The Second Bank of the United States was actually quite successful once Nicholas Biddle became president in 1823 and got on top of things.
The Second Bank kept the state-chartered banks "honest" by sending its agents to state-chartered banks with banknotes from those banks and demanding immediate payment in specie. Any state-chartered bank that couldn't meet its demand for specie was essentially cut out of commerce. This effort, and the fact that the US Governnment deposited its receipts in the Second Bank essentially meant that the Second Bank (like the First Bank before it) was the central bank of the US - a precurser of the FRB, if you will.
Unfortunately, Andrew Jackson hated banks and banknotes and was determined not to renew the Second Bank's charter (which expired in 1836). He removed the Government's deposits from the Second Bank in October 1833, supported the law of 1834 that reduced the gold value of the dollar by about 6% (and put US gold coins into general circulation for the first time) and signed the Specie Circular that prohibited the sale of public lands for anything other than specie, beginning in July 1836.
As a result, specie drained out of commercial centers (like New York and Boston) and went to the frontiers, where there wasn't any easy way for the specie to get back to the commercial centers.
President Jackson's actions certainly contributed to the Hard Times of 1837-1844.
But, back to the Second Bank: After its federal charter expired, Nicholas Biddle reincorporated the Bank as "The Bank of the United States of Pennsylvania" (a state-chartered bank). Unfortunately, Mr. Biddle got the new bank involved in some questionable activities and the bank filed for bankruptcy in 1841.
<<President Jackson's actions certainly contributed to the Hard Times of 1837-1844.>>
These were very interesting times. The Federal Government had a large budget surplus in 1836 which was given to the states. This raised havoc with the pet banks and their borrowers and certainly was a contributor to the Hard Times.
The state of Maine also had a budget surplus and gave the money to its towns on the basis of population.
The typical Maine town distributed it to the people on a per capita basis (including children). They had no intention of giving a rich absentee landowner a break in his taxes. It was to go to the people.
What I find interesting is the lack of correlation to banking practices and the monetary supply for public consumption.
For instance, the 1836 closure of the Bank of the United States, was reportedly the main cause the hard times era 1837-1844. As mentioned, the federal government had a surplus budget, yet there was no money (specie) in general circulation.
Add to that, in September 1838, Treasury Secetary Levi Woodbury ordered that $50,000 worth of gold be coined from the recently retrieved James Smithson donation. Yet according to the banking situation at the time, there was no money, especially gold coinage for the masses. Where did it go?
It's like that in today's economy. The banks seem to set or adjust their monetary policies to align with the federal government policies rather than the actual needs of the people. It's understood that some banking policies must be regulated and maintained, but the profits that are made from lending to the people (such as credit cards at over 20%) should be regulated as much as the other aspects of banking.
PM me if you are looking for U.S. auction catalogs
The increase in money supply relative the growth in the economy is inflation.
The FED put their foot on inflation by raising interest rates but this has caused the economy to falter.
There are no arrows left in the FED's quiver and we are about to experience all the inflation caused by the bailouts plus twenty eight years of pent up inflation. Hold onto your hats it will be a wild ride.
Every penny saved is a penny earned....Sound familiar??
This hogwash of 'a little inflation is good' is nonsense.
However how do you stop it? Inflation has always existed ever since coinage came about. Some roman coins were silver washed. Coin debasement in one form or another has always happened. Coins got smaller - silver & gold coins were debased worldwide into the situation that we have today--NO silver or gold coins are issued for circulation anywhere in the world. Most countries did it earlier than the USA. GB coins went from sterling (.925 fine silver) about 1920 to .500 fine and then to nickel in 1947. There is no true hard currency in the world today. All other countries discontinued silver and gold coinage for circulation production sometime the last century.
Here is a speech by HON. RON PAUL OF TEXAS IN THE HOUSE OF REPRESENTATIVES September 5, 2003
Almost five years ago. Yeah--it's long--but well worth reading. --------------------------------------------------------------------------------
HON. RON PAUL OF TEXAS IN THE HOUSE OF REPRESENTATIVES September 5, 2003
Paper Money and Tyranny
All great republics throughout history cherished sound money. This meant that the monetary unit was a commodity of honest weight and purity. When money was sound, civilizations were found to be more prosperous and freedom thrived. The less free a society becomes, the greater the likelihood its money is being debased and the economic well-being of its citizens diminished.
Alan Greenspan, years before he became Federal Reserve Board Chairman in charge of flagrantly debasing the U.S. dollar, wrote about this connection between sound money, prosperity, and freedom. In his article “Gold and Economic Freedom” (The Objectivist, July 1966), Greenspan starts by saying: “An almost hysterical antagonism toward the gold standard is an issue that unites statists of all persuasions. They seem to sense…that gold and economic freedom are inseparable.” Further he states that: “Under the gold standard, a free banking system stands as the protector of an economy’s stability and balanced growth.” Astoundingly, Mr. Greenspan’s analysis of the 1929 market crash, and how the Fed precipitated the crisis, directly parallels current conditions we are experiencing under his management of the Fed. Greenspan explains: “The excess credit which the Fed pumped into the economy spilled over into the stock market- triggering a fantastic speculative boom.” And, “…By 1929 the speculative imbalances had become overwhelming and unmanageable by the Fed.” Greenspan concluded his article by stating: “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation.” He explains that the “shabby secret” of the proponents of big government and paper money is that deficit spending is simply nothing more than a “scheme for the hidden confiscation of wealth.” Yet here we are today with a purely fiat monetary system, managed almost exclusively by Alan Greenspan, who once so correctly denounced the Fed’s role in the Depression while recognizing the need for sound money.
The Founders of this country, and a large majority of the American people up until the 1930s, disdained paper money, respected commodity money, and disapproved of a central bank’s monopoly control of money creation and interest rates. Ironically, it was the abuse of the gold standard, the Fed’s credit-creating habits of the 1920s, and its subsequent mischief in the 1930s, that not only gave us the Great Depression, but also prolonged it. Yet sound money was blamed for all the suffering. That’s why people hardly objected when Roosevelt and his statist friends confiscated gold and radically debased the currency, ushering in the age of worldwide fiat currencies with which the international economy struggles today.
If honest money and freedom are inseparable, as Mr. Greenspan argued, and paper money leads to tyranny, one must wonder why it’s so popular with economists, the business community, bankers, and our government officials. The simplest explanation is that it’s a human trait to always seek the comforts of wealth with the least amount of effort. This desire is quite positive when it inspires hard work and innovation in a capitalist society. Productivity is improved and the standard of living goes up for everyone. This process has permitted the poorest in today’s capitalist countries to enjoy luxuries never available to the royalty of old.
But this human trait of seeking wealth and comfort with the least amount of effort is often abused. It leads some to believe that by certain monetary manipulations, wealth can be made more available to everyone. Those who believe in fiat money often believe wealth can be increased without a commensurate amount of hard work and innovation. They also come to believe that savings and market control of interest rates are not only unnecessary, but actually hinder a productive growing economy. Concern for liberty is replaced by the illusion that material benefits can be more easily obtained with fiat money than through hard work and ingenuity. The perceived benefits soon become of greater concern for society than the preservation of liberty. This does not mean proponents of fiat money embark on a crusade to promote tyranny, though that is what it leads to, but rather they hope they have found the philosopher’s stone and a modern alternative to the challenge of turning lead into gold.
Our Founders thoroughly understood this issue, and warned us against the temptation to seek wealth and fortune without the work and savings that real prosperity requires. James Madison warned of “The pestilent effects of paper money,” as the Founders had vivid memories of the destructiveness of the Continental dollar. George Mason of Virginia said that he had a “Mortal hatred to paper money.” Constitutional Convention delegate Oliver Ellsworth from Connecticut thought the convention “A favorable moment to shut and bar the door against paper money.” This view of the evils of paper money was shared by almost all the delegates to the convention, and was the reason the Constitution limited congressional authority to deal with the issue and mandated that only gold and silver could be legal tender. Paper money was prohibited and no central bank was authorized. Over and above the economic reasons for honest money, however, Madison argued the moral case for such. Paper money, he explained, destroyed “The necessary confidence between man and man, on necessary confidence in public councils, on the industry and morals of people and on the character of republican government.”
The Founders were well aware of the biblical admonitions against dishonest weights and measures, debased silver, and watered-down wine. The issue of sound money throughout history has been as much a moral issue as an economic or political issue.
Even with this history and great concern expressed by the Founders, the barriers to paper money have been torn asunder. The Constitution has not been changed, but is no longer applied to the issue of money. It was once explained to me, during the debate over going to war in Iraq, that a declaration of war was not needed because to ask for such a declaration was “frivolous” and that the portion of the Constitution dealing with congressional war power was “anachronistic.” So too, it seems that the power over money given to Congress alone and limited to coinage and honest weights, is now also “anachronistic.”
If indeed our generation can make the case for paper money, issued by an unauthorized central bank, it behooves us to at least have enough respect for the Constitution to amend it in a proper fashion. Ignoring the Constitution in order to perform a pernicious act is detrimental in two ways. First, debasing the currency as a deliberate policy is economically destructive beyond measure. Second, doing it without consideration for the rule of law undermines the entire fabric of our Constitutional republic.
Though the need for sound money is currently not a pressing issue for Congress, it’s something that cannot be ignored because serious economic problems resulting from our paper money system are being forced upon us. As a matter of fact, we deal with the consequences on a daily basis, yet fail to see the connection between our economic problems and the mischief orchestrated by the Federal Reserve.
All the great religions teach honesty in money, and the economic shortcomings of paper money were well known when the Constitution was written, so we must try to understand why an entire generation of Americans have come to accept paper money without hesitation, without question. Most Americans are oblivious to the entire issue of the nature and importance of money. Many in authority, however, have either been misled by false notions or see that the power to create money is indeed a power they enjoy, as they promote their agenda of welfarism at home and empire abroad.
Money is a moral, economic, and political issue. Since the monetary unit measures every economic transaction, from wages to prices, taxes, and interest rates, it is vitally important that its value is honestly established in the marketplace without bankers, government, politicians, or the Federal Reserve manipulating its value to serve special interests.
Money As a Moral Issue The moral issue regarding money should be the easiest to understand, but almost no one in Washington thinks of money in these terms. Although there is a growing and deserved distrust in government per se, trust in money and the Federal Reserve’s ability to manage it remains strong. No one would welcome a counterfeiter to town, yet this same authority is blindly given to our central bank without any serious oversight by the Congress.
When the government can replicate the monetary unit at will without regard to cost, whether it’s paper currency or a computer entry, it’s morally identical to the counterfeiter who illegally prints currency. Both ways, it’s fraud.
A fiat monetary system allows power and influence to fall into the hands of those who control the creation of new money, and to those who get to use the money or credit early in its circulation. The insidious and eventual cost falls on unidentified victims who are usually oblivious to the cause of their plight. This system of legalized plunder (though not constitutional) allows one group to benefit at the expense of another. An actual transfer of wealth goes from the poor and the middle class to those in privileged financial positions.
In many societies the middle class has actually been wiped out by monetary inflation, which always accompanies fiat money. The high cost of living and loss of jobs hits one segment of society, while in the early stages of inflation, the business class actually benefits from the easy credit. An astute stock investor or home builder can make millions in the boom phase of the business cycle, while the poor and those dependent on fixed incomes can’t keep up with the rising cost of living.
Fiat money is also immoral because it allows government to finance special interest legislation that otherwise would have to be paid for by direct taxation or by productive enterprise. This transfer of wealth occurs without directly taking the money out of someone’s pocket. Every dollar created dilutes the value of existing dollars in circulation. Those individuals who worked hard, paid their taxes, and saved some money for a rainy day are hit the hardest, with their dollars being depreciated in value while earning interest that is kept artificially low by the Federal Reserve easy-credit policy. The easy credit helps investors and consumers who have no qualms about going into debt and even declaring bankruptcy.
If one sees the welfare state and foreign militarism as improper and immoral, one understands how the license to print money permits these policies to go forward far more easily than if they had to be paid for immediately by direct taxation.
Printing money, which is literally inflation, is nothing more than a sinister and evil form of hidden taxation. It’s unfair and deceptive, and accordingly strongly opposed by the authors of the Constitution. That is why there is no authority for Congress, the Federal Reserve, or the executive branch to operate the current system of money we have today.
Money As a Political Issue Although the money issue today is of little political interest to the parties and politicians, it should not be ignored. Policy makers must contend with the consequences of the business cycle, which result from the fiat monetary system under which we operate. They may not understand the connection now, but eventually they must.
In the past, money and gold have been dominant issues in several major political campaigns. We find that when the people have had a voice in the matter, they inevitably chose gold over paper. To the common man, it just makes sense. As a matter of fact, a large number of Americans, perhaps a majority, still believe our dollar is backed by huge hoards of gold in Fort Knox.
The monetary issue, along with the desire to have free trade among the states, prompted those at the Constitutional Convention to seek solutions to problems that plagued the post-revolutionary war economy. This post-war recession was greatly aggravated by the collapse of the unsound fiat Continental dollar. The people, through their representatives, spoke loudly and clearly for gold and silver over paper.
Andrew Jackson, a strong proponent of gold and opponent of central banking (the Second Bank of the United States,) was a hero to the working class and was twice elected president. This issue was fully debated in his presidential campaigns. The people voted for gold over paper.
In the 1870s, the people once again spoke out clearly against the greenback inflation of Lincoln. Notoriously, governments go to paper money while rejecting gold to promote unpopular and unaffordable wars. The return to gold in 1879 went smoothly and was welcomed by the people, putting behind them the disastrous Civil War inflationary period.
Grover Cleveland, elected twice to the presidency, was also a strong advocate of the gold standard.
Again, in the presidential race of 1896, William McKinley argued the case for gold. In spite of the great orations by William Jennings Bryant, who supported monetary inflation and made a mocking “Cross of Gold” speech, the people rallied behind McKinley’s bland but correct arguments for sound money.
The 20th Century was much less sympathetic to gold. Since 1913 central banking has been accepted in the United States without much debate, despite the many economic and political horrors caused or worsened by the Federal Reserve since its establishment. The ups and downs of the economy have all come as a consequence of Fed policies, from the Great Depression to the horrendous stagflation of the ‘70s, as well as the current ongoing economic crisis.
A central bank and fiat money enable government to maintain an easy war policy that under strict monetary rules would not be achievable. In other words, countries with sound monetary policies would rarely go to war because they could not afford to, especially if they were not attacked. The people could not be taxed enough to support wars without destroying the economy. But by printing money, the cost can be delayed and hidden, sometimes for years if not decades. To be truly opposed to preemptive and unnecessary wars one must advocate sound money to prevent the promoters of war from financing their imperialism.
Look at how the military budget is exploding, deficits are exploding, and tax revenues are going down. No problem; the Fed is there and will print whatever is needed to meet our military commitments, whether it’s wise to do so or not.
The money issue should indeed be a gigantic political issue. Fiat money hurts the economy, finances wars, and allows for excessive welfarism. When these connections are realized and understood, it will once again become a major political issue, since paper money never lasts. Ultimately politicians will not have a choice of whether to address or take a position on the money issue. The people and circumstances will demand it.
We do hear some talk about monetary policy and criticism directed toward the Federal Reserve, but it falls far short of what I’m talking about. Big-spending welfarists constantly complain about Fed policy, usually demanding lower interest rates even when rates are at historic lows. Big-government conservatives promoting grand worldwide military operations, while arguing that “deficits don’t matter” as long as marginal tax rates are lowered, also constantly criticize the Fed for high interest rates and lack of liquidity. Coming from both the left and the right, these demands would not occur if money could not be created out of thin air at will. Both sides are asking for the same thing from the Fed for different reasons. They want the printing presses to run faster and create more credit, so that the economy will be healed like magic- or so they believe.
This is not the kind of interest in the Fed that we need. I’m anticipating that we should and one day will be forced to deal with the definition of the dollar and what money should consist of. The current superficial discussion about money merely shows a desire to tinker with the current system in hopes of improving the deteriorating economy. There will be a point, though, when the tinkering will no longer be of any benefit and even the best advice will be of no value. We have just gone through two-and-a-half years of tinkering with 13 rate cuts, and recovery has not yet been achieved. It’s just possible that we’re much closer than anyone realizes to that day when it will become absolutely necessary to deal with the monetary issue- both philosophically and strategically- and forget about the band-aid approach to the current system.
Money as an Economic Issue For a time, the economic consequences of paper money may seem benign and even helpful, but are always disruptive to economic growth and prosperity.
Economic planners of the Keynesian-socialist type have always relished control over money creation in their efforts to regulate and plan the economy. They have no qualms with using this power to pursue their egalitarian dreams of wealth redistribution. That force and fraud are used to make the economic system supposedly fairer is of little concern to them.
There are also many conservatives who do not endorse central economic planning as those on the left do, but nevertheless concede this authority to the Federal Reserve to manipulate the economy through monetary policy. Only a small group of constitutionalists, libertarians, and Austrian free-market economists reject the notion that central planning, through interest-rate and money-supply manipulation, is a productive endeavor.
Many sincere politicians, bureaucrats, and bankers endorse the current system, not out of malice or greed, but because it’s the only system they have know. The principles of sound money and free market banking are not taught in our universities. The overwhelming consensus in Washington, as well as around the world, is that commodity money without a central bank is no longer practical or necessary. Be assured, though, that certain individuals who greatly benefit from a paper money system know exactly why the restraints that a commodities standard would have are unacceptable.
Though the economic consequences of paper money in the early stage affect lower-income and middle-class citizens, history shows that when the destruction of monetary value becomes rampant, nearly everyone suffers and the economic and political structure becomes unstable. There’s good reason for all of us to be concerned about our monetary system and the future of the dollar.
Nations that live beyond their means must always pay for their extravagance. It’s easy to understand why future generations inherit a burden when the national debt piles up. This requires others to pay the interest and debts when they come due. The victims are never the recipients of the borrowed funds. But this is not exactly what happens when a country pays off its debt. The debt, in nominal terms, always goes up, and since it is still accepted by mainstream economists that just borrowing endlessly is not the road to permanent prosperity, real debt must be reduced. Depreciating the value of the dollar does that. If the dollar loses 10% of its value, the national debt of $6.5 trillion is reduced in real terms by $650 billion dollars. That’s a pretty neat trick and quite helpful- to the government.
