IDEOLOGY AND ETHICS SURVEY
Additional Commentary and References
||Where should we locate "system risk" in the creation of money and credit?
||A strong decentralization.viewpoint:
A strong centralization viewpoint:
|It is less barbaric for local banks to
|Local bank failure so barbaric that central
||fail than to accumulate nationwide risk
banks and taxpayers must absorb risk
|Money creation should be kept out of
We can trust politicians and central bank-
||hands of politicians who only abuse it
ers to make wise central planning moves
|The system should punish loan officers
Financial institutions can consolidate be-
||where their judgment problems begin
cause they can self-police and be global
Sample argument (hard money) view: All considered, the 19th century system of decentralized "hard money" and regionally-restricted banking may have appeared stodgy and barbaric on the surface, but was in fact the most humane, robust, responsible and effective system in the long run. Although individual banks were allowed to fail, the failure rate never exceeded 1-2% a year, and most Americans successfully managed around this by diversifying where they stored their assets. While currency was tied to gold and kept out of the hands of politicians, there was no inflation. In fact, quite the opposite. By 1913 the average American could buy 50% more with his dollar than a hundred years earlier, despite a huge bout of government-sponsored inflation during the Civil War era. Even with so-called "tight money" the economy often grew about 5% a year. This system put a lot more responsibility on individual action and foresight, but had the major advantage of more likely punishing irresponsibility and incompetence where it originated at the local level. Today with a central bank system of bailouts, loan officers at the local level can engage in very risky and irresponsible behavior without facing consequences. Furthermore, the taxpayer usually ends up bailing out failure. Worse still, system risk accumulates at a central level where a blow out can undermine the economy nationwide, much like the way in which the quadrupling of money and credit from 1913 until the late 1920's culminated in a blow out that played a key role in bringing on the Great Depression. While Federal programs designed to protect orphan and widow depositors may appear good at first, over the long run they suffer from bureaucratic corruption and ineptitude and create more problems than they solve. Worse yet, government tends to create even more programs to "fix" the problems created by prior programs. Most academics who serve as advisors to government tend to stay within confines of conventional government wisdom, that is, serve as intellectual prostitutes. It will be a cold day in hell before you see any genuine self-policing. The Fed itself has never been audited, and since March 2006 no longer bothers to report money supply growth to Congress or the public. Thomas Jefferson and Andrew Jackson had it right when they claimed that the whole concept of a peacetime central bank is in itself self-serving and corrupt
|. . .
Sample argument (pro-central bank) view: Permitting bank failures created situations where orphans and widows were vulnerable to losing their savings. Certain classes of people require special protections by a compassionate, protective government and cannot be held responsible for their own lack of foresight, savings, or self-discipline even though they are legally adults. For this reason, we can justify deposit insurance and other bail-out programs even if they do in fact create moral hazard and increase riskier behavior at the loan origination level. In addition, by authorizing the creation of a privately-owned central bank in 1913, Congress gave itself much more freedom to create money independently of any ties to gold and silver reserves. This has given Congress, the President, and Jewish central bankers vastly more freedom to engage in deficit spending that supports myriad social programs as well as foreign wars fought for "democracy," anti-communism, anti-terrorism, Israel, oil, or whatever else they can think up next. They claim the need to finance social programs ostensibly designed to improve "equality" and wealth redistribution in American society far outweighs the risk that the process of paper money and debt creation can get out of control like the spending of drunken sailors. We can always trust that our elected government officials and central bankers would never do bad, self-serving things on purpose. We can always trust that this system is capable of adequate self-criticism and self-policing without massive outside scrutiny or citizen action to restrain it. The top guys are in a much better position to understand what is going on and fix things than you or I. Anarcho-libertarians who want to resurrect 19th century hard money must be kooks with their brains stuck in the past. We need "scientific" financial central management advised by the best minds our government-funded universities can produce. Last, but not least, we learned from the Great Depression that we simply can no longer trust a laissez faire free market to work on its own. We cannot afford to leave the money supply alone, nor allow the free market to set interest rates, nor let the free market correct economic distortions with its own recessions. Instead, we need central planners to keep "stimulating" the economy with steady money supply growth. We need for them to intervene in markets and to try to manage risk with complex financial instruments.
regarding the financial system
It is very important for Americans to understand
the difference between "natural" (or "free
market" or "libertarian") forms of money and credit, and "dictated" (or "fiat" or "centralized")
forms of these same things. This is very important both in order
to understand American history as well as to grasp the underlying
nature of America's
current financial crisis.
Unfortunately in America today, its controlled media tends to frame
all economic debate within a relatively small conceptual area by
We typically hear about such "modern" schools of economic thought
as monetarism, Keynesianism, and supply side economics. What all these schools
have in common is a fervent belief that it is highly desirable for Big Government
and a big central bank to actively manipulate a "dictated" (or "fiat")
money system. People who dare to suggest a natural money alternative,
completely divorced from government and central bank coercion and
often treated in a very condescending and disrespectful manner by
the controlled media.
