Egalitarianism and Inflation


Ayn Rand

The classic example of vicious irresponsibility is the story of Emperor Nero who fiddled, or sang poetry, while Rome burned. An example of similar behavior may be seen today in a less dramatic form. There is nothing imperial about the actors, they are not one single bloated monster, but a swarm of undernourished professors, there is nothing resembling poetry, even bad poetry, in the sounds they make, except for the pretentiousness—but they are prancing around the fire and, while chanting that they want to help, are pouring paper refuse on the flames. They are those amorphous intellectuals who are preaching egalitarianism to a leaderless country on the brink of an unprecedented disaster.

Egalitarianism is so evil—and so silly—a doctrine that it deserves no serious study or discussion. But that doctrine has a certain diagnostic value: it is the open confession of the hidden disease that has been eating away the insides of civilization for two centuries (or longer) under many disguise and cover-ups. Like the half-witted member of a family struggling to preserve a reputable front, egalitarianism has escaped from a dark closet and is screaming to the world that the motive of its compassionate, “humanitarian,” altruistic, collectivist brothers is not the desire to help the poor, but to destroy the competent. The motive is hatred of the good for being the good—a hated focused specifically on the fountainhead of all goods, spiritual or material: men of ability.

The mental process underlying the egalitarians’ hope to achieve their goal consists of three steps: 1. they believe that that which they refuse to identify does not exist; 2. therefore, human ability does not exist; and 3. therefore, they are free to devise social significance that will obliterate this nonexistent. Of special significance to the present discussion is the egalitarians’ defiance of the Law of Causality: their demand for equal results from unequal causes—or equal rewards for unequal performance.

As an example, I shall quote from a review by Bennett M. Berger, professor of sociology at the University of California, Sandiego(The New York Times Book Review, January 6, 1974). The review discusses a book entitled More Equality by Herbert Gans. I have not read and do not intend to read that book: it is the reviewer’s own notions that are particularly interesting and revealing. “[Herbert Gans] makes it clear from the start, “writes Mr. Berger, “that he’s not talking about equality of opportunity, which almost nobody seems to be against any more, but about equality of ‘results,’ what used to be called equality of condition.’

What he cares most about is reducing inequalities of income, wealth and political power….More equality could be achieved, according to Gans, by income redistribution (mostly through a version of the Credit Income Tax) and by decentralizations of power ranging from more equality in hierarchical organizations (e.g., corporations and universities) to a kind of ‘community control’ that would provide to those minorities most victimized by inequality some insulation against being consistently outvoted by the relatively affluent majorities of the larger political constituencies.”

If being consistently voted is a social injustice, what about big businessmen, who are the smallest minority and would always be consistently outvoted by the other groups? Mr. Berger does not say, but since he consistently equates economic power with political power, and seems to believe that money can buy anything, one can guess what his answer would be. And, in any case, he is not an admirer of “democracy.”

Mr. Berger reveals some of his motivation when he describes Herbert Gans as a “policy scientist” who suffers from a certain malaise. “Part of this malaise is a nightmare in which ‘the policy scientist’—not poorly prepared, but in full possession of the facts, reasons and plans the needs to promote persuasively the changes he advocates …-- is frustrated, defeated, humiliated by Congressional committees and executive staffs politically beholden to the constituencies and the patrons who keep them in office.” In other words: they did not let him have his way.

Lest you think that it is only material wealth that Mr. Berger is out to destroy, consider the following: “Decentralization of power, for example, doesn’t necessarily produce more equality….

…. Does very little to rid the local political community of the excessive influence exercised by the more educated, the more articulate, the more politically hip.” This means that the educated and the ignorant, the articulate and the incoherent, the politically active and the passive inert should have equal influence and an equal power over everyone’s life. There is only on instrument that can create an equality of this kind: a gun.

