Scotland (1714-1844) Was Once a Country with a Stable Banking System: No Central Bank, No Legal Tender Laws, No Banking Regulations, No Monetary Policy, and No Restrictions on the Right to form a Bank and Issue Money

There once was a country with a stable banking system the envy of the rest of the world. While there's nothing so extraordinary in that, it was a system with aspects almost everyone would call—were it proposed to them—unworkable. Not only was there no central bank, there were no legal tender laws, no political banking regulations, no monetary policy, and no restrictions on the right of anyone to form a bank and issue his own money. The country was Scotland from 1714-1844. When English law put an effective end to this "free banking" regime, there were 19 different banks issuing their own notes.

--Ron Paul and Lewis Lehrman, The Case for Gold: A Minority Report of the U.S. Gold Commission (Auburn, AL: Ludwig von Mises Institute, 2007), 147.

Under the Gold Standard, Inflation for the Purpose of Monetizing Debt is Prohibited, Thus Holding Government Size and Power in Check and Preventing Significant Deficits

During the time we were on a gold standard federal deficits were very small or nonexistent. Money that the government did not have, it could not spend nor could it create. Taxing the people the full amount for extravagant expenditures would prove too unpopular and a liability in the next election.

Justifiably, the people would rebel against such an outrage. Under the gold standard, inflation for the purpose of monetizing debt is prohibited, thus holding government size and power in check and preventing significant deficits from occurring. The gold standard is the enemy of big government. In time of war, in particular those wars unpopular with the people, governments suspend the beneficial restraints placed on the politicians in order to inflate the currency to finance the deficit. Strict adherence to the gold standard would prompt a balanced budget, yet it would still allow for "legitimate" borrowing when the people were willing to loan to the government for popular struggles. This would be a good test of the wisdom of the government's policy.

Finally, the inflationary climate has encouraged huge deficits to be run up by governments at all levels, as well as by consumers and corporations. The unbelievably large federal contingent liabilities of over $11 trillion are a result of inflationary policies, pervasive government planning, and unwise tax policies.

--Ron Paul and Lewis Lehrman, The Case for Gold: A Minority Report of the U.S. Gold Commission (Auburn, AL: Ludwig von Mises Institute, 2007), 155.

The Discovery of "Open-Market Operations" in 1922 Caused a Six-Year Bank Credit Inflation with New Money Pouring into the Stock Market and Real Estate

With the "discovery" of open-market operations around 1922, the Federal Reserve thought it had found a way to smooth out business cycles. In practice, it caused a substantial six-year bank credit inflation by buying securities on the open market and printing the money to pay for them. This money--bank reserves--was pyramided several-fold by means of the fractional reserve banking system. This policy of stabilizing the price level was deliberately engineered by the leader of the Federal Reserve System, Benjamin Strong, to follow the proto-monetarist theory of Yale economist Irving Fisher.

The 1920s are not often seen as an inflationary period because prices did not rise. But the money supply can rise even without prices rising in absolute terms. The 1920s saw such a burst of American technological advancement and cheaper ways of producing things that the natural tendency was for prices to fall (i.e., more goods chasing the same number of dollars). But the inflation caused prices to rise relative to what they would have done. So a "stable" price level was masking the fact that inflation was going on and creating distortions throughout the economy.

Between mid-1922 and April 1928, bank credit expanded by over twice as much as it did to help finance World War I. As with all inflations, this caused speculative excess; in this case, new money poured into the stock market and real estate. The cooling of this speculative fever in 1928 by officials who tightened the money supply because they were finally afraid of the overheated economy led to the Depression, which in turn led to the world's abandonment of the gold standard.

--Ron Paul and Lewis Lehrman, The Case for Gold: A Minority Report of the U.S. Gold Commission (Auburn, AL: Ludwig von Mises Institute, 2007), 123-124.