Wednesday, September 30, 2009

Money defined in six words

Gary North, one of the most prolific libertarian authors ever, began a series of articles yesterday called What is Money? His first installment was exceptionally clear and tightly-written.

Drawing on Mises' 1912 work, The Theory of Money and Credit, North says money can be defined in six words:
money is the most marketable commodity. [Mises] had in mind gold and silver coins, but his theory encompassed any commodity that can or has served as money in history. . .

Property rights are the foundation of money, Mises argued. Property rights provide the legal setting for voluntary exchange. He argued that the development of money was an unplanned outcome of the decisions of individuals who sought to increase their wealth by increasing their productivity. . .

What had originally been a commodity valued for some other characteristic increasingly was valued for the purpose of facilitating exchange. In other words, this commodity became money. . .

[G]overnments began to extend their control over money because they recognized that they could increase their extraction of wealth from private citizens with greater efficiency if they taxed people's monetary income rather than taxing their individual output. . . It was not that the state was the origin of money; it was that money became a tool of the expansion of the state.
There's more.
The confusion regarding monetary theory and practice has several aspects. First, there is conceptual confusion. There is a lack of understanding of how the free market works. The two fundamental rules governing free-market pricing are these:

1. Supply and demand
2. High bid wins

When you apply these two principles to any area of the economy, you have the conceptual tools necessary to understand the basics of economic causation. All deviations from free-market economic theory invariably involve the abandonment of one or both of these two principles of economic analysis. This certainly applies in the area of monetary theory and monetary policy.
I eagerly await the balance of North's series. I wonder if one of Ben Bernanke's lieutenants will read it.

Why Fed defenders oppose an audit

"An audit would make people realize that, while Bernie Madoff defrauded a lot of investors for a lot of money, the Fed has defrauded every one of us by destroying the value of our money. An honest and full accounting of how the money system really works in this country would mean there is not much of a chance the American people would stand for it anymore."

-- Ron Paul

Tuesday, September 29, 2009

Understanding the nature of money

Money - most people are interested only in acquiring more of it, whatever its nature happens to be. The people who run the government and the banks are several giant steps ahead of the pack.

They understand that to get the most money possible they must be in charge of the production and use of money. That is why we use federal reserve notes (or their dictated substitutes) in everyday exchanges rather than gold or silver coins (or their accepted substitutes). Government, through its central bank, issues the notes and mandates their acceptance. The U.S. government no longer outlaws competing monies directly. They don't have to. It never occurs to most people to use anything else because of their lack of knowledge and interest in monetary affairs. This means alternative monies don't have the status of a generally accepted medium of exchange, which means they are not truly money, no matter how otherwise sound they might be.

Imagine if your neighbor could dictate that the paper notes he printed on a printing press had to be accepted as a medium of exchange. Imagine if he could do it but no one else could; anyone else who tried would be subject to prosecution for counterfeiting. Would you expect him to have an advantage when it came to acquiring the goods and services other people produce? Would you expect him to have a major influence on the overall economy?

Further, would you expect your neighbor, no dummy when it comes to money, to understand the possible resistance to such an arrangement and camouflage its nature through various proven methods? For example, when creating a truckload of new money would you expect him to avoid saying he was creating inflation and instead perhaps claim he was accommodating the monetary needs of a robust economy? Would you expect him to put experts called economists on his payroll to tell everyone his jargon made sense and his privileges were necessary for the overall health of the economy?

In short, would you expect your neighbor, as the sole producer of money in society, to abuse that power?

And would you consider such an arrangement a system or a racket?

Friday, September 18, 2009

Turk skewers anti-gold propagandist

The Economist and Financial Times are not known for friendly commentary on the gold market, James Turk tells us, and a recent Lex column in FT illustrates his point. Inserting his comments in brackets while italicizing Lex's statements, Turk writes:
Stories of those who preserved their wealth or escaped hunger in decades past by hoarding precious metals when their governments set the printing-presses loose provide gold bugs with a compelling historical narrative. [Yes, and one that is very relevant today given what governments and central banks around the world are doing to national currencies by again setting the printing presses loose.]