Mr. Berger stresses that he agrees with Mr. Gan’s egalitarian goal, but he doubts that it can be achieved by the open cynicism, Mr. Berger suggests “another strategy”: “the advocacy of equality inevitably comes in conflict with other liberal values, such as individualism and achievement. But … the advocacy of ‘citizenship’ does not, and the history of democracy is a history of political struggles to win more and more ‘rights’ for more and more people to bring ever larger proportions of the population to fully functioning citizenship…. In the 20 th century there have been struggles to remove racial and sexual impediments … to win rights to decent housing, medical care, education—all on the grounds not of ‘equality’ but on the grounds that they are necessary conditions for citizens, equal by definition, to exercise their responsibility to govern themselves. Who knows what ‘rights’ lie over the horizon: a right to orgasm, to feel beautiful? I think these will make people better citizens.” In other words, he suggests that egalitarian goals can be achieved by blowing up the term “citizenship” into a totalitarian concept, i.e., a concept embracing all of life.

If Mr. Berger is that open in advising the setting up of an ideological booby trap, who are the boobs he expects to catch? The underendowed? The general public? Or the intellectuals, whom he tempts with such bait as “ a right to orgasm” in exchange for forgetting individualism and achievement? I hope your guess is as good as mine.

I will not argue against egalitarian doctrines by defending individualism, achievement, and the men of ability—not after writing Atlas Shrugged. I will reality speak for me—it usually does.

Under the heading of “Allende’s Legacy,” and article in The Wall Street Journal (April 19, 1974) offers some concrete, real-life examples of what happens when income, wealth and power are distributed equally among all men, regardless of their competence, character, knowledge, achievement, or brains.

“By the time the military acted to overthrow the Allende government, prices had soared more than 1000 percent in two years and were climbing at the rate of 3 percent a day at the very end. The national treasury was practically empty.” The socialist government had seized a number of American-owned industrial firms. The new military government invited the American managements to come back. Most of them accepted.

Among them was Dow Chemical Company, which owned a plastics plant in Chile. Bob G. Caldwell, Dow’s director of operations for South America, came with a technical team to inspect the remains of their plant. “’What we found was unbelievable to us,’ he recalls, ‘The plant was still operable, but in another six months we wouldn’t have had a plant at all. They never checked anything.’ ….Worse yet, the highly inflammable chemicals handled at the plant were in imminent danger of blowing up. ‘Safety went to pot,’ Mr. Caldwell says. ‘The fire-sprinkler system was disconnected and the valves taken away for some other use outside. Then they were smoking in the most dangerous areas. They told us, “You didn’t have any fires while you were here before, so it must not be as dangerous as you said.”’”

I submit that the mentality represented by this last sentence, a mentality capable of functioning in this manner, is the loathsomely evil root of all human evils.

Apparently, some mentalities in the new Chilean government belong to the same category: they have the same range and scope, but the consequences of their actions are not so immediately perceivable, though not much farther away. In order to avoid labor disputes, the new government has frozen all labor contracts in the form and on the terms established under the Allende regime. For example, the Dow Company’s contract includes a “requirement that all the plant’s plastic scrap be given to the union, which then sells it. ‘We hope to get that one changed,’ a company official says, ‘because it’s clear incentive to produce almost nothing but scrap.’”

Then there is the case of a big Santiago textile firm. “Its contract with 1,300 workers virtually guarantees bankruptcy. The textile firm’s employees get a certain amount of cloth free as part of their wages and can buy unlimited quantities at a 37 percent discount; at those prices the firm loses money. Under President Allende the workers sold the cloth on the black market at huge profits, and it was an important factor in assuring their backing for the Allende government.”

How long can a company—or a country, or mankind—survive under a policy of this sort? Most people today do not see the answer, but some do. Material shortages are the consequence of another, much more profound shortage, which is created by egalitarian governments and ignored by the public—until it is too late. “Chile’s experiment with Marxism has also left the country with a shortage of engineers and technicians that could reach serious proportions. Thousands of them left during the Allende regime. Despite incentives offered by the junta, they haven’t been coming back, and many more key people continue to leave for higher-paying jobs abroad…. ‘Here in Chile [says a business executive] we must get used to the fact that good people must be paid well.’”

But here in the United States, we are told to get used to the idea they must not.

