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Expiring Currency

Mises Daily: Monday, November 01, 1999 by

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In 1933, Franklin D. Roosevelt issued an executive order demanding that any American holding gold was to turn it over to the banks and the government. In 1999, a Federal Reserve has floated official has floated the idea of doing the same thing (in effect) to paper dollars. It’s proof that the 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 income in their mattresses, and spend it on goods and services, the economy would start to boom and prices would rise. Imagine that they dreamed up this convoluted theory fully three years before John Maynard Keynes systematized it in a grand treatise.

What is the problem with theory? First, the recovery was not being forestalled by low prices. In fact, 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. The law 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 subjected 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 in Wired, has a similar rationale with high-tech twist. Marvin Goodfriend, a senior vice president at the Richmond branch, has suggested that all bills should contain a magnetic strip. The strip would carry information about the last time it entered the banking system. When the bill is finally deposited, if the expiration date has passed, a "carry tax" will 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 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 of money and therefore an enemy of the people. Audits, investigations, and who knows what else will 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 FDRs, 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 keep their value. When prices are flat, people are more inclined to hold on to their dollars longer. But the Fed somehow thinks this is a bad thing: people should keep the 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 that dramatic decline in the savings rate. Whether that savings takes place in or out of the banking system, it necessary for long-term economic expansion. Why, then, would you want to place a tax on cash savings?

Really, this plan amounts to a kind of internal currency control–a tactic typical of totalitarian governments. In the case of FDR, his confiscation of gold nullified all gold contract 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 for too long at a time. In the broader context, this trial balloon is all 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 want 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 key merit of a pure gold standard. The government can’t destroy the money and can’t destroy liberty either. But today, money is entirely political, an instrument of state power and subject to endless manipulation by banking elites. Only they say what it’s worth, and when and for how long we can hold it. That’s just plain stealing, isn’t it?

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Llewellyn H. Rockwell, Jr. is president of the Ludwig von Mises Institute in Auburn, Alabama.