Interestingly enough, America's economy successfully ran on a natural
money system during major periods of its history. "Natural money" simply
means the medium of exchange that evolves naturally in a free enterprise
system when private citizens are free to chose whatever they want
to use as money without any outside coercion, restriction, or manipulation
government or a central bank.
Historically, gold and silver have generally
tended to emerge in various societies around the world as
money" of choice. This is because gold and silver
have always exemplified all the best characteristics
desired in a medium of exchange. These precious metals
are always very limited in supply (mines can never add
5% a year to global supply). They also have practical
use for jewelry or as industrial commodities, are infinitely
divisible, are always uniform in quality, are highly
and are virtually indestructible.
Natural money systems not only involve the use of items that have intrinsic
value such as gold and silver as a medium of exchange, but also for the sake
of convenience, the use of warehouse receipts for any other items that also
have intrinsic value. As an example, colonial Virginia used warehouse receipts
for a pound-of-tobacco as money. In the coinage
act of 1792
, the U.S. dollar was specifically defined as 371-/4 grains
(troy) of fine silver. The exchange rate of gold and silver was fixed.
Banks in early America essentially served as warehouses
that held gold and silver. Dollar bills were essentially
warehouse receipts for these holdings. Actually it was not
quite this simple, since banks tended to keep only about
40% of their deposits in gold reserves or their silver equivalents
rather than maintain a 100% coverage ratio. However, in the
19th century one could still walk into just about any bank
and exchange his dollar bills into gold and silver coins
Today, no one can walk into any bank and
swap Federal Reserve Notes (what we call "dollars" today)
for gold and silver coins. In fact, it is illegal to use
gold and silver
coins to buy common goods in retail stores. If you need
to exchange gold and silver coins into cash, you must first
visit a coin dealer.
The Federal Reserve Notes (FRN) you are
required by law to use as legal tender are not backed up
by anything except
the police power of the state that forces you to use
it. This is why it is called a "fiat" currency. ("Fiat" means "dictated").
It is also backed up by a broader intangible, namely public "confidence" that
our politicians and central bankers are not going to
completely debauch the value of the fiat money system
any time soon.
In contrast to our "modern" system,
Americans in the 18th and 19th centuries not only routinely
with gold and silver coins, but also frequently used
foreign coins such as Spanish silver dollars, Brazilian
French silver crowns and livres. According to one
source, 80% of specie circulating in America in 1800
of foreign coins. (p. 67, Rothbard, History of Money
and Banking in the U.S.). In fact, Americans were
often jealous of their free market money. For example,
Abraham Lincoln tried to get Californians to accept
his "greenback" paper
dollars in lieu of their gold and silver coins to
help finance his War Against Southern Independence, the
basically told him to bug off. However, they did
not go so far as to secede.
Since the creation of America's privately
owned banking cartel called the Federal Reserve in 1913,
America has gone
over completely to a "fiat" or "dictated" financial
system. In 1933, the U.S. Government even went so far
as to confiscate privately owned gold, although thanks
strenuous grass roots activist efforts it restored
the right to own gold
in 1975. In addition, bank
gold reserves today are often lower than 1%. Banks are
create loans out of thin air based on a fractional reserve
system in which they often require less than 10% deposits
to back them up. Most of these deposits consist of fiat
money rather than gold and silver. Hence, we face a situation
consisting of mainly fiat money deposits backing up other
fiat money deposits. America is essentially floating
on a giant, rapidly expanding sea of paper secured by
except "confidence" and police power.
As an aside, I need to alert the reader
that while what I have said is true in terms of broad generalities,
are certain historical exceptions and nuances that I
have left out to try to keep things simple for introductory
For example, in an effort to handle the tremendous financial
burdens of the American Revolution, War of 1812, and
War Against Southern Independence, the U.S. Government saddled
itself with various paper money regimes and de facto
schemes. However, by 20th century standards, these things
were relatively temporary. Eventually things reverted
back to hard money systems. Also, the banking system in America
was not always totally "hard." Not surprisingly,
many "wild cat" banks in the "Wild West" frontier
resorted to wild and wooly banking practices. Nevertheless,
by 20th century standards, American banking generally remained
relatively "hard," privatized, and decentralized.
I think a good way to understand the differences between these two very approaches
to money and credit is to examine them on an ethical level and also in terms
of the short term vs. long term tradeoffs of decentralized vs. centralized
Before we delve deeply into the monetary issue, we must first examine ones
fundamental attitude towards government. As I explain in my mutualism vs.
parasitism section, republican government evolved as a remedy against tyranny,.
This means creating a political system designed to resist rule by cruel,
arbitrary, capricious, incompetent, irrational, or insane decrees by a very
limited number of specially privileged individuals.
Republican government implies decentralization of political
power out of the hands of one person or a small clique. It
also implies checks and balances. It also implies adherence
to consistent standards, and open disclosure and open discussion
of policy issues.
