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or by a private investor who might purchase it, or by the Federal Reserve. When these bonds are auctioned off, people are willing to pay more money for them, since payment is guaranteed. The higher the amount of the bond means the lower the yield; a lower yield means a lower interest rate. A lower interest rate means it is less painful for the government to borrow money. This system led to the national debt ballooning from $2.6 billion in 1910 to $25.9 billion in 1920, which also led to the sharp spike of inflation that followed.

This caused massive expansion, and eventual contraction, and the Fed was forced to raise interest rates to stabilize the volatile economy. Once the economy stabilized in the early 1920s, the economy saw massive growth, but beneath the surface most of this growth was distorted by a Fed-generated inflationary credit expansion which lowered interest rates, causing a boom in the stock market. This was Hayek’s worst nightmare come true. The bust that Hayek’s theory explained was caused by the massive credit expansion and lower interest rates and came in the form of the Wall Street stock market crash of October 1929.

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Congressman Ron Paul, in his book End the Fed, has described this same process as it occurred in the context of the current financial crisis:

Prosperity can never be achieved by cheap credit. If that were so, no one would have to work for a living. . . . Artificially low rates of interest orchestrated by the Fed induced investors, savers, borrowers, and consumers to misjudge what was going on. Multiple mistakes were made. The apparent prosperity based on the illusion of such wealth and savings led to misdirected and excessive use of capital.6

History, it seems, has an odd habit of repeating itself.

Armed with Federal Reserve funding, President Franklin D. Roosevelt attempted an interesting solution to the 1929 stock market crash. This plan was to spend our way out of the depression and into prosperity, which is the exact opposite of rational logic and what the economy needed. This recklessness turned the stock market crash into the Great Depression, which lasted for fifteen years.

Unable to fund the massive debt he contemplated, FDR, during his first month in office and acting as a ruthless dictator, abandoned the gold standard for individuals, and confiscated every American’s gold.7 As well, FDR made ownership of gold illegal. The abandonment of the gold standard only made the Great Depression that much greater. Many of the policies of the New Deal exacerbated the Great Depression, and many economists believe these policies kept the country in the depression until after World War II.

The easy credit that led to the Great Depression, as explained by the Austrian Business Cycle Theory, was only made easier by the abandonment of the gold standard. Commercial banks now only needed to keep Federal Reserve notes as bank reserves, and the Federal Reserve was the only bank that needed to store gold. With a reduction of the fractional reserve ratio to 10 percent, the Federal Reserve could loan out ten dollars for every one dollar it had on reserve in gold. These loans went to commercial banks, and could be used as these banks’ reserves. The commercial banks could then loan out ten dollars for every one dollar they had on reserve in their bank’s vault. So a dollar’s worth of gold in the Federal Reserve Bank can be turned into one hundred dollars of loans to the public.

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Getting Out of the Woods

The great nations of the world would abandon the gold standard in order to print money to fund World War II. With the massive debt accrued by European nations to fight the war, as well as the need for the United States to pay its bills for the war, a new monetary system had to be formed. Shortly after World War II, Lord Keynes and Harry Dexter White, a U.S. Treasury official, prepared the plans for a new global financial system. Representatives of the financial rulers of the United Nations assembled in Bretton Woods, New Hampshire, and they enacted the new global monetary system. This system