Freedom Chatter Blog – Monetary Policy

Yes, Virginia, There Are No Reserve Requirements

Sunday, February 14th, 2010

In Part 1, Fractional Reserve Banking in Pictures, we saw how the banking system creates fraudulent money by creating new money on top of old. The reserve requirement limit used in the example, 10%, is the figure usually given, which means that from a $10 deposit the banking system could generate $90 of new money. Also, the FED uses Open Market Operations to create new money by writing a check upon itself.
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Tags: banking, Banks, Citibank, Currency, Federal Reserve, Fractional Reserve, open market operations, virginia
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Fractional Reserve Banking in Pictures

Saturday, February 6th, 2010

“The few who understand the system, will either be so interested in its profits, or so dependent on its favors, that there will be no opposition from that class. The great body of people, mentally incapable of comprehending the tremendous advantages, will bear its burden without complaint.”

- Lord Rothschild, European central banker

The below slides are meant to explain fractional reserve banking as simply as possible using pictures.  The below demonstration assumes a reserve requirement of 10%, which is the figure typically given by the banking industry and financial experts.  However, in Part 2 I will demonstrate there there is effectively NO set reserve requirement though the banking system obviously carry some level of cash reserves.
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Tags: Amschel Rothschild, banking, Banks, Currency, Debt, Dollar, Federal Reserve, Fiat Money, Fractional Reserve, henry ford, josiah stamp, loans, Thomas Paine
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The Money Matrix – What Makes Money Money?

Monday, February 1st, 2010

Money gradually evolved from societies from barter (or direct exchange) economies to economies based on indirect exchange. Under indirect exchange, Joey sells his chickens’ eggs for money and then either buys, say, a wrench from Bob or saves the money for future use. If one looks at this with an economist’s eye, Joey exchanged his commodity (eggs) for another commodity (money) and then either saved the commodity or exchanged it yet again for another commodity (Bob’s wrench). Hence money is actually a commodity just like corn, copper, or even an Ipod, if you follow the literal definition. This is a truth that few seem to recognize or fully appreciate its implications.

This system of indirect exchange, writes Murray Rothbard (see “What Has the Government Done with Our Money?“) is “at first glance… a clumsy and round-about operation. But it is actually the marvelous instrument that permits civilization to develop.” As long as Joey can find a market for his eggs, he can exchange them for money before the eggs spoil and then exchange the money later at a time of his choosing for any other good he wants. Bob does not need to barter his wrench for food, he merely has to find a market to sell his wrenches for money and wha-lah! specialization and quality are born, and Bob can feed himself. Money hence serves as a medium of exchange, and Rothbard comments its other attributes, like serving as a store of value, are merely corollaries of this.

So over time, people developed different types of money. Colonial Virginia used tobacco, ancient Greeks used cattle, Egyptians used copper, Tibetans used dried yak dung, etc. Europe’s kings for instance, used these wooden royal tally sticks as money for the better part of a millennium and well into the 20th century. It may seem a little silly, but the British Empire and Navy arose by a people using these twigs as money for over 700 years! Tally sticks were highly successful since they had a limited supply and were virtually impossible to counterfeit. It is my bet that future Americans will one day look back and break into outright laughter at today’s use of the Federal Reserve Note (see Part 2) as just plain absurd. A return to Austrian economics’ principles is starting to beckon, more on this later as the series continues.
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Tags: Bartering, Commodity, Currency, exchange, Federal Reserve, Money, sound money, Tom Woods
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Chasing Gelten Shadows

Wednesday, January 6th, 2010

“Money is not an invention of the state. It is not the product of a legislative act.” - Carl Menger, 1871

Money is an invention of mankind. Our society refers to the irredeemable scraps of linen and ink as “money,” but in truth the dollar is no such thing. It is merely a currency, a medium of exchange, created by fiat - by government decree and force. The dollar is a phantom I.O.U. note. It is a Ponzi scheme and the central banking system issues new dollar currency whenever it wishes.

Dollars are toxic waste in the literal and fiscal sense. Literally, each dollar bill contains arsenic, cadmium, mercury, thallium, and cyanide and generates dumpster upon dumpster of hazardous waste every day.  Fiscally, the dollar has lost 98.3% of its value as of January 1, 2010 since the creation of the central bank known as the Federal Reserve in 1913. (Note 1) Many Americans are unaware that the electrons and scraps of linen we trade around as currency are mere shadows of sound money.

