Happy New Year from a prestigious thief

We think of thieves as conducting their work when no one is looking, such as breaking into a house while the owners are away.  But the most successful thieves have done their stealing in plain sight, on a grand scale, while the owners are home and often with their tacit approval, though with sleight of hand techniques that not one man in a million is able to detect.  Such a thief entered our lives when Woodrow Wilson signed the Federal Reserve Act into law on December 23, 1913.  

A central bank such as the Fed has a remarkable character.  According to establishment boilerplate it’s purpose is to stabilize the economy and ensure prosperity and “full employment.”  The decision makers at the Fed are of necessity selected for their superhuman brilliance and neutrality of judgment, thus qualifying them to adjust the amount of money available to the banks so that they may in turn serve the interests of a public numbering some 322,267,564.  If for some reason certain members of the public don’t reap the benefits of this policy — or worse, end up losing their jobs, their savings, their businesses, and/or their homes — it’s not because the Fed itself is a bad idea.  How could it be?  Without the Fed as an emergency lender bankers threw the economy into Panics in the 19th and early 20th centuries.  No less than Ben Bernanke himself admitted this, telling Ron Paul the Fed exists to prevent Panics.  If economic problems arise, they won’t be Panics, and the culprit or culprits will be found somewhere other than in the Eccles Building.

There’s another side to the Fed’s character that is somewhat less wholesome than its public image and is best revealed by the manner in which it was founded.

The Bankers’s Dream

Before the Fed’s founding bankers in general and Wall Street in particular  complained about the lack of “elasticity” of U.S. currency.  “Elasticity” in this context is one of the great euphemisms of human history.  According to lore, this missing feature of “hard” money such as gold or silver was responsible for the Panics of 1873, 1884, 1893, and 1907.  The uncooperative coins that were behind the paper money substitutes couldn’t be increased in supply when needed.  They — gold and silver — were therefore said to be inelastic.  Because of this inelasticity, the legend persisted that banks were having trouble meeting the demand for farm loans at harvest time, as G. Edward Griffin explains*:

To supply those funds, the country banks had to draw down their cash reserves which generally were deposited with the larger city banks. This thinned out the reserves held in the cities, and the whole system became more vulnerable. Actually that part of the legend is true, but apparently no one is expected to ask questions about the rest of the story. Several of them come to mind. Why wasn't there a panic every Autumn instead of just every eleven years or so? Why didn't all banks— country or city— maintain adequate reserves to cover their depositor demands? And why didn't they do this in all seasons of the year? Why would merely saying no to some loan applicants cause hundreds of banks to fail? [Kindle, 7827]

The Morgan and Rockefeller bankers on Wall Street dreamed of having a central bank that could supply money when needed, as a “lender of last resort.”  A central bank would also control the rate of inflation of the banks under its control.  If bank reserves could be maintained at a central bank and a common reserve ratio established, then no one bank could expand credit beyond its rivals and therefore there would be no bankruptcies caused by the draining of currency from overly-inflationary banks.  All banks would inflate in harmony, and there would be tranquility and profits for all.   

All [banks] would walk the same distance from the edge [Griffin explains], regardless of how close it was. Under such uniformity, no individual bank could be blamed for failure to meet its obligations. The blame could be shifted, instead, to the "economy" or "government policy" or "interest rates" or "trade deficits" or the "exchange-value of the dollar" or even to the "capitalist system" itself.  [Kindle, 518-519]

With bankers off the hook, Griffin notes, “the door then could be opened for the use of tax money rather than their own funds for paying off the losses.”

The bankers who traveled a thousand miles to meet on Jekyll Island in November, 1910 understood they needed a cartel to bring their dream to life.  And a cartel meant they needed the threat of state violence to make it work.  Thus, included in their secret meeting were two politicians serving as the bankers’s advocates in Washington.  Together with the media they could slip their cartel on the American public over the Christmas holidays, though for political reasons it was delayed until 1913.  

The public would be a hard sell.  Americans were profoundly suspicious of Wall Street and cartels.  They distrusted anything big in business or government.  A central bank operating for the benefit of the big banks had no chance of becoming law, unless it was promoted as a way to shackle Wall Street itself.  This could be accomplished, it was widely believed, through a government bureaucracy of overseers.  

