Posts Tagged ‘Fiat money’

END THE FED

July 6, 2010

END THE FED

(In case you don’t know, The “Fed” is the US Federal Reserve System.)

Why end the Fed? Most Americans have no idea. I think it’s important that every citizen understand this. If enough people did understand this, Ron Paul would now be the U.S. President.

The Fed is the means by which our government can tax us without limit, so the government can finance wars and other programs which taxpayers would refuse to support. The Fed is picking your pocket with the stealth tax.

Without the stealth tax, we probably would have avoided involvement in all of the wars of the past 100 years. There would be no American Empire.

Inflation caused by the Fed is the cause of the boom and bust business cycle, stock market, commodity, and housing bubbles, the great depression, and all the lesser recessions since then, including the present one. The course the Fed is following will assure that this recession will become a long, hard depression, with increasing unemployment and hardship.

The American Banking system is a cartel, and the Fed controls it. A cartel is a group of companies acting together to gain the advantages of monopoly: the profit advantage that comes from the exclusion of competition.

The banking cartel was created by the law which created the Fed. The system protects the banks from competition and from failure. Thus secure, the banks can invest recklessly. That recklessness was what caused the crash of 2008. Sure enough, the banks threatened with bankruptcy in 2009 were rescued with massive bailouts from the government. The excuse was that they were “too big to fail”.

Who’s to blame for this crazy system? I wish I knew. There is a hint, though in the identity of the people who drafted the law which created the Fed. In a secret meeting on Jekyll Island, Georgia in 1910, representatives of the Morgan banks, the Rockefeller banks, and Kuhn, Loeb & Co drafted the bill to create the Fed. The bill was passed into law by Congress in 1913

It would be interesting to trace the relationship of all the financial beneficiaries of the 2009 bailouts to see how they relate to the people who wrote the law, 100 years ago, that created the Fed.

Now I’m going to try to explain just how the Fed can cause all those problems. Bear with me. It isn’t simple. In fact the Fed is designed to create an illusion, to delude us into believing that our government, our banks, and our dollars are real, honest, and trustworthy. All these things rest on our faith. If we lose that faith, they will all collapse. That might return us to the sort of country, and government, that the Constitution originally spelled out.

The Evolution of the dollar

Our dollar started out as the Spanish silver dollar, a strong and trustworthy currency. Later we went onto a gold standard. The dollar was defined as one twentieth of a troy ounce of gold. Ten dollar and twenty dollar US gold coins circulated along with silver dollars. Paper treasury notes circulated in $1, $2, and $5 denominations. These, and silver coins, were all redeemable on demand in gold.

We were on the gold standard. Independent banks printed their own paper notes but they too were redeemable in gold. Banks did print some paper notes in excess of the gold they held, but prudence kept them from getting reckless, lest they get caught out and go bankrupt. This kept them fairly cautious and “reasonably” honest.

Bank customers deposited cash in checking accounts. Banks lent temporary fictitious money called credit to customers by crediting their checking accounts with dollars. Banks developed clearing systems so that checks written on an account in one bank could be deposited to an account in another bank. Any imbalance in the flow of money by checks from one bank to another was balanced by a transfer of gold between the banks.

These transfers of gold kept the banks honest, or at least “prudent”. They had to keep enough gold or silver cash on hand to redeem banknotes and checks. All the banks produced some banknotes and credit in excess of their cash reserves; call it an overhang. If they all had about the same overhang in proportion to their reserves, the interbank gold transfers would balance and they would all keep enough cash to redeem checks. Charging interest on credit outstanding was profitable and the chief source of income for banks.

Businessmen, investors, and speculators use credit to invest and make a profit. They always complain that there isn’t enough “money” in circulation. What they really mean, however is not money but cheap credit. The British had long since perfected a central banking system (The Bank of England) which provided lots of cheap credit. This provided funding for the many colonial ventures which eventually built the British Empire. Many Americans clamored for a duplicate of the Bank of England. They wanted to get rich quick, using cheap credit.

The Genesis of the Fed

Twice in the 19th century the US government created a central bank and twice the government, under new administrations, closed them down. Finally in 1913, the Fed was created. It has lasted nearly 100 years.

The purpose of a central bank is to form a cartel of the banking system, to coordinate the expansion of lots of credit on top of the gold reserves. By 1971, the number of dollars in circulation was so great And the value of the dollar so reduced, that foreigners were exchanging all their dollars for gold. At that point we simply went off the gold standard. The government confiscated all the gold. We were left with the fiat dollar. The law (fiat) said that the dollar was legal tender, and the legal tender law said that we must accept the dollar “for all debts, public and private”.

The Stealth Tax Alias Government Deficits

Government, more than anybody, likes cheap credit. Obscured by the smoke and mirrors of bookkeeping, (Now you see it, now you don’t!) the Fed “lends” the government whatever amount of money it wants. The loan is never repaid, and the interest the government pays the Fed is returned to the US Treasury. I’d call that loan an outright gift, wouldn’t you?