Therefore, if your government is going to inflate the currency,
this can have some very nasty implications regarding basic
republican principles. Inflation is an indirect form of taxation.
It destroys the purchasing power of the common citizen just
as much as if he had been taxed. Therefore, if you believe
in taxation only with representation, and if you
believe strongly that all important policy issues must be
subjected to open public debate, then you must believe that every decision
to inflate the currency must be thoroughly scrutinized by
the citizenry and their elected officials and must be
subjected to a full legislative process before ever being
This is exactly what we do not have
in America today. In fact, in March 2006 the Federal Reserve
Chairman, Ben Bernanke, told Congress that the Fed no longer
feels that it needs to report the growth in M3 monetary aggregates
created by the Fed itself.
When Congressman Ron Paul dared to ask why the Fed would
dare to do this, he was arrogantly told that it was simply
to expensive for the Fed to bother to keep track of its own
policies. What is really pathetic today is that Congressman
Ron Paul is one of the very few Congressman with the economic
literacy and loyalty to the Constitution to even dare to
ask this question.
The Fed is currently inflating the currency at over 10%
a year. In fact, it has been doing this every year more or
less since 1995. This means that Americans are effectively
taxed over 10% a year (in addition to their other taxes)
not because of any legitimate republican legislative process,
but because of the way some very small clique of central
bankers operating behind closed doors might decide to help
out their political buddies or because how of they might
they feel after an all-night party when they pop some aspirin
and shift their rear ends in their chairs a certain way.
At the opposite extreme to all this is a gold and silver backed hard money
system of the 19th century. During much of this period, money was kept out
of the hands of central bankers and the government.
Since gold mining companies can rarely add more than 5%
a year to the total world gold supply, under a hard money
system there is almost never a danger of serious inflation
that can tax people without representation or rob them of
the value of their savings. In fact, under the gold standard,
the dollar could buy 50% more in 1913 than it could a hundred
years earlier (despite a bad bout of inflation of Lincoln
greenbacks during the War of Southern Independence). The
British pound, which had not experienced such wartime distortions,
could buy 100% more for the average British citizen at the
end of the same 100 year period.
The French philosopher Voltaire once commented that paper money always returns
to its intrinsic value, which is zero. Throughout history, the general pattern
has been that central bankers and politicians have always abused their fiat
money privileges and completely debauched their own currencies.
In regard to the ethical issue behind all of this, the ability of central
bankers and politicians to cheat the public is so great under any fiat money
system that in his book The Gold Wars, former Rothschild banker
Ferdinand Lips commented that when most European nations went off the
gold standard at the beginning of World War One, one prominent banker
that this signified "The end of honor."
In the final analysis, in economics there are no free lunches.
Someone always pays a price for the consequences of economic
policies both in the short run and the long run.
In a hard money system, no one even attempts
to give out any free lunches. But then again, this reluctance
corners is simply an honest statement of economic reality.
In contrast, in a fiat money system, certain insiders
use their inflationary power to slip "free lunches" to
their political buddies. At the same time, they pretend
on the surface that the system is honest in order to maintain
public confidence. But in reality, we see that this system
is really very crooked.
An inflationary fiat system resembles a ponzi game, where
the first people to spend the inflated dollars get the full
benefit of their purchasing power. However, as these added
dollars slosh around the economic system and inevitably drive
up prices, the people left holding the bag are common citizens
who must now pay higher prices for goods without any increases
in their paychecks.
This brings us to the issue of short term vs. the long
term trade offs. In the short run, a fiat money system can
initially make life easier for many people in society, because
the circulation of extra notes can help stimulate additional
demand for goods. However, we need to bear in mind that this
additional spending usually comes from government bureaucracies
or the additional credit created under a fractional reserve
system by bankers. Government bureaucrats and reckless bank
loan officers handling hot money are typically the least
competent people to be making wise investment decisions.
Typically the most competent people in an economy to make
investment decisions are entrepreneurs, small businessmen,
and industrialists in the heartland. These people include
scientists, engineers, and inventors who create the steady
flow of innovation that is absolutely vital to sustain the
automation revolution and continually drive down prices with
more advanced manufacturing methods and improved devices.
Therefore, we can already see how a fiat money system starts
to shift economic decision-making power out of the hands
of successful entrepreneurs and other savvy businessmen and
inventors in the heartland and towards relatively arrogant,
selfish, and stupid bureaucrats and bankers based in places
like Washington D.C. and New York City.
Typically the stimulus created by the bureaucrats and aggressive
bank loan officers does more to distort the economy than
provide a basis of solid, sustainable growth. Over the long
run, this artificial stimulus created by inflating the money
supply or increasing credit under fractional reserve lending
system becomes comparable to a person who relies on junk
food to satisfy hunger or a drug addict who needs his usual
dose to avoid withdrawal symptoms. Furthermore, easy money
systems tend to encourage easy values, where people take
hot money and put it into highly speculative enterprises
designed to produce quick gain from changes in market psychology
that are completely delinked from underlying economic fundamentals.