That’s why the Fed screams about a coming deflation, so it can continue the devaluation of the dollar unabated. The politicians don’t mind, the bankers welcome the business activity, and the recipients of the funds passed out by Congress never complain. The greater the debt, the greater the need to inflate the currency, since debt cannot be the source of long-term wealth. Individuals and corporations who borrow too much eventually must cut back and pay off debt and start anew, but governments rarely do.
But where’s the hitch? This process, which seems to be a creative way of paying off debt, eventually undermines the capitalist structure of the economy, thus making it difficult to produce wealth, and that’s when the whole process comes to an end. This system causes many economic problems, but most of them stem from the Fed’s interference with the market rate of interest that it achieves through credit creation and printing money.
Nearly 100 years ago, Austrian economist Ludwig von Mises explained and predicted the failure of socialism. Without a pricing mechanism, the delicate balance between consumers and producers would be destroyed. Freely fluctuating prices provide vital information to the entrepreneur who is making key decisions on production. Without this information, major mistakes are made. A central planning bureaucrat cannot be a substitute for the law of supply and demand.
Though generally accepted by most modern economists and politicians, there is little hesitancy in accepting the omnipotent wisdom of the Federal Reserve to know the “price” of money- the interest rate- and its proper supply. For decades, and especially during the 1990s- when Chairman Greenspan was held in such high esteem, and no one dared question his judgment or the wisdom of the system- this process was allowed to run unimpeded by political or market restraints. Just as we must eventually pay for our perpetual deficits, continuous manipulation of interest and credit will also extract a payment.
Artificially low interest rates deceive investors into believing that rates are low because savings are high and represent funds not spent on consumption. When the Fed creates bank deposits out of thin air making loans available at below-market rates, mal-investment and overcapacity results, setting the stage for the next recession or depression. The easy credit policy is welcomed by many: stock-market investors, home builders, home buyers, congressional spendthrifts, bankers, and many other consumers who enjoy borrowing at low rates and not worrying about repayment. However, perpetual good times cannot come from a printing press or easy credit created by a Federal Reserve computer. The piper will demand payment, and the downturn in the business cycle will see to it. The downturn is locked into place by the artificial boom that everyone enjoys, despite the dreams that we have ushered in a “new economic era.” Let there be no doubt: the business cycle, the stagflation, the recessions, the depressions, and the inflations are not a result of capitalism and sound money, but rather are a direct result of paper money and a central bank that is incapable of managing it.
Our current monetary system makes it tempting for all parties, individuals, corporations, and government to go into debt. It encourages consumption over investment and production. Incentives to save are diminished by the Fed’s making new credit available to everyone and keeping interest rates on saving so low that few find it advisable to save for a rainy day. This is made worse by taxing interest earned on savings. It plays havoc with those who do save and want to live off their interest. The artificial rates may be 4, 5, or even 6% below the market rate, and the savers- many who are elderly and on fixed incomes- suffer unfairly at the hands of Alan Greenspan, who believes that resorting to money creation will solve our problems and give us perpetual prosperity.
Lowering interest rates at times, especially early in the stages of monetary debasement, will produce the desired effects and stimulate another boom-bust cycle. But eventually the distortions and imbalances between consumption and production, and the excessive debt, prevent the monetary stimulus from doing very much to boost the economy. Just look at what’s been happening in Japan for the last 12 years. When conditions get bad enough the only recourse will be to have major monetary reform to restore confidence in the system.
The two conditions that result from fiat money that are more likely to concern the people are inflation of prices and unemployment. Unfortunately, few realize these problems are directly related to our monetary system. Instead of demanding reforms, the chorus from both the right and left is for the Fed to do more of the same- only faster. If our problem stems from easy credit and interest-rate manipulation by the Fed, demanding more will not do much to help. Sadly, it will only make our problems worse.
Ironically, the more successful the money managers are at restoring growth or prolonging the boom with their monetary machinations, the greater are the distortions and imbalances in the economy. This means that when corrections are eventually forced upon us, they are much more painful and more people suffer with the correction lasting longer.
Today’s Conditions Today’s economic conditions reflect a fiat monetary system held together by many tricks and luck over the past 30 years. The world has been awash in paper money since removal of the last vestige of the gold standard by Richard Nixon when he buried the Bretton Woods agreement- the gold exchange standard- on August 15, 1971. Since then we’ve been on a worldwide paper dollar standard. Quite possibly we are seeing the beginning of the end of that system. If so, tough times are ahead for the United States and the world economy.
A paper monetary standard means there are no restraints on the printing press or on federal deficits. In 1971, M3 was $776 billion; today it stands at $8.9 trillion, an 1100% increase. Our national debt in 1971 was $408 billion; today it stands at $6.8 trillion, a 1600% increase. Since that time, our dollar has lost almost 80% of its purchasing power. Common sense tells us that this process is not sustainable and something has to give. So far, no one in Washington seems interested.
Although dollar creation is ultimately the key to its value, many other factors play a part in its perceived value, such as: the strength of our economy, our political stability, our military power, the benefit of the dollar being the key reserve currency of the world, and the relative weakness of other nation’s economies and their currencies. For these reasons, the dollar has enjoyed a special place in the world economy. Increases in productivity have also helped to bestow undeserved trust in our economy with consumer prices, to some degree, being held in check and fooling the people, at the urging of the Fed, that “inflation” is not a problem. Trust is an important factor in how the dollar is perceived. Sound money encourages trust, but trust can come from these other sources as well. But when this trust is lost, which always occurs with paper money, the delayed adjustments can hit with a vengeance.
Following the breakdown of the Bretton Woods agreement, the world essentially accepted the dollar as a replacement for gold, to be held in reserve upon which even more monetary expansion could occur. It was a great arrangement that up until now seemed to make everyone happy.
We own the printing press and create as many dollars as we please. These dollars are used to buy federal debt. This allows our debt to be monetized and the spendthrift Congress, of course, finds this a delightful convenience and never complains. As the dollars circulate through our fractional reserve banking system, they expand many times over. With our excess dollars at home, our trading partners are only too happy to accept these dollars in order to sell us their products. Because our dollar is relatively strong compared to other currencies, we can buy foreign products at a discounted price. In other words, we get to create the world’s reserve currency at no cost, spend it overseas, and receive manufactured goods in return. Our excess dollars go abroad and other countries-especially Japan and China- are only too happy to loan them right back to us by buying our government and GSE debt. Up until now both sides have been happy with this arrangement.
But all good things must come to an end and this arrangement is ending. The process put us into a position of being a huge debtor nation, with our current account deficit of more than $600 billion per year now exceeding 5% of our GDP. We now owe foreigners more than any other nation ever owed in all of history, over $3 trillion.
A debt of this sort always ends by the currency of the debtor nation decreasing in value. And that’s what has started to happen with the dollar, although it still has a long way to go. Our free lunch cannot last. Printing money, buying foreign products, and selling foreign holders of dollars our debt ends when the foreign holders of this debt become concerned with the dollar’s future value.
Once this process starts, interest rates will rise. And in recent weeks, despite the frenetic effort of the Fed to keep interest rates low, they are actually rising instead. The official explanation is that this is due to an economic rebound with an increase in demand for loans. Yet a decrease in demand for our debt and reluctance to hold our dollars is a more likely cause. Only time will tell whether the economy rebounds to any significant degree, but one must be aware that rising interest rates and serious price inflation can also reflect a weak dollar and a weak economy. The stagflation of the 1970s baffled many conventional economists, but not the Austrian economists. Many other countries have in the past suffered from the extremes of inflation in an inflationary depression, and we are not immune from that happening here. Our monetary and fiscal policies are actually conducive to such a scenario.
In the short run, the current system gives us a free ride, our paper buys cheap goods from overseas, and foreigners risk all by financing our extravagance. But in the long run, we will surely pay for living beyond our means. Debt will be paid for one way or another. An inflated currency always comes back to haunt those who enjoyed the “benefits” of inflation. Although this process is extremely dangerous, many economists and politicians do not see it as a currency problem and are only too willing to find a villain to attack. Surprisingly the villain is often the foreigner who foolishly takes our paper for useful goods and accommodates us by loaning the proceeds back to us. It’s true that the system encourages exportation of jobs as we buy more and more foreign goods. But nobody understands the Fed role in this, so the cries go out to punish the competition with tariffs. Protectionism is a predictable consequence of paper- money inflation, just as is the impoverishment of an entire middle class. It should surprise no one that even in the boom phase of the 1990s, there were still many people who became poorer. Yet all we hear are calls for more government mischief to correct the problems with tariffs, increased welfare for the poor, increased unemployment benefits, deficit spending, and special interest tax reduction, none of which can solve the problems ingrained in a system that operates with paper money and a central bank.
If inflation were equitable and treated all classes the same, it would be less socially divisive. But while some see their incomes going up above the rate of inflation (movie stars, CEOs, stock brokers, speculators, professional athletes,) others see their incomes stagnate like lower-middle-income workers, retired people, and farmers. Likewise, the rise in the cost of living hurts the poor and middle class more than the wealthy. Because inflation treats certain groups unfairly, anger and envy are directed toward those who have benefited.
The long-term philosophic problem with this is that the central bank and the fiat monetary system are not blamed; instead free market capitalism is. This is what happened in the 1930s. The Keynesians, who grew to dominate economic thinking at the time, erroneously blamed the gold standard, balanced budgets, and capitalism instead of tax increases, tariffs, and Fed policy. This country cannot afford another attack on economic liberty similar to what followed the 1929 crash that ushered in the economic interventionism and inflationism which we have been saddled with ever since. These policies have brought us to the brink of another colossal economic downturn and we need to be prepared.
Big business and banking deserve our harsh criticism, but not because they are big or because they make a lot of money. Our criticism should come because of the special benefits they receive from a monetary system designed to assist the business class at the expense of the working class. Labor leader Samuel Gompers understood this and feared paper money and a central bank while arguing the case for gold. Since the monetary system is used to finance deficits that come from war expenditures, the military industrial complex is a strong supporter of the current monetary system.
Liberals foolishly believe that they can control the process and curtail the benefits going to corporations and banks by increasing the spending for welfare for the poor. But this never happens. Powerful financial special interests control the government spending process and throw only crumbs to the poor. The fallacy with this approach is that the advocates fail to see the harm done to the poor, with cost of living increases and job losses that are a natural consequence of monetary debasement. Therefore, even more liberal control over the spending process can never compensate for the great harm done to the economy and the poor by the Federal Reserve’s effort to manage an unmanageable fiat monetary system.
Economic intervention, financed by inflation, is high-stakes government. It provides the incentive for the big money to “invest” in gaining government control. The big money comes from those who have it- corporations and banking interests. That’s why literally billions of dollars are spent on elections and lobbying. The only way to restore equity is to change the primary function of government from economic planning and militarism to protecting liberty. Without money, the poor and middle class are disenfranchised since access for the most part requires money. Obviously, this is not a partisan issue since both major parties are controlled by wealthy special interests. Only the rhetoric is different.
Our current economic problems are directly related to the monetary excesses of three decades and the more recent efforts by the Federal Reserve to thwart the correction that the market is forcing upon us. Since 1998, there has been a sustained attack on corporate profits. Before that, profits and earnings were inflated and fictitious, with WorldCom and Enron being prime examples. In spite of the 13 rate cuts since 2001, economic growth has not been restored.
Paper money encourages speculation, excessive debt, and misdirected investments. The market, however, always moves in the direction of eliminating bad investments, liquidating debt, and reducing speculative excesses. What we have seen, especially since the stock market peak of early 2000, is a knock-down, drag-out battle between the Fed’s effort to avoid a recession, limit the recession, and stimulate growth with its only tool, money creation, while the market demands the elimination of bad investments and excess debt. The Fed was also motivated to save the stock market from collapsing, which in some ways they have been able to do. The market, in contrast, will insist on liquidation of unsustainable debt, removal of investment mistakes made over several decades, and a dramatic revaluation of the stock market. In this go-around, the Fed has pulled out all the stops and is more determined than ever, yet the market is saying that new and healthy growth cannot occur until a major cleansing of the system occurs. Does anyone think that tariffs and interest rates of 1% will encourage the rebuilding of our steel and textile industries anytime soon? Obviously, something more is needed.
The world central bankers are concerned with the lack of response to low interest rates and they have joined in a concerted effort to rescue the world economy through a policy of protecting the dollar’s role in the world economy, denying that inflation exists, and justifying unlimited expansion of the dollar money supply. To maintain confidence in the dollar, gold prices must be held in check. In the 1960s our government didn’t want a vote of no confidence in the dollar, and for a couple of decades, the price of gold was artificially held at $35 per ounce. That, of course, did not last.
In recent years, there has been a coordinated effort by the world central bankers to keep the gold price in check by dumping part of their large horde of gold into the market. This has worked to a degree, but just as it could not be sustained in the 1960s, until Nixon declared the Bretton Woods agreement dead in 1971, this effort will fail as well.
The market price of gold is important because it reflects the ultimate confidence in the dollar. An artificially low price for gold contributes to false confidence and when this is lost, more chaos ensues as the market adjusts for the delay.
Monetary policy today is designed to demonetize gold and guarantee for the first time that paper can serve as an adequate substitute in the hands of wise central bankers. Trust, then, has to be transferred from gold to the politicians and bureaucrats who are in charge of our monetary system. This fails to recognize the obvious reason that market participants throughout history have always preferred to deal with real assets, real money, rather than government paper. This contest between paper and honest money is of much greater significance than many realize. We should know the outcome of this struggle within the next decade.
Alan Greenspan, although once a strong advocate for the gold standard, now believes he knows what the outcome of this battle will be. Is it just wishful thinking on his part? In an answer to a question I asked before the Financial Services Committee in February 2003, Chairman Greenspan made an effort to convince me that paper money now works as well as gold: “I have been quite surprised, and I must say pleased, by the fact that central banks have been able to effectively simulate many of the characteristics of the gold standard by constraining the degree of finance in a manner which effectively brought down the general price levels.” Earlier, in December 2002, Mr. Greenspan spoke before the Economic Club of New York and addressed the same subject: “The record of the past 20 years appears to underscore the observation that, although pressures for excess issuance of fiat money are chronic, a prudent monetary policy maintained over a protracted period of time can contain the forces of inflation.” There are several problems with this optimistic assessment. First, efficient central bankers will never replace the invisible hand of a commodity monetary standard. Second, using government price indexes to measure the success of a managed fiat currency should not be reassuring. These indexes can be arbitrarily altered to imply a successful monetary policy. Also, price increases of consumer goods are not a litmus test for measuring the harm done by the money managers at the Fed. The development of overcapacity, excessive debt, and speculation still occur, even when prices happen to remain reasonably stable due to increases in productivity and technology. Chairman Greenspan makes his argument because he hopes he’s right that sound money is no longer necessary, and also because it’s an excuse to keep the inflation of the money supply going for as long as possible, hoping a miracle will restore sound growth to the economy. But that’s only a dream.
We are now faced with an economy that is far from robust and may get a lot worse before rebounding. If not now, the time will soon come when the conventional wisdom of the last 90 years, since the Fed was created, will have to be challenged. If the conditions have changed and the routine of fiscal and monetary stimulation don’t work, we better prepare ourselves for the aftermath of a failed dollar system, which will not be limited to the United States.
An interesting headline appeared in the New York Times on July 31, 2003, “Commodity Costs Soar, But Factories Don’t Bustle.” What is observed here is a sea change in attitude by investors shifting their investment funds and speculation into things of real value and out of financial areas, such as stocks and bonds. This shift shows that in spite of the most aggressive Fed policy in history in the past three years, the economy remains sluggish and interest rates are actually rising. What can the Fed do? If this trend continues, there’s little they can do. Not only do I believe this trend will continue, I believe it’s likely to accelerate. This policy plays havoc with our economy; reduces revenues, prompts increases in federal spending, increases in deficits and debt occur, and interest costs rise, compounding our budgetary woes.
The set of circumstances we face today are unique and quite different from all the other recessions the Federal Reserve has had to deal with. Generally, interest rates are raised to slow the economy and dampen price inflation. At the bottom of the cycle interest rates are lowered to stimulate the economy. But this time around, the recession came in spite of huge and significant interest rate reductions by the Fed. This aggressive policy did not prevent the recession as was hoped; so far it has not produced the desired recovery. Now we’re at the bottom of the cycle and interest rates not only can’t be lowered, they are rising. This is a unique and dangerous combination of events. This set of circumstances can only occur with fiat money and indicates that further manipulation of the money supply and interest rates by the Fed will have little if any effect.
The odds aren’t very good that the Fed will adopt a policy of not inflating the money supply because of some very painful consequences that would result. Also there would be a need to remove the pressure on the Fed to accommodate the big spenders in Congress. Since there are essentially only two groups that have any influence on spending levels, big-government liberals and big- government conservatives, that’s not about to happen. Poverty is going to worsen due to our monetary and fiscal policies, so spending on the war on poverty will accelerate. Our obsession with policing the world, nation building, and pre-emptive war are not likely to soon go away, since both Republican and Democratic leaders endorse them. Instead, the cost of defending the American empire is going to accelerate. A country that is getting poorer cannot pay these bills with higher taxation nor can they find enough excess funds for the people to loan to the government. The only recourse is for the Federal Reserve to accommodate and monetize the federal debt, and that, of course, is inflation.
It’s now admitted that the deficit is out of control, with next year’s deficit reaching over one-half trillion dollars, not counting the billions borrowed from “trust funds” like Social Security. I’m sticking to my prediction that within a few years the national debt will increase over $1 trillion in one fiscal year. So far, so good, no big market reactions, the dollar is holding its own and the administration and congressional leaders are not alarmed. But they ought to be.
I agree, it would be politically tough to bite the bullet and deal with our extravagance, both fiscal and monetary, but the repercussions here at home from a loss of confidence in the dollar throughout the world will not be a pretty sight to behold. I don’t see any way we are going to avoid the crisis.
We do have some options to minimize the suffering. If we decided to, we could permit some alternatives to the current system of money and banking we have today.
Already, we took a big step in this direction. Gold was illegal to own between 1933 and 1976. Today millions of Americans do own some gold.
Gold contracts are legal, but a settlement of any dispute is always in Federal Reserve notes. This makes gold contracts of limited value.
For gold to be an alternative to Federal Reserve notes, taxes on any transactions in gold must be removed, both sales and capital gains.