But the US is not Weimar Germany [Not yet, but wait a few months.] and, in spite of interest rates that make gold ownership cheap [Which is only one of gold’s many advantages at the moment], the opportunity cost of owning it is still unattractive in the long-run. [Complete rubbish. Gold has appreciated at double-digit rates on average this decade against all of the world’s currencies, and achieved that without counterparty risk. Gold is doing what money is supposed to do - preserve purchasing power.]
Read the full article, and buy gold while it's still cheap.

How cheap? Turk explains:
Adjusting for inflation, it takes more than $2,300 to purchase today what $850 purchased in January 1980, using the US government’s current CPI calculator. However, the US government has since amended its CPI calculator numerous times. Fortunately, makes available the same CPI calculator used when the Carter administration haplessly watched the gold price soar nearly three decades ago. Using this Carter-era calculator,<><> it takes over $6,300 today to match $850 of January 1980 purchasing power.

Thursday, September 17, 2009

Government as vampire

The September 9 Buttonwood commentary on the Economist blog talks about how consumers are cutting spending during this crisis.
The volume of consumer credit fell by $21.6 billion in July, the sixth monthly decline in a row. According to Lombard Street Research, this was the second largest percentage decline since World War Two. The 3-month annualised rate of decline is now running at 7%.
The column concludes with this observation: "[W]ithout the government, one fears the economy might look like the lead character of Weekend at Bernie's."

I haven't seen the movie nor have I heard much about it, but the plot summary at IMDb describes it as "A pair of losers try to pretend that their murdered employer is really alive, but the murderer is out to 'finish him off.'"

I don't know what Buttonwood meant by his comment, but there's certainly truth to the assertion that government intervention in this crisis is an attempt to give the dead the appearance of being alive -- much like a vampire that draws the blood of the healthy for its own end.

Tuesday, September 15, 2009

Memorable quotes on money and banking

"If anything had or could have a value equal to gold and silver, it would require no tender law; and if it had not that value it ought not to have such a law; and, therefore, all tender laws are tyrannical and unjust and calculated to support fraud and oppression." Thomas Paine, 1786

"Silver Certificates once were a promise to deliver silver. U.S. Notes now are a promise to deliver taxes and inflation." - G. Edward Griffin

"[Inflation] often makes it more profitable to speculate than to produce." Henry Hazlitt, Economics in One Lesson

"Without the money-based, bank-based division of labor, most of us would never have been born." -- Gary North

"Thus the sound-money principle has two aspects. It is affirmative in approving the market's choice of a commonly used medium of exchange. It is negative in obstructing the government's propensity to meddle with the currency system." -- Ludwig von Mises, Theory of Money and Credit

"What all the enemies of the gold standard spurn as its main vice is precisely the same thing that in the eyes of the advocates of the gold standard is its main virtue, namely, its incompatibility with a policy of credit expansion."
Ludwig von Mises, Theory of Money and Credit

"For the naive mind there is something miraculous in the issuance of fiat money."
Ludwig von Mises, Theory of Money and Credit

"Inflation is the fiscal complement of statism."
-- Ludwig von Mises, The Theory of Money and Credit

"Everything possible is done to prevent the fraud of the monetary system from being exposed to the masses who suffer from it." Rep. Ron Paul

"There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
-- John Maynard Keynes, 1919, Economic Consequences of the Peace, Ch. 6

"The first condition of any monetary reform is to halt the printing presses." Ludwig von Mises, The Causes of the Economic Crisis

Bernanke now says recession "very likely over"

Speaking to "experts and Washington insiders at the Brooking's Institution in Washington" today, Ben Bernanke said that "from a technical perspective, the recession is very likely over at this point," though unless you work for the government you will continue to sweat from job insecurity for a long time. Keep in mind Bernanke, the leading "expert," along with his audience of "experts," were completely blindsided by this crisis.