With a hard money system, things are admittedly a little
bit tighter in the short run, but in the long run it is infinitely
more honest, stable and healthy. A hard money system places
the full burden on making prudent business and other investment
decisions on the local entrepreneur, industrialist, and other
businessmen. If they screw up, they pay the price, even if
it happens to be a hard price.
Hard money systems tend to encourage hard values focused
on savings, thrift, and prudent foresight. They tend to be
focused on building real businesses that provide real products
that provide real services.
I personally believe that in the long run, a hard money system is the only
system that is fully compatible with republican principles. Republicanism
essentially means decentralizing all the hard issues of carrying on the affairs
of state on to the shoulders of common citizens. If people on a grass roots
level have adequate character, intellect, and education, then decentralization
is vastly better way to go compared to consolidating all power into the hands
of a very few.
Similarly, since natural or "free market" money systems imply
decentralized economic power, why would someone who favors decentralized
not also favor the same thing on an economic level?
Decentralization regarding central
banks and military alliances
Before leaving the centralization vs. decentralization debate, we need to
spend more time talking about central banking. This is critical, because
centralized banking has provided the financial rocket fuel necessary to greatly
accelerate political and economic centralization — and
corruption — everywhere
else in America. It is also critical because the system now threatens to
create a hyperinflationary economic meltdown in America that will impact
First, we need to really question the entire underlying
philosophical basis for the Federal Reserve Banking
System which currently threatens to totally
debauch our currency. We also need to understand the role that it plays
in ponzi politics and in exacerbating rather than
reducing "system risk."
Secondly, after dealing with the central
bankers, we need to deal with some military-industrial
complex sacred cows in the "system risk" topic
area as well.
Let me go back through an overview of central banking. Please pardon me when
I repeat some points made earlier in this article.
Back in the early 1800's American currency was usually tied to gold and
silver. Approximately 40% of bank reserves had to be secured by precious
It was common to pass gold and silver coins back and forth through a
bank teller window. People believed correctly that when money is delinked
a hard asset and placed in the hands of politicians and central bankers,
that they tend to abuse their "license to print money" and
ultimately drive the value of paper money to the ground. We are back
to the famous saying
by Voltaire that fiat money tends to always return to its intrinsic value —
putting fiat money in the hands of politicians and central bankers is like
handing the keys to a liquor cabinet to a gang of alcoholics.
Therefore, it was wrong to have a central bank except for use as a wartime
emergency. People preferred a highly decentralized system, where local banks
were allowed to fail rather than getting bailed out by the government or
a central bank.
According to Dr. Murray Rothbard, the bank failure rate in the 19th century
averaged only about 1-2% a year at most. People usually managed around bank
failures by keeping their money deposited in multiple banks. Also, since
their gold and silver-linked money tended to steadily appreciate over time,
it was a lot easier to store it in places outside of banks, to include the
insides of mattresses and chests buried in the back yard.
Another important point about these supposedly archaic,
bad old days of "tight
money" that tied dollar bills to such "barbaric relics" as
gold and silver is that America experienced real economic growth rates of
around 4-5% a year during times of peace. This was well beyond the average
growth rates experienced during the more "enlightened" fiat-money
era of easy monetary and credit expansion in the 20th century.
A third point is that the banking industry used to be much more honest and
understandable for people. The underlying reality used to be that when one
gave his money to a banker to get interest income, he took the banker in
as a business partner. In return for storing his funds and finding a qualified
borrower, the banker shared the interest income with the depositor, net of
the banker's expenses and default losses. Since banks typically have most
of their funds loaned out, bankers typically have to finesse paying out cash
to people who make withdrawals. Normally depositors knew this and had no
incentive to destabilize their own hometown bank with a bank run unless they
had solid grounds to believe something was really wrong. Conversely the banker
had every incentive to earn a public reputation for rectitude to forestall
such a run.
The position of a head banker is one of the most sensitive in society. A
crooked banker can create loans out of thin air based on reserves he does
not have, and then use his ill-gotten wealth to buy off politicians and police.
This is the easiest and most lucrative form of theft on the planet. Meanwhile,
other bankers are always struggling to maintain public confidence to prevent
a run on their own banks. On the one hand they do not want to unnecessarily
alarm the public, but on the other hand it is an extremely dangerous sign
of moral decadence when the business leaders in a society allow aliens and
crooks to gain a beachhead inside their banking system.
Perhaps one of the greatest breaches of national security
among Western nations in history took place during the
Napoleonic wars. This took place when the
Rothschilds and other extremely wealthy Jewish families were able to
stage a silent coup de etat using their sinister advantages.
They held in-bred
mafia-like tribal loyalties, a tremendous capacity for covert intelligence
operations, and close ties with smugglers and other organized crime elements.
