This article celebrates the wisdom of an ex US Senator who just happens to be Warren Buffet's father. It offers a depressing lesson from history, but it graphically illustrates how private property has delivered and protected personal freedom only for a privileged few, and how the opportunity to be one of them is still there for the taking.
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Warren Buffet's dad was no fool either. He was a US Congressman from Nebraska who managed to explain something complicated in a simple and clear way. He showed how with the passage of time democracy can turn itself inside-out to enslave its subjects, and he went on to demonstrate how a critical part of this process is related to government’s accountability for the money it spends. His explanation has a vital relevance to all of us who wish to remain reasonably wealthy and free in a changing world.
He invented an analogy of a fireman with a useless hose, and after a little introduction you can enjoy it verbatim.
The love of freedom on the one hand, and the wish for security through mutual support on the other, are two instincts which pull societies in opposite directions. One diminishes the state while the other expands it, and both revolve around attitudes to property.
Free people have better access to private property. The policy of the state is that individuals should secure their own futures, so less of their earnings are taken away in tax and they can then build a private reserve which gives them choice and liberty.
By contrast state mandated pools of public property go hand in hand with growing bureaucracy, greater influence in people's lives, and always more tax. When tax removes their wealth people develop a belief that the state should secure their futures. They demand high future public spending as a payback for the high current public spending which they finance.
A spiral of dependence is created - more tax : more benefits : more tax. Eventually ordinary people must consume all their after-tax income each month, and rely on state run collectives to support them in retirement or ill-health - at which point they will be provided with just enough to survive.
It is not so dissimilar from slavery, where workers could never accumulate property and liberty because their pay supported only subsistence.
Meanwhile government invests not a cent of that money taken in tax. Indeed it spends so much that it is forced to borrow.
There is nothing necessarily wrong with borrowing when it is done for the right reasons. It is - for example - absolutely sensible for a government to borrow to build the capital infrastructure it needs to deliver public services more efficiently, because the borrowing will be paid back by future savings in the cost of services. But there must be a check on the quality of the projects. If a keen shopper were allowed to borrow regardless of how stupidly he spent the money it is likely he would borrow too much. The bank's control of his overdraft limits the stupidity of the shopper, whose bankruptcy is against the bank’s interest.
Likewise state borrowing can and should be subjected to the same type of control under the terms of a sound Constitution. Failure to constitute government to ensure the correct controls on spending leads to trouble, because governments, and especially democratic ones, over-borrow and end up eliminating private property. When they do that even the savers become dependent on the state.
Weak monetary constitutions allow governments to attack property. To see how it is done it is necessary to understand universal money.
Gold coin - for example - is universal. It can be used to trade anywhere in the world because its intrinsic value is recognised regardless of whose face is on the coin. Through this universality it grants a broad economic freedom which cannot easily be taken back by the state so long as gold remains in private hands. The likes of Lenin, Mussolini & Hitler confiscated gold from their obedient citizens and replaced it with paper money. The universal money thus acquired granted economic freedom to the tyrants, who then bought on international markets the military hardware required to sustain them in power. At the same time it removed the private economic freedom which their subjects might well have exercised to get the hell out of countries descending into totalitarianism.
It is only universal money which grants freedom from bad government to its owner.
Look for example at Germany at the time of Hitler's complete ascendency in 1933. By then 10,000,000,000 1921 marks did not even buy a subway ticket in Germany. The previous owners of gold who had been obliged to receive this worthless paper in return for their savings had completely lost their freedom of movement as well as their property. With gold they could have left the country and bought the means of making a living - a training, a farm, some tools, maybe a small business - in any free country on Earth. But the confiscation removed all those possibilities and trapped them in Germany because none of those free countries had the slightest appetite for that newfangled German paper.
And with their money a joke Germans were prevented from reliably storing wealth for the future, so they became dependent on the state, and the only living the state offered them was a position in officialdom or a career in the military.
This illustrates a repeating process. By attacking private property rights it is easy to subordinate an entire nation through the eradication of its economic options. When governments grant themselves a monopoly over a nation's universal money they are attacking liberty at its root.
