Fisher v. Greenspan: The Fed, Our Government, and Our Dollar
By: BJ Lawson
In a previous post, we discussed the hazards (moral and otherwise) of fractional reserve banking. Once you understand fractional reserve banking, you understand why we need a central bank.
When you have a fractional reserve banking system, each bank is technically insolvent in that it cannot meet all of its depositors’ demands for their money. If all holders of demand deposits came to the bank to withdraw their funds, the run on the bank would force the bank to close down. It’s only the depositor’s confidence that the money will be there that keeps the bank in business.
Since that confidence proves shaky — witness the case of Northen Rock, or even Bear Stearns — the idea of “reserve pooling” gradually arose. The idea is that if an individual bank runs into trouble, other banks can temporarily lend it funds to meet its demands. The endgame for reserve pooling, however, is a single bank that has the power to arbitrarily create money — the central bank.
Our central bank, the Federal Reserve, was commissioned in 1913. It is not federal, and is owned by its member banks. The Federal Reserve interacts with the banking system in a simple but important way — it is the “lender of last resort”. That means that when a bank runs into trouble, the Federal Reserve will be there to bail it out, or orchestrate a merger or other transaction that will prevent collapse of the institution, or the entire system.
How does the Federal Reserve do its job? Today’s Federal Reserve is best known for setting the so-called “Fed Funds Rate“, or the price at which banks borrow money from each other overnight. Why would banks borrow from each other? One reason is to meet reserve requirements. If you own a bank, and make a new car or mortgage loan, you create new money for that loan in your borrower’s demand deposit account. You don’t need to have enough “reserves” in advance to make that loan, however — you can just borrow the necessary reserves in an overnight loan from other banks, and you should expect to pay close to the Federal Reserve’s target rate.
The Federal Reserve manages this interest rate by so-called “open market operations“, where the Federal Reserve buys and sells securities in an effort to keep interest rates close to its target. Right now, the Federal Reserve’s “Fed Funds Rate” is set at 2%. When banks are unwilling to lend to each other, and rates creep upwards, the Federal Reserve will add reserves to drive that interest rate down towards its target. Even if banks don’t have surplus reserves to lend, the Federal Reserve will still work to ensure that banks can borrow reserves at its target rate.
So what’s the problem with this system? Well, let’s take the words “add reserves”. The Fed “adds reserves” by purchasing debt, or providing a loan against debt (called a repurchase agreement, or repo).
When the Federal Reserve purchases debt from our government, or provides a loan against debt for a bank, it pays for that debt in Federal Reserve Notes. Where does the Federal Reserve get its Federal Reserve Notes? Well, the Federal Reserve has the unique ability to create new ones. In other words, the Fed has the ability to write a worthless check, and create new money.
Besides the moral issue of letting our central bank create new money that competes with money you’ve earned for goods and services, does this system really make sense?
No, it does not. Many people believe that in order for a bank to make a loan, someone must have first saved money, and made a deposit. That’s simply not true. When the Federal Reserve sets the interest rate at which banks can borrow to meet their reserve requirements, banks compete to make loans and create new paper money based upon their cost of borrowing, as opposed to the amount of reserves they have on deposit. Practically speaking, banks are limited in the amount of loans they can make based upon capital requirements, not reserve requirements.
In addition to the Federal Reserve’s ability to create money to lend to banks is the Federal Reserve’s ability to create money to give to our government. Our United States Treasury is constantly issuing new debt — we’re a “payday lender” nation whose government is constantly rolling over old debt into new debt, and issuing additional debt to pay for our constant budget deficits. Who buys all this debt?
Lots of people, and lots of institutions, purchase our Treasury’s debt. Many of these investors are overseas. The Federal Reserve also purchases our Treasury’s debt. But when the Federal Reserve purchases our government’s debt, unlike you or me, the Fed can give the Treasury a check with no money in the checking account. While you would be charged with fraud for writing worthless checks, it’s business as usual at the Federal Reserve. The Fed’s “checks” simply create new dollars in the Treasury’s checking account.