Using these dark powers, they were able to make very daring financial
manipulations of gold reserves and falsified credit. These
Jewish families had already
gained important access to various ruling aristocracies in Europe, and
now under the cover of war time "necessity" they
were able to pull off colossal banking swindles. A particularly famous
involved smuggling gold across France to pay off British soldiers
who were fighting Napoleon in Spain.
During the 19th century they got away with their incredibly nervy crooked
manipulations. They parlayed massive funds created out of thin air through
bank confidence games into real holdings in companies. They also used their
riches to buy political influence and social position. John Reeves described
in The Rothschilds: the Financial Rulers of Nations
they embedded themselves inside central banks of many nations of Europe and
became more powerful than many European monarchies.
This provided a base to expand international financial manipulation and political
thuggery to new levels, such as genociding innocent Dutch-descended Boer
women and children
, saddling America with its privately owned Federal
Reserve Banking System in 1913, and funding
of the Bolshevik
. The big money center bankers in the 20th century became particularly
ingenious at taking their risks and pawning them off on the government and
ultimately the taxpayer. They have also become also very ingenious about
creating false public impressions and confidence that hide underlying economic
realities. Last, but not least, they certainly have not lost their chutzpah,
whether it has involved saddling
Russia with kleptocrats
, assassinating President John F. Kennedy (cf. Final
" 9-11 controlled
, or high jacking American policy to fight wars in the Middle
East (cf. High Priests of War
Creating real wealth as opposed to scamming
it from the financial system
For the moment, let us review the basics regarding how real
is created in society.
The most critical factor in solid economic growth is competent entrepreneurial
calculation. This means competently developing, evaluating, and executing
business plans that focus on the creation of real products and services.
This in turn means delivering a "value proposition," in which
businesses learn how to profitably deliver products that provide a superior
quality to cost to consumers. The entrepreneur takes the risk that in
the process of executing his business plan, market demand for his products
be adequate to profitably cover his costs of operation.
It is very helpful to have a stable currency to aid the process of entrepreneurial
calculation. This helps the entrepreneur be more accurate in forecasting
revenues and costs looking into the future. It is also helpful for the free
market to determine interest rates, because this gives the entrepreneur more
accurate information about the time value of money and real rates of inflation.
Real wealth creation also means having a large community of people who can
support each other in principled free enterprise competition that should
ultimately create wealth for everyone. Business competition should be tough
enough to reward excellence and promote meritocracy, but chivalrous enough
so that businessmen are allowed to specialize and prosper at what they do
best in an ecology of business relations that ultimately create more wealth
Lastly, real wealth creation requires the honest informational feedback system
of a free market. I mentioned earlier how central planners are incapable
of operating complex systems. All of this in turn implies that the private
sector must retain overwhelming control of the economy and national wealth.
In contrast to this focus on specific products, specific
business relationships, and maintaining free and honest
markets, central bankers use an macro-economic
shot gun approach where they manipulate interest rates and the money
supply. They end up distorting all of the basic elements
of real wealth creation.
Rather than allow the free market to set interest rates, they distort
free market feedback signals by arbitrarily raising and
lowering interest rates.
They undermine currency stability by steadily inflating the money supply,
and they undermine credit system stability by expanding and contracting
credit under a fractional reserve system. The Mises Institute
offers an excellent
video that explains all these things in greater detail titled "Money,
Banking, and the Federal Reserve
I have already explained why government officials are incapable of creating
real wealth, and how excessive government growth and intervention tends to
act as an economic parasite over the long run. It is no different in regard
to the individuals who run a central bank.
Despite all of this, both the influence of America's government and central
bank have increased mightily for over nine decades.
It really makes one wonder about the character of the people
in charge of these entities. After the reader performs
his own in-depth research, he might
conclude as I have that the word "criminal" is hardly too strong.
One might even begin to conclude that America has been led by very selfish,
unprincipled people behind the scenes with alien interests who have been
out to ruthlessly exploit the general population.
The sad history of America's current
Following the creation of the Federal Reserve
Banking System in 1913, two very critical things started to
First, banks started dropping their required reserves. Throughout much of
the 19th century, banks backed up about 40% of their deposits with gold.
Now gold reserves were being dropped towards the single digit level. In fact,
within a few decades gold was completely replaced at most banks with Federal
Second, banks started to become very aggressive under a new fractional reserve
system. This meant that they started lending out many multiples of whatever
deposits they had on hand. This in turn meant that they could collect interest
on loans that they created out of thin air which were in excess of deposits.
This also meant an aggressive expansion of the money supply during the First
World War and Roaring Twenties era.
Aggressive money expansion typically fuels speculative investment, which
in turn tends to fuel overly leveraged investments, mal-investment and economic
distortion. At some point the need to write off mal-investment coincides
with a recessionary credit contraction.