To see the shadows in our money, we have only to look at it. Look at this old quarter. The one I have is a little worn but it still has a silvery glisten to it and rings when you drop it. Now look at the rim of any current quarter – it is a cheap copper sandwich with a thin plating of nickel on top to make it appear like silver. It makes an annoying tinny sound when you drop it. The quarter was exchangeable in 1916 for about 0.012 troy ounces of gold, or over $13 modern-day dollars. Today it is still exchangeable for over $3 just for its silver content. The modern quarter? The “melt” value of its copper and nickel is worth less than 5 cents.

Golden shadows? Look at a new $1 Sacajawea or presidential series coin. It’s copper with a manganese brass cladding to give it a nice, fake golden shine. The melt value of the metal is about 5 cents. Desperate to introduce them into circulation, the United States Mint accepts credit cards and ships direct for free (well, at taxpayer cost) to your home. [The Mint is trying to replace $1 bills, which costs around 5 cents each to print as they wear out very easily over several years, after which it is shredded and treated as toxic waste.]

When originally introduced as a super-cheap placeholder coin for silver and gold redemptions in 1866, the nickel was made of 3.75 grams of copper and 1.25 grams of nickel. The dollar’s debasement is so horrendous that nickel’s melt value is now higher than its face value of 5 cents.
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Tags: Bartering, carl menger, Commodity, Copper, Currency, Dollar, exchange, Fiat Money, Gold, Metals, Money, nickel, penny, Silver
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The Government’s “War” on Main Street

Saturday, December 5th, 2009

The War on Poverty… the War on Drugs… the War on Terror… now we have the government’s “War” on Main Street. How to improve the economy and why the government is taking the exact opposite actions to destroy Main Street as a bad case of the “Seen and the Unseen” strikes the Lehigh Valley.

This talk was originally delivered to a Campaign of Liberty chapter on December 3, 2009.  Video will be available shortly.

Today President Obama will tour Allentown, Pennsylvania, in my home congressional district as part of a “Main Street Tour” to show his concern for economic plight of the masses. Many of the people I have spoken with while campaigning innately realize that government is at fault – or at least complain a lot about how the government should “fix” the economy. Unfortunately, many do not have enough of a grasp of economics to understand exactly how the government is ruining their lives and their childrens’ lives. Speaking for myself, about 2 years ago I would have been included in this category. This is no surprise as most of the press and educational system has been hijacked by the disciples of Lord Keynes (the Keynesians) and the socialist Karl Marx for the past century.

The late economist from the Austrian school and NY Times columnist Henry Hazlitt wrote a series of easy-to-understand economic lessons in the 1940s in what was later published as Economics in One Lesson. Hazlitt warned of the dangers of what he termed the “seen and the unseen.” Let me give a rather harsh but true example.

Last week one local paper published a story about a local hardware store on Main Street in Nazareth going out of business. I grew up in Nazareth, and this store was there my whole life. The owners were not able to afford the rent, tried moving down the street for cheaper rent, but were not able to save the company.

On the exact same day, another local paper published a story about the Obama stimulus plan. They explain how $7.8 million was awarded to the private Lehigh University for research on hot lava, smarter electric wheelchairs, and Ice Age climate shifts in Alaska. This amount was more than the amounts allotted to Allentown, Bethlehem, and Easton, the three major cities in the Lehigh Valley. Before I continue – I am a proud alumni with an excellent education in chemical engineering provided by Lehigh.

So, what is going on here? It is nothing more than Hazlitt’s seen and the unseen at work. What is normally seen is the government spending on government pet projects, whether the Hoover Dam, hot lava research, banker bailouts of Goldman Sachs, or even new roads and bridges. Some government projects may even have some utility, like new roads or bridges. These are held up to the population as examples of how the government is doing its best to help you – with your taxes, that is.

However, what is typically NOT SEEN is local hardware stores failing, or other businesses who fail to get listed on the government’s gravy train list. What is NOT SEEN is those living on fixed incomes like social security whose standards of living are affected the harshest by inflation, the businesses that never started due to government interventions. What is NEVER SEEN is the employment these new businesses would be providing and, most especially, what is not seen is simply what would happen if the people were not plundered by government in the first place, either in the form of payroll taxes or the insidious hidden tax of inflation.

Of course, realistically speaking in today’s America, what is seen is the looting of the public treasury by the special interest lobbyists who, to a large extent, control Congress, the FED, and the rest of DC. We must instead focus on the general interest of society over the long run. We must remember that government exists to protect liberty, not to redistribute wealth, nor to grant special privileges, nor to interfere with the lives of individuals and their actions.  Read the rest of this entry »

Tags: Constitution, Currency, Federal Reserve, Henry Hazlitt, Keynes, Money, Recession, Socialism, Taxes, Thomas DiLorenzo, Welfare, World War I, World War II
Posted in Current Events, Government, Historic Analysis, Monetary Policy, Public Policies | 1 Comment »

The Money Matrix – Who Owns the FED?