There is no such thing as “good people,” cries Professor Berger—or Professor Gans, or Professor Rawls—and if some are good, it’s because they’re exploiting those that aren’t. There is no such thing as “key people,” says Professor Berger, we’re all equal by definition. No, says Professor Rawls, some were born with unfair advantages, such as intelligence, and should be made to atone for it to those who weren’t. We want more equality, says Professor Gans, so that those who devise sprinkler systems and those who smoke around inflammable chemicals would have equal pay, equal influence, and an equal voice in the community control of science and production.

The term “brain drain” is known the world over: it names a problem which various governments are beginning to recognize, and are trying to solve by chaining the men of ability to their homelands—yet social theoreticians see no connection between intelligence and production. The best among men are running—from every corner and slave-pen of the globe—running in search of freedom. Their refusal to cooperate with slave drivers is the noblest moral action they could take—and, incidentally, the greatest service they could render mankind—but they don’t know it. No voices are raised anywhere in their honor, in acknowledgment of their value, in recognition of their importance. Those whose job it is to know—those who profess concern with the plight of the world—look on and say nothing. The intellectuals turn their eyes away, refusing to know—the practical men do know, but keep silent.

One can’t blame the dazed brutes of Chile, who swoop down on an industrial plant and cavort at a black-market fiesta, for not understanding that the plan cannot run at a loss—if their social superiors tell them that they are entitled to more equality. One can’t blame savages for not understanding that everything has its price, and what you steal, seize or extort today will be paid for by their own starvation tomorrow—if their social superiors, in management offices, in university classrooms, in newspaper columns, in parliamentary halls, are afraid to tell them.

What are all those people counting on? If a Chilean factory goes bankrupt, the equalizers will find another factory to loot. If that other factory starts crumbling, it will get a loan from the bank. If the bank has no money, it will get a loan from the government. If the government has no money, it will get a loan from a foreign government, all of them will get a loan from the United States.

What they don’t know—and neither does this country—is that the United States is broke.

Justice does exist in the world, whether people choose to practice it or not. The men of ability are being avenged. The avenger is reality. Its weapon is slow, silent, invisible, and men perceive it only by its consequences—by the gutted ruins and the moans of agony it leaves in its wake. The name of the weapon is: inflation.

Inflation is a man-made scourge, made possible by the fact that most men do not understand it. It is a crime committed on so large a scale that its size is its protection: the integrating capacity of the victims’ minds breaks down before the magnitude—and the seeming complexity—of the crime, which permits it to be committed openly, in public. For centuries, inflation has been wrecking one country after another, yet men learn nothing, offer no resistance, and perish—not like animals driven to slaughter, but worse: like animals stampeding in search of a butcher.

If I told you that the precondition of inflation is psycho-epistemological—that inflation is hidden under the perceptual illusions created by broken conceptual links—you would not understand me. That is what I propose to explain and to prove.

Let us start at the beginning. Observe the fact that, as a human being, you are compelled by nature to eat at least once a day. In a modern American city, this is not a major problem. You can carry your sustenance in your pocket—in the form of a few coins. You can give it no thought, you can skip meals, and, when you’re hungry, you can grab a sandwich or open a can of food—which, you believe, will always be there.

But project what the necessity to eat would mean in nature, i.e., if you were alone in a primeval wilderness. Hunger, nature’s ultimatum, would make demands on you daily, but the satisfaction of the demands would not be available immediately: the satisfaction takes time—and tools. It takes time to hunt and to make your weapons. You have other needs as well. You need clothing—it takes time to kill a leopard and to get its skin. You need shelter—it takes time to build a hut, and food to sustain you while you’re building it. The satisfaction of your daily physical needs would absorb all of your time. Observe that time is the price of your survival, and that it has to be paid in advance.

Would it make any difference if there were ten of you, instead of just one? If there were a hundred of you? A thousand? A hundred thousand? Do not let the numbers confuse you: in regard to nature, the facts will remain inexorably the same. Socially, the large numbers may enable some men to enslave others and to live without effort, but unless a sufficient number of men are able to hunt, all of you will perish and so will your rulers.