Holding gold should be permitted in any pension fund, just as dollars are permitted in a checking account of these funds.
Repeal of all legal tender laws is a must. Sound money never requires the force of legal tender laws. Only paper money requires such laws.
These proposals, even if put in place tomorrow, would not solve all the problems we face. It would though, legalize freedom of choice in money, and many who worry about having their savings wiped out by a depreciating dollar would at least have another option. This option would ease some of the difficulties that are surely to come from runaway deficits in a weakening economy with skyrocketing inflation.
Curbing the scope of government and limiting its size to that prescribed in the Constitution is the goal that we should seek. But political reality makes this option available to us only after a national bankruptcy has occurred. We need not face that catastrophe. What we need to do is to strictly limit the power of government to meddle in our economy and our personal affairs, and stay out of the internal affairs of other nations.
Conclusion It’s no coincidence that during the period following the establishment of the Federal Reserve and the elimination of the gold standard, a huge growth in the size of the federal government and its debt occurred. Believers in big government, whether on the left or right, vociferously reject the constraints on government growth that gold demands. Liberty is virtually impossible to protect when the people allow their government to print money at will. Inevitably, the left will demand more economic interventionism, the right more militarism and empire building. Both sides, either inadvertently or deliberately, will foster corporatism. Those whose greatest interest is in liberty and self-reliance are lost in the shuffle. Though left and right have different goals and serve different special-interest groups, they are only too willing to compromise and support each other’s programs.
If unchecked, the economic and political chaos that comes from currency destruction inevitably leads to tyranny- a consequence of which the Founders were well aware. For 90 years we have lived with a central bank, with the last 32 years absent of any restraint on money creation. The longer the process lasts, the faster the printing presses have to run in an effort to maintain stability. They are currently running at record rate. It was predictable and is understandable that our national debt is now expanding at a record rate.
The panicky effort of the Fed to stimulate economic growth does produce what it considers favorable economic reports, recently citing second quarter growth this year at 3.1%. But in the footnotes, we find that military spending—almost all of which is overseas- was up an astounding 46%. This, of course, represents deficit spending financed by the Federal Reserve’s printing press. In the same quarter, after-tax corporate profits fell 3.4%. This is hardly a reassuring report on the health of our economy and merely reflects the bankruptcy of current economic policy.
Real economic growth won’t return until confidence in the entire system is restored. And that is impossible as long as it depends on the politicians not spending too much money and the Federal Reserve limiting its propensity to inflate our way to prosperity. Only sound money and limited government can do that.
I don't have the answer, but it seems pretty clear that allowing governments to have a monopoly on money creation leads to less a than optimal outcome on a fairly regular basis.
Every penny saved is a penny earned....Sound familiar??
This hogwash of 'a little inflation is good' is nonsense.
a speech by HON. RON PAUL OF TEXAS IN THE HOUSE OF REPRESENTATIVES September 5, 2003 . >>
These are all fine words but in the real world they would wreck havoc on economies and cause mass starvation at regular intervals. As the speaker himself admits it is not the mon- ey that causes the problem but its debasement. The debasement is always possible and is caused by those who would steal from the economy (ie all individuals). It's hardly "sound" money which will protect us from this it is a better electorate placing statesmen and sound politicians in Washington.
If you want better money you need a better electorate. To get a better electorate you'll need better schools. Since schools now fail to graduate nearly half of the students we will have a virtually insurmountable hurdle to having better money.
So long as people don't care that the educational system has utterly failed there is simply no alternative to expect increasing difficulty with the money.
After sitting on the sidelines for the Roadrunner/Mark "debate"... I feel the need to add these personal observations this morning...
You go...Roadrunner!!!!
...and as for you, Mark... the simple fact that you are apparently a college educated economist... that is enough for me to know that I can not trust a single word that comes out of your well-trained obedient mouth...or keypad as the case might be...
...an explanation of why I feel that way would unfortunately take this thread and/or my post into forbidden territory...
Re: Slabbed coins - There are some coins that LIVE within clear plastic and wear their labels with pride... while there are others that HIDE behind scratched plastic and are simply dragged along by a label. Then there are those coins that simply hang out, naked and free
I guess we shall need to disagree and apparently somewhat less pleasantly than roadrnner and I disagree given that roadrunner and I never asserted a lack of trust in each other nor inquired as to the other's guts. Frankly I can not understand the need to make a disagreement personal and perhaps it's that reason that I enjoy debating with roadrunner (even though he's wrong ).
Two quick points:
1) JungleFever: To take just one of your posts, the one in which you suggest that I am a fast reader for posting a comment about a piece of nonsense I found when I googled "Fed ownership:" Perhaps it would be better if you tried to explain what the charts on that page meant rather than challenge me to do so. I already said that to me they were absolutely meaningless and gave an example of how I could create a similar chart linking roadunner and me to the Fed. The one chart I could understand, the first chart, apparently made the point that member commercial banks own stock in the Fed and that private banks are owned by stockholders. To that I can add a big "DUH" for my reponse. So instead of insultng me, provide some explanation. All that said, when I get to work and am done teaching, I hope to have some time to Google the book or article you cited in your post to see what's there.
2) SeaEagleCoins: The fact that you don't trust a single word that comes out of my mouth because I am a college educated economist probably means you won't be loaning me any money soon? I surely hope you do not seek your medical advice from the local ditch digger because I have heard rumors to the effect that physicians also tend to be college educated. On a different, more coin related topic topic, I like the Texas commemorative that is your icon. Is that your commemorative? Based on the small picture, it seems very nice; I wish I could see a larger picture.
I stated earlier and will do so again. Our paper money states Federal Reserve Note and is signed by the Treasurer of the United States and the Secretary of the Treasury and states This Note Is Legal Tender For All Debts, Public And Private. Our coinage doesn't. No conspiracy theory is intended by my posting. Simply read the authority that caused the wording on paper money. Mark, I appreciate your thoughts. I do have a basic concern with the thrust of your observations. The people don't appear to be properly represented by the observations. Expansion of your statements to include the people and the preservation of their money and the logical method by which this preservation is acheived by the mission and actions of the Federal Reserve would be most welcome. Respectfully, John Curlis
I guess we shall need to disagree and apparently somewhat less pleasantly than roadrnner and I disagree given that roadrunner and I never asserted a lack of trust in each other nor inquired as to the other's guts. Frankly I can not understand the need to make a disagreement personal and perhaps it's that reason that I enjoy debating with roadrunner (even though he's wrong ).
Two quick points:
1) JungleFever: To take just one of your posts, the one in which you suggest that I am a fast reader for posting a comment about a piece of nonsense I found when I googled "Fed ownership:" Perhaps it would be better if you tried to explain what the charts on that page meant rather than challenge me to do so. I already said that to me they were absolutely meaningless and gave an example of how I could create a similar chart linking roadunner and me to the Fed. The one chart I could understand, the first chart, apparently made the point that member commercial banks own stock in the Fed and that private banks are owned by stockholders. To that I can add a big "DUH" for my reponse. So instead of insultng me, provide some explanation. All that said, when I get to work and am done teaching, I hope to have some time to Google the book or article you cited in your post to see what's there.
2) SeaEagleCoins: The fact that you don't trust a single word that comes out of my mouth because I am a college educated economist probably means you won't be loaning me any money soon? I surely hope you do not seek your medical advice from the local ditch digger because I have heard rumors to the effect that physicians also tend to be college educated. On a different, more coin related topic topic, I like the Texas commemorative that is your icon. Is that your commemorative? Based on the small picture, it seems very nice; I wish I could see a larger picture. >>
In all fairness, Mark...I do apologize for the harshness of my dismissal... it is not you that I have issue with...rather the source of your information...
Being also college educated... I became very discontent with the methods employed by most professors... they did not wish to teach me to use my mind...but instead regurgitated recycled information...telling me what to think and how to think it...I find most so-called knowledge being shoveled into students these days to be little more than propaganda...
I especially distrust certain areas of study, due to the fact that they rarely encourage exploration and thinking outside the box... Economics is one of these areas... essentially, IMHO, most, if not all, that is presently taught as Economics...is little more than "Here's the rule book...now go out and follow it and do all you can to insure that other's go along with the rules, as well"...
So, Mark...I do apologize for personalizing my intitial comment...you're probably a really nice guy... and yes, I really like that Texas design too...not mine though...it was offered by another board member here in a thread with a link to coin pics he was offering for use as icons...
BTW...I have gotten into the same debate you seem to be having with RR with other folks in the past...it tends to be about as productive as trying to have an open-minded discussion on religion with a door-to-door Christian...we each have our point of view and it's highly unlikely either is going to change...
Actually, I hope RR and I are wrong...because if we're right there will be absolutely no joy in seeing you proven wrong... 'cause if we're right, we are all gonna be up creek without a paddle real soon...
That's why I simply sat on the sidelines last nite...but after a few cups of coffee this AM, I just had to stick my nose in things...
Re: Slabbed coins - There are some coins that LIVE within clear plastic and wear their labels with pride... while there are others that HIDE behind scratched plastic and are simply dragged along by a label. Then there are those coins that simply hang out, naked and free
<<Yes, the Fed was passed by Congress.....on it's second try. The first try, the big banks promoted it heavily, the astute Americans smelled something fishy and voted it down. 2 years later, the bankers complained loudly how terrible it would be for them, and it naturally got voted in.>>
A lot of political log-rolling going on here. The Democrats were in charge (in part because of Teddy Roosevelt's Bull Moose fiasco). They told the Republican bankers to cool it and they did and it passed.
I don't know how bankers feel about owning the Fed. They were requires to turn over a per centage of their captalization. They had to buy their way in, whether they wanted to or not. They collect a dividend on this purchase but have little say in the control.
I am a simple man. I know the Fed to be a private institution that creates a fiat money supply with the intent of regulating the economy. And they do create plenty of the stuff, which can be doled out to anyone who wants free money at the Fed window these days.
I also know that Ginnie May and Freddie Mack are not really government institutions, although they have "government backing", and now may well be able to receive government funds in large doses.
I know that Bear Stearns, Lehman Brothers, JP Morgan, Morgan Stanley and Goldman Sachs are not government institutions, but they are now able to obtain huge amounts government money on a monthly rollover schedule ad infinitum.
As a simple man, I can only wonder why large banking institutions can be "too large to fail" while I, as a taxpaying citizen can be considered "too small to matter". It would be a lot cheaper for the government to bail me out than to bail out these guys.
I look at all of these *private* and/or for-profit institutions as the administrative branch of the money machine, and the US Treasury as the enforcement branch that can be used to put the hammer down on US citizens and corporations who fall out of favor and don't do what the heck they are told to do.
It puzzles me, being a simple man, why the testimonies in Congress about the banking debacle always refer to a "moral hazard", but then - the testimony doesn't really talk about what the "moral hazard" really is, who is responsible, and how to address it. Do they even care (wink, wink)?
I also know that if I had left my money with a federally-regulated money institution invested in traditional paper-backed financial instruments, my lifestyle would have already deteriorated and my retirement savings would already have been decimated. And I'm not particularly happy about all that. But, I am too-simple a man to know who all is behind my plight.
So Mark, I am not sure if there is a cabal of secretive international bankers who run our government behind the scenes and are largely responsible for looting us "little people" (as one of my favorites - Leona Helmsley, would say), but I do have my suspicions. Oh, and I've been trained in chemistry, finance and business - but only as a simple man.
Q: Are You Printing Money? Bernanke: Not Literally
The whole system is rigged. Just look at the COMMAND Bush gave to all the Naked Shorts on the stock market...as soon as he gave the command to stop the naked shorting, the market began to rise...does the common Joe have a chance when he plays with the big boys! Only if he is able to watch the signals. You got looted alright and you didn't even see it coming....But it is not your fault, it is the way the systems works....millions of little people to feed the big Albatross....it stays hungry, and two days ago it got its tummy full, so it is satisfied for a while...but it always needs to eat, so be careful!
You even noted that that was a call to all NAKED SHORTS, being a Naked Short is supposed to be illegal..it is shorting the market without shares to borrow against! Where is the SEC on this matter....I guess another blind eye!
Thanks for the reply. I agree with you that arguing on the Internet is likely the most productive of all endeavors. But, as long as it doesn't get personal, I see it as sometimes fun. That's probably why I enjoy my "discussions" with roadrunner...and, I expect and hope that I might enjoy some future "discussions" with you, too!
Re the Texas commemorative: I have a few. I have a brother-in-law who lives in Texas. When he visited us a few years ago, I was able to rationalize to my wife the purchase of one of them as a way to "honor" his stay at our house. Frankly I thought the argument bogus, but it worked and I was able to buy one. Since then I've added a few more but I only own 4 and hence need a bunch more. I sort of wish my brother-in-law would show up once again...
I googled "Federal Reserve Directors: A Study of Corporate and Banking Influence" and got the same set of charts that I described as nonsensical. Apparently this was some sort of Congressional report and perhaps the charts made sense when they were presented in the report. But it is to me frankly amazing how mnay web sites merely reproduce the charts with no sign that they make no sense whatsoever. And I suspect that they will made no sense even when they were first presented in the report.
One last comment: I think all of the London Connection conspiracy buffoons miss one very important point about the election of the members of each regional Federal Reserve Bank's Board of Directors. They all seem to say that the big banks own more of the stock in the Federal Reserve bank. That's indeed the case--member banks are required to own a certain fraction (I think 6%) of their capital as stock in the Federal Reserve. The conspiracy buffs all seem to say that therefore the it's the big banks that "run the Federal Reserve." Now setting aside the point that the Boards of Directors do very that is powerful, there is the small additional point that is msised: The member banks each have one vote. Yep, no matter how big or how small the commercial bank, it has one vote. You see, this stock really is not like typical stock--it really does not have the same ownership rights. Too bad this small little fact is overlooked.
By the way, here is a source for the fact: source. Given that I like arguing with facts rather than assertions and statements, I doubt you'll want to now provide me with a list of who actually owns the Federal Reserve and would prefer to simply say that I am ignorant and/or have no guts. I guess that's OK with me because I know I am ignorant in some areas...just not the Federal Reserve. And re guts: Well, I just lost 45 pounds over the last year, so you are more correct now than you would have been 12 months ago.
These were very interesting times. The Federal Government had a large budget surplus in 1836 which was given to the states. This raised havoc with the pet banks and their borrowers and certainly was a contributor to the Hard Times.
ProofArtworkonCircs,
It has been a while since I read Bray Hammond's "Banks and Politics in America from the Revolution to the Civil War" and my focus was really on the period after the Second Bank was put out of business, but, if I recall correctly, the Federal Government wasn't able to follow through on its plan to distribute it surplus to the states because, after 1836, there wasn't a surplus to distribute. (I believe that distributions were made in 1836, but not thereafter.)
firstmint,
I think it's important not to confuse money in the government's hands with money in the economy. I think the prime example of this is the hundreds of millions of Morgan dollars that sat in storage for decades. The Silverites thought that coining silver dollars would somehow help the country, but these coins sat in storage and never entered the economy. True, some of them served as backing for Silver Certificates, but this would only help the economy if the Silver Certificates were in circulation.
Money in the sub-Treasuries or the Mints isn't the same as money in my (or your) pocket or money in the bank - money in one's pocket can be spent and money in the bank generates interest for the depositor and serves as a loan for a business, both of which improve the economy.
Speaking specifically of the 1838 eagles, do you know if the Mint's shipping records are available through the Archives? This might tell us where the specific coins went once they were minted.
In general, I believe that they went from the Mint to a (probably) New York bank and were then exported to England and melted, as much American gold was during this period. America did a lot of business with England and Europe and they wanted to be paid in gold (usually in the form of bank credits, of course) not state-chartered banknotes. You can track specie exports through the Annual Reports of the Secretary of the Treasury (and other contemporary government publications) as well as Niles Register, Hunt's Merchant Magazine and The Banker's Magazine.
Edited to add: I just noticed that I forgot to mention that if the 1838 eagles were exported, then they were probably used to pay for imports - some of which were useful additions to the economy and some of which were "just" consumer goods. Unfortunately, then as now, many people spent a lot of money on consumer goods. For example, the cotton planters, as a class, generally had very large outstanding debts, despite the very large profits they derived from exporting cotton. It makes you realize how "large" they lived!
Self serving notice: If anyone's interested in reading more about how commerce was conducted in this period, please read my chapter in Doug Winter's Gold Coins of the New Orleans Mint, 2nd Edition. If you don't own a copy, you can read most of my chapter on the Internet via Google Book Search. (Please don't let that stop you from buying the book! I don't get anything but gratification out of it if you do and I'd be pleased to autograph your copy, if you're interested! )
Well, now I hope to add you to my list (along with roadrunner and SeaEagleCoins) of people with whom I can disagree in a pleasant way. That's a LOT more fun (to me) than name calling.
Now, re the fact that each bank has one vote for the (unimportant) position of board director: You apparently dismiss this point as unimportant. But I think that many of the web sites that reprint those insane charts are run by people who have no idea of that fact. They apparently think that the shares of stock in the Federal Reserve work like shares in a typical corporation so that when one bank has more shares than another bank, the bank with more shares has a greater voice in the election of the directors. While you and I agree that that assertion is wrong (since both banks get 1 vote), belief in it is the only way I can rationalize their views that the Fed is run for the benefit of large banks or owners of the large banks. Without that incorrect view, I think their claims make even less sense. Of course, I also believe that the fact they are wrong about something so fundamental is yet another manifestation of the fact that they are wrong about a lot of things. However, I suspect that in that last sentence, you and I will part company before the period...
The responsibility for the preservation of the money on behalf of the people is accomplished how? The mission of the Federal Reserve, if it is the preservation of the public trust and wealth, doesn't appear to be obvious in practice, nor do I read any commentary that is clear on the subject. Mark, there is a stated mission. What is it? Your thoughts to this point are helpful and academic. Is the subject matter I question outside the sphere of knowledge required to understand the Federal Reserve? Respectfully, John Curlis
Let me preface my comments by saying that it is likely my three friends in this thread might disagree with my comments. So let me be clear that my comments are meant to be within the mainstream of economic thought.
