Posted on 11/29/2005 1:19:18 PM PST by hubbubhubbub
"All the perplexities, confusion and distresses in America arise not from defects in the Constitution or confederation, nor from want of honor or virtue, as much from downright ignorance of the nature of coin, credit, and circulation." [1]
Abstract
Ignorantia juris non excusat (ignorance of the law does not excuse) is a well established principle dating back thousands of years. Roman and English law, precursors of the American system of jurisprudence, both recognized the maxim.
Be it not forgotten – justice excuses not the law. The laws of the land are to be made in pursuance of the Constitution. The Constitution has precedent. Any law not in pursuance of the Constitution is null and void, as if it never occurred. So the court has ruled.
"And there is virgin Justice, the daughter of Zeus, who is honored and reverenced among the gods who dwell on Olympus, and whenever anyone hurts her with lying slander, she sits beside her father, Zeus the son of Cronos, and tells him of men's wicked heart, until the people pay for the mad folly of their princes who, evilly minded, pervert judgement and give sentence crookedly." [2]
No man is above the law – not even the King. No law is above the Constitution – not even the King’s. All men are created equal. All men are judged accordingly. He without sin cast the first stone.
The ignorance of coin, credit, and circulation is unfortunately, a widespread occurrence – causing perplexities, confusion, and distress, all tearing at the social fabric of our nation. But who is guilty of these defects – who has caused them to be?
Is it the fault of the common man that he cannot understand the complexities of a monetary system that moved Lord Keynes to say that not one man in a million understands money?
No, the common man is not at fault, the blame lies elsewhere: it rests with those who have purposefully made the monetary policy so bizarre that even its keepers have a hard time understanding the delusion they have created.
John Kenneth Galbraith clearly understood the illusionary nature of the elite’s monetary economists when he stated that they:
“use complexity to disguise or to evade the truth, rather than to reveal it.” [3]
Fractional Reserves
The most dishonest monetary illusion is the shadow cast by fractional reserve lending.
"Because of 'fractional' reserve system, banks, as a whole, can expand our money supply several times, by making loans and investments." [4]
Let’s take a closer look at the sword of State the magi use to create their tricks of prestidigitation – the scepter of fractional reserves.
What is meant by fractional reserves? It would seem that reserves are reduced to a fraction, but a fraction of what? Perhaps we should seek the wise counsel of the Federal Reserve, as this is their raison d’etre.
Required Reserve Balances
“Required reserve balances are balances that a depository institution must hold with the Federal Reserve to satisfy its reserve requirement. Reserve requirements are imposed on all depository institutions – which include commercial banks, savings banks, savings and loan associations, and credit unions – as well as U.S. branches and agencies of foreign banks and other domestic banking entities that engage in international transactions.
Since the early 1990s, reserve requirements have been applied only to transaction deposits, which include demand deposits and interest-bearing accounts that offer unlimited checking privileges. An institution’s reserve requirement is a fraction of such deposits; the fraction – the required reserve ratio – is set by the Board of Governors within limits prescribed in the Federal Reserve Act.” [5]
According to the above, the Board of Governors set required reserve balances within limits as prescribed by the Federal Reserve Act that depository institutions must hold on account.
The required reserve ratio is clearly stated to be a fraction of demand deposits and interest-bearing accounts that offer unlimited checking privileges.
Notice the wording “since the early 1990s, reserve requirements have been applied only to transaction deposits”, as such language demonstrates that previous to the early 1990’s reserve requirements were applied to a larger composite – according to the usage of the word “only.”
Which in fact is true, as reserve requirements have been reduced several times since the Fed took control in 1913? A closer look at reserve requirements is in order.
Reserve Requirements
The Federal Reserve has the following to say in regards to reserve requirements:
“Reserve requirements have long been a part of our nation’s banking history. Depository institutions maintain a fraction of certain liabilities in reserve in specified assets. The Federal Reserve can adjust reserve requirements by changing required reserve ratios, the liabilities to which the ratios apply, or both.” [6]
Once again, we see the use of the word “fraction” when discussing reserve requirements, however, we now have the further clarification of reserves in “specified assets.” Obviously, these “specified assets” are critically important, as they are the reserves of our monetary system.
“A depository institution satisfies its reserve requirement by its holdings of vault cash (currency in its vault) and, if vault cash is insufficient to meet the requirement, by the balance maintained directly with a Federal Reserve Bank or indirectly with a pass-through correspondent bank (which in turn hold the balances in its account at the Federal Reserve).” [7]
Now we see that depository institutions satisfy their reserve requirements by holding cash (currency) in their vaults, or if short, they get some help from the Fed or a correspondent bank. The next logical question is: how much cash are they required to have on reserve in their vaults.