Thursday, November 19th, 2009

CARTEL – n. a combination of independent commercial or industrial enterprises designed to limit competition or fix prices (per Merriam-Webster’s Dictionary) (emblem)

__________________________________

“Banking was conceived in iniquity and was born in sin. The Bankers own the Earth. Take it away from them, but leave them the power to create deposits, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear, and they ought to disappear, for this would be a happier and better world to live in. But if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create deposits.”

- Josiah Stamp, President of the Bank of England in the 1920s Read the rest of this entry »

Tags: Alan Greenspan, Banks, Ben Bernanke, Central Bank, Federal Reserve, Stocks
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How to Retire TODAY!

Wednesday, November 11th, 2009

How to Double the Money

No matter who you are or what your income, you can retire today. Here’s how:

The Fed recently said it will leave interest rates unchanged at 0.00% to 0.25%. Helicopter Ben believes their is a low danger of inflation due to high unemployment. Let’s pretend for a moment that inflation is not strictly a monetary phenomenon and could simply be defined as “an increase in the money supply.” Don’t worry that the money supply has actually doubled. Just put your faith in Old Ben.

How to Retire Without Money

First, drive/fly/walk/run to your local Federal Reserve Bank, or go straight to the source in Washington, DC. Ask to talk to Ben. Tell him Nick sent you. Tell him that you understand how tough these economic times are, and that you want to do him a favor. Due to the lack of liquidity in the credit market you are going to help out the biggest of all “too-big-to-fail” banks. All he needs to do is give you a $1,000,000,000 loan at 0.00% interest. Heck, if you have bad credit you will even settle for the 0.25% rate.

In the Citi!

Now take your billion and head down to the nearest Citibank. Tell that you would like to make a deposit. I suspect the conversation will go a little like this:

Teller: Hi. Welcome to Citi. How can I help you.

You: I would like to open a savings account.

Teller: Excellent! How much would you like to deposit?

You: (pinky finger held at corner of mouth) One billion dollars!

Teller: Very funny sir.

You: (Show them your Federal Reserve check signed by Ben) Here you go.

Teller: (Mouth agape.) Let me get my manager.

Commercial Break

Living Off the Interest

Just a quick glance at Citi’s current savings account rates shows that their Ultimate Savings Account (which you will certainly qualify for….) pays an annual interest of 1.19%. Which means if you had good credit and got the 0.00% interest loan you are now making $19 million/year on the interest alone, and if you got the 0.25% (cause you had bad credit) you are making a measly $9.4 million. Either way you should be able to retire to the life of luxary.

Doin’ Nothin’, Nothin’ Doin’

While you are sitting on the beach somewhere sipping on an Italian Margarita you may start to wonder at this magic money trick, and how fractional reserve banking and fiat money managed to steal from the poor to give to the wealthy, but put that out of your mind. Instead, think about how cool a trick it is to be able to make money from nothing and to get your chicks for free!

After all, you have just injected a billion dollars liquidity back into the markets into a struggling bank that was really pressed for cash. They can now loan that money out to small business owners at exorbitant rates. The streets will flow with money again. House prices will rise forever. Buffett will buy an entire Railroad!

Don’t worry that you didn’t actually add any real production to the economy. Forget the fact that you didn’t have to work for an honest dollar like the common man. You are a member of the elite now. And when billions of dollars are involved you can afford not to have conscience.

Just remember that the Fed and all the banks they lend to have been getting away with the exact same practice for years now.

Tags: Ben Bernanke, Citibank, Credit, Federal Reserve, Fiat Money, Fractional Reserve, Interest Rates
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The FDIC and the Follies of Modern Banking: Part 1

Tuesday, September 1st, 2009

When the Federal Reserve was signed into law in 1913, it was largely on the basis that the independent organization would assume the role of “lender of last resort” to struggling banks and institutions. This would allow the Fed to extend credit in order to prevent short-term economic hardships. As I wrote in my article, Deception in “Free Market” Banking, banks had not experienced troubles because of the free market as is regularly assumed, but through the government-protected fractional reserve system that allowed banks to overextend themselves and deceive depositors:

After the Panic of 1907 and the umpteenth failure of fractional reserve lending, the attacks still were not aimed at the fractional reserve system. This system, when protected through law, gave banks the undoubted opportunity to inflate the money supply, overextend themselves in ways that would never be sustainable in a free market economy, and give little regard to the customers’ original property. Instead, economists began calling for a “lender of last resort” to bail out banks if they were caught overstretched in commitments. Many people don’t realize it, but the U.S. financial system has been in bailout mode for nearly a century since this event.