The issue becomes much clearer when you discover agriculture. You can survive more safely and comfortably by planting seeds and collecting a harvest months later—on condition that comply with two absolutes of nature: you must save enough that you have enough to feed you until your next harvest, and, above all, you must save enough seeds to plant your next harvest. You may run short on your own food, you may have to skimp and go half hungry, but, under penalty of death, you do not touch your stock seed; if you do, you’re through.

Agriculture is the first step toward civilization, because it requires a significant advance in men’s conceptual development: it requires that they grasp two cardinal concepts which the perceptual, concrete-bound mentality of the hunters could not grasp fully: time and savings. Once you grasp these, you have grasped the three essentials of human survival: time-savings-production. You have grasped the fat that production is not a matter confined to the immediate moment, but a continuous process, and that production is fueled by previous production. The concept of “stock seed” unites the three essentials and applies not merely to agriculture, but much, much more widely: to all forms of productive work. Anything above the level of a savage’s precarious, hand-to mouth existence requires savings. Savings buy time.

If you live on a self-sustaining farm, you save your grain: you need the saved harvest of your good years to carry you through the bad ones; you need your saved seed to expand your production—to plant a larger field. The safer your supply of food, the more time it buys for the upkeep or improvement of the other things you need: your clothing, your shelter, your water well, your livestock and, above all, your tools, such as your plow. You make a gigantic step forward when you discover that you can trade with other farmers, which leads you all to the discovery of the road to an advanced civilization: the division of labor. Let us say that there are a hundred of you; each learns to specialize in the production of some goods needed by all, and you trade your products by direct barter. All of you become more expert at your tasks—therefore, more productive—therefore, your time brings you better returns.

On a self-sustaining farm, your savings consisted mainly of stored grain and foodstuffs; but grain and foodstuffs are perishable and cannot be kept for long, so you ate what you could not save; your time-range was limited. Now, your horizon has been pushed immeasurably farther. You don’t have to expand the storage of your food: you can trade your grains for some commodity which will keep longer, and which you can trade for food when you need it. But which commodity? It is thus that you arrive at the next gigantic discovery: you devise a tool of exchange—money.

Money is the tool of men who have reached a high level of productivity and a long-range control over their lives. Money is not merely a tool of exchange: much more importantly, it is a tool of saving, which permits delayed consumption and buys time for future production. To fulfill this requirement, money has to be some material commodity which is imperishable, rare, homogeneous, easily stored, not subject to wide fluctuations of value, and always in demand among those you trade with. This leads you to the decision to use gold as money. Gold money is a tangible value in itself and a token of wealth actually produced. When you accept a gold coin in payment for your goods, you actually deliver the goods to the buyer; the transaction is as safe as simple barter. When you store your savings in the form of gold coins, they represent the goods which you have actually produced and which have gone to buy time for other producers, who will keep the productive process going, so that you’ll be able to trade your coins for goods any time you wish.

Now project what would happen to your community of a hundred hard-working, prosperous, forward-moving people, if one man were allowed to trade on your market, not by means of gold, but by means of paper—i.e., if he paid you, not with a material commodity, not with goods he had actually produced, but merely with a promissory note on his future production. This man takes your goods, but does not use them to support his own production; he does not produce at all—he merely consumes the goods. Then, he pays you higher prices for more goods—again in promissory notes—assuring you that he is your best customer, who expands your market.

Then, one day, a struggling young farmer, who suffered from a bad flood, wants to buy some grain from you, but your price has risen and you haven’t much grain to spare, so he goes bankrupt. Then, the dairy farmer, to whom he owed money, raises the price of milk to make up for the loss—and the truck farmer, who needs the milk, gives up buying the eggs he had always bought—and the poultry farmer kills some of his chickens, which he can’t afford to feed—and the dairy farmer can’t afford the higher price of alfalfa, so he cancels his order to the blacksmith—and you want to buy the new plow you have been saving for, but the blacksmith has gone bankrupt. Then all of you present the promissory notes to your “best customer,” and you discover that they were promissory notes not on his future production, but on yours—only you have nothing left to produce with. Your land is there, your structures are there, but there is no food to sustain you through the coming winter, and no stock seed to plant.

