Great article from Ron Paul on the Greece bailouts and the ongoing mess in Europe.

The spotlight remains on the Greek sovereign debt crisis as the riots continue. The terms of the Greek bailout from the IMF and Eurozone countries remain contentious with citizens on all sides. Europeans hate having their governments throw public money away as much as Americans do. The Greeks are not happy about having their taxes raised while their pensions and salaries are cut. Meanwhile, it is rumored by the Financial Times, AFP and others that Greece may spend more than it saves from austerity measures on arms deals with Germany, France and the US as a potential condition of receiving bailout funds. If true, it is certainly not unprecedented for the global military industrial complex to benefit from deals made by their friends in the central banking community. After all, war is the health of the state. The last thing big government proponents want is for peace to break out in the world.

This free flow of fiat money from around the globe to Greece will not really save Greece as much as it will grant a temporary reprieve to central bankers from the consequences of their mistakes. Sadly, this will come at the expense of the Greek people and taxpayers in Europe and America. Taxpayers are of no consequence to either European or American central bankers. Even the mere desire for complete information on what they are up to in our name is rebuffed, as we saw last week in the Senate with the failure of Senator Vitter’s amendment containing my language to fully audit the fed. The hubris of powerful and secretive central bankers seems to know no bounds.

If someone incurred debts against you as an individual, without your knowledge or consent, you would call it identity theft. You would call your bank for a full accounting of the debts incurred in your name, and after some verification, those debts would be declared invalid and you would not be held responsible for them. Furthermore, if the culprit was found, they would be prosecuted and sent to jail.

Not so with governments and central banks. Governments that are supposed to be of the people and for the people routinely incur debts against the people. Some governments even borrow money to oppress their citizens, and then expect them to pay for their own oppression with interest. With a fiat monetary system, the sky is the limit for how much debt a government can place on the backs of the people.

We have reached the point in the United States where the debt our government has accumulated against us is mathematically impossible to pay off. Harder times, likely due to a wave of hyperinflation, will eventually find its way to our streets and I am fearful of how Americans will react. My hope is that we will come together peacefully and help each other, and that enough of us will be aware that the blame rests securely on the shoulders of the Federal Reserve and the special interests. They should not be looked to for salvation. They should not be given more power. Rather, they should be stripped of the powers that allowed them to create this mess in the first place.

Resistance to public transparency regarding public debts should be denounced in the strongest of terms, and the central bankers that incurred them should be seen as no better than common identity thieves.

http://campaignforliberty.com/article.php?view=863

“I remember a German farmer expressing as much in a few words as the whole subject requires; ‘Money is money, and paper is paper.’” – Thomas Paine

America’s monetary situation is becoming fairly ridiculous.  This Monday, the Wall Street Journal carried “Will Nickel-Free Nickels Make a Dime’s Worth of Difference?” on its front page.  The article shares the government’s dilemma that minting each $100 box of nickels costs very close to $200, and that the metal content of the coin is worth more than the face value of 5 cents.  The penny, which was already debased from almost 100% copper to 2% copper in 1982 also costs more to mint than its face value.  The pre-1982 pennies are now worth over double their face value.

The nickel’s mass is 5 grams and consists of 25% nickel and 75% copper.  It is the only US coin to never have been devalued by using cheaper metals since it was first minted in 1866.  At that time, both the penny and nickel were worth far, far less than their face value, but were used as placeholders for gold and silver coins.  America’s dimes, quarters, half-dollars were all 90% silver up until 1964 when the silver content became worth more than the face value.  Today’s dimes, quarters, and half-dollars are nickel plating – done on purpose to resemble silver – sandwiched over a cheap copper core.

While the WSJ hems and haws between substituting wood, plastic, aluminum or zinc in the coins, one of the issues with “toy money” or devaluing the coin currency is that it could cause a psychological trigger as citizens realize Congress and the printing operators at the Federal Reserve intends to pursue its permanent monetary policy of inflation, which is a hidden, insidious tax on all Americans who hold dollars.