This is how our government finances its deficit. The Fed creates (counterfeits) new money for the government to spend. Talk about our grandchildren paying the mounting “debt” is a smokescreen. This is why people in government can say, “Deficits don’t matter.” That newly created money is spent as fast as it is created, and becomes a permanent addition to the money in circulation. That’s money inflation.

Something that’s hard to realize is that money, like any commodity, obeys the law of supply and demand. The more dollars available on the market (in circulation), the less each dollar is worth. Not immediately, but in time. The market reacts slowly because the realization spreads slowly that something has changed. Gradually all prices rise. You and I get less real wealth in goods for the money we earn. Uncle Sam has cleverly picked our pockets.

Remember, money is not wealth; it is just a medium of exchange. Putting it in terms of macroeconomics, the market adjusts prices so that the amount of money in circulation matches the amount of goods in production.

It would be tempting to set this down as an equation (It has been tried) but there are two problems with that. First, an equation implies an instantaneous reaction while the response of prices to money supply is a slowly ongoing process which never quite catches up with the latest change in the money supply.

The second problem lies in the definitions of “in circulation” and “in production”. They are both difficult to define and impossible to measure. But that is a fundamental problem with macroeconomics.

The Business Cycle

Perennial government deficits are a one-way street. Government wants money, the Fed supplies it, the government spends it, and goes back for more. The trend is an ever increasing money supply and an ever decreasing value of the dollar.

The business cycle, however, involves a cyclical variation of the money supply which is superimposed on the trend of increasing money supply caused by the government deficits.

The business cycle is caused by the efforts of the Fed to sustain an unsustainable boom. The boom is unsustainable because it is an illusion. The idea that manipulating the supply of money or credit can somehow increase the production of goods is a basic Keynesian fallacy.

The Fed tries to stimulate the economy by reducing interest rates to encourage the expansion of credit. The banks gladly extend credit at low interest, mostly to businesses.

Businessmen invest the new money on capital goods to improve productivity in hopes of profits. Such expansion appears profitable because of the new low interest rates.

The boom that follows does not affect everyone equally. Rather than increase total production, it shifts some productive activity away from production of consumer goods to production of capital goods: the buildings, machinery, and tools needed to improve production. These capital goods will increase productivity, in time. Meanwhile, the supply of consumer goods will be reduced to provide the means (labor and materials) to produce the capital goods.

The Fed operates on the Keynesian fallacy that adding money to the system is all that is needed to expand production and maintain prosperity. However, added production requires added materials and labor. Increasing the production of materials requires even more added labor. Labor is the limiting factor in a boom. More money can’t create more labor. It can only shift workers between jobs and companies and industries.

To persuade workers to move to new jobs requires offers of increased pay. This is the beginning of the price inflation which always follows an increase in the money supply. As workers spend their increased pay, we find an increasing supply of money chasing a reduced supply of consumer goods. Price inflation follows. Wage inflation spreads.

As with the stealth tax, the means to invest in capital goods is taken by stealth from the value of every dollar in circulation. It also reduces the value of my insurance policy and your pension fund.

The action of the Fed has defeated our efforts to provide for the future. The Fed has taken away our free choice as to how much to spend now and how much to provide for the future. We have been forced to do without some consumption goods now, to subsidize industry in the hope of better or cheaper goods in the future.

Businesses calculate the investment in new capital goods to be profitable on the basis of current prices of materials and labor. Increasing prices of materials and labor may be enough to turn the profit to loss. Some of those projects will fail. When this happens, new buildings and machinery will be wasted, abandoned or sold off at a loss.

When the banks feel that the credit they have expanded has become excessive in proportion to their reserves, they will halt the expansion or even reverse it. To do this, they will raise interest rates on their outstanding credit. This will cause more businesses to fail.

When, finally, some businesses default on their interest payments, bankers will panic and call in loans to retreat to a safer reserve ratio. This is the crash phase of the business cycle. Businesses retrench, downsize, and lay off workers.

The money supply has suddenly shrunk and prices and wages have dropped. Unemployment soars. Recession has arrived. The boom was started by creating money out of nothing. Now the money has returned to the nothingness from which it came. The Fed has orchestrated the cycle, guided by the fallacies of John Maynard Keynes.