Money doesn’t grow on trees any more — it’s even easier than that. The Treasury just needs to sell some bonds, and if there aren’t enough willing purchaser with existing dollars, the Federal Reserve creates new electronic money to make up the difference.
So why do we have inflation? One important factor is the Federal Reserve’s new money competing with your earnings and savings for goods and services. Ultimately, our flawed system makes everyone’s dollar worth less.
While the American worker and saver gets hurt by this arrangement, who benefits?
Consider the banks — banks are protected from failure by a central bank that can create money out of nothing. Furthermore, this perception of “stability” allows banks to create loans out of nothing, backed with minimal reserves, and thus claim an ever-greater share of borrowers’ future income through interest payments. More loans leads to more profits — it’s definitely a winner for the banks.
Consider our government — politicians can make promises that we can’t begin to afford, but our central bank’s ability to create money to buy our government’s debt means that politicians can spend obscene amounts of money without raising taxes. Instead, they simply borrow and print new money. As long as the American public is unaware that government benefits are paid for by newly-printed money, and don’t understand the link with rising prices, this system is tolerated. Even the mainstream media is widely ignorant of how this system works.
But the dynamics are changing. We can no longer ignore gas prices, and grocery bills. We can no longer ignore the future costs that our children face. A speech on May 28 entitled “Storms on the Horizon” by Dallas Federal Reserve President and CEO Richard Fisher (world government fans unite — check out his biography in Spanish!) paints a surprisingly realistic picture:
Tonight, I want to talk about a different matter. In keeping with Bill Martin’s advice, I have been scanning the horizon for danger signals even as we continue working to recover from the recent turmoil. In the distance, I see a frightful storm brewing in the form of untethered government debt. I choose the words—“frightful storm”—deliberately to avoid hyperbole. Unless we take steps to deal with it, the long-term fiscal situation of the federal government will be unimaginably more devastating to our economic prosperity than the subprime debacle and the recent debauching of credit markets that we are now working so hard to correct.
You might wonder why a central banker would be concerned with fiscal matters. Fiscal policy is, after all, the responsibility of the Congress, not the Federal Reserve. Congress, and Congress alone, has the power to tax and spend. From this monetary policymaker’s point of view, though, deficits matter for what we do at the Fed. There are many reasons why. Economists have found that structural deficits raise long-run interest rates, complicating the Fed’s dual mandate to develop a monetary policy that promotes sustainable, noninflationary growth. The even more disturbing dark and dirty secret about deficits—especially when they careen out of control—is that they create political pressure on central bankers to adopt looser monetary policy down the road. I will return to that shortly. First, let me give you the unvarnished facts of our nation’s fiscal predicament.
…
Doing deficit math is always a sobering exercise. It becomes an outright painful one when you apply your calculator to the long-run fiscal challenge posed by entitlement programs. Were I not a taciturn central banker, I would say the mathematics of the long-term outlook for entitlements, left unchanged, is nothing short of catastrophic.
Typically, critics ranging from the Concord Coalition to Ross Perot begin by wringing their collective hands over the unfunded liabilities of Social Security. A little history gives you a view as to why. Franklin Roosevelt originally conceived a social security system in which individuals would fund their own retirements through payroll-tax contributions. But Congress quickly realized that such a system could not put much money into the pockets of indigent elderly citizens ravaged by the Great Depression. Instead, a pay-as-you-go funding system was embraced, making each generation’s retirement the responsibility of its children.
Now, fast forward 70 or so years and ask this question: What is the mathematical predicament of Social Security today? Answer: The amount of money the Social Security system would need today to cover all unfunded liabilities from now on—what fiscal economists call the “infinite horizon discounted value” of what has already been promised recipients but has no funding mechanism currently in place—is $13.6 trillion, an amount slightly less than the annual gross domestic product of the United States.