The Federal Reserve’s “last resort” lending powers did not meet the expectation of politicians. Banks still overextended themselves with depositors’ money despite the new powers of the central bank. In fact, between 1921 and 1929 there was an average of 600 bank failures every year, which exceeded the previous decade’s average (the one in which the Fed was created) by ten times.

During the last few months of 1930 people grew increasingly weary and cautious of the banking system. Understandably, people did not react well when they realized the banks did not have their deposited money. Banks retracted credit and liquidated assets, building up a financial perfect storm that resulted in 9,096 banks suspending operations between 1930 and 1934.

Many politicians reacted by proposing a system (that had been discussed in recent years) of deposit insurance backed and paid by a federal agency, despite the failure of similar state setups of deposit insurance in the same era. Since the early 1800s many states had attempted to offer some form of deposit insurance, many failing to live up to their initial claims. All of them were broke by 1930 (some reached their demise many years earlier, such as Michigan, New York, and Vermont in the mid-1800s).

This all changed when The Banking Act of 1933 was signed into law by Franklin D. Roosevelt on June 16, 1933. The Federal Deposit Insurance Corporation (FDIC) was established as a temporary agency that started operating on January 1, 1934. In its first year the FDIC fund carried a balance of $292 million. In 1935, with President Roosevelt’s signing of The Banking Act of 1935, the FDIC was established as a permanent government agency.The act also strengthened the Federal Reserve Board of Governors, the group of seven individuals who play a major role in controlling monetary policy.

The primary functions of the FDIC include insuring deposits through the Deposit Insurance Fund (DIF) and examining/supervising “financial institutions for safety and soundness and consumer protection.” This has been the basic mission of the FDIC in its 75 year existence, the details of which I won’t fully cover in this article.

Modern economics and politics often praise the development of the FDIC as a great and necessary banking program (this alone might be reason enough to question the FDIC’s role). The main curiosity that I have is the fact that rather than recognize the failure of a government-protected banking system that had failed numerous times leading up to the Great Depression, politicians decided to once again prop up the government system. According to information on the fdic.gov website, the original FDIC legislation drew support from those “who were determined to end destruction of circulating medium due to bank failures and those who sought to preserve the existing banking structure.” (Emphasis added.) These people either failed to realize or downright ignored that it was precisely the banking structure of the fractional reserve system that made such booms and busts so dreadful.

The failure of many banks in the Great Depression was not due to the free market. Fractional reserve banking, the process of banks loaning and investing more money than they actually have in reserve, had been shot down by market forces many times throughout the 1800s in the U.S. The numerous “financial panics” of the 19th century that people often pin on the free market would not have been possible had the states and federal government ceased in protecting the ability of banks to deceitfully loan away depositors’ money. A free market system would not involve government protecting banks in this process, but enforcing the distinction of contracts between demand deposits and time deposits.

• Click here for Part 2.
  

Tags: Banking Act of 1933, Banking Act of 1935, Banks, Central Bank, Deposit Insurance, Deposit Insurance Fund, FDIC, Federal Reserve, Fractional Reserve, Franklin Roosevelt, Free Market, Great Depression, Individual, Panic of 1907, Panics, Recession
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Money and Currency in a Free Society

Monday, June 29th, 2009

We live in times when government and central banks monopolize money and make it next to impossible for viable competing currencies to arise, which can make it difficult to see the possibility of other currency alternatives.

Picture a new village, untouched by current monetary laws. People begin exchanging goods through the process of bartering. This makes it difficult to know what you can buy, because the milkman will only need so many of the pouches that you manufacture. Because bartering can be inefficient, unpredictable, and unreliable, the people decide to represent their goods with something of value. They find copper, silver, and gold nearby, all unique, relatively limited (therefore they hold more value than, say, granite), and quite durable. Thus, they can represent their goods with these valuable metals (and to make it more convenient, paper guarantees to those metals).

Money does not get its value through “force” as some believe. When the people in the village were looking for a more effective way to exchange goods, they were not trying to represent force. They were aiming to represent value through metals that were limited enough to have value, had durability, and could not easily be counterfeit (or inflated).  Currency is never originally brought about by force or through government.

Historically government has gotten involved in currency for one reason: greed. Kings would debase the metals that the market freely used and valued. Kings would inflate and devalue the currency that was once stable when the market was in control. Government could not debase metals, clip coins, and print unsound paper money and expect people to voluntarily accept it, thus force was necessary to make it happen. Legal tender laws forced devalued government money on the people and markets.

