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 “hidden” 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.
7. NOTES ON THE HISTORY OF AMERICAN FREE ENTERPRISE
BY AYN RAND
If a detailed, factual study were made of all those instances in the history of American industry which have been used by the statists as an indictment of free enterprise and as an argument in favor of a government-controlled economy, it would be found that the actions blamed on businessmen were caused, necessitated, and made possible only by government intervention in business. The evils, popularly ascribed to big industrialists, were not the result of an unregulated industry, but of government power over industry. The villain in the picture was not the businessman, but the legislator, not free enterprise, but government controls.
Businessmen were the victims, yet the victims have taken the blame (and are still taking it), while the guilty parties have used their own guilt as an argument for the extension of their power, for wider and wider opportunities to commit the same crime on a greater and greater scale. Public opinion has been so misinformed about the true facts that we have now reached the stage where, as a cure for the country’s problems, people are asking for more and more of the poison which made them sick in the first place.
As illustration, I will list below some examples which I have found in the course of my research into the history of just one industry—the American railroads.
One of the statists’ arguments in favor of government controls, is the notion that American railroads were built mainly through the financial help of the government and would have been impossible without it. Actually, government help to the railroads amounted to ten percent of the cost of all the railroads in the country—and the consequences of this help have been disastrous to the railroads. I quote from The Story of American Railroads by Stewart H. Holbrook:
Published by Nathaniel Branden Institute, New York, 1959.
102
In a little more than two decades, three transcontinental railroads were built with government help. All three wound up in bankruptcy courts. And thus, when James Jerome Hill said he was going to build a line from the Great Lakes to Puget Sound, without government cash or land grant, even his close friends thought him mad. But his Great Northern arrived at Puget Sound without a penny of federal help, nor did it fail. It was an achievement to shame the much-touted construction of the Erie Canal.1
The degree of government help received by any one n road, stood in direct proportion to that railroad’s troub and failures. The railroads with the worst histories of sc; dal, double-dealing, and bankruptcy were the ones that r, received the greatest amount of help from the governme The railroads that did best and never went through bankru cy were the ones that had neither received nor asked : government help. There may be exceptions to this rule, but all my reading on railroads I have not found one yet
It is generally believed that in the period when railros first began to be built in this country, there was a great di of useless “over-building,” a great many lines which w« started and abandoned after being proved worthless a ruining those involved. The statists often use this period as example of “the unplanned chaos” of free enterprise. T truth is that most (and perhaps all) of the useless railroa were built, not by men who intended to build a railroad i profit, but by speculators with political pull, who started the ventures for the sole purpose of obtaining money from t government.
There were many forms of government help for the projects, such as federal land grants, subsidies, state bone municipal bonds, etc. A great many speculators started ra road projects as a quick means to get some government cas with no concern for the future or the commercial possibiliti of their railroads. They went through the motions of layii so many miles of shoddy rail, anywhere at all, witho inquiring whether the locations they selected had any ne< for a railroad or any economic future. Some of those m< collected the cash and vanished, never starting any railros at all. This is the source of the popular impression that tl origin of American railroads was a period of wild, unscrupi lous speculation. But the railroads of this period which wei planned and built by businessmen for a proper, privat