Demographics explain why this is so. Birthrates have fallen dramatically, reducing the worker–retiree ratio and leaving today’s workers pulling a bigger load than the system designers ever envisioned. Life spans have lengthened without a corresponding increase in the retirement age, leaving retirees in a position to receive benefits far longer than the system designers envisioned. Formulae for benefits and cost-of-living adjustments have also contributed to the growth in unfunded liabilities.
The good news is this Social Security shortfall might be manageable. While the issues regarding Social Security reform are complex, it is at least possible to imagine how Congress might find, within a $14 trillion economy, ways to wrestle with a $13 trillion unfunded liability. The bad news is that Social Security is the lesser of our entitlement worries. It is but the tip of the unfunded liability iceberg. The much bigger concern is Medicare, a program established in 1965, the same prosperous year that Bill Martin cautioned his Columbia University audience to be wary of complacency and storms on the horizon.
Medicare was a pay-as-you-go program from the very beginning, despite warnings from some congressional leaders—Wilbur Mills was the most credible of them before he succumbed to the pay-as-you-go wiles of Fanne Foxe, the Argentine Firecracker—who foresaw some of the long-term fiscal issues such a financing system could pose. Unfortunately, they were right.
Please sit tight while I walk you through the math of Medicare. As you may know, the program comes in three parts: Medicare Part A, which covers hospital stays; Medicare B, which covers doctor visits; and Medicare D, the drug benefit that went into effect just 29 months ago. The infinite-horizon present discounted value of the unfunded liability for Medicare A is $34.4 trillion. The unfunded liability of Medicare B is an additional $34 trillion. The shortfall for Medicare D adds another $17.2 trillion. The total? If you wanted to cover the unfunded liability of all three programs today, you would be stuck with an $85.6 trillion bill. That is more than six times as large as the bill for Social Security. It is more than six times the annual output of the entire U.S. economy.
Why is the Medicare figure so large? There is a mix of reasons, really. In part, it is due to the same birthrate and life-expectancy issues that affect Social Security. In part, it is due to ever-costlier advances in medical technology and the willingness of Medicare to pay for them. And in part, it is due to expanded benefits—the new drug benefit program’s unfunded liability is by itself one-third greater than all of Social Security’s.
Add together the unfunded liabilities from Medicare and Social Security, and it comes to $99.2 trillion over the infinite horizon. Traditional Medicare composes about 69 percent, the new drug benefit roughly 17 percent and Social Security the remaining 14 percent.
What do we do about that? How can we begin to “fund” a $99 trillion liability?
Let’s say you and I and Bruce Ericson and every U.S. citizen who is alive today decided to fully address this unfunded liability through lump-sum payments from our own pocketbooks, so that all of us and all future generations could be secure in the knowledge that we and they would receive promised benefits in perpetuity. How much would we have to pay if we split the tab? Again, the math is painful. With a total population of 304 million, from infants to the elderly, the per-person payment to the federal treasury would come to $330,000. This comes to $1.3 million per family of four—over 25 times the average household’s income.
Clearly, once-and-for-all contributions would be an unbearable burden. Alternatively, we could address the entitlement shortfall through policy changes that would affect ourselves and future generations. For example, a permanent 68 percent increase in federal income tax revenue—from individual and corporate taxpayers—would suffice to fully fund our entitlement programs. Or we could instead divert 68 percent of current income-tax revenues from their intended uses to the entitlement system, which would accomplish the same thing.
Suppose we decided to tackle the issue solely on the spending side. It turns out that total discretionary spending in the federal budget, if maintained at its current share of GDP in perpetuity, is 3 percent larger than the entitlement shortfall. So all we would have to do to fully fund our nation’s entitlement programs would be to cut discretionary spending by 97 percent. But hold on. That discretionary spending includes defense and national security, education, the environment and many other areas, not just those controversial earmarks that make the evening news. All of them would have to be cut—almost eliminated, really—to tackle this problem through discretionary spending.