It is difficult for government to grow when people demand the money to be backed by hard goods (such as metals). It is difficult for government to expand its presence when the money supply is stable and in the hands of the people. History clearly shows us that when government wants to expand its state or military presence beyond its usual bounds, it cannot do so without control over the nation’s money supply. Without the control of money, government would have to take every cent it needed directly from the people and businesses, an approach that would become very unpopular in a very short amount of time.

This is why governments have always tried to take control and monopolize money. If people are forced to use government money and cannot create a competing currency, they must use the money the government gives them. Government can then indirectly “tax” the people through inflation and devaluation of the currency. This allows government to grow its boundaries and influence without directly feeling the repercussions of a people who see their property forcefully go out the door to the government in the form of taxes. Monetary inflation is a very indirect and gradual process for government to take money from the people. And it can only work if people are forced to accept the debased and often worthless money. As the money supply grows without solid commodity backing, prices begin to rise, impacting poorer citizens the most.

This brings us to the U.S. Some have argued that the Constitution allows the government to pass legal tender laws and control many aspects of monetary policy. However, on close inspection, this power has been greatly abused and misinterpreted. The Constitution states:

Article I, Section 8: The Congress shall have Power…To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.

Article I, Section 10: No State shall…coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debt.

Congress has the power to coin money, regulate its value, but nowhere does it have the authority to force people to accept that money. Congress can create and regulate its money, but it cannot mandate that people use it through legal tender laws. The states are prohibited from coining money and are required to make only “gold and silver Coin a Tender in Payment of Debt.”

Neither the powers delegated to Congress nor the states give them the authority to shove a currency onto the people. “Legal tender” means tender in the payment of debt. The states are given the duty to be sure that only gold and silver can be legal tender. For legal and juristic purposes, only gold and silver are acceptable in the payments of debt. But this does not give the state the power to dictate the forms of other monetary commodities or economic exchanges that the people and market might come up with. In other words, the state controls the legal use of money in the payment of debt, but neither the state nor Congress has authority over the economic exchanges of money in the marketplace.

The Founders did not give the federal government the ability to monopolize currency and force it on the people. There is no power in the Constitution given to the government to restrict currency production and choice of the people and marketplace. In fact, many competing and private currencies functioned efficiently for a good part of the 1800s. Today, however, we accept legal tender laws as a legitimate role of Congress, when in reality they do nothing but unconstitutionally force a worthless currency on the people.

Consider the basic principles of modern legal tender laws. No government force or mandates would be necessary to encourage people to use a widespread, valuable, and sustainable currency. Legal tender laws and government coercion over money are always used to force a currency that would otherwise be worthless onto the people and marketplace. Imagine if the legal tender laws enacted in the 1960s, forcing people to accept Federal Reserve Notes, were repealed today. Who in their right minds would continue using a currency whose value consistently decreases, is in the control of seven central bankers, and in reality is worth nothing more than the paper on which it is printed?

People will often reply that repealing legal tender laws would lead to the creation of hundreds of private currencies and economic chaos. But remember something. Especially in today’s digital, national, and even global economy, a currency would have to be simple, recognizable, valuable, and widespread to have a chance of surviving in the market. People will naturally encourage and use the currency that holds the most value and brings the greatest amount of ease to transactions. If that is the currency produced by Congress, so be it.

Monetary freedom simply gives people the option of throwing off the restrictive chains of a centrally manipulated, inflated, and drastically devalued currency, the symptoms of a government out of control. Competition in money would force government to stay in line, live within its means (both domestically and overseas), and maintain high levels of sensibility and responsibility. History has visibly painted the picture that without control over money, government’s long-term abilities are only as able as those that the people directly delegate to it. Freedom of money plays a major role in ensuring freedom and representation in government.

“With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people.” — F.A. Hayek

“Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice.” — George Washington

“All the perplexities, confusion and distresses in America arise not from defects in the constitution or confederation, nor from want of honor or virtue, as much from downright ignorance of the nature of coin, credit, and circulation.” — John Adams

“Whoever controls the volume of money in any country is absolute master of all industry and commerce.” — James A. Garfield

“We are in danger of being overwhelmed with irredeemable paper, mere paper, representing not gold nor silver; no sir, representing nothing but broken promises, bad faith, bankrupt corporations, cheated creditors and a ruined people.” — Daniel Webster

Tags: Banks, Bartering, Central Bank, Commodity, Constitution, Copper, Currency, Devaluation, Federal Reserve, Fiat Money, Free Market, Gold, Inflation, Kings, Legal Tender, Metals, Money, Monopoly, Silver, States
Posted in Economy, Featured, Government, Historic Analysis, Monetary Policy, Public Policies | 2 Comments »