Initially the Fed was set up to help furnish "an elastic currency," to act as a "lender of last resort," and to act as check clearing house. Let me take the last reason first: At the time it was sometimes the case that a check drawn on a distant bank would be cashed at only a discount. So, for example, if you were in Boston with a $100 check drawn on a bank in San Francisco, the Boston bank might cash it for only $95. I think there is little doubt that the Fed accomplished this goal. The first goal, provide an elastic currency, reflected the issue at the time that currency was almost always in short supply in the Fall when farmers were paid for their crops and needed currency to repay the loans they had made in the Spring. As a result, short-term interest rates tended to rise in the Fall and bank panics frequently occurred in the Fall. The Fed was supposed to increase the supply of currency in the Fall so that short-term interest rates wouldn't automatically rise and bank panics would not occur. Again, I think there is little doubt that the Fed succeeded in eliminating the annual fluctuations in the short-term interest rate. Bank panics, though, are a separate issue. But let me move to the last task, acting as a lender of last resort. The notion was that when a bank panic threatened and banks needed currency to meet their depositors' demands for withdrawls, the Fed would stand ready to loan to the banks and head off the panic. I think it is generally agreed that the Fed failed miserably at this goal in the 1930s when bank panics helped send the economy into the Great Depression. Currently the Fed asserts that it is acting in its lender of last resort role when it makes loans to investment banks, Fannie Mae, and Feddie Mac. These policies are controversial. Frankly I recognize both upides and downsides from these actions of the Fed. But I think it difficult to predict whether they will be good or bad on net over the long haul. inlude the goal of preservation of wealth.
One last comment: The goal of furnishing an elastic currency was broadened (immensely!!) to provide the rationale for the Fed to conduct monetary policy, that is, changes in the money supply and interest rates designed to help stabilize the economy. And whether the Fed's monetary policy has been helpful or harmful (or ineffective) is also a controversial issue amongst economists. (I suspect it is not nearly so controversial among the Fed's many critics in this thread!
So John, I think the initial goals of the Fed were meant to be helpful to the public but they most definitely did not include the goal of preservation of wealth. Nowadays the Fed has responded to a large economic literature that points out the importance of maintaining the reputation (=public trust) that the Fed will act to keep inflation low. So it seems to be the case the Bernanke (and the rest of the Fed) value the reputation of an inflation fighter.
John: Was that helpful and/or did it address your questions?
A candid reply and reasonable description of the events and the failure(at this time) to preserve wealth and the public trust. I concur that the mistrust by the public is slowly having an impact. I am pleased to read that there are individuals in the academic setting that recognize the shortcomings and the vital need to restore trust, dignity, clarity and recognition of the Federal Reserve of the people. I suspect this is not an easy concept to teach. Now, if we can just do something about that Treasury link on paper money... Respectfully, John Curlis
Secretary of the U.S. Treasury, William H. Woodin, wrote in 1933: ''The Federal Reserve Act lets us print all [the paper money] we'll need. And it won't frighten the people. It won't look like stage money. It'll be money that looks like real money.''
It'll be money that looks like real money.
Translation: it is NOT real money.
That's all you need to know.
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If inflation were equitable and treated all classes the same, it would be less socially divisive. But while some see their incomes going up above the rate of inflation (movie stars, CEOs, stock brokers, speculators, professional athletes,) others see their incomes stagnate like lower-middle-income workers, retired people, and farmers. Likewise, the rise in the cost of living hurts the poor and middle class more than the wealthy. Because inflation treats certain groups unfairly, anger and envy are directed toward those who have benefited.
Ron Paul makes it clear that inflation is an unfair tax that affects one class of society more than another. 30 years ago a $200K baseball salary was a big deal. Thanks to inflation, today $20 MILLION per year is a big baseball salary (100X increase). The NY Yankees were bought by GS in the 1970's for 1/50th to 1/100th of today's value if my numbers are correct. Again, inflation effects. I can also add that our inflation (ie large money supply increases) from 1983-2006 was exported overseas to Asia and other developing nations. We lucked out that little price inflation of standard goods and services was affected by this. The US was the beneficiary of cheap services and goods in the 80's and 90's while the stock market boomed. This was nirvahna. A free lunch and you could eat it too. We as a nation benefited from this and enjoyed bigger homes, nice vacations, SUV's, and all the modern conveniences...always staying ahead of the Jones'. But monetary inflation always comes home to roost. You can delay it but you can't keep it away forever. It's back and it's back big time, and getting bigger...at least in the things that really count now (food, professional services, energy, education, etc.),
The FED's primary mission in the first decade or two was price control. Or at least that's what they said they were concerned with.
Mark, I followed your link the Fed directors and I don't think it helps with the ownership issue. I want to know who is the money behind the bank, who really profits by the policies the FED sets or tacitly condones, not by ownership in some measly stock or the name of some front-man director who acts on behalf of Daddy Warburgs. Look at all the TRILLIONs of dollars the big banks raked in by making derivative transactions off the balance sheet (ie unbacked) while the FED, congress, and SEC all turned a blind eye. They made TRILLIONs, far more than they could in any stock ownership. The FED can make money electronically, off the balance sheet. Some of that would have been caught in M3 (revolving repo's for example). The FED knew in late 2005 that they would be offering handouts in a few years to ailing banks and brokerages and dumping M3 was a good move to keep their actions hidden. It's the policies of the FED that allow the owners of the banks to make their Billions. All that money has been safely socked away even as CEO's get canned for what is nothing less than criminality.
the Fed has responded to a large economic literature that points out the importance of maintaining the reputation (=public trust) that the Fed will act to keep inflation low. So it seems to be the case the Bernanke (and the rest of the Fed) value the reputation of an inflation fighter.
They value the reputation only because the public fails to realize that they are the LONE source of all US monetary inflation. They also do a bad job of price control because they resort to having the BLS paint a picture of a bogus basket of goods that is very resilient to price changes......by design and definition. While the FED may value the reputation of inflation fighter, the fact that the M3 money supply has increased by 13X since 1982 and 10% per year since 1996, indicates they are primarily inflationists. Yes, they can often point to M1 decreasing (currency in circulation) to show their public mettle, but it's the electronic money and credit behind the scenes and often off the balance sheets that really stokes the price inflation fires. You don't get to $1 QUADRILLION in derivatives with a FED that is concerned about price controls or inflation or deflation....but only about lining the pockets of the banks.
Bernanke's published writings tend to support Mark's comments.
Yeah, that's his public personna. Yet Greenspan's written views prior to becoming FED chief were to support a gold standard. He recognized fiat currency as an inflation tax on the people that transfered wealth to the banks. Volcker today recognizes that both Greenspan and Bernanke have followed a path to kill the economy. So that's 2 FED chiefs that have disagreed with Bernanke's current views (and Mark's). You can bet that ole man Greenspan is heavily invested into gold right now, I have no doubts.
While running for office might have some interesting consequences, I learned long ago that there is no room in the world for:
1. honest politicians 2. honest car dealers 3. honest auto mechanics 4. and unfortunately, honest coin dealers (and by "honest CD" I specifically refer to a dealer who looks out for his clients above his own needs or desires. His primary motivation is to service that client and to build his collection rather than to consider his own profits. His profits come second). Such a dealer would refuse a profit if he is putting his client into a loser coin. Just my 2c.
You'd go broke before anyone realizes what you're about.
<< <i>Ron Paul makes it clear that inflation is an unfair tax that affects one class of society more than another. 30 years ago a $200K baseball salary was a big deal. >>
This is not inflation.
This is a society which is willing to cast off culture in favor of the "big game".
This is the result of a government which turns its back on collusion and allows all the auto companies to fund the "big game" at the expense of car buyers.
As usual, your comments are well reasoned (but wrong ). You and will undoubtably continue to disagree about the CPI and other price indices, so I'll leave that topic alone (or, perhaps more realistically, save it for another time). The only issue I have time for right now is the suggestion that the links to ownership are not helpful. I think that for you, they may not be. But for others who know less (and assert more) and believe that the Fed is owned by foreigners or some group of bankers, I think that links and data will show that they are wrong. Not misguided--wrong.
You suggest that the Fed's policy allowed banks to earn trillions (I think you actualy mean billions) of profit. The way I look at this issue is somewhat related to your assertion but the casuality is different. I look at it this way: The Fed and other regulatory agencies set rules. Banks and other financial institutions maximize their profits given thse regulations. You suggest that the Fed and the other agencies set the rules to maximize the profits of the banks. Economists call this thesis the "capture theory," that is, the idea that firms regulated by a government agency "capture" the regulatory body so that regulations further the firms' interest rather than the public's interest. So is the Fed captured by the banks and other financial firms? I think the answer is "to some extent." But 1) I think it's probably much less than you'd assert because I see a lot of Fed actions that go against banks' interests, and 2) most of the effect I believe you implicitly discuss revolves around the Fed's regulations and not its monetary policy.
And, to say that the Fed has been "captured" by the firms it regulates is a LOT different than to say that the Fed is "owned" by some private (perhaps foreign!) group. Research indicates that the FAA probably had been captured to a large extent by the airlines that it regulated in the 1980s. But to say that TWA and United Airlines "owned" the FAA would have been a nonsensical statement because ownership has implications that are wrong.
So roadrunner, I think your assertion is more subtle than those made by most other people with whom you (think) you agree. Perhaps if my intrepretation of what you say is correct, we can see that we disagree on the magnitude of the capture. Or perhaps my intrepretation is wrong... By the way, one other point: Note how I separate the Fed's regulation regime from its monetary policy. I think that is generally the right way to proceed because it makes it easier to concentrate upon and focus upon whatever issue is being discussed.
Now, about M3....nah, let's save that for another time.
This is a society which is willing to cast off culture in favor of the "big game". This is the result of a government which turns its back on collusion and allows all the auto companies to fund the "big game" at the expense of car buyers.
But it is precisely the result of inflation. It's the same 50X increase since the early 70's seen in superb rare coins and other collectibles like sports cards, classic muscle cars, sport's salaries, fine art and antiques, etc. It's where the well-connected money has gone to help preserve wealth from the results of endless monetary inflation. It's asset inflation at its very finest and it shifted into high gear in the early 1970's.
Mark, I would stick with TRILLIONS of dollars made by the sum of the banks and brokers over the past 10 years. Considering that a single 1% transaction profit on $1,000,000,000,000 in world-wide derivatives is $10 TRILLION, the total profit should be north of that number. The BIS is the one that published that $1.1 QUAD number.
Suppose I'm a blue collar factory worker (this is a hypothetical, so it's okay to imagine we still make stuff in this country) who has religiously been putting a portion of my income in the bank in order to have something to support myself with in my old age. How does the Fed's dollar-destroying inflation help me?
Revolutions have been fought over taxation without representation, which is exactly the case with inflation (loss of purchasing power and the higher taxes that result from tax bracket creep).
The Fed has continued to promote our habitual spending orgy, causing savers to be penalized, which is exactly the opposite social effect that is needed to maintain an economy that values production and productive labor over academic constructs and mathematical models that produce nothing.
And, for all of this happy spending and consumption, we've lost our industrial base.
And, as roadrunner notes the banks raked in trillions as if by magic, from the creation of CDOs and derivatives that couldn't even be valued because of the complicated risk vs. liability relationships between a myriad of ownership interests.
My opinion - the criminals should be pursued and prosecuted to the fullest extent of the law, if the law can even determine who is culpable.
Q: Are You Printing Money? Bernanke: Not Literally
In regard to your question earlier about "moral hazard". It may not be what you expect, in economics it refers to the possibility that a borrower may engage in more risky behavior after a loan has been made.
A classic example would be a town that sells bonds for a convention center and has an electoral turnover after the sale. The new town leaders decide they want to double the size of the convention center almost ensuring that it will be unprofitable in the long run. This action increases the risk that the bondholders will not recieve the promised yields on the towns municipal bond. This posibility that a borrower may behave in a way that increases risk after loan has been made or a debt instrument has been purchased is a moral hazard.
But it is precisely the result of inflation. It's the same 50X increase since the early 70's seen in superb rare coins and other collectibles like sports cards, classic muscle cars, sport's salaries, fine art and antiques, etc. It's where the well-connected money has gone to help preserve wealth from the results of endless monetary inflation. It's asset inflation at its very finest and it shifted into high gear in the early 1970's.
>>
But few things from the early '70's have increased substantially in value. This may be partially because so much money is siphoned out of the economy by the things which have.
Look at the vast wasteland TV has become. TV news is a caricature of what it was in the '50's. Most collectible fields have fallen by the wayside to be replaced mostly by the hobbies and pastimes of the wealthy. True inflation tends to af- fect most things somewhat equally and centers on necessities rather than hob- bies.
I'd agree that a $50 million painting is a form of inflation but it's a form that doesn't affect the average person very meaningfully. It's made possible by profits from all kinds of enter[prises being funneled to the few at the top while shareholders content themselves with rising stock prices and the company's manufacturing plant being disassembled and shipped to China. It's made possible by an electorate which is satisfied with a failed educational system and the status quo.
<< <i>They value the reputation only because the public fails to realize that they are the LONE source of all US monetary inflation. >>
I must forcefully disagree with you here.
The origin of inflation is huge deficit spending by our government which then forces the Federal Reserve to print more paper money in order to purchase the additional US government bonds the US government issues to float the additional debt.
Most of the increase in our money supply is due to the massive borrowing our US government has engorged on to finance its' deficit. A much smaller portion of the increase in the money supply is due to the Federal Reserve recent public attempts to prevent the economy from going into a freefall by Greenspan and Bernanke's public statements.
While the Federal Reserve has an interest in favoring a small amount of inflation, it is more fearful of excess inflation as well as deflation since the former threatens the FRN's currency which gives the Fed its basis of existence as well as its member banks while the latter can potentially destroy the existence of its member banks.
Roadrunner: You cannot put all of the blame on the Federal Reserve without putting at least 50% (or more) of the blame on Congress, the President, the US Treasury Department, and the American people.
Sure, the Federal Reserve has blundered quite a bit in the last 95 years but it has also had its shining moments when Paul Volker did the courageous thing to clamp down on inflation when it was threatening to escalate into runaway inflation. There have been times when the Fed was willing and able to do the right thing by the American people when our government was incapable of doing so.
Indeed, we must be extremely guarded against the power of the Federal Reserve Bank system and their power should be curtailed. We can't even get Congress/President to legislate outlawing the US $1 or $5 and to order the the US Treasury to force the Federal Reserve to stop (through the BEP) printing FRN $1 and $5's.
Then, the domain of $1 and $5's can then return to the US Treasury by the issuance of coins ONLY and our government outside the Federal Reserve's influence.
I have looked over the Constitution of the United States and I don't see anywhere that Congress has the power to print money or authorize any private company or organization to print money. Congress has the authority to coin money. That is a very differant process than printing money with no intrinsic value. The founding fathers knew that paper money always becomes worthless unless it is backed by some precious metal. They found that out with Continental Currency. It seems that we never learn from the past.
I think that there are a few misconceptions that seem to be readily accepted. There seems to be a few that believe the Fed is conspiring to control the economy..... this couldn't be further from the truth, there are a lot of factors that influence the economy and information is only one of them.
First off there is the problem of asymetric information in monetary policymaking. This is one problem central banks face when conducting monetary policy, that people may not believe their commitment to low inflation policies. When people know that a central bank would like the real GDP to be near the economy's capacity level, they anticipate that the central bank will attempt to expand aggregate demand in the short run, thereby inducing inflation. This gives workers an incentive to bargain for higher wages than they would otherwise be willing to accept. Such wage increases, in turn, tend to shift the aggregate supply schedule upward and to the left, in other words higher prices and less production. To prevent the short run reduction in real GDP that would occur, the Fed engages in exactly the aggregate demand expansion that people had anticipated. This interaction between the public and the Fed leads to an inflation bias in monetary policy.
Why are people so often unwilling to believe a central banks commitment to fighting inflation? For one thing, just as seeing is believing, "not seeing" can be "not believing." During his tenure as as Fed chair, Alan Greenspan hardly ever passed up an oppportunity to preach to the virtues of price stability. Nevertheless, the price level rose in every single year of his time in the chair.
Another reason the Feds commitment to price stability may be doubted is that firms and households have incomplete knowledge of the objectives of the Feds officials, and as a result, may misinterpret their policy actions.
Even when the officials attempt to make their objectives clear, they may not suceed. There are time lags from when a countercyclical policy is put into effect until the changes actually have an effect on economic activity. The public may mispercieve the Feds slow response, implementation and policy actions as an indication of a lack of interest in countering cycles in economioc activity. Or, the Fed could enact a policy that fails to have the intended effects, they are, after all only human. People may misinterpret this policy failure as a lack of Fed commitment to stated objectives..... This is the asymetric-information problem.
There seems to be a few that believe the Fed is conspiring to control the economy..... this couldn't be further from the truth
I think there will always be an undercurrent of belief that large systems can be controlled by a few guys smoking cigars in a back room someplace. While that may be true for a thinly traded individual stock, it's highly unlikely for a complex system such as the US economy, which is itself influenced by the global economy. I think this belief originates in a well intentioned desire for fairness, but it results in class warfare and frustration that the "game is rigged" against the little guy.
Most of the increase in our money supply is due to the massive borrowing our US government has engorged on to finance its' deficit. A much smaller portion of the increase in the money supply is due to the Federal Reserve recent public attempts to prevent the economy from going into a freefall by Greenspan and Bernanke's public statements.
While the Federal Reserve has an interest in favoring a small amount of inflation, it is more fearful of excess inflation as well as deflation
I think this is right on the money, and for the most part the Fed has been successful in maintaining this. I don't see how you could make a case that the Fed favors and causes inflation. If anything, they have erred on the side of caution at times to the detriment of economic growth.
GFourDriver has a very clear and extremely accurate summary of the research which indicates the importance of the public's expectations about the Fed. There also is additional research using data which concludes that, on average, the more independent the cetral bank from the government, the lower the inflation rate.
This brings me to Oreville's post about the government budget deficit. I rarely disageree with Oreville and I know I will never disagree about anything he posts concerning numismatics. But in this case I will partially disagree. First, there is no legal reason for the Fed to increase its purchases of government securities when the budget deficit increases. And, second there is no empirical evidence of which I am aware that demonstrates that the Fed's purchases of government securities increases when the budget deficit increases. And it is through these purchases that the Fed expands the money supply and ultimately drives the inflation rate. Now in other countries and other times, the budget deficit does play a key role. For instance in a hyperinflation the budget deficit is always large and the central bank is not independent so the central bank monetizes the deficit by buying a bunch of the newly issued government debt thereby creating massive inflation. And in countries with a central bank that is not independent of the federal government the size of the budget deficit helps determine the growth of that nation's money supply and hence its inflation rate. So in other countries and for other times Oreville's post is accurate...it's just not accurate for the United States.