I hope that gives you some idea of just how large the problem is. And just to drive an important point home, these spending cuts or tax increases would need to be made immediately and maintained in perpetuity to solve the entitlement deficit problem. Discretionary spending would have to be reduced by 97 percent not only for our generation, but for our children and their children and every generation of children to come. And similarly on the taxation side, income tax revenue would have to rise 68 percent and remain that high forever. Remember, though, I said tax revenue, not tax rates. Who knows how much individual and corporate tax rates would have to change to increase revenue by 68 percent?
If these possible solutions to the unfunded-liability problem seem draconian, it’s because they are draconian. But they do serve to give you a sense of the severity of the problem. To be sure, there are ways to lessen the reliance on any single policy and the burden borne by any particular set of citizens. Most proposals to address long-term entitlement debt, for example, rely on a combination of tax increases, benefit reductions and eligibility changes to find the trillions necessary to safeguard the system over the long term.
No combination of tax hikes and spending cuts, though, will change the total burden borne by current and future generations. For the existing unfunded liabilities to be covered in the end, someone must pay $99.2 trillion more or receive $99.2 trillion less than they have been currently promised. This is a cold, hard fact. The decision we must make is whether to shoulder a substantial portion of that burden today or compel future generations to bear its full weight.
OK, so if we can’t cut spending, and if we can’t increase taxes, are there other options?
Now that you are all thoroughly depressed, let me come back to monetary policy and the Fed.
It is only natural to cast about for a solution—any solution—to avoid the fiscal pain we know is necessary because we succumbed to complacency and put off dealing with this looming fiscal disaster. Throughout history, many nations, when confronted by sizable debts they were unable or unwilling to repay, have seized upon an apparently painless solution to this dilemma: monetization. Just have the monetary authority run cash off the printing presses until the debt is repaid, the story goes, then promise to be responsible from that point on and hope your sins will be forgiven by God and Milton Friedman and everyone else.
We know from centuries of evidence in countless economies, from ancient Rome to today’s Zimbabwe, that running the printing press to pay off today’s bills leads to much worse problems later on. The inflation that results from the flood of money into the economy turns out to be far worse than the fiscal pain those countries hoped to avoid.
Earlier I mentioned the Fed’s dual mandate to manage growth and inflation. In the long run, growth cannot be sustained if markets are undermined by inflation. Stable prices go hand in hand with achieving sustainable economic growth. I have said many, many times that inflation is a sinister beast that, if uncaged, devours savings, erodes consumers’ purchasing power, decimates returns on capital, undermines the reliability of financial accounting, distracts the attention of corporate management, undercuts employment growth and real wages, and debases the currency.
Purging rampant inflation and a debased currency requires administering a harsh medicine. We have been there, and we know the cure that was wrought by the FOMC under Paul Volcker. Even the perception that the Fed is pursuing a cheap-money strategy to accommodate fiscal burdens, should it take root, is a paramount risk to the long-term welfare of the U.S. economy. The Federal Reserve will never let this happen. It is not an option. Ever. Period.
Mr. Fisher, I wish I could believe you. Based upon the performance of our dollar against other currencies, it appears that we are doing exactly that. In fact, Alan Greenspan was asked about the problem of how we could meet our Social Security obligations back in 2005. His response at the time? “We can guarantee cash, but we cannot guarantee purchasing power!” In other words, we can print the money, but it won’t buy anything.
Odds are, despite Mr. Fisher’s wishes, we keep borrowing and printing. As Mr. Fisher concluded his speech:
Of late, we have heard many complaints about the weakness of the dollar against the euro and other currencies. It was recently argued in the op-ed pages of the Financial Times [3] that one reason for the demise of the British pound was the need to liquidate England’s international reserves to pay off the costs of the Great Wars. In the end, the pound, it was essentially argued, was sunk by the kaiser’s army and Hitler’s bombs. Right now, we—you and I—are launching fiscal bombs against ourselves. You have it in your power as the electors of our fiscal authorities to prevent this destruction. Please do so.
Mr. Fisher, you are correct. We do have the power to prevent this destruction. The cause of this destruction is the system itself. We cannot afford a debt-backed monetary system controlled by a private central bank that creates money out of nothing — thus facilitating unrestrained spending by politicians interested only in their re-election.