Fed chairmen never admit to seeing trouble ahead. They may have "concerns" about current trends, but they never see disasters staring them in the face. In Bernanke's now famous words, the U.S. government has a technology called a printing press that can rescue us from any crisis, in the unlikely event one should arise.

And what about the ones who did see the financial debacle coming, such as Peter Schiff and most Austrian economists?

They are roundly ignored in the mainstream. Austrian theory not only posits a necessary correction (recession) after monetary inflation -- inflating the currency being the Fed's mission in life -- it also says the correction will be delayed unless government gets out of the way. For this, Austrians are derided as "cranks."

Do prisoners use fiat paper money?

Of course not.

In an article posted at way back on June 3, 2009, Chris Casey explains:
Since money is banned in prisons, the historical use of cigarettes by prisoners as money avers that money requires alternative value (i.e., value apart from its use as money) and proves that our present system of fiat currency (and fractional-reserve banking) is eventually doomed.

Prisoners exchange cigarettes for sex, drugs, gambling, and the killing of other inmates (all other recreational activities being provided free of charge by taxpayers). The cigarettes hold alternative value through their direct consumption (smoking). . . .

Fiat money does not exist in prison. Prisoners do not dye sheets of paper green and attempt to circulate them as money. No inmate would accept this as money, not even if the penal equivalent of a Bretton Woods agreement existed between the toughest gangs.

Why is it that criminals continue to use real money in their transactions? Because they have not been fooled otherwise. . . .

Incredibly, it is those outside of prison who are truly institutionalized.

Saturday, September 12, 2009

Fiat gold led to fiat paper

In a Texas Straight Talk posted earlier this year, Ron Paul discussed the meaning of fiat money. "Fiat," he points, is latin for what can be crudely translated as "there shall be." Fiat money is therefore money that exists only because government creates it. It is an entirely different creature than the money that arises on the market, where individuals choose a commodity that best serves the needs of trade to act as a medium of exchange.

As a result of government's fiat paper money, Paul says, Americans have lost "the concept of budgeting." And the government acts like a reckless teenager, with the taxpayers as parents footing the bill.
Every dollar created and spent by government makes the dollars in your pocket worth less and less. Eventually any currency controlled by government will be debased to worthlessness, and will wipe out the savings of the citizens who put faith in that currency.
As Jorge Guido Hulsmann explains in his book, The Ethics of Money Production,
[P]aper money is by its very nature a form of (fiat) inflation. It exists only because of continued legal privileges. It is always and everywhere in greater supply than it would be on the free market, for the simple reason that on the market it could not sustain itself at all. (pp. 160-161)
Many people don't seem to realize that "fiat" applied to the gold standard, as well. What the U.S. and the rest of the world calls the classical gold standard was in fact a fiat gold standard. It was established to serve the interest of the rulers.

Gold had been monopoly legal tender in Britain since 1821; the Coinage Act of 1834 put the U.S. on a de facto gold standard, and Canada and Australia went the same way in the early 1850s. Germany's victory over France in the war of 1870-1871 is usually regarded as the beginning of the classical gold standard.

After the war, Bismarck "set up a fiat gold standard, demonetizing the silver coins that had hitherto been dominant in German lands," Hulsmann writes. (p. 209) Four years later Bismarck turned the Prussian Bank into a national central bank and called it the Reichsbank, thus copying the British model by "combining fiat gold with fractional-reserve banking and a central bank . . ."

Why did Bismarck choose gold and not silver? "[G]old was the money of Great Britain, the country with the largest and most sophisticated capital market. On the other hand, several major silver countries including Russia and Austria had suspended payments at the time of the German victory. Thus, silver offered no advantages for the international division of labor, whereas gold did."

And there was another reason why Germany prefered gold to silver:
Because of its bulkiness, the use of silver entails high transaction costs, which makes it less suitable than gold for fractional-reserve banks trying to quash systematic bank runs through cooperation.