This posibility that a borrower may behave in a way that increases risk after loan has been made or a debt instrument has been purchased is a moral hazard.
Call that what you like. I call what you've just described "bad management".
Q: Are You Printing Money? Bernanke: Not Literally
Okey Dokey --- A cup of coffee and I'm ready to jump back in with this "simple" observation...
...after reviewing this thread... I am reminded of a quote I heard many years ago... IIRC it was (rightly or wrongly) attributed to good old Albert Einstein...
"If you can not explain something in a simple enough manner, so that a 4 year old can completely understand it...then you do not truly know what you are talking about"
...and this is what, IMHO...is completely wrong with the present socio-economic society we have all been born into and blindly accept...this Capitalistic bohemoth our ancestors created and we happily(?) propogate...is by it's very nature, so complex, that even those who purport to educate us about it... are unable to truly grasp it in it's full magnitude... like a blind man describing an elephant...
...and to keep it on topic...for this forum, I mean... how about the totally absurd notion that a round of silver or gold or even nickel can be worth more than it's intrinsic value... in a world where most folks don't even have two coins to rub together...let alone food to eat... go ahead... explain THAT to your 4 year old... that you have a coin worth thousands of dollars and in the time it takes to look at it... some 4 year old somewhere in the world just died from disease or starvation... and the value you place on that coin could have been enough to have saved that child's life...
I know...there are many justifications we can come up with to defend our absurd lifestyle choices... but go ahead...explain yourself to a 4 year old... and don't lie...and don't compartmentalize the truth...present it in it's full context... be brutally honest and explain it... so it makes sense...
I recently tried explaining coin collecting to a child a bit older than 4...I think he was around 10... he wanted to know where I found these coins... as he put 2 and 2 together he shook his head and told me it wasn't a hobby... it was "just buying stuff cause you like it"... he thought money was something to spend (i.e. something to make trade more convenient)...collecting it as a hobby made no sense to him...
Heck...I collect coins...and most of the time it doesn't make much sense to me either...
Re: Slabbed coins - There are some coins that LIVE within clear plastic and wear their labels with pride... while there are others that HIDE behind scratched plastic and are simply dragged along by a label. Then there are those coins that simply hang out, naked and free
Re: Slabbed coins - There are some coins that LIVE within clear plastic and wear their labels with pride... while there are others that HIDE behind scratched plastic and are simply dragged along by a label. Then there are those coins that simply hang out, naked and free
Comments
The Second Bank of the United States was actually quite successful once Nicholas Biddle became president in 1823 and got on top of things.
The Second Bank kept the state-chartered banks "honest" by sending its agents to state-chartered banks with banknotes from those banks and demanding immediate payment in specie. Any state-chartered bank that couldn't meet its demand for specie was essentially cut out of commerce. This effort, and the fact that the US Governnment deposited its receipts in the Second Bank essentially meant that the Second Bank (like the First Bank before it) was the central bank of the US - a precurser of the FRB, if you will.
Unfortunately, Andrew Jackson hated banks and banknotes and was determined not to renew the Second Bank's charter (which expired in 1836). He removed the Government's deposits from the Second Bank in October 1833, supported the law of 1834 that reduced the gold value of the dollar by about 6% (and put US gold coins into general circulation for the first time) and signed the Specie Circular that prohibited the sale of public lands for anything other than specie, beginning in July 1836.
As a result, specie drained out of commercial centers (like New York and Boston) and went to the frontiers, where there wasn't any easy way for the specie to get back to the commercial centers.
President Jackson's actions certainly contributed to the Hard Times of 1837-1844.
But, back to the Second Bank: After its federal charter expired, Nicholas Biddle reincorporated the Bank as "The Bank of the United States of Pennsylvania" (a state-chartered bank). Unfortunately, Mr. Biddle got the new bank involved in some questionable activities and the bank filed for bankruptcy in 1841.
Check out the Southern Gold Society
These were very interesting times. The Federal Government had a large budget surplus in 1836 which was given to the states. This raised havoc with the pet banks and their borrowers and certainly was a contributor to the Hard Times.
The state of Maine also had a budget surplus and gave the money to its towns on the basis of population.
The typical Maine town distributed it to the people on a per capita basis (including children). They had no intention of giving a rich absentee landowner a break in his taxes. It was to go to the people.
For instance, the 1836 closure of the Bank of the United States, was reportedly the main cause the hard times era 1837-1844. As mentioned, the federal government had a surplus budget, yet there was no money (specie) in general circulation.
Add to that, in September 1838, Treasury Secetary Levi Woodbury ordered that $50,000 worth of gold be coined from the recently retrieved James Smithson donation. Yet according to the banking situation at the time, there was no money, especially gold coinage for the masses. Where did it go?
It's like that in today's economy. The banks seem to set or adjust their monetary policies to align with the federal government policies rather than the actual needs of the people. It's understood that some banking policies must be regulated and maintained, but the profits that are made from lending to the people (such as credit cards at over 20%) should be regulated as much as the other aspects of banking.
The increase in money supply relative the growth in the economy is inflation.
The FED put their foot on inflation by raising interest rates but this has caused the economy to falter.
There are no arrows left in the FED's quiver and we are about to experience all the inflation caused by the bailouts plus twenty eight years of pent up inflation. Hold onto your hats it will be a wild ride.
Think of a lifetime of absolute Zero% inflation.
Every penny saved is a penny earned....Sound familiar??
This hogwash of 'a little inflation is good' is nonsense.
However how do you stop it? Inflation has always existed ever since coinage came about. Some roman coins were silver washed. Coin debasement in one form or another has always happened. Coins got smaller - silver & gold coins were debased worldwide into the situation that we have today--NO silver or gold coins are issued for circulation anywhere in the world. Most countries did it earlier than the USA. GB coins went from sterling (.925 fine silver) about 1920 to .500 fine and then to nickel in 1947. There is no true hard currency in the world today. All other countries discontinued silver and gold coinage for circulation production sometime the last century.
Here is a speech by HON. RON PAUL OF TEXAS
IN THE HOUSE OF REPRESENTATIVES
September 5, 2003
Almost five years ago.
Yeah--it's long--but well worth reading.
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HON. RON PAUL OF TEXAS
IN THE HOUSE OF REPRESENTATIVES
September 5, 2003
Paper Money and Tyranny
All great republics throughout history cherished sound money. This meant that the monetary unit was a commodity of honest weight and purity. When money was sound, civilizations were found to be more prosperous and freedom thrived. The less free a society becomes, the greater the likelihood its money is being debased and the economic well-being of its citizens diminished.
Alan Greenspan, years before he became Federal Reserve Board Chairman in charge of flagrantly debasing the U.S. dollar, wrote about this connection between sound money, prosperity, and freedom. In his article “Gold and Economic Freedom” (The Objectivist, July 1966), Greenspan starts by saying: “An almost hysterical antagonism toward the gold standard is an issue that unites statists of all persuasions. They seem to sense…that gold and economic freedom are inseparable.” Further he states that: “Under the gold standard, a free banking system stands as the protector of an economy’s stability and balanced growth.” Astoundingly, Mr. Greenspan’s analysis of the 1929 market crash, and how the Fed precipitated the crisis, directly parallels current conditions we are experiencing under his management of the Fed. Greenspan explains: “The excess credit which the Fed pumped into the economy spilled over into the stock market- triggering a fantastic speculative boom.” And, “…By 1929 the speculative imbalances had become overwhelming and unmanageable by the Fed.” Greenspan concluded his article by stating: “In the absence of the gold standard, there is no way to protect savings from confiscation through inflation.” He explains that the “shabby secret” of the proponents of big government and paper money is that deficit spending is simply nothing more than a “scheme for the hidden confiscation of wealth.” Yet here we are today with a purely fiat monetary system, managed almost exclusively by Alan Greenspan, who once so correctly denounced the Fed’s role in the Depression while recognizing the need for sound money.
The Founders of this country, and a large majority of the American people up until the 1930s, disdained paper money, respected commodity money, and disapproved of a central bank’s monopoly control of money creation and interest rates. Ironically, it was the abuse of the gold standard, the Fed’s credit-creating habits of the 1920s, and its subsequent mischief in the 1930s, that not only gave us the Great Depression, but also prolonged it. Yet sound money was blamed for all the suffering. That’s why people hardly objected when Roosevelt and his statist friends confiscated gold and radically debased the currency, ushering in the age of worldwide fiat currencies with which the international economy struggles today.
If honest money and freedom are inseparable, as Mr. Greenspan argued, and paper money leads to tyranny, one must wonder why it’s so popular with economists, the business community, bankers, and our government officials. The simplest explanation is that it’s a human trait to always seek the comforts of wealth with the least amount of effort. This desire is quite positive when it inspires hard work and innovation in a capitalist society. Productivity is improved and the standard of living goes up for everyone. This process has permitted the poorest in today’s capitalist countries to enjoy luxuries never available to the royalty of old.
But this human trait of seeking wealth and comfort with the least amount of effort is often abused. It leads some to believe that by certain monetary manipulations, wealth can be made more available to everyone. Those who believe in fiat money often believe wealth can be increased without a commensurate amount of hard work and innovation. They also come to believe that savings and market control of interest rates are not only unnecessary, but actually hinder a productive growing economy. Concern for liberty is replaced by the illusion that material benefits can be more easily obtained with fiat money than through hard work and ingenuity. The perceived benefits soon become of greater concern for society than the preservation of liberty. This does not mean proponents of fiat money embark on a crusade to promote tyranny, though that is what it leads to, but rather they hope they have found the philosopher’s stone and a modern alternative to the challenge of turning lead into gold.
Our Founders thoroughly understood this issue, and warned us against the temptation to seek wealth and fortune without the work and savings that real prosperity requires. James Madison warned of “The pestilent effects of paper money,” as the Founders had vivid memories of the destructiveness of the Continental dollar. George Mason of Virginia said that he had a “Mortal hatred to paper money.” Constitutional Convention delegate Oliver Ellsworth from Connecticut thought the convention “A favorable moment to shut and bar the door against paper money.” This view of the evils of paper money was shared by almost all the delegates to the convention, and was the reason the Constitution limited congressional authority to deal with the issue and mandated that only gold and silver could be legal tender. Paper money was prohibited and no central bank was authorized. Over and above the economic reasons for honest money, however, Madison argued the moral case for such. Paper money, he explained, destroyed “The necessary confidence between man and man, on necessary confidence in public councils, on the industry and morals of people and on the character of republican government.”
The Founders were well aware of the biblical admonitions against dishonest weights and measures, debased silver, and watered-down wine. The issue of sound money throughout history has been as much a moral issue as an economic or political issue.
Even with this history and great concern expressed by the Founders, the barriers to paper money have been torn asunder. The Constitution has not been changed, but is no longer applied to the issue of money. It was once explained to me, during the debate over going to war in Iraq, that a declaration of war was not needed because to ask for such a declaration was “frivolous” and that the portion of the Constitution dealing with congressional war power was “anachronistic.” So too, it seems that the power over money given to Congress alone and limited to coinage and honest weights, is now also “anachronistic.”
If indeed our generation can make the case for paper money, issued by an unauthorized central bank, it behooves us to at least have enough respect for the Constitution to amend it in a proper fashion. Ignoring the Constitution in order to perform a pernicious act is detrimental in two ways. First, debasing the currency as a deliberate policy is economically destructive beyond measure. Second, doing it without consideration for the rule of law undermines the entire fabric of our Constitutional republic.
Though the need for sound money is currently not a pressing issue for Congress, it’s something that cannot be ignored because serious economic problems resulting from our paper money system are being forced upon us. As a matter of fact, we deal with the consequences on a daily basis, yet fail to see the connection between our economic problems and the mischief orchestrated by the Federal Reserve.
All the great religions teach honesty in money, and the economic shortcomings of paper money were well known when the Constitution was written, so we must try to understand why an entire generation of Americans have come to accept paper money without hesitation, without question. Most Americans are oblivious to the entire issue of the nature and importance of money. Many in authority, however, have either been misled by false notions or see that the power to create money is indeed a power they enjoy, as they promote their agenda of welfarism at home and empire abroad.
Money is a moral, economic, and political issue. Since the monetary unit measures every economic transaction, from wages to prices, taxes, and interest rates, it is vitally important that its value is honestly established in the marketplace without bankers, government, politicians, or the Federal Reserve manipulating its value to serve special interests.
Money As a Moral Issue
The moral issue regarding money should be the easiest to understand, but almost no one in Washington thinks of money in these terms. Although there is a growing and deserved distrust in government per se, trust in money and the Federal Reserve’s ability to manage it remains strong. No one would welcome a counterfeiter to town, yet this same authority is blindly given to our central bank without any serious oversight by the Congress.
When the government can replicate the monetary unit at will without regard to cost, whether it’s paper currency or a computer entry, it’s morally identical to the counterfeiter who illegally prints currency. Both ways, it’s fraud.
A fiat monetary system allows power and influence to fall into the hands of those who control the creation of new money, and to those who get to use the money or credit early in its circulation. The insidious and eventual cost falls on unidentified victims who are usually oblivious to the cause of their plight. This system of legalized plunder (though not constitutional) allows one group to benefit at the expense of another. An actual transfer of wealth goes from the poor and the middle class to those in privileged financial positions.
In many societies the middle class has actually been wiped out by monetary inflation, which always accompanies fiat money. The high cost of living and loss of jobs hits one segment of society, while in the early stages of inflation, the business class actually benefits from the easy credit. An astute stock investor or home builder can make millions in the boom phase of the business cycle, while the poor and those dependent on fixed incomes can’t keep up with the rising cost of living.
Fiat money is also immoral because it allows government to finance special interest legislation that otherwise would have to be paid for by direct taxation or by productive enterprise. This transfer of wealth occurs without directly taking the money out of someone’s pocket. Every dollar created dilutes the value of existing dollars in circulation. Those individuals who worked hard, paid their taxes, and saved some money for a rainy day are hit the hardest, with their dollars being depreciated in value while earning interest that is kept artificially low by the Federal Reserve easy-credit policy. The easy credit helps investors and consumers who have no qualms about going into debt and even declaring bankruptcy.
If one sees the welfare state and foreign militarism as improper and immoral, one understands how the license to print money permits these policies to go forward far more easily than if they had to be paid for immediately by direct taxation.
Printing money, which is literally inflation, is nothing more than a sinister and evil form of hidden taxation. It’s unfair and deceptive, and accordingly strongly opposed by the authors of the Constitution. That is why there is no authority for Congress, the Federal Reserve, or the executive branch to operate the current system of money we have today.
Money As a Political Issue
Although the money issue today is of little political interest to the parties and politicians, it should not be ignored. Policy makers must contend with the consequences of the business cycle, which result from the fiat monetary system under which we operate. They may not understand the connection now, but eventually they must.
In the past, money and gold have been dominant issues in several major political campaigns. We find that when the people have had a voice in the matter, they inevitably chose gold over paper. To the common man, it just makes sense. As a matter of fact, a large number of Americans, perhaps a majority, still believe our dollar is backed by huge hoards of gold in Fort Knox.
The monetary issue, along with the desire to have free trade among the states, prompted those at the Constitutional Convention to seek solutions to problems that plagued the post-revolutionary war economy. This post-war recession was greatly aggravated by the collapse of the unsound fiat Continental dollar. The people, through their representatives, spoke loudly and clearly for gold and silver over paper.
Andrew Jackson, a strong proponent of gold and opponent of central banking (the Second Bank of the United States,) was a hero to the working class and was twice elected president. This issue was fully debated in his presidential campaigns. The people voted for gold over paper.
In the 1870s, the people once again spoke out clearly against the greenback inflation of Lincoln. Notoriously, governments go to paper money while rejecting gold to promote unpopular and unaffordable wars. The return to gold in 1879 went smoothly and was welcomed by the people, putting behind them the disastrous Civil War inflationary period.
Grover Cleveland, elected twice to the presidency, was also a strong advocate of the gold standard.
Again, in the presidential race of 1896, William McKinley argued the case for gold. In spite of the great orations by William Jennings Bryant, who supported monetary inflation and made a mocking “Cross of Gold” speech, the people rallied behind McKinley’s bland but correct arguments for sound money.
The 20th Century was much less sympathetic to gold. Since 1913 central banking has been accepted in the United States without much debate, despite the many economic and political horrors caused or worsened by the Federal Reserve since its establishment. The ups and downs of the economy have all come as a consequence of Fed policies, from the Great Depression to the horrendous stagflation of the ‘70s, as well as the current ongoing economic crisis.
A central bank and fiat money enable government to maintain an easy war policy that under strict monetary rules would not be achievable. In other words, countries with sound monetary policies would rarely go to war because they could not afford to, especially if they were not attacked. The people could not be taxed enough to support wars without destroying the economy. But by printing money, the cost can be delayed and hidden, sometimes for years if not decades. To be truly opposed to preemptive and unnecessary wars one must advocate sound money to prevent the promoters of war from financing their imperialism.
Look at how the military budget is exploding, deficits are exploding, and tax revenues are going down. No problem; the Fed is there and will print whatever is needed to meet our military commitments, whether it’s wise to do so or not.
The money issue should indeed be a gigantic political issue. Fiat money hurts the economy, finances wars, and allows for excessive welfarism. When these connections are realized and understood, it will once again become a major political issue, since paper money never lasts. Ultimately politicians will not have a choice of whether to address or take a position on the money issue. The people and circumstances will demand it.
We do hear some talk about monetary policy and criticism directed toward the Federal Reserve, but it falls far short of what I’m talking about. Big-spending welfarists constantly complain about Fed policy, usually demanding lower interest rates even when rates are at historic lows. Big-government conservatives promoting grand worldwide military operations, while arguing that “deficits don’t matter” as long as marginal tax rates are lowered, also constantly criticize the Fed for high interest rates and lack of liquidity. Coming from both the left and the right, these demands would not occur if money could not be created out of thin air at will. Both sides are asking for the same thing from the Fed for different reasons. They want the printing presses to run faster and create more credit, so that the economy will be healed like magic- or so they believe.