Coupling an unstable banking and monetary system with a government that gives favors in exchange for growing its power is a recipe for collapse into tyranny.
June 13th, 2008 at 1:33 am
[...] Fisher v. Greenspan: The Fed, Our Government, and Our Dollar [...]
June 13th, 2008 at 11:33 am
Amazing.
You sum up these arguments so well.
Thanks.
June 13th, 2008 at 8:12 pm
End the Fed.
June 16th, 2008 at 3:51 am
Very interesting, and with many valid points. However, I feel that a few things need clarification.
While it is true that the Fed creates money out of nothing, and theoretically there may be times where unjustifiable reasons are used to justify an increase in money supply, on average the broad supply of money (M3) has increased by about .6% monthly. Increasing the money supply by small, regular amounts is helpful to the economy. If the Fed is not motivated by outside interests, then it as an institution works quite well. Besides, most of the money creation that occurs within our economy happens through the banking system (money multiplier), not from being printed.
The problem arises when the Fed is pressured or influenced to conduct monetary policy outside the (albeit murky) boundaries of the Fed.
As for the federal deficit, the federal government needs to work to build up a surplus. (We’ll be counting on you, Mr. Lawson!) The the only relation the Fed has with this is to *not* overly give money to the government and cause inflation, which would lower the value of debt at the expense of the economy and consumers.
With a thought on inflation: yes, excessive money supply does cause inflation. However, the recent bout of inflation was induced by food and fuel prices, which (in my opinion) are being driven out of proportion by speculators.
I, as with everyone, am concerned over the problem of our entitlements, and I wish our representatives luck and fortitude in dealing with this issue. In regards to Mr. Fisher’s numbers, however, I would like to make some comments. First of all, I do not believe it is practical to discount the cost to infinity, without any sort of realistic timeline. Secondly, due to the nature of discounting, this $99.2 trillion is a ballpark measure that can change drastically if you alter your assumptions even a little. And thirdly, the section of how the current US citizens could pay for an ETERNITY of entitlements is ludicrous. Still, Mr. Fisher does highlight the large and growing entitlements problem that we face.
I thoroughly enjoyed reading your views and opinions on this matter; thank you and best wishes.
June 17th, 2008 at 10:08 am
PYD - I’d like to see your source for M3, as the numbers I’m following are much higher:
http://www.nowandfutures.com/key_stats.html
http://www.shadowstats.com/alternate_data
Even beyond the obvious concerns of debasing our currency, however, is the concern of our debt-based fiat currency itself. Not only does our banking system create money out of nothing, but it’s creating money out of a borrower’s promise to repay it, plus interest.
Does that make sense? Why should a bank be able to create money out of nothing based upon my promise to repay it, plus interest, and if I fail in my quest to repay it, the bank will take my house?
Constant growth of the money supply *is* required in a debt-based monetary system, because when the bank creates the $100,000 for my mortgage, it does *not* create the money for the interest payments. So where do I get the money to pay the interest? I need someone else to take on more debt, to create more money, so I can get the interest payments from someone else.
So in a sense, I’m also quite concerned about the “unholy trinity” at the root of our economy — a debt currency, fractional reserve banking with a private central bank, and legal tender laws that enforce an unhealthy and unsustainable monopoly.
It’s interesting to consider that we can’t pay off the national debt with our current monetary system. Our Treasury bonds are reserves in the banking system that form the foundation of our money supply. No national debt = vast reduction in the money supply = debilitating deflation. So we keep going deeper into debt, and growing the money supply proportionately — but every dollar of debt that is issued as money gives someone else a claim our wealth.
Here’s an interesting article from the Heritage Foundation back in 2000 that resurrects the Hamiltonian argument that “the national debt is a national blessing”, with a key quote:
“More restricted?” That’s a funny way to put it. Without a national debt, the current system could not exist.