From the same Fed publication, we find the following table:
(table didn't come across)
As can be seen from the above chart there isn’t a heck of a lot of reserves on reserve. Three of the five categories listed in the chart have zero (0) reserve requirements. One of the five categories has three (3%) percent reserves, and the remaining category has approximately ten (10%) percent reserve requirements.
So, what are the ramifications of the above listed reserve requirements? From the Fed’s publication, we find the following:
Autonomous Factors
“The supply of balances can vary substantially from day to day because of movements in other items on the Federal Reserve’s balance sheet. These so-called autonomous factors are generally outside the Federal Reserve’s direct day-to-day control.
The largest autonomous factor is Federal Reserve notes. When a depository institution needs currency, it places an order with a Federal Reserve Bank. When the Federal Reserve fills the order, it debits the account of the depository institution at the Federal Reserve, and total Federal Reserve balances decline.
The amount of currency demanded tends to grow over time, in part reflecting increases in nominal spending as the economy grows. Consequently, an increasing volume of balances would be extinguished, and the federal funds rate would rise, if the Federal Reserve did not offset the contraction in balances by purchasing securities. Indeed, the expansion of Federal Reserve notes is the primary reason that the Federal Reserve’s holdings of securities grow over time.” [8]
Federal Reserve notes are those little green pieces of paper we all carry around in our wallet or purse and refer to as cash. A dollar bill is a Federal Reserve note, as are fives, tens, twenties, fifties, and one hundred dollar bills.
From where does the Fed get the Federal Reserve Notes? Good question. Let’s try and find the answer.
Notice in the above quote the last sentence, which reads, “Indeed, the expansion of Federal Reserve notes is the primary reason that the Federal Reserve’s holdings of securities grow over time.”
With the Fed’s holding of securities entering the picture, we now have two questions to answer: Federal Reserve notes come from where; and what securities is the Fed holding due to the expansion of Federal Reserve notes?
The Treasury
The Treasury has a role to play in this monetary game of musical chairs. The Fed has this to say regarding the Treasury:
“Another important factor is the balance in the U.S. Treasury’s account at the Federal Reserve. The Treasury draws on this account to make payments by check or direct deposit for all types of federal spending. When these payments clear, the Treasury’s account is reduced and the account of the depository institution for the person or entity that receives the funds is increased. The Treasury is not a depository institution, so a payment by the Treasury to the public (for example, a Social Security payment) raises the volume of Federal Reserve balances available to depository institutions.” [9]
From this we see that the Treasury has an account at the Federal Reserve, and that the Treasury draws on the account to make payments by check and direct deposit. Where did the Treasury’s account at the Fed come from? Rather than finding answers, we are discovering more questions.
Open Market Operations
“Open market operations are the most powerful and often-used tool for controlling the funds rate. These operations, which are arranged nearly every business day, are designed to bring the supply of Federal Reserve balances in line with the demand for those balances at the FOMC’s target rate.” [10]
The more we look, the greater our task becomes. That is good, as often times its not just the answers that matter, but asking the right questions as well. We are getting warmer by the minute.
“In theory, the Federal Reserve could conduct open market operations by purchasing or selling any type of asset. In practice, however, most assets cannot be traded readily enough to accommodate open market operations. For open market operations to work effectively, the Federal Reserve must be able to buy and sell quickly, at its own convenience, in whatever volume may be needed to keep the federal funds rate at the target level. These conditions require that the instrument it buys or sells be traded in a broad, highly active market that can accommodate the transactions without distortions or disruptions to the market itself. The market for U.S. Treasury securities satisfies these conditions.” [11]
United States Treasury securities are the main market the Fed uses to conduct open market operations. As the money supply continually grows, the buying of Treasury securities by the Fed occurs more often then selling.
Summary To Date
Fractional Reserves refers to monetary reserves required to be on deposit in banks. The reserve requirements go from zero, to 3%, to 10%. Federal Reserve notes (cash) are the predominant reserve deposit. When banks need cash, they go to the Fed. The Fed holds U.S. government securities in its accounts. The U.S. Treasury has an account at the Fed. The Fed conducts open market operation of buying or selling Treasury securities. The remaining questions before us are:
Where does the Fed get the ever-increasing supply of Federal Reserve notes? Where did the Treasury account at the Fed come from? Where The Money Comes From
Trillions of dollars are said to be everywhere. I remember as a kid that a million was a big number. Today billions of dollars are tossed around from computer to computer without the blink of an eye. Trillions are now the topic de jour.