Would it make any difference if that community consisted of a thousand farmers? A hundred thousand? A million? The entire globe? No matter how widely you spread the blight, no matter what a variety of products and what an incalculable complexity of deals become involved, this, dear readers, is the cause, the pattern, and the outcome of inflation.

There is only one institution that can arrogate to itself the power legally to trade by means of rubber checks: the government. And it is the only institution that can mortgage your future without your knowledge or consent: government securities (and paper money) are promissory notes on future tax receipts, i.e., on your future production.

Now project the mentality of a savage, who can grasp nothing but the concretes of the immediate moment, and who finds himself transported into the midst of a modern, industrial smattering of knowledge, but there are two concepts he will not be able to grasp: “credit” and “market.”

He observes that people get food, clothes, and all sorts of objects simply by presenting pieces of paper called checks—and he observes that skyscrapers and gigantic factories spring out of the ground at the command of very rich men, whose bookkeepers keep switching magic figures from the ledgers of one to those of another and another and another. This seems to be done faster than he can follow, so he concludes that speed is the secret of the magic power of paper—and that everyone will work and produce and prosper, so long as those checks are passed from hand to hand fast enough. If that savage breaks into print with his discovery, he will find that he has been anticipated by John Maynard Keynes.

Then the savage observes that the department stores are full of wonderful goods, but people do not seem to buy them. “Why is that?” he asks a floorwalker. “We don’t have enough of a market,” his new teacher answers, “goods are produced for people to consume, it’s the consumers that make the world go round, but we don’t have enough consumers.” “Is that so?” says the savage, his eyes flashing with fire of a new idea. Next day, he obtains a check from a big educational foundation, he hires a plane, he flies away—and comes back, a while later, bringing his entire naked, barefoot tribe along. “You don’t know how good they are at consuming,” he tells his friend, the floorwalker, “and there’s plenty more where these come from. Pretty soon you’ll get a raise in pay.” But the store, pretty soon, goes bankrupt.

The poor savage is unable to understand it to this day—because he had made sure that many, many people agreed with his idea, among them many noble tribal chiefs, such as Governor Romney, who sang incantations to “consumerism,” and warrior Nader, who fought for the consumers’ rights, and big business chieftains who recited formulas about serving the consumers, and chiefs who sat in Congress, and chiefs in the White House, and chiefs in every government in Europe, and many more professors than he could count.

Perhaps it is harder for us to understand that the mentality of that savage has been ruling Western civilization for almost a century.

Trained in college to believe that to look beyond the immediate moment—to look for causes or to foresee consequences—is impossible, modern men have developed context-dropping as their normal method of cognition. Observing a bad, small town shopkeeper, the kind who is doomed to fail, they believe—as he does—that lack of customers is his only problem; and that the question of the goods he sells, or where these goods come from, has nothing to do with it. The goods, they believe, are here and will always be here. Therefore, they conclude, the consumer—not the producer—is the motor of an economy. Let us extend credit, i.e., our savings, to the consumers—they advise—in order to expand the market for our goods.

But, in fact, consumers qua consumers are not part of anyone’s market; qua; consumers, they are irrelevant to economics. Nature does not grant anyone an innate title of “consumer”; it is a title that has to be earned—by production. Only producers constitute a market—only men who trade products or services for products or services. In the role of producers, they represent a market’s “supply”; in the role of consumers, they represent a market’s “demand.” The law of supply and demand has an implicit subclause: that it involves the same people in both capacities. When this subclause is forgotten, ignored or evaded—you get the economic situation of today.

A successful producer can support many people, e.g., his children, by delegating to them his market power of consumer. Can that capacity be unlimited? How many men would you be able to feed on a self-sustaining farm? In more primitive times, farmers used to raise large families in order to obtain farm labor, i.e., productive help. How many non-productive people could you support by your own effort? If the number were unlimited, if demand became greater than supply—if demand were turned into a command, as it is today—you would have to use and exhaust your stock seed. This is the process now going on in this country.