MONETARY REFORM

April 30, 2010

Monetary Reform
Gold was long ago chosen by the free market, by the people, as the best money. The gold standard is a convenient way to use gold as money. This means honest banknotes (no counterfeits) and token coins in circulation, redeemable at any time in gold at face value. Face value should be stated not in discredited units like dollars, pounds sterling, francs or yen, but in ounces or grams of gold.
Banking adds convenience to the gold standard, with checks and electronic transfers for convenient payment. Honest banking would mean simply enabling easy transfer of ownership of gold from one person to another, and acting as go-between for loans of gold.
How do we get from here to there?
Many economists have proposed assorted schemes to return to the gold standard. Most of them require either the co-operation or overthrow of the government. I see no chance of any government depriving itself of the power to use us with fiat currency. Therefore, I propose a free market re-creation of a gold standard, in free competition with government currency. Here’s how I see this happening.
First, get the message to the people- they are being cheated and manipulated through the stealth tax and the government control of the money supply. Their votes are needed to force the government to give up the monopoly in the money business. This would not force the government to quit the money business; it would simply require them to compete.
Next, repeal any laws that prohibit trade and contracts in other currencies. This would make it legal to buy, sell, lend, and make contracts (loans, insurance, annuities, mortgages, etc) in any currency, including, of course, gold.
Make it legal and easy to buy back our gold from the government at the free market price.
With this freedom, the market could provide us with an honest currency, with private banks and private mints dealing in gold coins, subsidiary token coins and bills.
Can we trust these private individuals to deal honestly with us? Not entirely. However, we won’t do business with private, competing banks and mints unless they give ironclad guarantees, and develop a reputation for honesty. They have to earn our trust, as any business operating in the free market has to earn our trust. An easy route to trust would be Insurance contracts that guarantee the safety of our deposits. The insurance company would have an excellent motive to detect and eliminate any cheating.
If banks don’t abide by their contractual obligations, we, or the insurance company, can bring them to justice and try them for fraud. That’s just what we can’t do to government, and that’s why we can’t trust government with our money.
There is no telling just how such a system might evolve. The free market is forever surprising us with new ideas. It could well give us an honest currency and an end to the boom and bust cycle. I would expect banks to evolve explicit contracts on the terms for withdrawing funds, such as advance notification for larger withdrawals, and deposit insurance (but not by government) as a guarantee against fraud or failure.

IF ONLY THE MARKET WERE FREE

March 30, 2010

IF ONLY THE MARKET WERE FREE

Critics of the free market like to point to “market failures” to prove that the freedom of the market must be limited by government intervention. There’s one enormous flaw in this argument; the market is not free. Since government was invented, there has always been economic intervention. Examining each and every so-called failure, it soon becomes obvious that it was caused by the intervention of the powers that be. However, at this point, I will try to show first what a truly free market would be like, and the many benefits it could bring us.

In a free market there would be no interference with our personal choices, or our voluntary economic exchanges, trades, or agreements with other people. There would be no price controls, wage controls, interest controls, rationing, protective tariffs, or taxes designed to influence our economic choices. There would be no involuntary transfers of wealth from taxpayers to politically favored groups or causes.

And above all, in a free market, there would be no interference in our choice of what to use as money and there would be no government control of the money supply. Money is indispensible for the functioning of the specialization and trade of our complex economy, which is the only way that billions of people can survive in this world. Since the dawn of civilization, governments have taken control of the definition and supply of money in order to tax us by stealth.

The only involvement of government in a free market would be to protect us from robbery, theft, embezzlement and fraud. The government control of the money enables government to engage in all of these, and influences every economic choice we make.

SO HOW WOULD THE FREE MARKET WORK?

The fundamental rule in a free market is that every exchange is voluntary for each party to the exchange, with no coercion by either party or any third party.

Since each party makes the exchange voluntarily, there is one unavoidable conclusion; each party wants what he gets more than what he gives. That means that each party to the trade profits by the exchange.

This brings up a second unavoidable conclusion; any outside intervention in this exchange can only reduce the satisfaction of one or both parties to the exchange. The free market gives each of us free choice to get the most of what we want within our means.

WITH WHAT RESULTS?

The Free market directs every aspect of production to give consumers what they want most, within their means. Ever changing prices direct the constantly changing allocation of materials, capital and labor; industries and methods and products and services keep changing to adapt to the changing wants of consumers. Each worker adapts, learns new skills, changes jobs, and increases his income by adapting to consumers’ wants.

WHAT ABOUT MONEY?

From the dawn of history, people have selected the stuff they use as money for convenience and reliability. The end of the free selection process has everywhere brought us to the selection of precious metals, usually gold, silver, and copper. These metals were usually formed into coins to assure a uniform weight of metal.

Metal coins worked reliably in the market until governments took over the business of minting coins, and then found ways (clipping and debasing) to tax their citizens by stealth, by reducing the value of each coin. Money became even less reliable when Banks substituted banknotes for coins and then proceeded to issue extra (counterfeit) banknotes. Since then, the amount of money in circulation has always varied unpredictably, making the value of the money unreliable.

But in the free market, counterfeiting or debasing money would be considered theft and not tolerated. The money would be reliably stable, unadulterated at the whim of governments or bankers.

This would drastically change the business of banking. Banks, unable to earn money by collecting interest on counterfeit money, would simply be in the business of transferring ownership of the money stored in their vaults. They would have to earn a living by charging fees for the safe storage of coins and fees for the bookkeeping chore of recording the transfers. And you and I would no longer share in the loot from fractional reserve banking. We would instead pay for the safe storage of our money and for the convenience of paying by check, banknote, debit or credit card, or electronic transfer, rather than carry coins for all transactions.

The financing of business and personal loans would also be very different in a free market. Money for loans would come from savings built up by people living well within their means. Borrowers would have to pay sufficient interest on the loan to induce people to put off consumption in order to save. Money could no longer be created out of thin air for a loan, and thus loaned at an artificially low interest rate.

In the free market, loans would not affect the amount of money in circulation, as the lending of counterfeit money would. The lender abstains from buying now so that the borrower can spend now. Thus the value of money would be much more stable and reliable than in the counterfeit economy.