Budgets, deficits, and international money flows are all described using trillions or parts thereof. We have come a long way. The financial wizards circle high above the common man. But perhaps the way so chosen is the wrong way, for the good of all of the people – not just the elite few who control the strings of the purse, and profit thereby.
Let’s go within the Temple of the Wizards of Finance, to see what arts the conjuring is done by, to see what potions and spells are cast within fortune’s cauldron, and what strange brew precipitates there from.
The Beginning
On that fateful day when Federal Reserve Notes were first issued, it is obvious that a huge number of dollar bills had to be printed. Now, the printing press is pretty much obsolete; the only money that actually gets printed is used to replace old and worn Federal Reserve notes already in circulation. In vogue today is electronic money – fast food style.
The process actually begins with the Treasury Department printing a piece of paper called a bond, which is done electronically. Treasury bonds are debt obligations (liability) of the government to repay a loan - with interest.
The Treasury sells bonds to the public. The bonds the public does not buy, the Treasury deposits with the Federal Reserve. When the Fed accepts the bond from the Treasury, it lists the bond on its books as an asset.
The Fed assumes the government will make good on its promise to pay back the loan. This is based on the belief that the government’s power to tax the people is sufficient collateral.
Because the Fed now has an asset that it didn't have before receiving the Treasury bond, the Fed can now create a liability that is offset by its new asset.
The liability that the Fed creates is a Federal Reserve check. It gives the Treasury the check in payment for the Treasury bond.
THERE IS NO EXISTING MONEY IN THE FED'S ACCOUNT TO COVER THIS CHECK.
The Federal Reserve check is endorsed by the Treasury and is deposited in one of the government's accounts at the Federal Reserve. The government can use the deposits to write checks against, to pay for government expenses.
This is the first new money flow to enter the system. Various government contractors, vendors, etc. receive these checks as payment for services rendered, and they take the checks and deposit them in their commercial banks.
The Second Step
This is when the wizards of finance perform their greatest feats of magic. The deposits in the commercial banks take on a sort of split personality or dementia, brought on by a preponderance of delusional thinking.
On the one hand, the deposits are the bank’s liabilities, as they owe the total sums to their depositors.
However, because of FRACTIONAL RESERVE lending, the bankers get to lend out 9 times what they have on deposit.
The commercial banks get to list the deposits as RESERVES.
In other words, FRACTIONAL RESERVE lending allows the commercial banks to create 9 times more money then they have on reserve. The banks lend money they don’t have, and:
They get to charge interest on it.
As the newly issued money is put to work by borrowers, they then spend it and the receiver then deposits it in their bank account, and the bank starts the reserve lending policy all over again. This is why the
Money supply must expand by the amount of interest owed on the debt.
If it didn't, the debt would not be able to be serviced. There is no money created without creating debt, they are one and the same. Wealth is not created by creating money by fiat – only debt. As the Fed has admitted:
"Commercial banks create checkbook money whenever they grant a loan, simply by adding new deposit dollars in accounts on their books in exchange for a borrower's IOU." [12]
Conclusion
Fractional reserve lending invokes the moral hazard of fidelity of contract. Banks have on deposit (reserve) at most 10% of the “money supply.”
This means that if more than 10% of depositors go to the bank at one time to withdraw “our” money – there isn’t any money to withdraw beyond the 10% reserves.
Which means that 90% of the money supply is non-existent, nothing more than a fleeting illusion.
The bank’s solvency stands on the faith that no more than 10% of depositors will want their money at the same time. This means that although
Banks may appear to be solvent – they are without question illiquid.
Fractional reserve lending insures and guarantees that banks cannot possibly be liquid.
Banking is the only type of business that is allowed to function this way. If any other business used a similar modus operandi it would be subject to censor, arrest, court, and possibly imprisonment. Banks cannot fulfill all of their contracts if demand occurred at the same time. Thus, the banks are illiquid.
Why the double standard? Why the dishonesty? Why are they afraid of gold and silver money as the Constitution mandates? Because it would make them tow the line or go bankrupt. Less they forget - be ever mindful - even Zeus cannot deny Destiny.
Coming Soon – Open Letter To Congress Seeking Redress For The Return To Honest Money
[1] John Adams in a letter to Thomas Jefferson [2] Hesiod, Works and Days [3] John Kenneth Galbraith Money: Whence It Came, Where It Went [4] Federal Reserve Bank, New York The Story of Banks, p.5. [5] The Federal Reserve System Purposes and Functions The Implementation of Monetary Policy [6] Same as above [7] Same [8] Same [9] Same [10] Same [11] Same [12] Federal reserve Bank of New York, I Bet You Thought, p.19
Stability not only has never been a characteristic of metallic regimes but in actual fact they have been only theoretic thoughout most of capitalistic development. It was the growth of capitalism which led to the development of banking in the first place because of the needs to provide and international means of exchange without having to deal with the cumbersome transportation of precious metals. Coins were notoriously variable in quality and weight. You might measure the backwardness of an economy by its dependence upon metals for money.