And they don’t say that retiring the national debt would remove such a massive amount of credit = debt = money from the economy that the resulting deflation would result in massive foreclosures and creditors owning *everything*. We’re clearly between a rock and a hard place.
Does that sound like a good way to run a country?
June 17th, 2008 at 8:46 pm
I used data from the Fed, http://www.federalreserve.gov/releases/h6/hist/
I admit that the data may be a bit skewed, as the last 2 years are not accounted for here.
I agree that the system we currently have is not sustainable. If we continue on to increase our debt, eventually it will grow too large and we may default.
In theory, the Fed should be an independent body acting in the interests of the entire US, not for the government. In reality, I believe that there is enough pressure on the Fed by the government (and perhaps other interests) to fund the spending practices of our country even with knowledge of its risks and longterm insustainability. The US has enjoyed a period of great fortune, since the dollar is the world currency. Foreign countries must use the dollar in order to trade many goods, thus allowing the government to spend beyond its means. In essence, we are buying foreign goods using our printed money, and our promise. This has led, as you mentioned, to foreign countries holding significant portions of our debt and formidable power when it comes to international relations.
Since we agree that this policy of printing and spending money is a grave problem that has contributed to the recent economic disruptions, I would like to ask for your opinions as to how to resolve the “unholy trinity,” and how politically feasible that would be. Of course, the system is too big to be shut down quickly, and would require much integrity and responsibility from all participants. You are right, we are in a tough situation. Any change in the system is tricky and can be costly: no change would also cost us in the future.
Best wishes
June 18th, 2008 at 9:03 am
PYD - the most feasible incremental improvement I’ve heard is to repeal capital gains and sales taxes on gold and silver. That would essentially “legalize” constitutional money, and provide needed competition among spenders and savers to the Federal Reserve Note. You wouldn’t need to carry around gold or silver, you would just have the option to maintain your savings in gold or silver to preserve purchasing power.
For example, existing exchange-traded funds such as GLD provide a low-cost way invest in gold without taking delivery. Additional products offered through progressive banks would make saving in metal currency even more accessible.
The next incremental reform is to repeal legal tender laws. The federal government would always accept Federal Reserve Notes for tax payments, but no one would be required to accept them in payment — the choice of how to settle a transaction would be up to the buyer and seller. Here’s an interesting historical perspective on legal tender laws:
http://www.rogershermansociety.com/rushdoony.htm
We generally think competition is a good thing for most commodities — why is it that we accept a monopoly for our economy’s most fundamental commodity, money itself?
There are other potential solutions, as well. The populist movement over the years has advocated having the government issue its own debt-free currency, as opposed to government debt for which the people are obligated to pay interest to private banks. Thomas Edison is reported to have said the following in a 1921 New York Times interview:
These are the discussions we should be having in the midst of the current credit turmoil, and objectively unsustainable debt/credit bubble.
Oh, and it’s interesting to note that the Federal Reserve stopped publishing M3 in 2006. Private sources still follow it, however, as one of the broadest measures of the money supply.
June 19th, 2008 at 4:33 pm
Your blog posts could have come straight from the Mises Institute! Ending the Federal Reserve and returning to a free market in money is one of the most critical issues of our time. Thank you for taking up the cause!
Speaking of the Mises Institute, they include a chart of what Murray Rothbard called the “True Money Supply,” or TMS:
http://mises.org/content/nofed/chart.aspx?series=TMS
Money should be viewed as the general medium of exchange in society, and this chart attempts to reflect that. It’s upslope is not quite as steep as M3, but it’s still obvious that the money supply is inflating rapidly.
June 24th, 2008 at 4:02 pm
Money and the Gold Standard.
Hunger, the need for clothing, shelter, heat, medical care and rest, are temporal needs from which no man can escape as long as he is on earth.
The aim of man’s economic activities is precisely to make needs join goods. If an economic system does this, then it achieves its end. If it leaves goods on one side and needs on the other, it fails completely. The economic system fails completely in our country, since it leaves many to go hungry, homeless and without heat, and without care.