The Pujo Committee

Frequent speeches by Wisconsin Senator Robert LaFollette and Minnesota Congressman Charles Lindbergh brought public outrage over the “Money Trust” to a boil.  LaFollette charged that the entire country was under control of just fifty men; Morgan partner George Baker disputed the allegation, claiming it was no more than eight men.  Lindbergh pointed out that bankers had controlled all financial legislation since the Civil War, through committee memberships:  

These committees have controlled the nature of the bills to be reported, the extent of them, and the debates that were to be held on them when they were being considered in the Senate and the House. . .  No one, not on the committee, is recognized ... unless someone favorable to the committee has been arranged for. [Kindle, 8425]

Government, acting as the sword of justice, decided to take action, with most people oblivious to the fact that the executioner and the accused were one and the same.  From May 1912 until January 1913 it held hearings headed by Louisiana Congressman Arsène Pujo, then roundly considered to be a spokesman for the “Oil Trust.”  

The Pujo Committee hearings followed the usual pattern, bringing forth immense quantities of statistics and testimonies from bankers themselves.  Though the hearings were conducted largely as a result of the charges brought forth by LaFollette and Lindbergh, neither man was allowed to testify.  Gabriel Kolko explains:

The evidence seemed conclusive, and the nation was suitably frightened into realizing that reform of the banking system was urgent— presumably to bring Wall Street under control....  

The orgy of Wall Street was resurrected by the newspapers, who quite ignored the fact that the biggest advocates of banking reform were the bankers themselves, bankers with a somewhat different view of the problem.... Yet it was largely the Pujo hearings that made the topic of banking reform a serious one.  [Kindle, 8441]

Under the direction of Paul Warburg, the principal author of the Jekyll Island plan that in its essentials became the Federal Reserve Act, the banks provided 100% financing for something called the National Citizens League, the purpose of which was to create the illusion of grass-roots support for Warburg’s brainchild.  University of Chicago economics professor J. Laurence Laughlin was put in charge of the League’s propaganda, ostensibly to bring a measure of objectivity to the discussions.  John D. Rockefeller, whose representatives at Jekyll were Senator Nelson Aldrich and bank president Frank Vanderlip, had endowed the university with fifty million dollars.  [Kindle, 8476]

It should also be noted that Woodrow Wilson was an outspoken critic of the Money Trust in his 1912 presidential campaign, all the while receiving funding from the very Trust he was condemning.  Wilson:

I have seen men squeezed by [the Money Trust]; I have seen men who, as they themselves expressed it, were put “out of business by Wall Street,” because Wall Street found them inconvenient and didn’t want their competition.

When the Fed began operations in late 1914 the man in charge of the system was Morgan banker Benjamin Strong, Jr., one of the Jekyll Island attendees who served as president of the Federal Reserve Bank of New York from its inception until his death on October 16, 1928.  Strong, in the Morgan tradition, was an anglophile who inflated the U.S. money supply from 1925-1928 to keep Britain from losing gold to the U.S.  Details of Strong’s reign and the pre-Crash conditions he created can be found in Murray Rothbard’s America’s Great Depression. 

Conclusion

The big bankers got what they wanted: A cartel run by and for the bankers.  From What is Money? by Gary North:

A central bank provides emergency money to commercial banks. This reduces the threat of bank runs. Central banks intervene to save large banks. This is why no large American bank went bust in the Great Depression, while over 6,000 small banks did.  

Central banks are the enforcing arm of the fractional reserve banking system. Central banks determine which banks survive and which do not in a national bank run. Their job is to protect the largest commercial banks.

* Mysteriously, the excellent Kindle version of Creature is not currently available.

Take comfort, libertarians, the future is ours

Bad news: Government is getting bigger and more oppressive.

Good news: As it gets bigger it also gets weaker.

Better news: Technology is making us, as individuals, stronger.

How do we know government is getting weaker?  Because it is sustained by central bank counterfeiting and debt, and the lies of state sycophants.   How long can massive fraud last?  To say that government is corrupt is saying water is wet.  The whole apparatus of government — a bandit gang writ large, in Rothbard’s famous depiction — is an affront to civilization and human dignity.  Yet it’s the absence of government — anarchy — that we’re supposed to avoid at all costs. We’re avoiding it, all right, and we’re paying dearly for it.

Meanwhile, a quiet revolution is ongoing that almost no one seems to understand, yet is talked about incessantly: The rising power of technology.  Without asking our permission, technology is taking us down the path to anarchy.  How is this so?