As a defense against a sharp recession, the Fed was supposed
to step in and bail out problem banks as a "lender of last resort." This
was one of the features of the Federal Reserve Banking
System that Paul Warburg and
his allies sold to Congress in 1913. In actuality, the Fed was highly
selective about who it helped during the ensuing credit
implosion. According to Vince
LoCascio in Special Privilege
The first opportunity the Fed had to be
a lender of last resort occurred during the 1920s. In 1920,
there were 23,000 banks in America. In 1929, there were only
18,000. In the interim 5,700 banks failed and less than 1,000
new ones were formed. In other words, about one out of every
four banks failed during the 20s — the
first full decade after we instituted the lender of last
resort! During the 50 years of the reputedly ineffective
National Banking System, only in 1893, a panic year, did
more than 300 banks fail in a single year. From 1921 through
1929, during supposedly good times, an average of over 600
banks per year failed. Even in the best of those years (1922)
367 banks failed. From 1930-33, over 9,100 more banks failed,
producing a 50% reduction in the number of banks in a four-year
period. As lender of last resort, the Fed was an even more
miserable failure than as a source of monetary stability.
Instead of saving America from sharp business
cycles, bank centralization instead set up America for the
nastiest depression in its history by first fueling excess
monetary and credit growth in the prior two decades. This preparatory
bout of massive inflation was part of a broader, more complex
international story in which the U.S. Federal Reserve sought
to accommodate the needs of the Rothschild-controlled Bank
of England, which sought to restore the old global strength
of the British Pound relative to the dollar in the aftermath
of Britain's ruinous World War One inflation. This was certainly
not part of any kind of "America First" policy.
Rather than stabilize the currency, as was promised when the Fed was created
in 1913, the Fed has instead eroded over 97% of the value of the dollar since
The centralization of credit has created all the same problems I have described
with other centralization ploys. First, it has reduced accountability and decoupled
performance from returns. In the 1800's, if a local bank officer screwed up,
his bank went under. Bad bankers paid the price at the local level. Under the
Fed, incompetent bank officers get bailed out and hang around. Their lousy
loans ultimately get bailed out by an increase in the money supply or by government
bailout (as in the case of the S & L crisis of the late 1980's). Either
way, whether through inflation or direct government subsidy, it involves some
form of subtle or direct taxation of average Americans.
Predictably, centralization has also created a byzantine nest that is perfect
for unscrupulous people to game the system to their advantage. The economist
John Kenneth Galbraith commented in 1975 that "The study of money, above
all other fields in economics, is one in which complexity is used to disguise
truth or evade truth, not to reveal it."
Privilege: How the Monetary Elite Benefit at Your Expense
Vincent LoCasio summarizes special privileges that no other industry in America
can remotely match. I have provided his list from pages 199-200 in boldface
below, and have added some of my own comments.
: The right to create "money" out
of thin air was given by the original Constitution to Congress,
not to central bankers, but today only the bankers have the
privilege of creating money. The Fed Chairman used to be
kind enough to inform Congressional representatives about
money creation numbers after the fact. After March 2006,
the Fed no longer reports M3 growth to its camp followers
on Capitol Hill. (Fed chairman Ben Bernanke told Rep. Ron
Paul that it is now too expensive to keep records!) Of course
money creation without prior scrutiny and approval by people's
elected representatives is a form of taxation without representation
since it takes purchasing power out of the hands of taxpayers
just the same. To add insult to injury, under a fractional
reserve system, "...banks are then allowed to create
multiple dollars of liabilities against themselves for each
dollar of Federal Reserve Notes that they have." (LoCascio,
2. Asset protection (discount
privilege at the Fed)
According to LoCascio, (page 199) "If
the Fed so chooses, it can guarantee the assets of any bank by
buying the banks's assets at their time adjusted face value. Since
the Fed has an unlimited ability to do this, no bank, no matter
how poorly managed, can ever fail if the Fed merely chooses to
rescue it. To date, the Fed has favored taxpayer bailouts, instead.
The effect is essentially the same." I might add that when
member banks start to get into trouble, the Fed can also drop the
discount rate at which banks borrow money from the Fed. Banks and
take this money and loan it out at higher rates. Their loan rates
typically decline less than the discount rate. This is particularly
true of credit card interest rates. All of this means increased
profitability for the banks. In other words, this is a cartelized
industry whose head can arbitrarily provide guaranteed increases
in profit margins. This creates moral hazard by encouraging even
more reckless lending, which in the long run increases financial
system instability and the likelihood of deep recessions once the
need to write off bad debt and mal-investments inevitably leads
to a credit squeeze.
3. Liability protection
, Started in the 1930's, "deposit
insurance" was raised well ahead of the rate of inflation
to $100,000 per account in 1980. No doubt "deposit insurance" sounds
wonderful and "common sense" to the average person at
first sight, but we need to remember that over the long run in
economics, there are never any free lunches. This "insurance" is
actually a taxpayer-guaranteed bailout. The losses typically come
from bad loans created by reckless or incompetent loan officers.