This does not mean that money itself is wealth. Money is not an earthly good capable of satisfying a temporal need.
You cannot keep yourself alive by eating money. To get dressed, you cannot sew together dollar bills to make a dress or a pair of stockings. You cannot rest by lying down on money. You cannot cure a sickness by putting money on the seat of the malady. You cannot educate yourself by crowning your head with money.
Money is not real wealth. Real wealth consists of all the useful things which satisfy human needs.
Bread, meat, fish, cotton, wood, coal, a car on a good road, a doctor visiting the sick, the knowledge of a science — these are real wealth.
But, in our modern world, each individual does not produce all the things. People must buy from one another. Money is the symbol or token that one gets in return for a thing sold; it is the symbol that one must give in return for a thing that one wants from another.
Wealth is the thing; money is the symbol of that thing. The symbol should reflect the thing.
If there are a lot of things for sale in a country, there must be a great deal of money to dispose of them. The more people and goods, the more money in circulation is required, otherwise everything stops.
It is precisely this balance that is lacking today. We have at our disposal almost as great a quantity of goods as we could possibly wish, thanks to applied science, to new discoveries, and to the perfecting of machinery. We even have a lot of people without occupations, who represent a potential source of goods. We have loads of useless, even pernicious, occupations. We have activities of which the sole end is destruction.
Money was created for the purpose of keeping goods moving. Why, then, does it not find its way into the hands of the people in the same measure as the flow of goods from the production line?
A prevalent belief about the origin of money is that the Government makes it. This is also incorrect. The Government today does not create money, and complains continuously about not having any. If the Government were the source of money, it would not have sat around idly for ten years in front of the lack of money. The Government takes and borrows, but it does not create money.
Those who control the birth and death of money also regulate its volume. If they make much money and destroy little, there is more. If the destruction of money goes faster than its creation, its quantity decreases.
Our standard of living, in a country where money is lacking, is not regulated by the volume of goods produced, but by the amount of money at our disposal to buy these goods. So those who control the volume of money, control our standard of living. “Those who control money and credit have become the masters of our lives… No one dare breathe against their will.”
It is Saint Louis, King of France, who said: “The first duty of a king is to coin money when it is necessary for the sound economic life of his subjects.”
It is not at all necessary, nor to be recommended, that banks be abolished or nationalized. The banker is an expert in accounting and investing; he may well continue to receive and invest savings with profit, taking is share of profits. But the creation of money is an act of sovereignty which should not be left in the hands of a bank. Sovereignty must be taken out of the hands of the banks and returned to the nation.
Book money is a good modern invention that should be retained. But instead of it proceeding from a private pen, in the form of a debt, those figures, which serve as money, should come from the pen of a national organism, in the form of money destined to serve the people.
Therefore nothing is to be turned upside down in the field of ownership or investment. There is no need to abolish the current money and replace it with other kinds of money. All that is needed is that a social monetary organism add enough of the same kind of money to the money that already exists, according to the country’s possibilities and the population’s needs.
One must stop suffering from privations when there is everything needed in the country to bring comfort into every home. The amount of money should be measured according to the demand of the consumers for possible and useful goods.
It is therefore the producers and consumers as a whole, the whole of society, which, in producing goods in front of needs, should determine the amount of new money that an organism, acting in the name of society, should put into circulation from time to time, in accordance with the country’s developments.
Money should therefore be put into circulation according to the rate of production and as the needs of distribution dictate.
But to whom does this new money belong when it comes into circulation in the country? — This money belongs to the citizens themselves. It does not belong to the Government, which is not the owner of the country, but only the protector of the common good; nor does it belong to the accountants of the national monetary organism: like judges, they carry out a social function and are paid, according to law, by society for their services.
Some say we must have gold as a basis for our money…
Money gets its value from production and mutual confidence. Empty the U.S. of all useful production and it becomes a real desert. Of what use then would money be, even in gold? Then what about the gold standard? The gold standard is a definition of the monetary unit of each country, formulated to allow comparisons between the monies of different countries. If you say that the dollar is worth 40 grains of gold, it means that you get, for a dollar, 40 grains of gold or the equivalent in merchandise. Even if the gold is not there, if the goods are there, you can still get them for your dollar.
