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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.


In my centralization vs. decentralization article in my Resolving Opposing Ideologies series I describe in some length social and political ramifications of the decentralization of money and credit. I have reproduced that discussion immediately below:

Decentralization 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 historical standards. 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 manipulation, are 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 by a government or a central bank.

Historically, gold and silver have generally tended to emerge in various societies around the world as the "natural money" of choice. This is because gold and silver have always exemplified all the best characteristics people have desired in a medium of exchange. These precious metals are always very limited in supply (mines can never add more than 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 transportable, 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 at will.

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 transacted with gold and silver coins, but also frequently used foreign coins such as Spanish silver dollars, Brazilian coins, and French silver crowns and livres. According to one source, 80% of specie circulating in America in 1800 consisted 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, when 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 Golden State folks 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 to some 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 free to 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 today 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 nothing 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, there are certain historical exceptions and nuances that I have left out to try to keep things simple for introductory purposes. 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 central banking 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 systems.

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 implemented.

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 commented 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 to cut 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 political power 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 everyone.

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 metals. 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 from 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 zero since 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 example 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 how 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 most of the Bolshevik Revolution. 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 Judgment), "pulling" 9-11 controlled demolitions, 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 wealth 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 ratio or quality to cost to consumers. The entrepreneur takes the risk that in the process of executing his business plan, market demand for his products will 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 for everyone.

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 central bank

Following the creation of the Federal Reserve Banking System in 1913, two very critical things started to happen.

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 Reserve paper.

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 (p. 95):
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 inception.

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."

In Special 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.

.....1. Money creation: 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, p. 199).

.....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 (FDIC coverage), 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 rates no matter how speculative the underlying loan portfolios are in nature this 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 as well as the mega-sums involved in taxpayer-funded bailouts. One of the biggest recent whoppers was the Savings & Loan industry bailout of 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 no matter how stupid particularly if they all act in concert with each other. By acting together whether it is lending to Mexico, South-East Asia, Donald Trump, or Long Term Capital Management they can virtually guarantee they will be rescued if things go wrong."

.....5. Accounting irregularities According 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 According 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 of 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 of risk. Billionaire investor Warren Buffet has referred to these derivatives as "Weapons 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 detail in 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 alliances

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 making provocations.

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 less inclined 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 openly 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.
[End of extract from the "Centralization vs. Decentralization" article]

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