From my overseas experience in China, one oddity is bank accounts and many restaurants or shops still issue receipts with two decimal places, even though there is no coin in wide circulation that is worth 0.01 yuan.  These coins stopped being used by the public simply because this amount no longer has any practical purchasing power.  A similar situation now exists in the USA today.

The most sensible solution for Congress to pursue is to halt the inflation and stop minting pennies and nickels altogether.

However, Congress is not sensible.  For reasons briefly outlined here, Congress will continue inflation for as long as it can to maintain this charade of “desperado economics.”  Note the gold price rising to all-time record highs yesterday in dollars, British pounds, Swiss Francs, and Euros.  However, gold’s value is not really rising – it is just the devaluation of the dollar becoming more and more visible to the general public as posted recently in “The Haunted House of Fiat Currencies.”

Today’s dollars are mere shadows of what America’s money once was.  Money made with a printing press is nothing new – Thomas Paine and the rest of the founders were aware of the dire dangers – the phrase “worth less than a Continental” refers to script currency Washington issued the troops which quickly became worth nothing. This campaign has specifically about the nickel debasement two weeks ago, again in January, and well before this campaign started way back in August 2008 when I was just beginning to figure out what the government has done to our money.

While the masses will eventually catch on, forewarned is forearmed.  Here is a snippet from Chapter 17 of Human Action written by economist Ludwig Von Mises:

“The course of a progressing inflation is this: At the beginning the inflow of additional money makes the prices of some commodities and services rise; other prices rise later. The price rise affects the various commodities and services, as has been shown, at different dates and to a different extent.

This first stage of the inflationary process may last for many years. While it lasts, the prices of many goods and services are not yet adjusted to the altered money relation. There are still people in the country who have not yet become aware of the fact that they are confronted with a price revolution which will finally result in a considerable rise of all prices, although the extent of this rise will not be the same in the various commodities and services. These people still believe that prices one day will drop. Waiting for this day, they restrict their purchases and concomitantly increase their cash holdings. As long as such ideas are still held by public opinion, it is not yet too late for the government to abandon its inflationary policy.

But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against “real” goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.

It was this that happened with the Continental currency in America in 1781, with the French mandats territoriaux in 1796, and with the German Mark in 1923. It will happen again whenever the same conditions appear. If a thing has to be used as a medium of exchange, public opinion must not believe that the quantity of this thing will increase beyond all bounds. Inflation is a policy that cannot last.”

[Suggested further reading: the campaign's Federal Reserve plank, Sound Money and Jobs plank, and "One Step Clower to the End of the Yellow Brick Road"  Towne is one of the few writers brave enough to address the transition to sound money here.  While the end result of the crack-up boom predicted by Mises is as above, during the path towards it anything can happen as the amount of credit could be contracting at a faster rate as I wrote about in "'Credetary' Inflation and Deflation" and "Bring Light to Dark Derivatives!!" last year.]

Jake Towne is running for U.S. Congress in eastern Pennsylvania’s 15th district in 2010. Prior to returning home, he had been living in Shanghai as an engineer in the semiconductor industry for over 3 years. As part of defending liberty and championing the Constitution, Towne is offering the citizens in his area a novel form of accountable government called “Our Open Office.”

In this blog I will attempt to show you that two commonly held American beliefs are actually completely incompatible. They stand in direct opposition to each other and can not be reconciled. This post is intended to help you question your own thought process so that you may come to a better understanding of the interrelationships of economics, liberty, monetary policy, and foreign policy.  None of these things exist in a vacuum and, as I’m about to show you, some institutions harm people in other institutions.

“Support the Troops” even if you don’t support the war is among the most widely held beliefs in America.  Another widely held belief, often shared by the same people, is that the Federal Reserve is a necessary institution. Monetary policy and financial regulation must be conducted by a central authority.  These two positions are actually in direct opposition to each other.  The efforts of the Federal Reserve harm the very troops Americans “support.”