The perversity comes from the fact that whenever a bank can slap
on the FDIC label and simultaneously offer the highest interest
matter how speculative the underlying loan portfolios are in nature —
bank will typically bring in the most assets while luring assets
away from more prudent portfolios... This also helps accelerate
the trend where loan officers are no longer likely to carefully
select and monitor borrowers in their local communities, but instead
they quickly package and swap loans among other financial institutions
in an impersonal way. This decouples loan origination officers
further from direct responsibility and accountability and adds
even more system risk. As a consequence of all this, FDIC "insurance" has
actually increased the long term failure rate —
well as the mega-sums involved in taxpayer-funded bailouts. One
of the biggest recent whoppers was the Savings & Loan industry bailout
the late 1980's that cost taxpayers over $160 billion dollars.
4. Rescue missions (bailouts
and the like)
Banks have become so powerful that "too
big to fail" often means too big to be missed by Congressmen
who depend on their campaign contributions and junkets. LoCascio
summarizes on page 200: ""Various taxpayer bailout schemes
permit the banks to pay no attention to the risk of any enterprise —
matter how stupid —
if they all act in concert with each other. By acting together —
it is lending to Mexico, South-East Asia, Donald Trump, or Long
Term Capital Management —
can virtually guarantee they will be rescued if things go wrong."
5. Accounting irregularities
to LoCascio (p. 200): "Accounting rules allow banks, and only
banks, to carry investments at acquisition cost when the current
market value is lower. This unquestionably perverts the bank's
true financial health. No rationale for this is plausible. Other
rules are similarly perverse and distort reality. In addition,
regulatory bodies and politicians intervene with their own irregularities
whenever such intervention is required to protect these inherently
unsound and unstable institutions."
6. Secrecy rules
to LoCascio (page 180),
Some special privileges relating to secrecy
were built right into the original Federal Reserve Act of
1913. For example, the act provided for a body called the
Federal Advisory Council (FAC). Directors of the Boards of
the Federal Reserve Banks select the members of FAC. Today,
FAC members consist of the top management of banks whose
combined assets exceed $1 trillion. These members meet regularly
with the Board of Governors, in secret and without oversight,
to air their concerns and provide advice. No other regulatory
agency meets in secret like this with the entities it regulates.
Other special treatment relating to secrecy was built into subsequent legislation.
For example, most federal employees are provided whistle blower protection
for revealing criminal or fraudulent activities that they come across in
the conduct of their jobs. Bank examiners, however, were specifically denied
such protection within the provisions of FIRREA — and
act supposedly dedicated to bank reform.
If all of this is beginning to sound like a big scam, well, join the conspiracy
theorist club. None of this should be a surprise for anyone who has read
about the real history of the Fed. An excellent and extremely well-written
primer is The
Creature From Jekyll Island
by veteran investigative journalist
G. Edward Griffin.
The Fed was a the brainchild of Paul Warburg, a Rothschild agent who got
together with Morgan and Rockefeller interests (themselves confederates of
elite Jewish banking families) to adapt European central banking schemes
to America. The reality of their system today has become the exact opposite
of the decentralized financial system championed by American patriots such
as Thomas Jefferson and Andrew Jackson.
Centralization has led to exponential increases
in total system risk. For starters, the Fed has
completely abandoned all 19th century standards
rectitude regarding sound money and credit. Unfortunately under "globalization" other
foreign central banks have followed the Fed's leadership, creating
a massive global problem rather than just a U.S. problem.
Ever since the Nixon Administration de-linked the dollar from gold in 1971,
the entire industrialized world has headed down the path to our present situation
where the entire world is floating on nothing but a sea of fiat-money paper.
Worse still, not only has the international community
abandoned gold as an anchor point for currency
exchanges, but in the place of gold it has substituted
unregulated derivatives as devices to hedge currency and other forms
Billionaire investor Warren Buffet has referred to these derivatives
of Mass Financial Destruction." They have swollen to over $200
trillion, or over twenty times the size of the U.S. economy.
In contrast the old gold system was simple and robust. It was based on the
intrinsic worth of gold itself, and carried no implosion risks.
Derivatives are nothing but paper contracts designed to hedge against uncertainties.
Many market professionals are gravely concerned that if a market crash turns
into a panic, many of these instruments can become completely illiquid. We
saw a good example of irrational market behavior during the Russian default
and Asian crisis in 1998. Investor behavior fundamentally changed much like
the way water turns to ice with the right reduction in temperature. Normal
trading ranges between many financial instruments evaporated or even became
inverted, leading to massive losses. One of the worst hit hedge funds was
Long Term Capital Management, which had been founded by several nobel laureates.
This failure threatened to wipe out some major banks before the Fed intervened
with a bailout program.
So many major U.S. money center banks and large corporations are now loaded
with debt and derivatives that their capital structures resemble hedge funds.