So an exchange economy and credit banking are historically coordinated. As for the historic horrors you list surely you cannot compare a deliberate governmental policy of inflation under Weimar to destroy the huge debt of Versailles with the deliberations of representatives of the American people? Or those of a Bloody Tyranny casting about like a desparate animal with the French Assignats?
Hamilton solved the problem of American monetary needs and the Continentals with his funding program and the creation of a money supply by selling debt for specie. He capitalized the word of the American people. American monetary authorities have on the whole done a good job in monetary matters though making some mistakes there have been few examples of real irresponsibility.
Gold coinage is hugely difficult to keep and, the proclamation of metallic standards prove impossible to maintain with war certain to suspend convertibility. Financing modern military establishments is also impossible under a metallic standard.
Public finance is like most sciences in that there were strange theories which once held sway but which have gotten closer and closer to real answers. There is nothing to fear about Central Banking which is just as well since it is impossible to do without it in a modern economy.
In that is supports the transactions of modern capitalism it certainly does work to our advantage. Without modern banking including Central Banking there is no such thing as a capitalistic economy beyond minimal levels. As soon as it grows past a certain point it demands banking look at Italy around the 13th century.
Actually the increased value of the house reflects the increased development of the area around it not mere monetary inflation. And the reduction in the ability of the housing supply to expand fast enough because of governmental restrictions. Do you believe a situation where the value of the house does not increase to be preferable to one where an investment actually becomes more valuable?
This article is just a pretentious conspiracy fantasy of little value.
Jefferson was an economic and financial simpleton. He fought tooth and nail with every underhanded method available to frustrate the real financial and economic genius of that era, Hamilton. A Jeffersonian economy would have left the US with an agricultural economy which could never have led the world or become the most powerful in history.
Jefferson's foreign policy almost destroyed the US economy by declaring an embargo against France and England rather than build a navy and fund and army to protect American interests.
His major act, the Louisiana Purchase, was a complete accident and he didn't even believe the Constitution allowed for it. Jefferson was a very interesting man but the most overrated president we ever had with huge flaws of understanding. Terrific rhetoritician though as long as he didn't have to live up to his rhetoric.
Great Britain has not had a revolution since 1688 four years before the founding of the Bank of England. France's revolution was not caused by fiat money it was introduced during the revolution and theoretically based upon the lands confiscated from the Church.
You are working for purchasing power. With that purchasing power you can buy things which retain or gain value.
Deflation makes it more difficult for new business. When prices are falling you don't see as many new businesses spring up or existing businesses expand. Those were times where it was said "money is scarce". When prices are high or rising more competition arises.
China does not have deflation but rather high inflation. But we would have more inflation if we did not import from China.
US debt is denominated at a fixed rate which would not be affected by the value of the money provided. There is no requirement to pay it in gold or silver so their level is not significant.
The US Government is the creation of the US people.
For his efforts Hamilton earned the undying hatred of the Jeffersonians and their followers blackened his reputation for decades to come.
"All the capital employed in paper speculation is barren and useless, producing, like that on a gaming table, no accession to itself, and is withdrawn from commerce and agriculture where it would have produced addition to the common mass... It nourishes in our citizens habits of vice and idleness instead of industry and morality... It has furnished effectual means of corrupting such a portion of the legislature as turns the balance between the honest voters whichever way it is directed." --Thomas Jefferson to George Washington, 1792. ME 8:344
It should only say that it is a one ounce gold note, redeemable for one ounce of gold. Originally, a dollar was set at an exact weight in pure silver, based on the most common coin of the time, the Spanish "piece of eight." The dollar was exactly equal to that weight of silver. Period.
Wow, a straw man and a non-sequitor in one stupid rhetorical question! I'm impressed! (Not.)
Such hubris. Such amazing hubris. Before every crash, they say, "It's different this time. We're so much smarter, we have a much better understanding of economics."
"If recession should threaten serious consequences for business (as is not indicated at present) there is little doubt that the Federal Reserve System would take steps to ease the money market and so check the movement."
--Harvard Economic Society, October 19, 1929
Your example of the USA from 1973 to present as proof of the long-term viability of fiat money systems is laughable, like the man falling off a cliff who says, "So far so good" when half way down.
Time will tell, who of us is right.
Got the site bookmarked.