Defining Americans’ “Support the Troops” slogan

In order to engage this line of reasoning, we must first decide what Americans mean when they say “Support the Troops.”  To be honest, this is a gray area.  I don’t know what each individual really means when they say it.  Do they support warfighters as a rule of thumb?  Do they believe that the troops provide for their liberty, and so they must be taken care of?  Do they believe that the troops are making great sacrifices?  Or do they just say it because they would rather just repeat the slogan rather than face a backlash of criticism for appearing to not support the troops?  I honestly can not say what each individual American believes.  However, I must start with the basic premise that Americans “Support the Troops” and do not support any action that would bring harm to American troops through no fault of their own.  This harm must include any negligence by their superiors, any wrongful prosecution, undue economic hardships, or any violation of contract by the federal government.  I think we can all agree on that these situations would be things Americans who support the troops would find unfavorable.

The Contract

When a young person enters the military, they enter into a voluntary contract (assuming no draft is in place, which is a form of slavery and a wholly separate issue.) The contract is for a specific time limit.  The pay is lower, on average, than their civilian counterparts, particularly among the officer corps.  The difference, however, is made up in housing, medical, and educational benefits.  These benefits can be quite extraordinary.  The remaining equilibrium of recruiting is made up through the relentless pro-State propaganda that brings in a small fraction of patriotic young people (the number is higher during times of war) and the depressed economic conditions in the country (the number is higher in a depressed economy.)  All of these factors contribute to the make up the initial pool of available men and women that agree to the terms of their first contract.

Things get a bit more complex when the service-member decides to get out or enter into a second contract.  With the average contract being 4 years for enlisted and 6 years for officers, a second contract makes the likelihood of being a “lifer” a much greater probability.  A “lifer” is the military term for a career servicemen.  Career soldiers are important to the service, as they represent the knowledge of previous experiences and the leadership to instruct the new generation.  Regardless of your support of military institutions in general or warfighting in general, if you “Support the Troops” then you will understand that the “lifer” is an important competent of military competency.

The contract decision for a “lifer” then is quite different for the decision of a new recruit. The lifer now has experience and perhaps a technical skill that can be useful in the private sector.  They have completed a higher education, in general, than the recruit.  In order for the government to “negotiate,” they must offer something more.  The bargaining chip employed here is retirement.  After 20 years, the government will provide a generous pension to all service-members.  This is a desirable agreement, and usually puts the second enlistment soldier over the top.  Once a soldier does eight or ten years, it is very likely they will do the final half of their career to earn their retirement.  Once again, labor equilibrium is found.

(Side note: I got out after 10 years. I’m a different bird.)

But what if that promise of retirement was not all it’s cracked up to be?  What if that retirement benefit was destroyed through a reduction of purchasing power?  Would you be willing to support policies that purposely destroyed the government’s ability to fulfill its financial obligation to the soldiers you support?

The Benefit of Inflation

Inflation is defined as a persistent rise in prices.  This is the modern definition, however it is not the only definition.  Persistent price increases happen for a reason.  Here we must distinguish between the fluctuations in commodity prices (think oil last year) and real persistent increases over time, which is a purely monetary phenomenon.  Persistent price increases occur from currency devaluation, an increase in the amount of currency available relative to the market need.  This is the classical definition of inflation.  We refer to it as “printing money out of thin air, ” a cute euphemism for the practice of bringing about inflation.

Supporters of big government, and the Federal Reserve, point out a very obvious benefit of a moderate policy of inflation.  Debts contracted by the government can be paid back more cheaply if the currency used to pay back the debt is less valuable than the currency received.  If the government borrows $100 over 10 years, and then devalues the currency by 3% per year, while the rate of interest is 2%, the government makes a “profit.”  (I use quotation marks because the idea of profit here is completely different from the profit earned in the private sector. It’s a separate discussion but if you wish to delve into it further hit me up in the comments section.)