The Fed has done nothing to curb the growth of unregulated derivatives. This
is probably because hedge funds widely use them. These hedge funds aid Fed
manipulation by using their instruments to transmit Fed short term rate reductions
into long term rate reductions in bond markets. The hedge funds are also
are significant customers for major Wall Street firms, who also enjoy an
incestuous relationship with the Fed.
According to the report "Move
Over Adam Smith
: The Visible Hand of Uncle Sam" by John Embry of
Sprott Asset Management in Canada, the major investment firms also receive
massive infusions of funds from the Fed via its "Repo Market" which
they use to manipulate major markets to the mutual advantage of both
the Fed and the investment firms. I discuss all of this in greater
a paper I wrote in July 2003 about Fed
desperation and intervention wizardry
when I once worked as a full time
stock broker and investment strategist.
As total system risk builds towards a final blow out, it remains a wonderful
life on planet Krypton, U.S.A. for individuals near the top who enjoy high
salaries, bloated consulting fees and lecture honorariums. It is also a criminally
wonderful life for those within their confidence who can trade on inside
information. In this world of fluctuating fractional reserve ratios and discount
rates and other forms of central bank manipulation, there are all kinds of
wonderful, sneaky opportunities for insiders to continuously carve out little
percentages for themselves out of big pots of money and bury the evidence
within piles of complex transactions.
In contrast, it is not such a wonderful thing for common citizens. The purchasing
power of the dollar bills in their wallets will continue to decline towards
zero as the Fed continues to use its money creation powers to bail out bad
loans, shaky derivatives, disintegrating banks, blown up hedge funds, and
other problems related to banker recklessness, incompetence, and dishonesty.
Overall, the damage done to America has been far greater than if we had continued
to quarantine failure at a local level by allowing local banks to fail, as
barbaric as that practice may seem. We would also be far better off today
if we had stayed with a gold and silver based money system that remained
out of the hands of politicians and central bankers, as primitive as that
system may seem as well.
Personally speaking, I greatly prefer the relatively primitive but robust
and thoroughly reliable precious metals-based financial system without a
central bank or fractional reserve lending that characterized America in
the 19th century to the hyperinflationary blow-out regime we are likely to
see in the not too distant future.
Total system risk and military
There is an interesting analogy between the way
system risk is consolidated and magnified in the
banking world, and the way "war risk" is
similarly pooled and magnified today with America's
entangling alliances abroad.
Initially, creating a lot of military alliances may seem like a great idea.
After all, the more allies one has, the more likely it is that one might
defeat an enemy.
However, creating large numbers of entangling alliances can appear threatening
to foreigners. In the longer term, it may encourage the creation of larger
counter alliances among potential enemies than would be the case without
In addition, once large entangling alliances are created, it is much easier
for a relatively small localized war to suck in other, entangled powers,
and quickly escalate into a major war. The Balkans conflict that ignited
World War I is a prime example.
Dr. Hans-Hermann Hoppe points out that during the
Middle Ages, when Europe was much more fragmented,
the wars tended to be much smaller, more localized,
and more likely to be fought by professional armies. As mentioned previously,
the European countries tended to be run by monarchs and their relatively
small advisory councils. This "privately owned" government
had a much greater sense of long term caretakership. They were far
than social democrats to agitate, regulate, mobilize, or socially experiment
with their own people.
In contrast, in our so-called modern era of social
democracy, countries are more likely to fight "peoples wars" or total wars with mass conscript
armies. Social democracies typically bribe the loyalty of their mass citizenry
for war through social security legislation and other benefits, hence the
meaning of "welfare-warfare" in the phrase "neo-Jacobin welfare
warfare state" that libertarians use to describe America today.
Contemporary social democratic governments have central banks whose fiat
currencies can be readily inflated to help fight total wars to complete national
exhaustion. Social democracies have proven every bit as much, if not more
adept than the old constitutional monarchies at using alliances to escalate
conflagrations, even to the levels of World War II.
Incidentally, the American social security system
was largely inspired by German Chancellor Otto
von Bismarck's social benefits system. Bismarck
defended his system as a tool to politically bribe workers within the
unified German state into feeling a sense of obligation
towards military service
for his imperial war machine. He also wanted to head off progressivist
platforms by implementing his own social programs.
This is one of the ways that "welfare" and "warfare" government
spending originally fit together.
Also, getting back to my discussion of ponzi government and evil government,
the existence of entangling alliances and a large standing military typically
present a chicken and the egg problem. Major media condition us to think
that first there is a legitimate threat, and then America goes looking for
alliances as a second step to meet a real threat.
Many libertarians believe that the underlying reality is usually the reverse.
They argue that the neo-Jacobin welfare warfare state goes looking for trouble
first before reacting to it. The superstate needs entangling alliances and
enemies as an alternative to undergoing the pain of downsizing government
and the military-industrial complex. As one example, a number of Mises Institute
lecturers claim that the CIA wildly over-inflated the Russian economy and
military expenditures during the Truman Administration in order to help keep
the American military budget artificially bloated.