Some will ask will money be good abroad if it is not backed by gold? Money is a national matter. The U.S. dollar does not circulate in France, nor does the French franc circulate in the U.S. The French buyers or retailers do not ask themselves if the U.S. has many or a few dollars in circulation. What interests them is how much one dollar can buy. If you double the U.S. production and double the amount of dollars in front of it at the same time, does not each dollar buy exactly the same thing as before? It is even the only way to preserve the stability in the purchasing power of the dollar, a factor so vital in international trade.
The gold myth is a fetish that the masters of money and credit keep alive so as to carry out their plans more easily. Isn’t it rather silly to condition a man’s right to eat by the amount of gold in existence rather than by the amount of food available? And similarly for the other goods.
(Post information taken from Louis Even’s book, What Do We Mean By Real Social Credit?, partially revised).
June 27th, 2008 at 7:49 am
“The gold myth is a fetish that the masters of money and credit keep alive so as to carry out their plans more easily. ”
Strange how Mr. Evans can be generally right, and then go completely off into the weeds like this. Central bankers have been trying to disparage gold as a “myth” and a “fetish” ever since they invented fiat currency, because the price of gold is the immediate refutation of their manipulations.
-jcr
June 27th, 2008 at 9:02 am
JCR - Have you explored the history of “tally sticks”, or colonial scrip (not Continental dollars) issued in the American colonies prior to the Revolution, and prior to Parliament’s Currency Acts of 1764?
I’m increasingly convinced that the root of our problems are monetary monopolies — fiat, gold, or otherwise — along with fractional reserve banking and usury that accompany them. An enforced gold standard simply means that those who control the gold control the money supply, and takes us back to the Populist “cross of gold” arguments of William Jennings Bryan.
Monetary choice is a good thing, as having options for a medium of exchange allows folks to maximize opportunities for trade in a mutually-beneficial fashion. Regardless of the medium of exchange, however, it appears that fractional reserve banking and usury (loaning money at interest) also contribute to the problem.
June 27th, 2008 at 8:11 pm
BJ,
I have read about the colonial scrip, I think it was in an article by Rothbard.
I haven’t advocated an enforced gold standard, and the constitution doesn’t require it. All the that the constitution has to say on the subject is that the congress is authorized to coin money, and that the states are prohibited from making anything but gold or silver legal tender.
As for gold being a monetary monopoly, it can only be one if someone manages to corner the worldwide gold market. I’m not really worried about that possibility, given the history of the Hunt brothers’ failure to corner the silver market a couple of decades back.
With a free market for money (and credit), we could trade platinum or irridium coinage, or notes redeemable in kilowatt-hours, or anything else that people are willing to accept in trade, and that’s no problem at all. I expect that gold will prove to be the most popular coinage, simply because it’s a very good metal for the purpose. Easy to divide, doesn’t tarnish, accepted anywhere.
-jcr
June 28th, 2008 at 10:05 pm
Dr Lawson! Are you sure it’s “MD” and not “PhD”? Bravo, sir. You’ve obviously gone well past the standard Ron Paul discipleship; I’m impressed and inspired by you and pledge to further grow my knowledge base and political involvement. You’ve got to be a true source of personal pride for Dr. Paul.
I look forward to your debates with Congressman Price. I will travel from the Charlotte area to see this intellectual, constitutional and moral bludgeoning.
I will also be participating in the money bomb tomorrow (June 29th) and have encouraged others to do the same. Every little bit helps.
Your friend in liberty,
Sean O’Donnell
Cornelius (Charlotte), resident of District 9
June 30th, 2008 at 12:50 pm
Thanks for this fantastic explanation of the monetary issues that need to become part of the national discussion. I linked to it on my site.
Scot MacTaggart
ablankpaper.com