference toward efficient solutions. Sometimes, however, that does mean government involvement, no matter how badly our trust has been damaged in the past. We have to rebuild the system, not circumvent it.

They haven't reigned in their spending habits because we haven't come close to making them. They're responding to their strongest constituents. Believe me, the people can effect the choices of the lawmakers, but it requires constant work. We have to become their strongest constituents. We do that by knowing exactly what we're talking about, and being loud about it.

Congress needs to reign in the spending. Let's formulate some solutions, and be loud about them. More debt is off the table, and, for the sake of argument, so is the gold-standard. What else have we got?

In the debt system of money we endure, wouldn't reducing the debt simply crash the system?

 

[PaulFrazee]

How so?

 

[Travlyr]

How so?

Rather than derail this thread this one talks of debt as money: http://www.ronpaulforums.com/showthread.php?t=264231

 

[xd9fan]

Congress needs to reign in the spending. Let's formulate some solutions, and be loud about them. More debt is off the table, and, for the sake of argument, so is the gold-standard. What else have we got?

how is gold off the Table??? Why are central banks buying it??? They are buying it because gold IS money. History did not start in the last hundred years.

Again if your telling me that washingtondc can be cured by "good Policy" I'm going to again tell you that washingtondc cant (or wont) stick with even the basics of good policy like the CONSTITUTION.

Sometimes we dont need to rethink the wheel here......we dont need to "formulate some solutions" when washingtondc cant even stick to the constitution.

Does cutting the size of Govt reach your table??

 

[xd9fan]

Alan Greenspan and the gold standard speech 1966

Gold and Economic Freedom

by Alan Greenspan

Published in Ayn Rand's "Objectivist" newsletter in 1966, and reprinted in her book, Capitalism: The Unknown Ideal, in 1967.
An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense — perhaps more clearly and subtly than many consistent defenders of laissez-faire — that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.

In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.

Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.

The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.

What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity. Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term "luxury good" implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.

In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.

Whether the single medium is gold, silver, seashells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has significant advantages over all other media of exchange. Since the beginning of World War I, it has been virtually the sole international standard of exchange. If all goods and services were to be paid for in gold, large payments would be difficult to execute and this would tend to limit the extent of a society's divisions of labor and specialization. Thus a logical extension of the creation of a medium of exchange is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.

A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.

When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth. When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one — so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the "easy money" country, inducing tighter credit standards and a return to competitively higher interest rates again.

A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World War I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.

But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline — argued economic interventionists — why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely — it was claimed — there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks ("paper reserves") could serve as legal tender to pay depositors.

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates. The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market, triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.

With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain's abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed "a mixed gold standard"; yet it is gold that took the blame.) But the opposition to the gold standard in any form — from a growing number of welfare-state advocates — was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which — through a complex series of steps — the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.