This is not the kind of interest in the Fed that we need. I’m anticipating that we should and one day will be forced to deal with the definition of the dollar and what money should consist of. The current superficial discussion about money merely shows a desire to tinker with the current system in hopes of improving the deteriorating economy. There will be a point, though, when the tinkering will no longer be of any benefit and even the best advice will be of no value. We have just gone through two-and-a-half years of tinkering with 13 rate cuts, and recovery has not yet been achieved. It’s just possible that we’re much closer than anyone realizes to that day when it will become absolutely necessary to deal with the monetary issue- both philosophically and strategically- and forget about the band-aid approach to the current system.
Money as an Economic Issue
For a time, the economic consequences of paper money may seem benign and even helpful, but are always disruptive to economic growth and prosperity.
Economic planners of the Keynesian-socialist type have always relished control over money creation in their efforts to regulate and plan the economy. They have no qualms with using this power to pursue their egalitarian dreams of wealth redistribution. That force and fraud are used to make the economic system supposedly fairer is of little concern to them.
There are also many conservatives who do not endorse central economic planning as those on the left do, but nevertheless concede this authority to the Federal Reserve to manipulate the economy through monetary policy. Only a small group of constitutionalists, libertarians, and Austrian free-market economists reject the notion that central planning, through interest-rate and money-supply manipulation, is a productive endeavor.
Many sincere politicians, bureaucrats, and bankers endorse the current system, not out of malice or greed, but because it’s the only system they have know. The principles of sound money and free market banking are not taught in our universities. The overwhelming consensus in Washington, as well as around the world, is that commodity money without a central bank is no longer practical or necessary. Be assured, though, that certain individuals who greatly benefit from a paper money system know exactly why the restraints that a commodities standard would have are unacceptable.
Though the economic consequences of paper money in the early stage affect lower-income and middle-class citizens, history shows that when the destruction of monetary value becomes rampant, nearly everyone suffers and the economic and political structure becomes unstable. There’s good reason for all of us to be concerned about our monetary system and the future of the dollar.
Nations that live beyond their means must always pay for their extravagance. It’s easy to understand why future generations inherit a burden when the national debt piles up. This requires others to pay the interest and debts when they come due. The victims are never the recipients of the borrowed funds. But this is not exactly what happens when a country pays off its debt. The debt, in nominal terms, always goes up, and since it is still accepted by mainstream economists that just borrowing endlessly is not the road to permanent prosperity, real debt must be reduced. Depreciating the value of the dollar does that. If the dollar loses 10% of its value, the national debt of $6.5 trillion is reduced in real terms by $650 billion dollars. That’s a pretty neat trick and quite helpful- to the government.
That’s why the Fed screams about a coming deflation, so it can continue the devaluation of the dollar unabated. The politicians don’t mind, the bankers welcome the business activity, and the recipients of the funds passed out by Congress never complain. The greater the debt, the greater the need to inflate the currency, since debt cannot be the source of long-term wealth. Individuals and corporations who borrow too much eventually must cut back and pay off debt and start anew, but governments rarely do.
But where’s the hitch? This process, which seems to be a creative way of paying off debt, eventually undermines the capitalist structure of the economy, thus making it difficult to produce wealth, and that’s when the whole process comes to an end. This system causes many economic problems, but most of them stem from the Fed’s interference with the market rate of interest that it achieves through credit creation and printing money.
Nearly 100 years ago, Austrian economist Ludwig von Mises explained and predicted the failure of socialism. Without a pricing mechanism, the delicate balance between consumers and producers would be destroyed. Freely fluctuating prices provide vital information to the entrepreneur who is making key decisions on production. Without this information, major mistakes are made. A central planning bureaucrat cannot be a substitute for the law of supply and demand.
Though generally accepted by most modern economists and politicians, there is little hesitancy in accepting the omnipotent wisdom of the Federal Reserve to know the “price” of money- the interest rate- and its proper supply. For decades, and especially during the 1990s- when Chairman Greenspan was held in such high esteem, and no one dared question his judgment or the wisdom of the system- this process was allowed to run unimpeded by political or market restraints. Just as we must eventually pay for our perpetual deficits, continuous manipulation of interest and credit will also extract a payment.
Artificially low interest rates deceive investors into believing that rates are low because savings are high and represent funds not spent on consumption. When the Fed creates bank deposits out of thin air making loans available at below-market rates, mal-investment and overcapacity results, setting the stage for the next recession or depression. The easy credit policy is welcomed by many: stock-market investors, home builders, home buyers, congressional spendthrifts, bankers, and many other consumers who enjoy borrowing at low rates and not worrying about repayment. However, perpetual good times cannot come from a printing press or easy credit created by a Federal Reserve computer. The piper will demand payment, and the downturn in the business cycle will see to it. The downturn is locked into place by the artificial boom that everyone enjoys, despite the dreams that we have ushered in a “new economic era.” Let there be no doubt: the business cycle, the stagflation, the recessions, the depressions, and the inflations are not a result of capitalism and sound money, but rather are a direct result of paper money and a central bank that is incapable of managing it.
Our current monetary system makes it tempting for all parties, individuals, corporations, and government to go into debt. It encourages consumption over investment and production. Incentives to save are diminished by the Fed’s making new credit available to everyone and keeping interest rates on saving so low that few find it advisable to save for a rainy day. This is made worse by taxing interest earned on savings. It plays havoc with those who do save and want to live off their interest. The artificial rates may be 4, 5, or even 6% below the market rate, and the savers- many who are elderly and on fixed incomes- suffer unfairly at the hands of Alan Greenspan, who believes that resorting to money creation will solve our problems and give us perpetual prosperity.
Lowering interest rates at times, especially early in the stages of monetary debasement, will produce the desired effects and stimulate another boom-bust cycle. But eventually the distortions and imbalances between consumption and production, and the excessive debt, prevent the monetary stimulus from doing very much to boost the economy. Just look at what’s been happening in Japan for the last 12 years. When conditions get bad enough the only recourse will be to have major monetary reform to restore confidence in the system.
The two conditions that result from fiat money that are more likely to concern the people are inflation of prices and unemployment. Unfortunately, few realize these problems are directly related to our monetary system. Instead of demanding reforms, the chorus from both the right and left is for the Fed to do more of the same- only faster. If our problem stems from easy credit and interest-rate manipulation by the Fed, demanding more will not do much to help. Sadly, it will only make our problems worse.
Ironically, the more successful the money managers are at restoring growth or prolonging the boom with their monetary machinations, the greater are the distortions and imbalances in the economy. This means that when corrections are eventually forced upon us, they are much more painful and more people suffer with the correction lasting longer.
Today’s Conditions
Today’s economic conditions reflect a fiat monetary system held together by many tricks and luck over the past 30 years. The world has been awash in paper money since removal of the last vestige of the gold standard by Richard Nixon when he buried the Bretton Woods agreement- the gold exchange standard- on August 15, 1971. Since then we’ve been on a worldwide paper dollar standard. Quite possibly we are seeing the beginning of the end of that system. If so, tough times are ahead for the United States and the world economy.
A paper monetary standard means there are no restraints on the printing press or on federal deficits. In 1971, M3 was $776 billion; today it stands at $8.9 trillion, an 1100% increase. Our national debt in 1971 was $408 billion; today it stands at $6.8 trillion, a 1600% increase. Since that time, our dollar has lost almost 80% of its purchasing power. Common sense tells us that this process is not sustainable and something has to give. So far, no one in Washington seems interested.
Although dollar creation is ultimately the key to its value, many other factors play a part in its perceived value, such as: the strength of our economy, our political stability, our military power, the benefit of the dollar being the key reserve currency of the world, and the relative weakness of other nation’s economies and their currencies. For these reasons, the dollar has enjoyed a special place in the world economy. Increases in productivity have also helped to bestow undeserved trust in our economy with consumer prices, to some degree, being held in check and fooling the people, at the urging of the Fed, that “inflation” is not a problem. Trust is an important factor in how the dollar is perceived. Sound money encourages trust, but trust can come from these other sources as well. But when this trust is lost, which always occurs with paper money, the delayed adjustments can hit with a vengeance.
Following the breakdown of the Bretton Woods agreement, the world essentially accepted the dollar as a replacement for gold, to be held in reserve upon which even more monetary expansion could occur. It was a great arrangement that up until now seemed to make everyone happy.
We own the printing press and create as many dollars as we please. These dollars are used to buy federal debt. This allows our debt to be monetized and the spendthrift Congress, of course, finds this a delightful convenience and never complains. As the dollars circulate through our fractional reserve banking system, they expand many times over. With our excess dollars at home, our trading partners are only too happy to accept these dollars in order to sell us their products. Because our dollar is relatively strong compared to other currencies, we can buy foreign products at a discounted price. In other words, we get to create the world’s reserve currency at no cost, spend it overseas, and receive manufactured goods in return. Our excess dollars go abroad and other countries-especially Japan and China- are only too happy to loan them right back to us by buying our government and GSE debt. Up until now both sides have been happy with this arrangement.
But all good things must come to an end and this arrangement is ending. The process put us into a position of being a huge debtor nation, with our current account deficit of more than $600 billion per year now exceeding 5% of our GDP. We now owe foreigners more than any other nation ever owed in all of history, over $3 trillion.
A debt of this sort always ends by the currency of the debtor nation decreasing in value. And that’s what has started to happen with the dollar, although it still has a long way to go. Our free lunch cannot last. Printing money, buying foreign products, and selling foreign holders of dollars our debt ends when the foreign holders of this debt become concerned with the dollar’s future value.
Once this process starts, interest rates will rise. And in recent weeks, despite the frenetic effort of the Fed to keep interest rates low, they are actually rising instead. The official explanation is that this is due to an economic rebound with an increase in demand for loans. Yet a decrease in demand for our debt and reluctance to hold our dollars is a more likely cause. Only time will tell whether the economy rebounds to any significant degree, but one must be aware that rising interest rates and serious price inflation can also reflect a weak dollar and a weak economy. The stagflation of the 1970s baffled many conventional economists, but not the Austrian economists. Many other countries have in the past suffered from the extremes of inflation in an inflationary depression, and we are not immune from that happening here. Our monetary and fiscal policies are actually conducive to such a scenario.
In the short run, the current system gives us a free ride, our paper buys cheap goods from overseas, and foreigners risk all by financing our extravagance. But in the long run, we will surely pay for living beyond our means. Debt will be paid for one way or another. An inflated currency always comes back to haunt those who enjoyed the “benefits” of inflation. Although this process is extremely dangerous, many economists and politicians do not see it as a currency problem and are only too willing to find a villain to attack. Surprisingly the villain is often the foreigner who foolishly takes our paper for useful goods and accommodates us by loaning the proceeds back to us. It’s true that the system encourages exportation of jobs as we buy more and more foreign goods. But nobody understands the Fed role in this, so the cries go out to punish the competition with tariffs. Protectionism is a predictable consequence of paper- money inflation, just as is the impoverishment of an entire middle class. It should surprise no one that even in the boom phase of the 1990s, there were still many people who became poorer. Yet all we hear are calls for more government mischief to correct the problems with tariffs, increased welfare for the poor, increased unemployment benefits, deficit spending, and special interest tax reduction, none of which can solve the problems ingrained in a system that operates with paper money and a central bank.
If inflation were equitable and treated all classes the same, it would be less socially divisive. But while some see their incomes going up above the rate of inflation (movie stars, CEOs, stock brokers, speculators, professional athletes,) others see their incomes stagnate like lower-middle-income workers, retired people, and farmers. Likewise, the rise in the cost of living hurts the poor and middle class more than the wealthy. Because inflation treats certain groups unfairly, anger and envy are directed toward those who have benefited.
The long-term philosophic problem with this is that the central bank and the fiat monetary system are not blamed; instead free market capitalism is. This is what happened in the 1930s. The Keynesians, who grew to dominate economic thinking at the time, erroneously blamed the gold standard, balanced budgets, and capitalism instead of tax increases, tariffs, and Fed policy. This country cannot afford another attack on economic liberty similar to what followed the 1929 crash that ushered in the economic interventionism and inflationism which we have been saddled with ever since. These policies have brought us to the brink of another colossal economic downturn and we need to be prepared.
Big business and banking deserve our harsh criticism, but not because they are big or because they make a lot of money. Our criticism should come because of the special benefits they receive from a monetary system designed to assist the business class at the expense of the working class. Labor leader Samuel Gompers understood this and feared paper money and a central bank while arguing the case for gold. Since the monetary system is used to finance deficits that come from war expenditures, the military industrial complex is a strong supporter of the current monetary system.
Liberals foolishly believe that they can control the process and curtail the benefits going to corporations and banks by increasing the spending for welfare for the poor. But this never happens. Powerful financial special interests control the government spending process and throw only crumbs to the poor. The fallacy with this approach is that the advocates fail to see the harm done to the poor, with cost of living increases and job losses that are a natural consequence of monetary debasement. Therefore, even more liberal control over the spending process can never compensate for the great harm done to the economy and the poor by the Federal Reserve’s effort to manage an unmanageable fiat monetary system.
Economic intervention, financed by inflation, is high-stakes government. It provides the incentive for the big money to “invest” in gaining government control. The big money comes from those who have it- corporations and banking interests. That’s why literally billions of dollars are spent on elections and lobbying. The only way to restore equity is to change the primary function of government from economic planning and militarism to protecting liberty. Without money, the poor and middle class are disenfranchised since access for the most part requires money. Obviously, this is not a partisan issue since both major parties are controlled by wealthy special interests. Only the rhetoric is different.
Our current economic problems are directly related to the monetary excesses of three decades and the more recent efforts by the Federal Reserve to thwart the correction that the market is forcing upon us. Since 1998, there has been a sustained attack on corporate profits. Before that, profits and earnings were inflated and fictitious, with WorldCom and Enron being prime examples. In spite of the 13 rate cuts since 2001, economic growth has not been restored.
Paper money encourages speculation, excessive debt, and misdirected investments. The market, however, always moves in the direction of eliminating bad investments, liquidating debt, and reducing speculative excesses. What we have seen, especially since the stock market peak of early 2000, is a knock-down, drag-out battle between the Fed’s effort to avoid a recession, limit the recession, and stimulate growth with its only tool, money creation, while the market demands the elimination of bad investments and excess debt. The Fed was also motivated to save the stock market from collapsing, which in some ways they have been able to do. The market, in contrast, will insist on liquidation of unsustainable debt, removal of investment mistakes made over several decades, and a dramatic revaluation of the stock market. In this go-around, the Fed has pulled out all the stops and is more determined than ever, yet the market is saying that new and healthy growth cannot occur until a major cleansing of the system occurs. Does anyone think that tariffs and interest rates of 1% will encourage the rebuilding of our steel and textile industries anytime soon? Obviously, something more is needed.
The world central bankers are concerned with the lack of response to low interest rates and they have joined in a concerted effort to rescue the world economy through a policy of protecting the dollar’s role in the world economy, denying that inflation exists, and justifying unlimited expansion of the dollar money supply. To maintain confidence in the dollar, gold prices must be held in check. In the 1960s our government didn’t want a vote of no confidence in the dollar, and for a couple of decades, the price of gold was artificially held at $35 per ounce. That, of course, did not last.
In recent years, there has been a coordinated effort by the world central bankers to keep the gold price in check by dumping part of their large horde of gold into the market. This has worked to a degree, but just as it could not be sustained in the 1960s, until Nixon declared the Bretton Woods agreement dead in 1971, this effort will fail as well.
The market price of gold is important because it reflects the ultimate confidence in the dollar. An artificially low price for gold contributes to false confidence and when this is lost, more chaos ensues as the market adjusts for the delay.
Monetary policy today is designed to demonetize gold and guarantee for the first time that paper can serve as an adequate substitute in the hands of wise central bankers. Trust, then, has to be transferred from gold to the politicians and bureaucrats who are in charge of our monetary system. This fails to recognize the obvious reason that market participants throughout history have always preferred to deal with real assets, real money, rather than government paper. This contest between paper and honest money is of much greater significance than many realize. We should know the outcome of this struggle within the next decade.
Alan Greenspan, although once a strong advocate for the gold standard, now believes he knows what the outcome of this battle will be. Is it just wishful thinking on his part? In an answer to a question I asked before the Financial Services Committee in February 2003, Chairman Greenspan made an effort to convince me that paper money now works as well as gold: “I have been quite surprised, and I must say pleased, by the fact that central banks have been able to effectively simulate many of the characteristics of the gold standard by constraining the degree of finance in a manner which effectively brought down the general price levels.” Earlier, in December 2002, Mr. Greenspan spoke before the Economic Club of New York and addressed the same subject: “The record of the past 20 years appears to underscore the observation that, although pressures for excess issuance of fiat money are chronic, a prudent monetary policy maintained over a protracted period of time can contain the forces of inflation.” There are several problems with this optimistic assessment. First, efficient central bankers will never replace the invisible hand of a commodity monetary standard. Second, using government price indexes to measure the success of a managed fiat currency should not be reassuring. These indexes can be arbitrarily altered to imply a successful monetary policy. Also, price increases of consumer goods are not a litmus test for measuring the harm done by the money managers at the Fed. The development of overcapacity, excessive debt, and speculation still occur, even when prices happen to remain reasonably stable due to increases in productivity and technology. Chairman Greenspan makes his argument because he hopes he’s right that sound money is no longer necessary, and also because it’s an excuse to keep the inflation of the money supply going for as long as possible, hoping a miracle will restore sound growth to the economy. But that’s only a dream.
We are now faced with an economy that is far from robust and may get a lot worse before rebounding. If not now, the time will soon come when the conventional wisdom of the last 90 years, since the Fed was created, will have to be challenged. If the conditions have changed and the routine of fiscal and monetary stimulation don’t work, we better prepare ourselves for the aftermath of a failed dollar system, which will not be limited to the United States.
An interesting headline appeared in the New York Times on July 31, 2003, “Commodity Costs Soar, But Factories Don’t Bustle.” What is observed here is a sea change in attitude by investors shifting their investment funds and speculation into things of real value and out of financial areas, such as stocks and bonds. This shift shows that in spite of the most aggressive Fed policy in history in the past three years, the economy remains sluggish and interest rates are actually rising. What can the Fed do? If this trend continues, there’s little they can do. Not only do I believe this trend will continue, I believe it’s likely to accelerate. This policy plays havoc with our economy; reduces revenues, prompts increases in federal spending, increases in deficits and debt occur, and interest costs rise, compounding our budgetary woes.