There is only one institution that could bring it about: the government—with the help of a vicious doctrine that serves as a cover-up: altruism. The visible profiteers of altruism—the welfare recipients—are part victims, part window dressing for the statist policies of the government. But no government could have gotten away with it, if people had grasped the other concept which the savage was unable to grasp: the concept of “credit.”

If you understand the function of stock seed—of savings—in a primitive farm community, apply the same principle to a complex industrial economy.

Wealth represents goods that have been produced, but not consumed. What would a man do with his wealth in terms of direct barter? Let us say a successful shoe manufacturer wants to enlarge his production. His wealth consists of shoes; he trades some shoes for the things he needs as a consumer, but he saves a large number of shoes and trades them for building materials, machinery and labor to build a new factory—and another larger number of shoes, for raw materials and for the labor he will employ to manufacture more shoes. Money facilitates this trading, but does not change its nature. All the physical goods and services he needs for his project must actually exist and be available for trade—just as his payment for them must actually exist in the form of physical goods (in this case, shoes). An exchange of paper money (or even of gold coins) would not do any good to any of the parties involved, if the physical things they needed were not there and could not be obtained in exchange for the money.

If a man does not consume his goods at once, but saves them for the future, whether he wants to enlarge his production or to live on his savings (which he holds in the form of money)—in either case, he is counting on the fact that he will be able to exchange his money for the things he needs, when and as he needs them. This means that the is relying on a continuous process of production—which requires an uninterrupted flow of goods saved to fuel further and further production. This flow is “investment capital,” the stock seed of industry. When a rich man lends money to others, what he lends to them is the goods which he has not consumed.

This is the meaning of the concept “investment.” If you have wondered how one can start producing, when nature requires time paid in advance, this is the beneficent process that enables men to do it: a successful man lends his goods to a promising beginner (or to any reputable producer)—in exchange for the payment of interest. The payment is for the risk he is taking: nature does not guarantee man’s success, neither on a farm nor in a factory. If the venture fails, it means that the goods have been consumed without a productive return, so the investor loses his money; if the venture succeeds, the producer pays the interest out of the new goods, the profits, which the investment enabled him to make.

Observe, and bear in mind above all else, that this process applies only to financing the needs of production, not of consumption—and that its success rests on the investor’s judgment of men’s productive ability, not on his compassion for their feelings, hopes or dreams.

Such is the meaning of the term “credit.” In all its countless variations and applications, “credit” means money, i.e., unconsumed goods, loaned by one productive person (or group) to another, to be repaid out of future production. Even the credit extended for a consumption purpose, such as the purchase of an automobile, is based on the productive record and prospects of the borrower. Credit is not—as the savage believed—a magic piece of paper that reverses cause and effect, and transforms consumption into a source of production.

Consumption is the final, not the efficient, cause of production. The efficient cause s savings, which can be said to represent the opposite of consumption: they represent unconsumed goods. Consumption is the end of production, and a dead end, as far as the productive process is concerned. The worker who produces so little that he consumes everything that he earns, carries his own weight economically, but contributes nothing to future production. The worker who has a modest savings account, and the millionaire who invests his fortune 9and all the men in between), are those who finance the future. The man who consumes without producing is a parasite, whether he is a welfare recipient or a rich playboy.

An industrial economy is enormously complex: it involves calculations of time, of motion, of credit, and long sequences of interlocking contractual exchanges. This complexity is the system’s great virtue and the source of its vulnerability. The vulnerability is psycho-epistemological. No human mind and no computer—and no planner—can grasp the complexity in every detail. Even to grasp the principles that rule it, is a major feat of abstraction. This is where the conceptual links of men’s integrating capacity break down: most people are unable to grasp the working of their home-town’s economy, let alone the country’s or the world’s. Under the influence of today’s mind-shrinking, anti-conceptual education, most people tend to see economic problems in terms of immediate concretes: of their paychecks, their landlords, and the corner grocery store. The most disastrous loss—which broke their tie to reality—is the loss of the concept that money stands for existing, but unconsumed goods.