Virtually all other Western countries now followed suit.
The international "unity" in monetary affairs "served as the perfect justification for a further massive intervention of national governments into the monetary systems of the countries." (p. 210)
By the early 1880s, the countries of the West and their colonies all over the world had adopted the British model. [The exception was India, which adopted the gold standard in 1898. Among major countries, only China remained on a silver standard.] This created the great illusion of some profound economic unity of the western world, whereas in fact the movement merely homogenized the national monetary systems. (p. 211)
The homogeneity lasted until 1914, when the central banks decided to suspend gold redemption and print paper money to pay for World War I.

Gold breaks a barrier, again

Yesterday, gold broke the $1,000-per-ounce mark for the third time in less than 12 months. Peter Schiff comments:
[T]here is no shortage of market analysts who are not buying gold while questioning the motives of those who are. Although they offer a variety of strained reasons, they nearly all agree that it has nothing to do with inflation, which is nearly universally considered dead and buried. As a self-confessed gold bug, I can assure all that inflation is the only reason I buy gold. And recently, I'm buying a lot. . . .

While there are those who buy gold to speculate on its appreciation, the underlying factor that drives that appreciation in the first place will always be inflation. If governments were not creating inflation, there would be little investment advantage to owning gold. . .

When economies move into recession, there is always political pressure for governments to intervene. Their one tool is the printing press. . .

Most analysts, however, simply look at the dubious CPI to determine the presence of inflation and inflation expectations. They perennially forget that prices are a lagging indicator and only a symptom of inflation, and may in fact not be rising at the moment when inflation kicks into high gear.

Friday, September 11, 2009

Gold dollar vs. paper dollar

For another view of this chart visit the Mises Institute.

A Fed Report Card: Maintaining the value of the dollar

Inflation: Politically-Correct Plunder

Aside from natural disasters, human error, and private crime, what would account for the continual destruction of capital that keeps us from enjoying a better life? Claude Frédéric Bastiat (30 June 1801 – 24 December 1850) lays the blame on plunder, which he defines as “prohibiting, by force or fraud, freedom of exchange, in order to receive a service without rendering one in return.” [Economic Sophisms, p. 132] Improvement in the social order is held back by the “constant endeavor of its members to live and prosper at one another’s expense.” The plunder he describes receives both legal and moral sanction, and would today simply be called policy.

One policy he doesn’t discuss is government inflation, the act of increasing the money supply. As credit expansion, which entails the creation of deposit accounts from nothing (as a child playing make-believe might do), inflation destroys capital by promoting overconsumption and malinvestment. Since it erodes purchasing power, inflation undermines capital accumulation by discouraging savings. When the rate of inflation slows and the recession arrives, government inflates more aggressively in an attempt to avoid the necessary correction, which diverts capital from wealth producers to the recipients of the new money. As government grows, its appetite for revenue grows, putting pressure on the central bank to keep the printing press rolling and continue the cycle of boom and bust, and with it the destruction of capital.

“All economic betterment depends on saving and the accumulation of capital,” Mises stated repeatedly throughout his life. [Economic Freedom and Interventionism, p. 6] Inflation, which is a form of theft, is an enemy of prosperity because it “makes suckers out of savers,” to borrow Judy Shelton’s apt description, and weakens the pool of real funding.

Thursday, September 10, 2009

How the Fed bought the economics profession

From Ryan Grim at the Huffington Post:
The Federal Reserve, through its extensive network of consultants, visiting scholars, alumni and staff economists, so thoroughly dominates the field of economics that real criticism of the central bank has become a career liability for members of the profession, an investigation by the Huffington Post has found.

This dominance helps explain how, even after the Fed failed to foresee the greatest economic collapse since the Great Depression, the central bank has largely escaped criticism from academic economists. In the Fed's thrall, the economists missed it, too.

"The Fed has a lock on the economics world," says Joshua Rosner, a Wall Street analyst who correctly called the meltdown. "There is no room for other views, which I guess is why economists got it so wrong."