Technology today is climbing up the curve of the exponential but if you look at any one point it appears linear.  In our day-to-day lives we are looking at points, seeing incremental improvements but nothing that would suggest radical innovation.  Yet it happens.  We see magic but consider it mundane.  We have smartphones that can transmit live video from around the world, and say “So what?”  We read about a young programmer who builds a self-driving car in his garage, and say “Huh.”   We need to step back and look at the trend to see where all this is going.  Ray Kurzweil explains:

Early stages of technology – the wheel, fire, stone tools – took tens of thousands of years to evolve and be widely deployed. A thousand years ago, a paradigm shift such as the printing press, took on the order of a century to be widely deployed. Today, major paradigm shifts, such as cell phones and the world wide web were widely adopted in only a few years time.

He adds (from The Singularity is Near, 2005):

A primary reason that evolution— of life-forms or of technology— speeds up is that it builds on its own increasing order, with ever more sophisticated means of recording and manipulating information. . .  [p. 39]

For example,

The first computers were designed on paper and assembled by hand. Today, they are designed on computer workstations, with the computers themselves working out many details of the next generation’s design, and are then produced in fully automated factories with only limited human intervention. [p. 40]

As the technology continues to build on itself, it will eventually take “full control of its own progression.”  It will no longer need human intervention.

But fear not, he says.  In the future we will not see super-smart robots controlling or wiping out humans; rather, what will evolve is a merger of humans with their technology.  Humans, as his book’s subtitle tells us, will “transcend biology.”  Kurzweil:

It would mean that human performance is not necessarily dependent on the biological substrate that comprises our brains today. The biological information processing in our brains is, after all, much slower than information processing in conventional electronics today. Information in our brains is transmitted using chemical signals that travel a few hundred feet per second, which is a million times slower than electronics.  [p. 122]

We will reach a point when “the pace of technological change will be so rapid, its impact so deep, that human life will be irreversibly transformed.”  Or as Kevin Kelly, founder of Wired Magazine, puts it: "all the change in the last million years will be superseded by the change in the next five minutes.”  Before we can say “So what?” again we will have reached what Kurzweil and others call the Technological Singularity.  

Kurzweil refers to this progression as the law of accelerating returns.  It is “inexorable,” and his books are packed with charts showing why this is so.  According to his prediction the law will reach the Singularity by 2045.  It sounds incredible but so have most of his other predictions that have played out to be true.    

He also considers the progression to be in terms of price-performance, meaning that “all of these technologies quickly become so inexpensive as to become almost free.” [SIN, p. 430]  It’s not the case that only the rich will have access to them.

But what about government?  Won’t it feel threatened and impede innovation?  As Kurzweil points out, “the nature of wealth and power in the age of intelligent machines will encourage the open society. Oppressive societies will find it hard to provide the economic incentives needed to pay for computers and their development.” [p. 128]

He brings up a crucial point: The law of accelerating returns has always operated under government-controlled conditions.  Government wars, depressions, genocides, currency debauchery, regulations, etc. have not slowed it down, or at least not for long.  To repeat, the law is inexorable.

Innovation has a way of working around the limits imposed by institutions. The advent of decentralized technology empowers the individual to bypass all kinds of restrictions, and does represent a primary means for social change to accelerate.  [SIN, p. 472; my emphasis]

Technology in the hands of the government can be a nightmare.  But as it disperses into the lives of individuals it becomes empowering.  Over time it quietly undermines government power, as Gary North tells us:  

Technological innovation is not going to be stopped by any local government, state government, national government, or the World Trade Organization. Technological innovation is about as close to an autonomous process as anything in history. 

Technological innovation is decentralized on a scale never before seen. Because of the Internet, because of 3-D printing, and because of innovation of all kinds, technological innovation is a tsunami that is headed for all government welfare programs, all government central planning, all government regulatory agencies, every labor union, and every good old boy network. Technological innovation is simply sweeping everything before it. 

This is going to change the whole shape of civilization, and it isn't going to take three generations. It is fairly far advanced now, and another 40 years of this is going to change the political landscape entirely.

I say 20 years, but either way government is doomed, liberty is enhanced.

For libertarians, that’s a comforting thought this holiday season.

Was the Fed ever a good idea?

There’s an idea at root among some libertarians that the Federal Reserve was originally a sound institution that has grown corrupt.  As a bankers’ bank, it’s fine, they believe, but not as the monster it’s grown to be.  If only we could go back to the Fed’s founding charter, all would be well.

I’m thinking of two well-known financial analysts who are unsurpassed in their analytical brilliance and knowledge of markets, who rightly regard the bureaucratic FOMC as the father of bubbles, busts, stagnation, and market privilege.  In their articles they hammer the Fed relentlessly and rightfully for its cluelessness, corruption, and threat to our material and spiritual well-being.  They have authored engaging bestsellers on the state of the economy and place blame where it belongs, on the monetary policies of the federal reserve.  