I think some people consider that the current era is the most enlightened height of human civilization. That technology always equals advancement or progress in every sphere. That humanity is always progressing up, up, better and better. That just because something is happening "now" it must be better than what was happening "then".
I don't have that view.
There are other standards of human civilization besides traveling fast, telecommunications, millions of stores in which to purchase millions of trinkets and gadgets, and thousands of drugs that often have odd side effects.
The hubris of each generation knows no limits. We have mastered the art of pumping up a credit bubble to undreamed of size. The pop is going to be ever so dramatic. I believe we will see "a greater depression."
With the Gold Standard, it "Costs money to create money." That is both the advantage and disadvantage if the gikd standard. To create money, the government has to buy gold. That puts a big damper on expansion of the money supply. The advantange to the gold standard is that there is no inflation with it. Unfortunately, that's the only advantage. It also stymies economic growth - the money supply may not expand fast enough to keep up with bursts in the economy.
The classic example of hyperinflation - Weimar Germany in the 1920s - occurred because of massive deficit spending in the face of almost no tax revenue.
"What is Inflation," by Walter Williams, Nov. 2005.
Last month, President Bush nominated Dr. Ben S. Bernanke, currently chairman of the President's Council of Economic Advisors, as chairman of Federal Reserve Board to replace the retiring Alan Greenspan. Alan Greenspan's replacement comes at a time of heightened fears of inflation resulting from the recent spike in oil prices.
First, let's decide what is and what is not inflation. One price or several prices rising is not inflation. When there's a general increase in prices, or alternatively, a reduction in the purchasing power of money, there's inflation. But just as in the case of diseases, describing a symptom doesn't necessarily give us a clue to a cause. Nobel Laureate and professor Milton Friedman says, "[I]nflation is always and everywhere a monetary phenomenon, in the sense that it cannot occur without a more rapid increase in the quantity of money than in output." Increases in money supply are what constitute inflation, and a general rise in prices is the symptom.
Let's look at that with a simple example. Pretend several of us gather to play a standard Monopoly game that contains $15,140 worth of money. The player who owns Boardwalk or any other property is free to sell it for any price he wishes. Given the money supply in the game, a general price level will emerge for all trades. If some property prices rise, others will fall, thereby maintaining that level.
Suppose unbeknownst to other players, I counterfeit $5,000 and introduce it into the game. Initially, that gives me tremendous purchasing power, whereby I can bid up property prices. After my $5,000 has circulated through the game, there will be a general rise in the prices -- something that would have been impossible before I slipped money into the game. My example is a highly simplistic example of a real economy, but it permits us to make some basic assessments of inflation.
First, let's not let politicians deceive us, and escape culpability, by defining inflation as rising prices, which would allow them to make the pretense that inflation is caused by greedy businessmen, rapacious unions or Arab sheiks. Increases in money supply are what constitute inflation, and the general rise in the price level is the result. Who's in charge of the money supply? It's the government operating through the Federal Reserve.
There's another inflation result that bears acknowledgment. Printing new money to introduce into the game makes me a thief. I've obtained objects of value for nothing in return. My actions also lower the purchasing power of every dollar in the game. I've often suggested that if a person is ever charged with counterfeiting, he should tell the judge he was engaging in monetary policy.
When inflation is unanticipated, as it so often is, there's a redistribution of wealth from creditors to debtors. If you lend me $100, and over the term of the loan the Federal Reserve increases the money supply in a way that causes inflation, I pay you back with dollars with reduced purchasing power. Since inflation redistributes (steals) wealth from creditors to debtors, it helps us identify inflation's primary beneficiary. That identification is easy if you ask: Who is the nation's largest debtor? If you said, "It's the U.S. government," go to the head of the class.
So what about the president's nomination of Ben S. Bernanke as Alan Greenspan's replacement? I know little or nothing about the man. What I do know is that it's not wise for one person, or group of persons, to have so much power over our economy. Here's my recommendation for reducing that power: Repeal legal tender laws and eliminate all taxes on gold, silver and platinum transactions. That way, Americans could write contracts in precious metals and thereby reduce the ability of government to steal from us.
Dr. Williams has served on the faculty of George Mason University in Fairfax, VA, as John M. Olin Distinguished Professor of Economics, since 1980.
So what about the president's nomination of Ben S. Bernanke as Alan Greenspan's replacement? I know little or nothing about the man. What I do know is that it's not wise for one person, or group of persons, to have so much power over our economy. Here's my recommendation for reducing that power: Repeal legal tender laws and eliminate all taxes on gold, silver and platinum transactions. That way, Americans could write contracts in precious metals and thereby reduce the ability of government to steal from us.
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