One critical way the Fed exerts control on academic economists is through its relationships with the field's gatekeepers. For instance, at the Journal of Monetary Economics, a must-publish venue for rising economists, more than half of the editorial board members are currently on the Fed payroll -- and the rest have been in the past.

Real Federal Deficit is $2.13 Trillion

From Richard Daughty, the Mogambo Guru:
If you want to know what kind of monetary morons we have in charge of the Federal Reserve, then you have come to the right place, because a record of sorts was set last week, in that the loathsome, disastrous Federal Reserve bought up – in the last 12 short months – $1.011 trillion in US government securities! Yikes! . . .

It’s called “monetizing the debt”, which Ben Bernanke said, in response to a direct question about it recently, that the Fed would “never” do! “Never” has now been re-defined to mean “continually?” Hahaha! Too much! . . .

. . . and if you want to know the actual size of the actual federal deficit for the actual last year because you are pretty sure that the government is lying to you about the real size of their deficit-spending, then you have also come to the right place, because Treasury Public Debt is, as of last Friday, $11.797 trillion, whereas 12 lousy months ago it was $9.667 trillion, meaning that even if you are not sober enough to get this damned calculator to work or see those tiny little numbers, you can do the subtraction in your head!

The actual, in-your-face federal deficit was $2.130 trillion in the last 12 months! The deficit-spending by Congress is a whopping 15.2% of GDP, for crying out loud! . . .

And remember that this $2.130 trillion increase in the national debt is just the deficit in Congressional spending, which doesn’t even include the $2.6 trillion in the budget that was “paid for” by offsetting revenues!

So, being the cantankerous sort that I am, suspecting treachery at every turn and disaster at the hands of the corrupt, the ignorant and the stupid that we lovingly call “Congress”, let me note that the morons of Congress have spent $2.6 trillion, plus $2.1 trillion equals $4.7 trillion, which they spent in a $14 trillion economy! The government is spending the equivalent of 34% of GDP! Gaaahh!

And it is going to get worse and worse because the Fed is doing more and more of the same thing that created the economic problem in the first place! Gaaahhh! We’re freaking doomed!

Tuesday, September 8, 2009

Steve Saville on Gold Money

Writes Steve:
The probability that there will be some sort of official link between China's currency and gold anytime soon is very close to zero, and the same can be said about every other national currency. Unfortunately, the current major trend is for increasing, not decreasing, government control over banking and money. . . .

Many years into the future there will come a time when our present monetary system is so ravaged by inflation that a complete system change will be unavoidable. At this future time the reintroduction of an official monetary role for gold could become a realistic possibility.

Rather than having a Gold Standard or some other official (government-mandated/controlled) link between the currency and gold, the optimum solution would be for the government to get out of the money business altogether and let the market use whatever money it chooses to use. The trouble is, the optimum solution is so far outside the realm of mainstream thinking that it won't even find its way to the discussion table until after there is a total monetary collapse.

Inflation and the Fall of the Roman Empire

Read the transcript of Professor Joseph Peden's 50-minute lecture "Inflation and the Fall of the Roman Empire," given at the Seminar on Money and Government in Houston, Texas, on October 27, 1984. From the lecture:
"If a city couldn't pay its costs or pay the salaries of its employees, it simply struck up some token coinage and issued that."

"The Roman people, the mass of the population, had but one wish after being captured by the barbarians: to never again fall under the rule of the Roman bureaucracy."

"Prices in this period [258 - 275 A.D.] rose in most parts of the empire by nearly 1,000 percent. The only people who were getting paid in gold were the barbarian troops hired by the emperors. The barbarians were so barbarous that they would only accept gold in payment for their services."