The system’s complexity serves, occasionally, as a temporary cover for the operations of some shady characters. You have all heard of some manipulator who does not work, but lives in luxury by obtaining a loan, which he the repays by obtaining another loan elsewhere, which he repays by obtaining another loan, etc. You know that his policy can’t go on forever, that it catches up with him eventually and he crashes. But what if that manipulator is the government.

The government is not a productive enterprise. It produces nothing. In respect to its legitimate functions—which are the police, the army, the law courts—it performs a service needed by a productive economy. When a government steps beyond these functions, it becomes an economy’s destroyer.

The government has no source of revenue, except the taxes paid by the producers. To free itself—for a while—from the limits set by reality, the government initiates a credit con game on a scale which the private manipulator could not dream of. It borrows money from you today, which is to be repaid with money it will borrow from you tomorrow, and so on. This is known as “deficit financing.” It is made possible by the fact that the government cuts the connection between goods and money. It issues paper money, which is used as a claim by any goods, it is not backed by gold, it is backed by nothing. It is a promissory note issued to you in exchange for your goods, to be paid by you (in the form of taxes) out of your future production.

Where does you money go? Anywhere and nowhere. First, it goes to establish an altruistic excuse and window dressing for the rest: to establish a system of subsidized consumption—a “welfare” class of men who consume without producing—a growing dead end, imposed on a shrinking production. Then the money goes to subsidize any pressure group at the expense of any other—to buy their votes—to pay for the failure of that project, to start another, etc. The welfare recipients are not the worst part of the producer’s burden. The worst part are the bureaucrats—the government officials who are given the power to regulate production. They are not merely unproductive consumers: their jobs consist in making it harder and harder and, ultimately, impossible for the producers to produce. (Most of them are men who’s ultimate goal is to place all producers in the position of welfare recipients.)

While the government struggles to save one crumbling enterprise at the expense of the crumbling of another, it accelerates the process of juggling debts, switching losses, piling loans on loans, mortgaging the future and the future’s future. As things grow worse, the government protects itself not by contracting this process, but by expanding it. The process becomes global: it involves foreign aid, and credits to foreign consumers to enable them to consume our goods—while, simultaneously, the American producers, who are paying for it all, are left without protection, and their properties are seized by any sheik in any pesthole of the globe, and the wealth they have created, as well as their energy, is turned against them, as, for example, in the case of Middle Eastern oil.

Do you think a spending orgy of this kind could be paid for out of current production? No, the situation is much worse than that. The government is consuming this country’s stock seed—the stock seed of industrial production: investment capital, i.e., the savings needed to keep production going. These savings were not paper, but actual goods. Under all the complexities of private credit, the economy was kept going by the fact that, in one form or another, in one place or another, somewhere within it, actual material goods existed to back its financial transactions. It kept going long after that protection was breached. Today, the goods are almost gone.

A piece of paper will not feed you when there is no bread to eat. It will not build a factory when there are no steel girders to buy. It will not make shoes when there is no leather, no machines, no fuel. You have heard it said that today’s economy is afflicted by sudden, unpredictable shortages of various commodities. These are the advance symptoms of what is to come.

You have heard economists say that they are puzzled by the nature of today’s problem: they are unable to understand why inflation is accompanied by recession—which is contrary to their Keynesian doctrines; and they have coined a ridiculous name for it: “stagflation.” Their theories ignore the fact that money can function only so long as it represents actual goods—and that at a certain stage of inflating the money supply, the government begins to consume a nation’s investment capital, thus making production impossible.

The value of the total tangible assets of the United States at present, was estimated—in terms of 1968 dollars—at 3.1 trillion dollars. If government spending continues, that incredible wealth will not save you. You may be left with all the magnificent skyscrapers, the giant factories, the rich farmlands—but without fuel, without electricity, without transportation, without steel, without paper, without seeds to plant the next harvest.

If that time comes, the government will declare explicitly the premise on which it has been acting implicitly: that its only “capital asset” is you. Since you will not be able to work any longer, the government will take over and will make you work—on a slope descending to sub-industrial production. The only substitute for technological energy is the muscular labor of slaves. This is the way an economic collapse leads to dictatorship—as it did in Germany and in Russia. And if anyone thinks that government planning is a solution to the problems of human survival observe that after half a century of total dictatorship, Soviet Russia is begging for American wheat and for American industrial “know-how”.

