Tuesday, January 4, 2011

Is the Fed dollar "safe and stable"?

On the website of the Board of Governors of the Federal Reserve System, at the top of the home page, we find the following words:
The Federal Reserve, the central bank of the United States, provides the nation with a safe, flexible, and stable monetary and financial system.
Flexible? The dollar is a paper fiat currency, backed by nothing.  Its flexibility is virtually infinite. Recently, we've seen how flexible the Fed has been with the American dollar, as Senator Bernie Sanders tells us:
We have learned that the $700 billion Wall Street bailout signed into law by President George W. Bush turned out to be pocket change compared to the trillions and trillions of dollars in near-zero interest loans and other financial arrangements the Federal Reserve doled out to every major financial institution in this country. Among those are Goldman Sachs, which received nearly $600 billion; Morgan Stanley, which received nearly $2 trillion; Citigroup, which received $1.8 trillion; Bear Stearns, which received nearly $1 trillion, and Merrill Lynch, which received some $1.5 trillion in short term loans from the Fed.

We also learned that the Fed's multi-trillion bailout was not limited to Wall Street and big banks, but that some of the largest corporations in this country also received a very substantial bailout. Among those are General Electric, McDonald's, Caterpillar, Harley Davidson, Toyota and Verizon.

Perhaps most surprising is the huge sum that went to bail out foreign private banks and corporations including two European megabanks -- Deutsche Bank and Credit Suisse -- which were the largest beneficiaries of the Fed's purchase of mortgage-backed securities.

Deutsche Bank, a German lender, sold the Fed more than $290 billion worth of mortgage securities. Credit Suisse, a Swiss bank, sold the Fed more than $287 billion in mortgage bonds.
Safe and stable?  The Fed doesn't explain what they mean by these terms.  Can we say that a currency is safe and stable if people use it in everyday transactions?  If so, then there's no question the Federal Reserve Note is at least somewhat safe and stable, because people, in spite of their complaints, have not abandoned it for anything better.   True, legal tender laws force Americans to accept the Fed's money regardless of what they might prefer, but history shows that people will abandon the legal tender currency if it becomes too worthless or inconvenient to perform its function as a medium of exchange.  Though we're not to that point yet, we've been heading in that direction since the Federal Reserve first rolled up its sleeves.

It's also true that the government has placed mankind's money - gold and silver coins - at a severe disadvantage through its monopoly of minting and with regulations stipulating the coins are legal tender at face value only, not market value.  Furthermore, most Americans alive today have never used gold and silver coins in everyday commerce.  To them "money" is what the government issues, and the bullion coins minted by the government, though officially monetized, are a fool's token if they are exchanged at face value.  Aside from a small minority of gold investors, most Americans have nothing to do with them; they stick with the paper dollar.  The government, to sum up, has rigged the system in favor of its remunerative counterfeit currency but so far most people still use it with complete trust.

Is a currency safe and stable if it holds its value over many years?  Savers certainly want their dollars to buy as much as they did when they were first hoarded or deposited in a bank.  For many, their ideal is to have their savings appreciate merely by not spending it - store it under the bed or in a home safe then forget about it.  Putting it in a fractional reserve bank runs risks they don't wish to bear.

The Fed's ideal is a depreciating currency. Its goal is to make the dollar buy less over time.  The Fed thus creates premeditated price inflation, or rising prices.  It is opposed to the interests of savers.  People whose incomes don't keep pace with rising prices are hurt the most.  People who are the early recipients of the newly created money have the same advantage any counterfeiter would have.

The St. Louis Fed publishes a month by month history of the CPI from January, 1913 to the present.  Using their table of measures, we find that when the Fed opened its doors in October, 1914 the CPI was 10.1.  By October, 2010 it stood at 218.711, representing a 2,065% increase in the consumer price level over 96 years.  Leaving aside the ongoing CPI controversy, does a two thousand percent increase in prices over a period of a century represent a "safe and stable" currency? 

A better way to consider the issue is to take another look at history - in the years before Congress and Woodrow Wilson chained us to the Fed and before Franklin Roosevelt made it a felony to own gold coins.   Walker Todd, writing for the American Institute of Economic Research (AIER), states that
The first chart in every edition of The AIER Chart Book shows the purchasing power of the dollar since 1792, the first date from which relevant statistics can be calculated. Starting at a value of $1 in 1792, through many fluctuations both above and below that value during the 19th and early 20th centuries, a startling conclusion emerges: The price level always had a central tendency of $1 for as long as the United States was on a gold standard (1792-1933, with an 18-year hiatus during and right after the Civil War).

That is, an explicit link to a particular weight of gold per dollar tended to serve as a long-term guarantor of long-term stability of the purchasing power of the dollar.
According to the Measuring Worth website, $1.00 in 1792 has the same purchase power as $1.04 in 1913, a 4% increase over a span of 121 years.  So we have four percent price inflation without the Fed vs. two-thousand percent with the Fed.  Which do you consider safer and more stable?

Instead of a monetary system, we've been living with a counterfeiting system.  When it's done legally, counterfeiting is a bonanza for the ones in charge.  As evidence, we see the continuing flood of Wall Street profits and six- and seven-figure bonuses, trillion-dollar bailouts, and a mushrooming federal government in an economy where real private unemployment is around 25 percent.

If we want a safe and stable monetary system we need to eliminate the elements that make our current system grossly unfair and unstable.  The Fed must be abolished, and the government must be excluded from monetary matters altogether. We need free market money - probably gold and/or silver - run by free market institutions.   Government's one role would be to protect private property and uphold contracts, which would make it difficult, if not impossible, for banks to engage in the fraud of fractional reserve banking.  Only then could we look to the future with realistic optimism.

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