Monday, September 7, 2009

Mankind's savior, the International Division of Labor

Money makes the division of labor possible, and the use of money among the world's people makes that division international in scope. Murray Rothbard:
The nineteenth century saw the benefits of one money throughout the civilized world. One money facilitated freedom of trade, investment, and travel throughout that trading and monetary area, with the consequent growth of specialization and the international division of labor.
But there's a catch: government has to stay out of the way:
It must be emphasized that gold was not selected arbitrarily by governments to be the monetary standard. Gold had developed for many centuries on the free market as the best money; as the commodity providing the most stable and desirable monetary medium. Above all, the supply and provision of gold was subject only to market forces, and not to the arbitrary printing press of the government.

The international gold standard provided an automatic market mechanism for checking the inflationary potential of government. It also provided an automatic mechanism for keeping the balance of payments of each country in equilibrium.
With the world's money about to enter its fifth decade as fiat paper money of no redeemable value, while being manipulated by the few, for the few, the division of labor and civilization are increasingly threatened.

Writing in 1938, Ludwig von Mises said:
The gold standard was and is still the best and even the only practical solution to an international organization of triangular trade. That it no longer works is not due to inherent defects or to a change in the conditions it presupposes. It is simply the consequence of the fact that governments no longer wish to let its mechanism work. They combat the international division of labor and they therefore intend to destroy the most important tool of international trade. It is not the breakdown of the gold standard, and it is not the unsatisfactory state of the world's monetary system which necessitate a policy of trade restrictions for monetary reasons. On the contrary. The gold standard and the world's monetary system collapsed because the governments destroyed them purposely for the sake of doing away with international trade.

Ron Paul on the Fed

From his Texas Straight Talk column:

Fed policies have been as bad for the economy as they are good for politicians and bankers, as the recently released numbers on the debt and deficit demonstrate. For the first time since World War II the annual budget deficit is projected to be over 11 percent of the nation’s gross domestic product. It is also projected that by 2019 the national debt will be 68�f GDP. Our path, if unchanged, is completely untenable.

The administration claims that it inherited a dire situation from the last administration, which is absolutely true. However, that hasn’t stopped them from accepting all the policies and premises that got us here, and accelerating those policies to rapidly make a bad situation much worse. The bailouts started with the last administration. They have gotten bigger with this one. The last administration gave us expanded government involvement in healthcare with a new prescription drug benefit. This administration gave us a renewal and expansion of SCHIP, and now the current healthcare takeover attempts. In reality, we can afford none of this, but shady monetary policy allows Washington to continue along its merry way, aggravating all our economic problems.

Not everyone in government finds it acceptable that the Fed wields so much power and privilege in secrecy. Last week, a federal judge ruled against Fed secrecy, compelling them to release under the Freedom of Information Act information regarding which banks received emergency loans, and under what terms. The Fed will, of course do everything in its power to fight this ruling and it is certainly not the last word on the issue. Still, it is encouraging to see that the interests of the taxpayers were defended victoriously in court, while the Fed only sees the plight of its big banker friends.

Saturday, September 5, 2009

That tricky GDP

According to convention, when government at any level spends money, it contributes to Gross Domestic Product, GDP. The Bureau of Economic Analysis calculates GDP periodically, and Richard Daughty, the Mogambo Guru, vents about its methodology and conclusions. In its most recent report, the second-quarter GDP reflected "negative contributions" from private-sector components, but the BEA hastens to add the "good" news. Mogambo:
For some reason, I think that we are supposed to be calmed that these losses "were partly offset by positive contributions from federal government spending and state and local government spending." Gaaaaaahhhh!
Since I find it hard to express the horror I feel as a result of GDP falling while government spending is increasing, I will not try, and instead focus on the arcane handling of imports which, of course, seems perverse, in that imports are a subtraction in the calculation of GDP, so that when imports increase, GDP decreases.
Not this time, though! You can tell by the way the birds have stopped singing and the world seems to have caught its collective breath that GDP went down even more than you think because imports decreased, too, which means that, again seemingly perversely, GDP was registered as having an increase as a result, when, in fact, everyone has been laid off and bankrupted as we die a horrible economic death, screaming in financial pain from letting the filthy Federal Reserve create so much money and credit all those years . . .