The framers of the US Constitution fully understood the potential for their nascent democracy to hand back the individual freedoms they had won at independence to a government which in spite of democratic credentials might develop tyrannical tendencies. The Constitution was very carefully designed to limit governmental power over money. After all, what was the point of democracy if it too granted to government the power to confiscate freedom.
So the US Constitution included a prohibition on false money:- "No state shall ... make anything but gold and silver coin a tender in payment of debts."
This deliberately barred states from paying their debts by government decree, i.e. with newly printed paper, and it applied a powerful constitutional brake on government spending and borrowing. It was a prohibition deliberately inserted to defend American liberty from bad government, and to prevent the slide of American freedom into state sponsored dependence.
But in extreme circumstances in the Great Depression in 1932 Roosevelt decided to make the US government a large scale borrower. Up to that point there had been an automatic check on the US Government’s ability to finance its operations by borrowing, because the currency was backed by physical reserves of gold bullion. There was a clear constitutional right for America’s people to demand that gold - and the universal economic freedom it granted - in return for their US banknotes, and this right to universal money prevented the state from taking back the solid gold economic freedom of the American people. It forced government to be small - a universally good marker for liberty.
As Roosevelt’s new deal put more paper dollars into the system America's savers saw the risk of their being unable to replace their share of this expanding supply of paper with a constant supply of gold. As was their right at that time they started to demand gold in exchange for their paper money.
What the savers of America were doing was exercising exactly the same control over their government as the bank exercises over the incautious shopper. They had realised that with this type of government their gold, the physical guarantor of their freedom, was safer buried in their fields.
Experiencing a rupture of its gold reserve the response of the Roosevelt government was to outlaw the personal ownership of gold in 1933. Naturally it was never intended as a tyrannical act, but it was nonetheless the first and far from obvious step on the road to the end of liberty. Since then the supply of paper dollars has been controlled by the US government. The issue of paper money is no longer ‘hooked up’ to the accumulated real wealth of American savers, and they have absolutely no control over their government's excesses.
For the last 70 years the US government has settled its debts with its own paper money, and both Americans and people all over the world have accepted it. In the same period it has promised layers of future welfare to current taxpayers, without ever investing any of the money taken in taxes [footnote]. For maybe the first 40 of those 70 years the risk of issuing debt was well understood, the power granted by Roosevelt’s administration was executed cautiously, and the US dollar continued to deserve its international trustworthiness and status as universal money. Then, because nothing went seriously wrong through this period of gradual debt issuance, the pace of its issue accelerated from 1970, and from 1990 dramatically. US sovereign debt issuance has rolled happily along on the momentum of the carefully established international reputation of the dollar. It has allowed US citizens to enjoy a standard of living well beyond their means until, like everyone who ever became addicted to consumption, the US has become a serious debtor, in fact easily the biggest debtor the world has ever known.
This situation is possible only because credit is being granted by the world to the USA - to the tune of about $5,000 per American family per year - a sum which is left in American capital markets by foreigners who currently still trust the dollar's reputation.
If US dollars were suddenly no longer trusted by the world's creditors - if, in other words, it were to lose its status as the world's universal money - then the historical precedents suggest it will not be just American wealth which is destroyed. Now American liberty is at risk too. The domestic dollar reserve of America's middle classes will become valueless under the government sponsored inflation required to pay off its debts, and this will take away their ability to choose how they live their lives.
America's national debt is now worth about $62,000 per American family - which has been accumulated almost entirely since 1971 when the last controls on currency expansion were dismantled. This almost invisible debt has been the key source of demand in the US economy, and it has powered unstoppable growth.
This extraordinary debt is at per capita rates which in any other country in the world would long since have precipitated certain currency collapse (Argentina - which imploded under its state borrowings during 2001-2002 - had a $120 billion debt worth a paltry $12,000 per family). Many sensible politicians have seen the writing on the wall. Dozens of them have tried to diminish this growing US public debt mountain, but without success. Acts of Congress have been passed, only to be later ignored under attack from the groups seeking public money during tight fought elections. It was in this context that Mr Buffet (senior) compared his role in the US government to that of a fireman with a useless hose:-
"There is only one way these spending pressures can be halted, and that is to restore the final decision on public spending to the producers of wealth. Taxpayers must regain their right to obtain gold in exchange for the fruits of their labour. This restoration would give the people the final say-so on governmental spending, and would enable wealth producers to control the issuance of paper money and bonds.