The set of circumstances we face today are unique and quite different from all the other recessions the Federal Reserve has had to deal with. Generally, interest rates are raised to slow the economy and dampen price inflation. At the bottom of the cycle interest rates are lowered to stimulate the economy. But this time around, the recession came in spite of huge and significant interest rate reductions by the Fed. This aggressive policy did not prevent the recession as was hoped; so far it has not produced the desired recovery. Now we’re at the bottom of the cycle and interest rates not only can’t be lowered, they are rising. This is a unique and dangerous combination of events. This set of circumstances can only occur with fiat money and indicates that further manipulation of the money supply and interest rates by the Fed will have little if any effect.
The odds aren’t very good that the Fed will adopt a policy of not inflating the money supply because of some very painful consequences that would result. Also there would be a need to remove the pressure on the Fed to accommodate the big spenders in Congress. Since there are essentially only two groups that have any influence on spending levels, big-government liberals and big- government conservatives, that’s not about to happen. Poverty is going to worsen due to our monetary and fiscal policies, so spending on the war on poverty will accelerate. Our obsession with policing the world, nation building, and pre-emptive war are not likely to soon go away, since both Republican and Democratic leaders endorse them. Instead, the cost of defending the American empire is going to accelerate. A country that is getting poorer cannot pay these bills with higher taxation nor can they find enough excess funds for the people to loan to the government. The only recourse is for the Federal Reserve to accommodate and monetize the federal debt, and that, of course, is inflation.
It’s now admitted that the deficit is out of control, with next year’s deficit reaching over one-half trillion dollars, not counting the billions borrowed from “trust funds” like Social Security. I’m sticking to my prediction that within a few years the national debt will increase over $1 trillion in one fiscal year. So far, so good, no big market reactions, the dollar is holding its own and the administration and congressional leaders are not alarmed. But they ought to be.
I agree, it would be politically tough to bite the bullet and deal with our extravagance, both fiscal and monetary, but the repercussions here at home from a loss of confidence in the dollar throughout the world will not be a pretty sight to behold. I don’t see any way we are going to avoid the crisis.
We do have some options to minimize the suffering. If we decided to, we could permit some alternatives to the current system of money and banking we have today.
Already, we took a big step in this direction. Gold was illegal to own between 1933 and 1976. Today millions of Americans do own some gold.
Gold contracts are legal, but a settlement of any dispute is always in Federal Reserve notes. This makes gold contracts of limited value.
For gold to be an alternative to Federal Reserve notes, taxes on any transactions in gold must be removed, both sales and capital gains.
Holding gold should be permitted in any pension fund, just as dollars are permitted in a checking account of these funds.
Repeal of all legal tender laws is a must. Sound money never requires the force of legal tender laws. Only paper money requires such laws.
These proposals, even if put in place tomorrow, would not solve all the problems we face. It would though, legalize freedom of choice in money, and many who worry about having their savings wiped out by a depreciating dollar would at least have another option. This option would ease some of the difficulties that are surely to come from runaway deficits in a weakening economy with skyrocketing inflation.
Curbing the scope of government and limiting its size to that prescribed in the Constitution is the goal that we should seek. But political reality makes this option available to us only after a national bankruptcy has occurred. We need not face that catastrophe. What we need to do is to strictly limit the power of government to meddle in our economy and our personal affairs, and stay out of the internal affairs of other nations.
Conclusion
It’s no coincidence that during the period following the establishment of the Federal Reserve and the elimination of the gold standard, a huge growth in the size of the federal government and its debt occurred. Believers in big government, whether on the left or right, vociferously reject the constraints on government growth that gold demands. Liberty is virtually impossible to protect when the people allow their government to print money at will. Inevitably, the left will demand more economic interventionism, the right more militarism and empire building. Both sides, either inadvertently or deliberately, will foster corporatism. Those whose greatest interest is in liberty and self-reliance are lost in the shuffle. Though left and right have different goals and serve different special-interest groups, they are only too willing to compromise and support each other’s programs.
If unchecked, the economic and political chaos that comes from currency destruction inevitably leads to tyranny- a consequence of which the Founders were well aware. For 90 years we have lived with a central bank, with the last 32 years absent of any restraint on money creation. The longer the process lasts, the faster the printing presses have to run in an effort to maintain stability. They are currently running at record rate. It was predictable and is understandable that our national debt is now expanding at a record rate.
The panicky effort of the Fed to stimulate economic growth does produce what it considers favorable economic reports, recently citing second quarter growth this year at 3.1%. But in the footnotes, we find that military spending—almost all of which is overseas- was up an astounding 46%. This, of course, represents deficit spending financed by the Federal Reserve’s printing press. In the same quarter, after-tax corporate profits fell 3.4%. This is hardly a reassuring report on the health of our economy and merely reflects the bankruptcy of current economic policy.
Real economic growth won’t return until confidence in the entire system is restored. And that is impossible as long as it depends on the politicians not spending too much money and the Federal Reserve limiting its propensity to inflate our way to prosperity. Only sound money and limited government can do that.
<< <i>However how do you stop it? >>
I don't have the answer, but it seems pretty clear that allowing governments to have a monopoly on money creation leads to less a than optimal outcome on a fairly regular basis.
<< <i>ANY inflation benefits no one.
Think of a lifetime of absolute Zero% inflation.
Every penny saved is a penny earned....Sound familiar??
This hogwash of 'a little inflation is good' is nonsense.
a speech by HON. RON PAUL OF TEXAS
IN THE HOUSE OF REPRESENTATIVES
September 5, 2003
. >>
These are all fine words but in the real world they would wreck havoc on economies and
cause mass starvation at regular intervals. As the speaker himself admits it is not the mon-
ey that causes the problem but its debasement. The debasement is always possible and
is caused by those who would steal from the economy (ie all individuals). It's hardly "sound"
money which will protect us from this it is a better electorate placing statesmen and sound
politicians in Washington.
If you want better money you need a better electorate. To get a better electorate you'll need
better schools. Since schools now fail to graduate nearly half of the students we will have a
virtually insurmountable hurdle to having better money.
So long as people don't care that the educational system has utterly failed there is simply no
alternative to expect increasing difficulty with the money.
<< <i>The US owns the reserves the FED gives away. We even print the FRN's that they freely distribute to us. roadrunner >>
Good article, this is the only mis-information: The US doesn't own any reserves the FED gives away. None. Nada. Zero. Zip.
You go...Roadrunner!!!!
...and as for you, Mark... the simple fact that you are apparently a college educated economist... that is enough for me to know that I can not trust a single word that comes out of your well-trained obedient mouth...or keypad as the case might be...
...an explanation of why I feel that way would unfortunately take this thread and/or my post into forbidden territory...
I guess we shall need to disagree and apparently somewhat less pleasantly than roadrnner and I disagree given that roadrunner and I never asserted a lack of trust in each other nor inquired as to the other's guts. Frankly I can not understand the need to make a disagreement personal and perhaps it's that reason that I enjoy debating with roadrunner (even though he's wrong
Two quick points:
1) JungleFever: To take just one of your posts, the one in which you suggest that I am a fast reader for posting a comment about a piece of nonsense I found when I googled "Fed ownership:" Perhaps it would be better if you tried to explain what the charts on that page meant rather than challenge me to do so. I already said that to me they were absolutely meaningless and gave an example of how I could create a similar chart linking roadunner and me to the Fed. The one chart I could understand, the first chart, apparently made the point that member commercial banks own stock in the Fed and that private banks are owned by stockholders. To that I can add a big "DUH" for my reponse. So instead of insultng me, provide some explanation. All that said, when I get to work and am done teaching, I hope to have some time to Google the book or article you cited in your post to see what's there.
2) SeaEagleCoins: The fact that you don't trust a single word that comes out of my mouth because I am a college educated economist probably means you won't be loaning me any money soon? I surely hope you do not seek your medical advice from the local ditch digger because I have heard rumors to the effect that physicians also tend to be college educated. On a different, more coin related topic topic, I like the Texas commemorative that is your icon. Is that your commemorative? Based on the small picture, it seems very nice; I wish I could see a larger picture.
<< <i>JungleFever and SeaEagleCoins:
I guess we shall need to disagree and apparently somewhat less pleasantly than roadrnner and I disagree given that roadrunner and I never asserted a lack of trust in each other nor inquired as to the other's guts. Frankly I can not understand the need to make a disagreement personal and perhaps it's that reason that I enjoy debating with roadrunner (even though he's wrong
Two quick points:
1) JungleFever: To take just one of your posts, the one in which you suggest that I am a fast reader for posting a comment about a piece of nonsense I found when I googled "Fed ownership:" Perhaps it would be better if you tried to explain what the charts on that page meant rather than challenge me to do so. I already said that to me they were absolutely meaningless and gave an example of how I could create a similar chart linking roadunner and me to the Fed. The one chart I could understand, the first chart, apparently made the point that member commercial banks own stock in the Fed and that private banks are owned by stockholders. To that I can add a big "DUH" for my reponse. So instead of insultng me, provide some explanation. All that said, when I get to work and am done teaching, I hope to have some time to Google the book or article you cited in your post to see what's there.
2) SeaEagleCoins: The fact that you don't trust a single word that comes out of my mouth because I am a college educated economist probably means you won't be loaning me any money soon? I surely hope you do not seek your medical advice from the local ditch digger because I have heard rumors to the effect that physicians also tend to be college educated. On a different, more coin related topic topic, I like the Texas commemorative that is your icon. Is that your commemorative? Based on the small picture, it seems very nice; I wish I could see a larger picture. >>
In all fairness, Mark...I do apologize for the harshness of my dismissal... it is not you that I have issue with...rather the source of your information...
Being also college educated... I became very discontent with the methods employed by most professors... they did not wish to teach me to use my mind...but instead regurgitated recycled information...telling me what to think and how to think it...I find most so-called knowledge being shoveled into students these days to be little more than propaganda...
I especially distrust certain areas of study, due to the fact that they rarely encourage exploration and thinking outside the box... Economics is one of these areas... essentially, IMHO, most, if not all, that is presently taught as Economics...is little more than "Here's the rule book...now go out and follow it and do all you can to insure that other's go along with the rules, as well"...
So, Mark...I do apologize for personalizing my intitial comment...you're probably a really nice guy... and yes, I really like that Texas design too...not mine though...it was offered by another board member here in a thread with a link to coin pics he was offering for use as icons...
BTW...I have gotten into the same debate you seem to be having with RR with other folks in the past...it tends to be about as productive as trying to have an open-minded discussion on religion with a door-to-door Christian...we each have our point of view and it's highly unlikely either is going to change...
Actually, I hope RR and I are wrong...because if we're right there will be absolutely no joy in seeing you proven wrong... 'cause if we're right, we are all gonna be up
That's why I simply sat on the sidelines last nite...but after a few cups of coffee this AM, I just had to stick my nose in things...
They have my vote!!
"“Those who sacrifice liberty for security/safety deserve neither.“(Benjamin Franklin)
"I only golf on days that end in 'Y'" (DE59)
A lot of political log-rolling going on here. The Democrats were in charge (in part because of Teddy Roosevelt's Bull Moose fiasco).
They told the Republican bankers to cool it and they did and it passed.
I don't know how bankers feel about owning the Fed. They were requires to turn over a per centage of their captalization. They had to buy their way in, whether they wanted to or not. They collect a dividend on this purchase but have little say in the control.
I also know that Ginnie May and Freddie Mack are not really government institutions, although they have "government backing", and now may well be able to receive government funds in large doses.
I know that Bear Stearns, Lehman Brothers, JP Morgan, Morgan Stanley and Goldman Sachs are not government institutions, but they are now able to obtain huge amounts government money on a monthly rollover schedule ad infinitum.
As a simple man, I can only wonder why large banking institutions can be "too large to fail" while I, as a taxpaying citizen can be considered "too small to matter". It would be a lot cheaper for the government to bail me out than to bail out these guys.
I look at all of these *private* and/or for-profit institutions as the administrative branch of the money machine, and the US Treasury as the enforcement branch that can be used to put the hammer down on US citizens and corporations who fall out of favor and don't do what the heck they are told to do.
It puzzles me, being a simple man, why the testimonies in Congress about the banking debacle always refer to a "moral hazard", but then - the testimony doesn't really talk about what the "moral hazard" really is, who is responsible, and how to address it. Do they even care (wink, wink)?
I also know that if I had left my money with a federally-regulated money institution invested in traditional paper-backed financial instruments, my lifestyle would have already deteriorated and my retirement savings would already have been decimated. And I'm not particularly happy about all that. But, I am too-simple a man to know who all is behind my plight.
So Mark, I am not sure if there is a cabal of secretive international bankers who run our government behind the scenes and are largely responsible for looting us "little people" (as one of my favorites - Leona Helmsley, would say), but I do have my suspicions. Oh, and I've been trained in chemistry, finance and business - but only as a simple man.
I knew it would happen.
You even noted that that was a call to all NAKED SHORTS, being a Naked Short is supposed to be illegal..it is shorting the market without shares to borrow against! Where is the SEC on this matter....I guess another blind eye!
We The People are just food for the Albatross.
Coin's for sale/trade.
Tom Pilitowski
US Rare Coin Investments
800-624-1870
Thanks for the reply. I agree with you that arguing on the Internet is likely the most productive of all endeavors. But, as long as it doesn't get personal, I see it as sometimes fun. That's probably why I enjoy my "discussions" with roadrunner...and, I expect and hope that I might enjoy some future "discussions" with you, too!
Re the Texas commemorative: I have a few. I have a brother-in-law who lives in Texas. When he visited us a few years ago, I was able to rationalize to my wife the purchase of one of them as a way to "honor" his stay at our house. Frankly I thought the argument bogus, but it worked and I was able to buy one.
I googled "Federal Reserve Directors: A Study of Corporate and Banking Influence" and got the same set of charts that I described as nonsensical. Apparently this was some sort of Congressional report and perhaps the charts made sense when they were presented in the report. But it is to me frankly amazing how mnay web sites merely reproduce the charts with no sign that they make no sense whatsoever. And I suspect that they will made no sense even when they were first presented in the report.
One last comment: I think all of the London Connection conspiracy buffoons miss one very important point about the election of the members of each regional Federal Reserve Bank's Board of Directors. They all seem to say that the big banks own more of the stock in the Federal Reserve bank. That's indeed the case--member banks are required to own a certain fraction (I think 6%) of their capital as stock in the Federal Reserve. The conspiracy buffs all seem to say that therefore the it's the big banks that "run the Federal Reserve." Now setting aside the point that the Boards of Directors do very that is powerful, there is the small additional point that is msised: The member banks each have one vote. Yep, no matter how big or how small the commercial bank, it has one vote. You see, this stock really is not like typical stock--it really does not have the same ownership rights. Too bad this small little fact is overlooked.
By the way, here is a source for the fact: source. Given that I like arguing with facts rather than assertions and statements, I doubt you'll want to now provide me with a list of who actually owns the Federal Reserve and would prefer to simply say that I am ignorant and/or have no guts. I guess that's OK with me because I know I am ignorant in some areas...just not the Federal Reserve. And re guts: Well, I just lost 45 pounds over the last year, so you are more correct now than you would have been 12 months ago.
What ever you do, take the time to watch this.
ProofArtworkonCircs,
It has been a while since I read Bray Hammond's "Banks and Politics in America from the Revolution to the Civil War" and my focus was really on the period after the Second Bank was put out of business, but, if I recall correctly, the Federal Government wasn't able to follow through on its plan to distribute it surplus to the states because, after 1836, there wasn't a surplus to distribute. (I believe that distributions were made in 1836, but not thereafter.)
firstmint,
I think it's important not to confuse money in the government's hands with money in the economy. I think the prime example of this is the hundreds of millions of Morgan dollars that sat in storage for decades. The Silverites thought that coining silver dollars would somehow help the country, but these coins sat in storage and never entered the economy. True, some of them served as backing for Silver Certificates, but this would only help the economy if the Silver Certificates were in circulation.
Money in the sub-Treasuries or the Mints isn't the same as money in my (or your) pocket or money in the bank - money in one's pocket can be spent and money in the bank generates interest for the depositor and serves as a loan for a business, both of which improve the economy.
Speaking specifically of the 1838 eagles, do you know if the Mint's shipping records are available through the Archives? This might tell us where the specific coins went once they were minted.
In general, I believe that they went from the Mint to a (probably) New York bank and were then exported to England and melted, as much American gold was during this period. America did a lot of business with England and Europe and they wanted to be paid in gold (usually in the form of bank credits, of course) not state-chartered banknotes. You can track specie exports through the Annual Reports of the Secretary of the Treasury (and other contemporary government publications) as well as Niles Register, Hunt's Merchant Magazine and The Banker's Magazine.
Edited to add: I just noticed that I forgot to mention that if the 1838 eagles were exported, then they were probably used to pay for imports - some of which were useful additions to the economy and some of which were "just" consumer goods. Unfortunately, then as now, many people spent a lot of money on consumer goods. For example, the cotton planters, as a class, generally had very large outstanding debts, despite the very large profits they derived from exporting cotton. It makes you realize how "large" they lived!
Self serving notice: If anyone's interested in reading more about how commerce was conducted in this period, please read my chapter in Doug Winter's Gold Coins of the New Orleans Mint, 2nd Edition. If you don't own a copy, you can read most of my chapter on the Internet via Google Book Search. (Please don't let that stop you from buying the book! I don't get anything but gratification out of it if you do and I'd be pleased to autograph your copy, if you're interested!
Check out the Southern Gold Society
Well, now I hope to add you to my list (along with roadrunner and SeaEagleCoins) of people with whom I can disagree in a pleasant way. That's a LOT more fun (to me) than name calling.
Now, re the fact that each bank has one vote for the (unimportant) position of board director: You apparently dismiss this point as unimportant. But I think that many of the web sites that reprint those insane charts are run by people who have no idea of that fact. They apparently think that the shares of stock in the Federal Reserve work like shares in a typical corporation so that when one bank has more shares than another bank, the bank with more shares has a greater voice in the election of the directors. While you and I agree that that assertion is wrong (since both banks get 1 vote), belief in it is the only way I can rationalize their views that the Fed is run for the benefit of large banks or owners of the large banks. Without that incorrect view, I think their claims make even less sense. Of course, I also believe that the fact they are wrong about something so fundamental is yet another manifestation of the fact that they are wrong about a lot of things. However, I suspect that in that last sentence, you and I will part company before the period...