A dictatorship would find it impossible to rule this country in the foreseeable future. What is possible is the blind chaos of a civil war.

It is at a time like this, in the face of an approaching economic collapse, that the intellectuals are preaching egalitarian notions. When the curtailment of government spending is imperative, they demand more welfare projects. When the need for men of productive ability is desperate, they demand more equality for the incompetents. When the country needs the accumulation of capital, they demand that we soak the rich. When the country needs more savings, they demand a “redistribution of income.” They demand more jobs and less profits—more jobs and fewer factories—more jobs and no fuel, no oil, no coal, no “pollution”—but, above all, more goods for free to more consumers, no matter what happens to jobs, to factories, or to producers.

The results of their Keynesian economics are wrecking every industrial country, but they refuse to question their basic assumptions. The examples of Soviet Russia, of Nazi Germany, of Red China, of Marxist Chile, of socialist England are multiplying around them, but they refuse to see and to learn. Today, production is the world’s most urgent need, and the threat of starvation is spreading through the globe; the intellectuals know the only economic system that can and did produce unlimited abundance, but they give it no thought and keep silent about it, as if it had never existed. It is almost irrelevant to blame them for their default at the task of intellectual leadership: the smallness of their stature is overwhelming.

Is there any hope for the future of this country? Yes, there is. This country has one asset left: the matchless productive ability of its people. If, and to the extent that , this ability is liberated, we might still have a chance to avoid a collapse. We cannot expect to reach the ideal overnight, but we must at least reveal its name. We must reveal to this country the secret which all those posturing intellectuals of any political denomination, who clamor for openness and truth, are trying so hard to cover up: that the name of that miraculous productive system is Capitalism.

As to such things as taxes and the rebuilding of a country, I will say that in his goals, if not his methods, the best economist in Atlas Shrugged was Ragnar Danneskjold.

Gold and Economic Freedom

by Alan Greenspan

[Editor's note - It may surprise more than a few gold devotees to learn they have an ideological friend in none other than Federal Reserve Board chairman Alan Greenspan. Starting in the 1950s, in fact, Greenspan was a stalwart member of Ayn Rand's intellectual inner circle. A self-designated "objectivist", Rand preached a strongly libertarian view, applying it to politics and economics, as well as to religion and popular culture. Under her influence, Greenspan wrote for the first issue of what was to become the widely-circulated Objectivist Newsletter. When Gerald Ford appointed him to the Council of Economic Advisors, Greenspan invited Rand to his swearing-in ceremony. He even attended her funeral in 1982.In 1967, Rand published her non-fiction book, Capitalism, the Unknown Ideal. In it, she included Gold and Economic Freedom, the essay by Alan Greenspan which appears below. Drawing heavily from Murray Rothbard's much longer The Mystery of Banking, Greenspan argues persuasively in favor of a gold standard and against the concept of a central bank.Can this be the same Alan Greenspan who today chairs the most important central bank of them all? Again, you might be surprised. R.W. Bradford writes in Liberty magazine that, as Fed chairman, "Greenspan (once) recommended to a Senate committee that all economic regulations should have fixed lifespans. Senator Paul Sarbanes (D-Md.) accused him of 'playing with fire, or indeed throwing gasoline on the fire,' and asked him whether he favored a similar provision in the Fed's authorization. Greenspan coolly answered that he did. Do you actually mean, demanded the senator, that the Fed 'should cease to function unless affirmatively continued?' 'That is correct, sir,' Greenspan responded."

Bradford continues, "The Senator could scarcely believe his ears. 'Now my next question is, is it your intention that the report of this hearing should be that Greenspan recommends a return to the gold standard?' Greenspan responded, 'I've been recommending that for years, there's nothing new about that. It would probably mean there is only one vote in the Federal Open Market Committee for that, but it is mine.'" -- Editor, The Gilded Opinion ]

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 Was 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.