Certainly many Americans will agree that stiffing the Chinese on money we have borrowed to finance our government is a great idea. (Sarcasm only partially intended.)  Unfortunately, the Chinese are not the only people the American government has obligated to repay.  Not only have they promised Social Security benefits to generations of workers, but they have also promised a definite standard of living to American career soldiers in exchange for their service, as I explained above.  Had they not engaged in this negotiation, there would be fewer career soldiers.  It is part of the give-and-take market process that determines the labor force.

This money is owed to the people serving.  It is owed to the troops you support.  Would you feel comfortable knowing that the government must violate this contract?  That it has no choice?  The reason that it must violate this contract is because the Federal Reserve engages in a practice of inflation and has done so for the 96 years of its existence.

Much ink has been spilled on the Federal Reserve, inflation, the dollar losing 96% of its value since the Fed took over (with the directive to protect the dollar), fiat money, and fractional reserve banking.  I am going to assume that if you are still reading, you have a solid grasp of the basics.  The point of this post is to help you see the interrelationships of these institutions and for you to see that these two beliefs: Supporting the Troops and Supporting the Federal Reserve, are incompatible.

The Federal Reserve destroys the purchasing power of military veterans.  This point is irrefutable.  It has done so for 96 years.  Should the Federal Reserve bring about mass inflation (persistent double digit inflation), veterans will not receive the purchasing power of their obligation from the government at the level they were promised.  This is a violation of their property rights.  It is unethical.  Please do not “Support the Troops” and turn a blind eye to this fact.

Objections

This is a blog post and not an academic paper.  I don’t have time for the latter.  I can think of many objections, and can address them here, or I can let you make the objections and I will address them in the comments.  I’ll take the latter path to save me some time.

“Paper money eventually returns to its intrinsic value — ZERO.” – Voltaire (1694-1778)

The world champion athletes at the Winter Olympics receive gold, silver, and bronze medals that contain roughly the same amounts of metal as the last Summer Olympics.

• A gold medal contains 550 grams of silver and is layered with just 6 grams of gold.
• A silver medal has 509 grams of silver and about 41 grams of copper.
• The bronze medals likely contain about 450 grams of copper and 50 grams of mostly tin and zinc.

At current market prices, a gold medal is exchangeable for about $494, a silver for about $260, and a bronze for just $3. If the gold medal was solid gold with the same mass, it would be exchangeable for almost $20,000.
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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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“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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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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Ponzi scheme – a fraudulent investment operation that returns assets to the defrauded from assets they previously loaned to the scheme’s operators or assets paid by subsequent newer “investors” rather than from any actual profit earned

While it is (comparatively) well-known that the US dollar, while a currency, is a solely an instrument of credit issued by the Federal Reserve. All holders of dollars – including myself and most readers of this article – are in debt to the Federal Reserve. Now, this debt is really phantom debt, but the key really is printed on each dollar, more properly known as a Federal Reserve Note: “This note is legal tender for all debts, public and private.” (1)

The total federal debt issued was $11.933 trillion dollars at the end of fiscal year 2009 in September per the Treasury Department, an increase of $1.9 trillion from 2008. (page 37/123) This debt will continue to increase every year until the monetary system collapses due (just in part) to the compounding “miracle” of interest rates. Federal debt is bought at auction by primary dealers (Goldman Sachs, JP Morgan Chase, etc.) and “resold” to the FED, which then inflates the money supply by creating new dollars, or “injecting liquidity.” The FED can also “inject liquidity” by purchasing assets, such as toxic mortgage debt or even company stock like AIG or GM. Individual community banks, whether Citibank, Bank of America, or small local banks and credit unions, can also create new dollars with the fractional reserve system, which is can be viewed graphically here. However, a proof I wrote demonstrates that fractional reserve banking broke down years ago, and can be more aptly named as the “no-reserve lending” system.
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