I do not ask you to accept this contention outright. But if you look at the political facts of life I think you will agree that this is the only genuine cure.
There is a parallel between business and politics which quickly illustrates the weakness in political control of money.
Each of you is in business to make profits. If your firm does not make profits it goes out of business. If I were to bring a product to you and say this item is splendid for your customers, but you would have to sell it without profit, or even at a loss which would put you out of business, well I would get thrown out of your office, perhaps politely, but certainly quickly.
In politics votes have a similar vital importance to an elected official. That situation is not ideal, but it exists.
Perhaps you are right now saying to yourself ‘That’s just what I have always thought. The politicians are thinking of votes when they ought to think about the future of the country. What we need is a Congress with some guts. If we elected a Congress with intestinal fortitude it would stop the spending all right’.
I went to Washington with exactly that hope and belief. But I have had to discard it as unrealistic. Why? Because an economy Congressman under our printing-press money system is in the position of a fireman running into a burning building with a hose that is not connected to the water. His courage may be commendable, but he is not hooked up right.
When the people’s right to restrain public spending by demanding gold coin was taken from them, the automatic flow of strength from the grass roots to enforce economy in Washington was disconnected.
Truman’s promises were to be expected under our paper currency system because his continuance in office depends upon pleasing a majority of pressure groups.
But it was not always this way. Before 1933 the people themselves had an effective way to demand economy. Before 1933 whenever the people became disturbed over Federal spending they could go to the banks, redeem their paper currency in gold, and wait for common sense to return to Washington."
Being ‘hooked up right’ - according to the design of the US Constitution - regulated government power by allowing people to act as their individual preferences dictated with respect to the private property which underwrote their freedom. When savers were prevented from withdrawing the support of their money their government began - slowly at first - to spend without restraint. The effects have been falling standards of honesty in public life, the diminution of the worth of money, the theft, by stealth, of the private property of the American people, and the erosion of the liberty which that private property underpinned.
Liberty is already subordinated to a cheapened democracy. Unfortunately for everyone there is no easy way back, and the likely end point is currency collapse, widespread poverty, subsistence, radicalism and tyranny.
Paper money delivers huge standard of living benefits while it works, and once people have embarked upon it the only time they will come to understand its downside will be when it is well and truly broken. Perhaps then the courage of Americans to assert their liberty will return and incorruptible private property and sound money will re-emerge. But it is unlikely.
There have been few great libertarian societies but what they have all had in common is sufficient resources to permit the acquisition of personal property. The liberty is only as universal as the wealth. Many ancient Greeks enjoyed liberty, but resources were limited, so only a particular privileged class benefited while a slave class toiled beneath. The European middle class from the 1860s enjoyed liberty, founded on the first industrial society, but the industrial workers in the mills subsisted and did not share. Even the members of the communist parties of the Soviet Bloc era enjoyed liberty (property, reserved and protected for their exclusive use, was private in all but name), while the load was borne by the thousands of workers in the state controlled enterprises who were excluded.
What was special about newly independent America was the colossal availability of resources in a thinly populated land. This enabled constitutional liberty to be offered to every individual, and it produced the most productive society the world has ever known. Free to produce, and accumulate, Americans embarked on 130 years of private wealth generation which built the platform upon which current American society still rests.
America's magnificent universal liberty is unlikely to recur. The US is now much more densely populated and far from surplus in resources, so there is not the capacity to extend such freedoms to all her citizens. After a substantial economic contraction - whether gradual or dramatic - widespread poverty will develop, and if history is any guide the dispossessed will seek the property of everyone else through revolutionary politics, which may or may not succeed. Then liberty will once again be the prerogative of those select few with universally valued private property.
Wealthy Americans - and Europeans, and Japanese - might consider all this very carefully. Individual liberty has always been the privilege of those with universally valuable property held sufficiently at arms length that it was hard for others to take possession of it. Just as gold has previously enabled its holders to experience global liberty in oppressive domestic political circumstances so it will again, and a bar or two offshore is now a far better guarantee of personal liberty than the equivalent domestic dollar balance.
Modern dollars are about as lightweight a substitute for sound money as it is possible to conjure up.
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