America is the economic engine of the world and in that role has been all powerful. Now, however, the consumer engine driving the economic train cannot get the train up the hill.

American consumers are in shock. The economy is in serious recession. It contracted at an annual rate of 6.1 percent for the first three months of 2009. Unemployment is nearing 9 percent. And loan defaults continue to rise.

As most children know, when the mammoth train could not get up the hill, it took “The Little Engine That Could” to get it done. It had the unfailing optimism to repeat, in railroad cadence, “I think I can, I think I can … .”

But America no longer appears to have the optimism of that little engine.

Politicians blame the recession on speculative bankers for engineering a massive excess of leverage, much of it geared to predatory subprime mortgage lending, which now threatens to bring the world economy to its knees. Following this analysis, the administration is targeting many trillions of dollars of citizens’ money at the banking and housing industries in an effort to restore confidence and consumer spending.

Unfortunately for the world’s economies, this political conclusion is biased, shallow and fatally flawed.

Contrary to widely held opinion, insolvent banks, consumer shock and high unemployment are not the cause of economic recession. Rather, they are merely symptoms. The real cause rests with politicians and their abuse of money, in particular paper or “fiat” money.

The abuse of currency has occurred often in history when a lack of confidence has brought down powerful empires. The abuse was most often perpetrated by means of dilution of the precious metal in the currency, usually gold or silver.

In America it has been the abuse of paper currency. To help finance the Civil War, President Lincoln issued the first paper dollars. However, following the war, the issue of paper dollars was limited to the value of the gold held by the U.S. Treasury. In short, except for the brief interlude of World War I, American paper dollars were gold-backed.

In 1933, President Roosevelt felt he needed to spend massively to buy a way out of the Great Depression. But the Fed was limited in the issuance of paper dollars by its gold reserves. To increase the Fed’s gold holdings, FDR confiscated all gold from American citizens.

In 1934, he devalued the dollar by 75 percent against gold and issued a massive number of paper dollars. This ignited the first great inflation of the 20th century. Later, Congress agreed to remove the limitation of gold backing for paper dollars, fanning inflation still further.

In 1971, President Nixon broke the final dollar-gold link, unleashing the second great inflation of the century.

With the discipline of gold extinguished, Congress began a splurge of massive spending, largely on vote-catching entitlement programs. Financial and economic confidence was eroded.

By 2001, the Clinton-Greenspan regime increased U.S Treasury debt to an unimaginable $5 trillion. Unwilling to accept any naturally corrective recession and to finance a disastrous war in Iraq, the Bush-Greenspan regime doubled the published Treasury debt to $10 trillion and added a further $40 trillion in guarantees and IOUs to Medicare and Social Security funds. They used the proceeds to flood the world with low-cost paper dollars.

The result was the largest asset boom in history. Speculation became a way of life. Unprecedented levels of borrowing became the way to unheard-of riches, much of which was used by financiers to persuade Congress to abolish laws and regulations established by their forefathers to ensure that the Great Crash and the Great Depression never were repeated.

The Glass-Steagall Act was repealed; “sweep” accounts were reintroduced and single-state banking laws abolished to allow the creation of vast money-center banks. The result was an orgy of leverage.

In finding a cure, the administration talks about the need for financial deleveraging and economic restructuring but mentions nothing of restoring faith in the U.S. currency. In doing so, it misses the essential target for restoring economic confidence.

The administration appears to be afraid of the political pain that accompanies deleveraging and restructuring. Restructuring requires companies such as AIG, Citibank and GM with failed managements and moribund business models to go to the junkyard. This makes room for new vibrant companies to replace them and grow, creating new, profitable jobs.

In short, creeping socialism is now gripping America. It acts against the free enterprise spirit that made America great.

In the national interest, President Obama must concentrate on the fundamental problem of currency abuse if he is to succeed in restoring genuine economic confidence. He faces the Herculean task of leading his Democratic Party from the worn-out rails of Socialist decay and back toward the “American Way” of free enterprise and national success.

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