Threatening an imminent economic collapse, Treasury Secretary Hank Paulson and Fed Chairman Ben Bernanke have bamboozled Congress into enacting the most brazen confiscatory scheme ever concocted by government. The scheme would have American taxpayers fork over $700 billion of their cash to help recapitalize some of the country’s biggest banks  the same banks that recently larded their bigwigs with $62 billion in bonuses.

Sensing a pushback by the world’s dollar-surplus regions  Asia and the Mideast  to finance the largest debtor economy, the U.S. government will now plunder its own countrymen to keep capital running "uphill." As with most statist remedies, it is being marketed as a boon for Main Street, tantalizing its inhabitants with the prospect of profits wafting westward from those malodorous Wall Street investments. However, Congress has inured the Treasury from accountability and legal recourse, giving Paulson dictatorial power over the nation’s financial sector. Rather than let this bloated segment of the economy shrink and consolidate, Paulson and his successor will extend it unlimited life support, bloodletting everything else, in a final ruin of the nation.

The problem that is vexing the financial system, we are told, is the pile of mortgage-backed securities held by financial institutions. These have lost value as the underlying assets  the actual homes  have plummeted in value. But this is a fraud. This precipitating event no more caused the financial fiasco than the murder of someone named Ferdinand provoked World War I, as taught in elementary school.

Remember the war? Not just the current and future wars, but the one that gave us the fiat monetary system: the war in Vietnam. Prior to that calamity the world operated under the Bretton Woods monetary system, a post-World War II arrangement that pegged all currencies to the dollar and made only the dollar convertible to gold, thereby ensuring the dollar’s reserve currency status. During the 1950s, the system seemed invulnerable as U.S. gold reserves exceeded foreign liabilities by threefold. By 1970, however, as the U.S. inflated its money supply to fund the Southeast Asian conflict, the monetary position of the U.S. reversed, with foreign liabilities exceeding gold reserves fivefold. When France demanded gold for dollars at the statutory rate of $35/oz., President Nixon shut the gold window for good. As a result, currencies went from a fixed to a floating (and pegged) rate system in 1973. It has vexed economists ever since.

This system of fiat currencies has given peculiar leverage to the U.S. dollar. As the world’s reserve currency, the dollar has preserved faith in its purchasing power among its holders, including foreign central banks. This faith and willingness to buy U.S. low-yield debt instruments such as Treasuries has enabled the U.S. public and private sectors to go on the largest borrowing binge the world has ever seen, manifesting in the gargantuan twin deficits of budget and trade. These imbalances would never have occurred under a gold standard. Credit would have been constrained by statutory levels of gold reserves in the banking system, instead of being created out of thin air by the 40-1 leverage levels granted by the SEC in 2004 to the five now defunct investment banks. Also, the huge influx of imported goods would have halted due to inflationary pressures in the exporting countries  a phenomenon deemed the "price-specie flow mechanism" by 18th century philosopher David Hume.

Robert Mundell, a Nobel Prize-winning economist who sparred with Milton Friedman over floating rates vs. the gold standard, had this to say about fiat currencies:

"The present international monetary system neither manages the interdependence of currencies nor stabilizes prices. Instead of relying on the equilibrium produced by [gold’s] automaticity, the superpower has to resort to ‘bashing’ its trading partners, which it treats as enemies."

So here we are: a phony monetary system, $3 trillion wasted on wars, and a citizenry mired in debt. And what does Congress do? It adds more debt  a trillion dollars, just for starters, since once starting down this slippery slope, it won’t be able to stop. It then gives the Treasury the green light to buy securities that are trading as low as 20 cents on the dollar at the hold-to-maturity value, i.e., par! Not surprisingly it has engaged in a media blitz to "sell" this boondoggle, convincing the taxpayer that this bucket of dross will one day turn to platinum. Sensing that working stiffs are a little perturbed about the fleecing, it has leapt to the offense: "No, this is not a bailout of Wall Street. This is a rescue plan for Main Street." By embracing the mortgage waste dump, U.S. citizens are supposedly saving jobs and retirement dreams. They are told that interest-free car loans will stream from dealerships and refi windows will again beckon, even to those with homes worth half the value of mortgage paper.

With Congress granting the Treasury (along with an "oversight" board) almost unlimited power over the country’s financial landscape, the U.S. has terminated its democracy and is well on the Road to Serfdom. As Friedrich Hayek explained in 1944, "Economic control is not merely control of a sector of human life that can be separated from the rest; it is the control of the means for all our ends. And whoever has sole control of the means must also determine which ends are to be served, which values are to be rated higher and which lower  in short, what men should believe and strive for."

Farewell, America.