Let me preface my comments by saying that it is likely my three friends in this thread might disagree with my comments. So let me be clear that my comments are meant to be within the mainstream of economic thought.
Initially the Fed was set up to help furnish "an elastic currency," to act as a "lender of last resort," and to act as check clearing house. Let me take the last reason first: At the time it was sometimes the case that a check drawn on a distant bank would be cashed at only a discount. So, for example, if you were in Boston with a $100 check drawn on a bank in San Francisco, the Boston bank might cash it for only $95. I think there is little doubt that the Fed accomplished this goal. The first goal, provide an elastic currency, reflected the issue at the time that currency was almost always in short supply in the Fall when farmers were paid for their crops and needed currency to repay the loans they had made in the Spring. As a result, short-term interest rates tended to rise in the Fall and bank panics frequently occurred in the Fall. The Fed was supposed to increase the supply of currency in the Fall so that short-term interest rates wouldn't automatically rise and bank panics would not occur. Again, I think there is little doubt that the Fed succeeded in eliminating the annual fluctuations in the short-term interest rate. Bank panics, though, are a separate issue. But let me move to the last task, acting as a lender of last resort. The notion was that when a bank panic threatened and banks needed currency to meet their depositors' demands for withdrawls, the Fed would stand ready to loan to the banks and head off the panic. I think it is generally agreed that the Fed failed miserably at this goal in the 1930s when bank panics helped send the economy into the Great Depression. Currently the Fed asserts that it is acting in its lender of last resort role when it makes loans to investment banks, Fannie Mae, and Feddie Mac. These policies are controversial. Frankly I recognize both upides and downsides from these actions of the Fed. But I think it difficult to predict whether they will be good or bad on net over the long haul.
inlude the goal of preservation of wealth.
One last comment: The goal of furnishing an elastic currency was broadened (immensely!!) to provide the rationale for the Fed to conduct monetary policy, that is, changes in the money supply and interest rates designed to help stabilize the economy. And whether the Fed's monetary policy has been helpful or harmful (or ineffective) is also a controversial issue amongst economists. (I suspect it is not nearly so controversial among the Fed's many critics in this thread!
So John, I think the initial goals of the Fed were meant to be helpful to the public but they most definitely did not include the goal of preservation of wealth. Nowadays the Fed has responded to a large economic literature that points out the importance of maintaining the reputation (=public trust) that the Fed will act to keep inflation low. So it seems to be the case the Bernanke (and the rest of the Fed) value the reputation of an inflation fighter.
John: Was that helpful and/or did it address your questions?
It'll be money that looks like real money.
Translation: it is NOT real money.
That's all you need to know.
my early American coins & currency: -- http://yankeedoodlecoins.com/
Ron Paul makes it clear that inflation is an unfair tax that affects one class of society more than another. 30 years ago a $200K baseball salary was a big deal. Thanks to inflation, today $20 MILLION per year is a big baseball salary (100X increase). The NY Yankees were bought by GS in the 1970's for 1/50th to 1/100th of today's value if my numbers are correct. Again, inflation effects. I can also add that our inflation (ie large money supply increases) from 1983-2006 was exported overseas to Asia and other developing nations. We lucked out that little price inflation of standard goods and services was affected by this. The US was the beneficiary of cheap services and goods in the 80's and 90's while the stock market boomed. This was nirvahna. A free lunch and you could eat it too. We as a nation benefited from this and enjoyed bigger homes, nice vacations, SUV's, and all the modern conveniences...always staying ahead of the Jones'. But monetary inflation always comes home to roost. You can delay it but you can't keep it away forever. It's back and it's back big time, and getting bigger...at least in the things that really count now (food, professional services, energy, education, etc.),
The FED's primary mission in the first decade or two was price control. Or at least that's what they said they were concerned with.
Mark, I followed your link the Fed directors and I don't think it helps with the ownership issue. I want to know who is the money behind the bank, who really profits by the policies the FED sets or tacitly condones, not by ownership in some measly stock or the name of some front-man director who acts on behalf of Daddy Warburgs. Look at all the TRILLIONs of dollars the big banks raked in by making derivative transactions off the balance sheet (ie unbacked) while the FED, congress, and SEC all turned a blind eye. They made TRILLIONs, far more than they could in any stock ownership. The FED can make money electronically, off the balance sheet. Some of that would have been caught in M3 (revolving repo's for example). The FED knew in late 2005 that they would be offering handouts in a few years to ailing banks and brokerages and dumping M3 was a good move to keep their actions hidden. It's the policies of the FED that allow the owners of the banks to make their Billions. All that money has been safely socked away even as CEO's get canned for what is nothing less than criminality.
the Fed has responded to a large economic literature that points out the importance of maintaining the reputation (=public trust) that the Fed will act to keep inflation low. So it seems to be the case the Bernanke (and the rest of the Fed) value the reputation of an inflation fighter.
They value the reputation only because the public fails to realize that they are the LONE source of all US monetary inflation. They also do a bad job of price control because they resort to having the BLS paint a picture of a bogus basket of goods that is very resilient to price changes......by design and definition. While the FED may value the reputation of inflation fighter, the fact that the M3 money supply has increased by 13X since 1982 and 10% per year since 1996, indicates they are primarily inflationists. Yes, they can often point to M1 decreasing (currency in circulation) to show their public mettle, but it's the electronic money and credit behind the scenes and often off the balance sheets that really stokes the price inflation fires. You don't get to $1 QUADRILLION in derivatives with a FED that is concerned about price controls or inflation or deflation....but only about lining the pockets of the banks.
Bernanke's published writings tend to support Mark's comments.
Yeah, that's his public personna. Yet Greenspan's written views prior to becoming FED chief were to support a gold standard. He recognized fiat currency as an inflation tax on the people that transfered wealth to the banks. Volcker today recognizes that both Greenspan and Bernanke have followed a path to kill the economy. So that's 2 FED chiefs that have disagreed with Bernanke's current views (and Mark's). You can bet that ole man Greenspan is heavily invested into gold right now, I have no doubts.
While running for office might have some interesting consequences, I learned long ago that there is no room in the world for:
1. honest politicians
2. honest car dealers
3. honest auto mechanics
4. and unfortunately, honest coin dealers (and by "honest CD" I specifically refer to a dealer who looks out for his clients above his own needs or desires. His primary motivation is to service that client and to build his collection rather than to consider his own profits. His profits come second). Such a dealer would refuse a profit if he is putting his client into a loser coin. Just my 2c.
You'd go broke before anyone realizes what you're about.
roadrunner
<< <i>Ron Paul makes it clear that inflation is an unfair tax that affects one class of society more than another. 30 years ago a $200K baseball salary was a big deal. >>
This is not inflation.
This is a society which is willing to cast off culture in favor of the "big game".
This is the result of a government which turns its back on collusion and allows all the auto companies to fund the "big game" at the expense of car buyers.
As usual, your comments are well reasoned (but wrong
You suggest that the Fed's policy allowed banks to earn trillions (I think you actualy mean billions) of profit. The way I look at this issue is somewhat related to your assertion but the casuality is different. I look at it this way: The Fed and other regulatory agencies set rules. Banks and other financial institutions maximize their profits given thse regulations. You suggest that the Fed and the other agencies set the rules to maximize the profits of the banks. Economists call this thesis the "capture theory," that is, the idea that firms regulated by a government agency "capture" the regulatory body so that regulations further the firms' interest rather than the public's interest. So is the Fed captured by the banks and other financial firms? I think the answer is "to some extent." But 1) I think it's probably much less than you'd assert because I see a lot of Fed actions that go against banks' interests, and 2) most of the effect I believe you implicitly discuss revolves around the Fed's regulations and not its monetary policy.
And, to say that the Fed has been "captured" by the firms it regulates is a LOT different than to say that the Fed is "owned" by some private (perhaps foreign!) group. Research indicates that the FAA probably had been captured to a large extent by the airlines that it regulated in the 1980s. But to say that TWA and United Airlines "owned" the FAA would have been a nonsensical statement because ownership has implications that are wrong.
So roadrunner, I think your assertion is more subtle than those made by most other people with whom you (think) you agree. Perhaps if my intrepretation of what you say is correct, we can see that we disagree on the magnitude of the capture. Or perhaps my intrepretation is wrong... By the way, one other point: Note how I separate the Fed's regulation regime from its monetary policy. I think that is generally the right way to proceed because it makes it easier to concentrate upon and focus upon whatever issue is being discussed.
Now, about M3....nah, let's save that for another time.
This is a society which is willing to cast off culture in favor of the "big game". This is the result of a government which turns its back on collusion and allows all the auto companies to fund the "big game" at the expense of car buyers.
But it is precisely the result of inflation. It's the same 50X increase since the early 70's seen in superb rare coins and other collectibles like sports cards, classic muscle cars, sport's salaries, fine art and antiques, etc. It's where the well-connected money has gone to help preserve wealth from the results of endless monetary inflation.
It's asset inflation at its very finest and it shifted into high gear in the early 1970's.
Mark, I would stick with TRILLIONS of dollars made by the sum of the banks and brokers over the past 10 years. Considering that a single 1% transaction profit on $1,000,000,000,000 in world-wide derivatives is $10 TRILLION, the total profit should be north of that number. The BIS is the one that published that $1.1 QUAD number.
roadrunner
The Fed has continued to promote our habitual spending orgy, causing savers to be penalized, which is exactly the opposite social effect that is needed to maintain an economy that values production and productive labor over academic constructs and mathematical models that produce nothing.
And, for all of this happy spending and consumption, we've lost our industrial base.
And, as roadrunner notes the banks raked in trillions as if by magic, from the creation of CDOs and derivatives that couldn't even be valued because of the complicated risk vs. liability relationships between a myriad of ownership interests.
My opinion - the criminals should be pursued and prosecuted to the fullest extent of the law, if the law can even determine who is culpable.
I knew it would happen.
In regard to your question earlier about "moral hazard". It may not be what you expect, in economics it refers to the possibility that a borrower may engage in more risky behavior after a loan has been made.
A classic example would be a town that sells bonds for a convention center and has an electoral turnover after the sale. The new town leaders decide they want to double the size of the convention center almost ensuring that it will be unprofitable in the long run. This action increases the risk that the bondholders will not recieve the promised yields on the towns municipal bond. This posibility that a borrower may behave in a way that increases risk after loan has been made or a debt instrument has been purchased is a moral hazard.
<< <i>
But it is precisely the result of inflation. It's the same 50X increase since the early 70's seen in superb rare coins and other collectibles like sports cards, classic muscle cars, sport's salaries, fine art and antiques, etc. It's where the well-connected money has gone to help preserve wealth from the results of endless monetary inflation.
It's asset inflation at its very finest and it shifted into high gear in the early 1970's.
>>
But few things from the early '70's have increased substantially in value. This
may be partially because so much money is siphoned out of the economy by the
things which have.
Look at the vast wasteland TV has become. TV news is a caricature of what it
was in the '50's. Most collectible fields have fallen by the wayside to be replaced
mostly by the hobbies and pastimes of the wealthy. True inflation tends to af-
fect most things somewhat equally and centers on necessities rather than hob-
bies.
I'd agree that a $50 million painting is a form of inflation but it's a form that doesn't
affect the average person very meaningfully. It's made possible by profits from
all kinds of enter[prises being funneled to the few at the top while shareholders
content themselves with rising stock prices and the company's manufacturing plant
being disassembled and shipped to China. It's made possible by an electorate
which is satisfied with a failed educational system and the status quo.
You said:
<< <i>They value the reputation only because the public fails to realize that they are the LONE source of all US monetary inflation. >>
I must forcefully disagree with you here.
The origin of inflation is huge deficit spending by our government which then forces the Federal Reserve to print more paper money in order to purchase the additional US government bonds the US government issues to float the additional debt.
Most of the increase in our money supply is due to the massive borrowing our US government has engorged on to finance its' deficit. A much smaller portion of the increase in the money supply is due to the Federal Reserve recent public attempts to prevent the economy from going into a freefall by Greenspan and Bernanke's public statements.
While the Federal Reserve has an interest in favoring a small amount of inflation, it is more fearful of excess inflation as well as deflation since the former threatens the FRN's currency which gives the Fed its basis of existence as well as its member banks while the latter can potentially destroy the existence of its member banks.
Roadrunner: You cannot put all of the blame on the Federal Reserve without putting at least 50% (or more) of the blame on Congress, the President, the US Treasury Department, and the American people.
Sure, the Federal Reserve has blundered quite a bit in the last 95 years but it has also had its shining moments when Paul Volker did the courageous thing to clamp down on inflation when it was threatening to escalate into runaway inflation. There have been times when the Fed was willing and able to do the right thing by the American people when our government was incapable of doing so.
Indeed, we must be extremely guarded against the power of the Federal Reserve Bank system and their power should be curtailed. We can't even get Congress/President to legislate outlawing the US $1 or $5 and to order the the US Treasury to force the Federal Reserve to stop (through the BEP) printing FRN $1 and $5's.
Then, the domain of $1 and $5's can then return to the US Treasury by the issuance of coins ONLY and our government outside the Federal Reserve's influence.
Overland Trail Collection Showcase
Dahlonega Type Set-2008 PCGS Best Exhibited Set
First off there is the problem of asymetric information in monetary policymaking. This is one problem central banks face when conducting monetary policy, that people may not believe their commitment to low inflation policies. When people know that a central bank would like the real GDP to be near the economy's capacity level, they anticipate that the central bank will attempt to expand aggregate demand in the short run, thereby inducing inflation. This gives workers an incentive to bargain for higher wages than they would otherwise be willing to accept. Such wage increases, in turn, tend to shift the aggregate supply schedule upward and to the left, in other words higher prices and less production. To prevent the short run reduction in real GDP that would occur, the Fed engages in exactly the aggregate demand expansion that people had anticipated. This interaction between the public and the Fed leads to an inflation bias in monetary policy.
Why are people so often unwilling to believe a central banks commitment to fighting inflation? For one thing, just as seeing is believing, "not seeing" can be "not believing." During his tenure as as Fed chair, Alan Greenspan hardly ever passed up an oppportunity to preach to the virtues of price stability. Nevertheless, the price level rose in every single year of his time in the chair.
Another reason the Feds commitment to price stability may be doubted is that firms and households have incomplete knowledge of the objectives of the Feds officials, and as a result, may misinterpret their policy actions.
Even when the officials attempt to make their objectives clear, they may not suceed. There are time lags from when a countercyclical policy is put into effect until the changes actually have an effect on economic activity. The public may mispercieve the Feds slow response, implementation and policy actions as an indication of a lack of interest in countering cycles in economioc activity. Or, the Fed could enact a policy that fails to have the intended effects, they are, after all only human. People may misinterpret this policy failure as a lack of Fed commitment to stated objectives..... This is the asymetric-information problem.
I think there will always be an undercurrent of belief that large systems can be controlled by a few guys smoking cigars in a back room someplace. While that may be true for a thinly traded individual stock, it's highly unlikely for a complex system such as the US economy, which is itself influenced by the global economy. I think this belief originates in a well intentioned desire for fairness, but it results in class warfare and frustration that the "game is rigged" against the little guy.
Most of the increase in our money supply is due to the massive borrowing our US government has engorged on to finance its' deficit. A much smaller portion of the increase in the money supply is due to the Federal Reserve recent public attempts to prevent the economy from going into a freefall by Greenspan and Bernanke's public statements.
While the Federal Reserve has an interest in favoring a small amount of inflation, it is more fearful of excess inflation as well as deflation
I think this is right on the money, and for the most part the Fed has been successful in maintaining this. I don't see how you could make a case that the Fed favors and causes inflation. If anything, they have erred on the side of caution at times to the detriment of economic growth.
This brings me to Oreville's post about the government budget deficit. I rarely disageree with Oreville and I know I will never disagree about anything he posts concerning numismatics. But in this case I will partially disagree. First, there is no legal reason for the Fed to increase its purchases of government securities when the budget deficit increases. And, second there is no empirical evidence of which I am aware that demonstrates that the Fed's purchases of government securities increases when the budget deficit increases. And it is through these purchases that the Fed expands the money supply and ultimately drives the inflation rate. Now in other countries and other times, the budget deficit does play a key role. For instance in a hyperinflation the budget deficit is always large and the central bank is not independent so the central bank monetizes the deficit by buying a bunch of the newly issued government debt thereby creating massive inflation. And in countries with a central bank that is not independent of the federal government the size of the budget deficit helps determine the growth of that nation's money supply and hence its inflation rate. So in other countries and for other times Oreville's post is accurate...it's just not accurate for the United States.
Call that what you like. I call what you've just described "bad management".
I knew it would happen.
...after reviewing this thread... I am reminded of a quote I heard many years ago... IIRC it was (rightly or wrongly) attributed to good old Albert Einstein...
"If you can not explain something in a simple enough manner, so that a 4 year old can completely understand it...then you do not truly know what you are talking about"
...and this is what, IMHO...is completely wrong with the present socio-economic society we have all been born into and blindly accept...this Capitalistic bohemoth our ancestors created and we happily(?) propogate...is by it's very nature, so complex, that even those who purport to educate us about it... are unable to truly grasp it in it's full magnitude... like a blind man describing an elephant...
...and to keep it on topic...for this forum, I mean... how about the totally absurd notion that a round of silver or gold or even nickel can be worth more than it's intrinsic value... in a world where most folks don't even have two coins to rub together...let alone food to eat... go ahead... explain THAT to your 4 year old... that you have a coin worth thousands of dollars and in the time it takes to look at it... some 4 year old somewhere in the world just died from disease or starvation... and the value you place on that coin could have been enough to have saved that child's life...
I know...there are many justifications we can come up with to defend our absurd lifestyle choices... but go ahead...explain yourself to a 4 year old... and don't lie...and don't compartmentalize the truth...present it in it's full context... be brutally honest and explain it... so it makes sense...
I recently tried explaining coin collecting to a child a bit older than 4...I think he was around 10... he wanted to know where I found these coins... as he put 2 and 2 together he shook his head and told me it wasn't a hobby... it was "just buying stuff cause you like it"... he thought money was something to spend (i.e. something to make trade more convenient)...collecting it as a hobby made no sense to him...
Heck...I collect coins...and most of the time it doesn't make much sense to me either...