Friday, September 4, 2009

Ohanian vindicates Rothbard

Joseph Salerno brings our attention to a National Bureau of Economic Research working paper on the Great Depression that is almost hardcore Rothbardian.

Salerno writes:
In writing his article, "Who — or What — Started the Great Depression," UCLA economist Lee E. Ohanian spent four years poring over wage data and culling information from sources related to Hoover and his administration. . . .

Ohanian contends that Hoover's policy of propping up wages and encouraging work sharing "was the single most important event in precipitating the Great Depression" and resulted in "a significant labor market distortion."

Thus, "the recession was three times worse — at a minimum — than it otherwise would have been, because of Hoover."

The main reason is that in September 1931 nominal wage rates were 92 percent of their level two years earlier. Since a significant price deflation had occurred during these two years, real wages rose by 10 percent during the same period, while gross domestic product (GDP) fell by 27 percent. By contrast, during 1920–1921 — a period that was accompanied by a severe deflation — "some manufacturing wages fell by 30 percent. GDP, meanwhile, only dropped by 4 percent."

As Ohanian notes, "The Depression was the first time in the history of the US that wages did not fall during a period of significant deflation." Ohanian estimates that the severe labor-market disequilibrium induced by Hoover's policies accounted for 18 percent of the 27 percent decline in the nation's GDP by the fourth quarter of 1931.
In America's Great Depression, Rothbard criticized Hoover for public works, tax increases, and the Smoot-Hawley tariff. But Hoover's greatest blunder, according to Rothbard, were his efforts to keep wages from falling [i.e., he prevented the downward-adjustment of nominal wages] during a period of severe price deflation.

Rothbard's explanation for the severity of the depression runs counter to the widely-accepted view of Milton Friedman and Anna Schwartz, as expounded in their classic work A Monetary History of the United States, 1867–1960. "The Friedman-Schwartz view came to dominate mainstream macroeconomics after the collapse of the Keynesian consensus in the 1970s. Indeed, it is today the conventional explanation of the Great Depression, which Bernanke holds to and which governs the policy response of the Fed to the current financial crisis."

Bernanke, as we've witnessed, is making sure "it" doesn't happen here.

Wednesday, September 2, 2009

End the Fed by Ron Paul

Here is my Amazon review of Dr. Paul's new book:
I read the book in its entirety last night and couldn't put it down. Ron Paul makes his case on several levels - constitutional, economic, moral, and political. The writing is fresh, vigorous, and accurate. He includes excerpts from his exchanges with Greenspan and Bernanke, and has a chapter devoted to his intellectual journey in arriving at his convictions about central banking and fiat paper money.

My favorite chapter unfortunately was one of the thinnest - Chapter 4: "Central Banks and War." Commenting on the impact of the Fed during World War I, Paul writes (p. 66): "In total, scholars have estimated that only 21 percent of the war was funded through taxation. The remainder was funded by Fed-backed borrowing (56 percent) and outright money creation (23 percent), for a total cost of $33 billion."

For the U.S, the war meant the launching of the imperial presidency and a globalized foreign policy; for Germany, it brought on the hyperinflation of 1923 and Hitler; For Russia, it meant the birth of Communism. "The beast [the Fed] . . . promised all things to all people, made the wishes of all politicians come true . . . [gave] the banking establishment in this country . . . new guarantees against failure, which created a 'moral hazard' for them." Not to mention the rest of us.

Many readers will have already read Tom Woods' Meltdown and Robert Murphy's The P.I.G to the Great Depression and the New Deal. I encourage those people to follow up with Dr. Paul's excellent book. If you haven't read those, order all three and get busy. I promise you will never make a better investment. In my view, the Fed is the most destructive force in the world, in part because it's viewed as our savior rather than our destroyer. It is imperative to understand its history and the role it has played in world events. Read this book and encourage others to do the same.