Yet, strangely, their recommendations stop short of eradicating the cancer altogether.  They want the Fed reformed, not abolished.  In each case they believe the Fed in its infancy was an institution compatible with free markets. 

Peter Schiff writes,  “the role of a central bank is limited: to control the currency so as to keep prices and interest rates fairly stable. . . .  This sort of central bank is one I could have supported. But the Federal Reserve Bank of the United States never functioned this way, and it probably was never meant to.“  And he concludes: “We never should have trusted the Fed to respect its boundaries.”  (The Real Crash, Ch. 2)

Later in his book he adds: “The ultimate destroyer of the U.S. dollar was the Federal Reserve System, which was supposed to be the guardian of the currency. As I discussed in chapter 2, the original idea of the Fed was a good one: providing a uniform currency backed by gold.”

In The Great Deformation, David Stockman tells us: 

The Federal Reserve System, therefore, was intended to be a ‘banker’s bank,’ not an agent of national economic management.  This founding charter has been literally blotted out of modern day discussions . . . [p. 197]

In his closing chapter, he lists various steps he believes will avoid the worst of possible catastrophes, beginning with the restoration of the Fed as a banker’s bank and the adoption of sound money, by which he means “a gold-backed dollar.”  (p. 707)

Why was the Fed created?

In the years before the Fed, the number of non-national banks was growing steadily, as was their percentage of total bank deposits.  By 1896 the number of non-nationals had grown to 61% and their share of deposits to 54%; by 1913 those numbers had increased to 71% and 57%, respectively.  Thus, Wall Street power was waning.  It was also being diminished by a new trend in industry in which growth was being financed from profits rather than borrowed funds. Bank interest rates were too high for many ventures.  

Then there was the long-standing problem with depositors.  They would leave their money with a bank, believing it was available on demand, while the bank turned around and loaned it out.  When enough customers lined up to withdraw their money, the bank could only close its doors (or get an exemption from government).  

So, from Wall Street’s perspective there was the problem of competition — from non-national banks and industry’s preference for thrift over debt — and the public’s irritating tendency toward bank runs when they panicked.

To address this situation, four representatives of the Morgan, Rockefeller, and Kuhn-Loeb interests, along with Senator Nelson Aldrich and Assistant Secretary of the Treasury A. Piatt Andrew, huddled secretly at Morgan’s retreat on Jekyll Island, Georgia in November, 1910.  The bankers accounted for an estimated one-fourth of the world’s wealth.  Led by Paul Warburg of Kuhn-Loeb they devised a banking cartel that became law in late 1913.  The Money Powers — Wall Street  — sold it to the public as a means of controlling the vast power of Wall Street.  

How was Wall Street shackled?  By appointing Wall Street bankers to the Federal Reserve Board and to the most important post in the system, Governor of the New York Fed.  (reference here)

The original manifestation of the Fed included such tidbits as these:

1. The Fed’s monopoly on the issue of all bank notes; national and state banks could only issue deposits, and the deposits had to be redeemable in Fed notes and gold.
2. All national banks were drafted into the Fed, and their reserves had to be kept as demand deposits at the Fed.  
3. As banks around the country sent their depositors’ gold to the Fed they received Fed notes in return.  Thereafter, when the public made withdrawals they were handed Fed notes instead of gold coins.  The disuse of gold coins not only encouraged inflation, it made confiscation easier later on.
4. With the centralizing of gold and bank reserves, the Fed doubled the inflationary power of the banks by reducing the reserve requirement from 5:1 to 10:1. With more credit available, the banks could lower their interest rates.  (reference here)

Banks violate their depositors’ property rights

As I note in chapter 5 of The Jolly Roger Dollar, the key to the success of free markets is the establishment and defense of property rights.  Government law has never recognized the right of depositors to their property, meaning their deposits.  Alan Greenspan in his famous 1966 essay writes:

Since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits . . .

Observe the language: “. . . the banker need keep only a fraction of his total deposits.”  How different the impact of that sentence would be if he had said: The banker need keep only a portion of his customers’ property that they entrusted to him for safekeeping. 

I’m not trying to nit-pick.  Consider that fractional reserve banking is behind most if not all banking crises, that if bankers respected their depositors right to their deposits they would be practicing full-reserve (100% reserve) banking.  Yet the law has always sided with the bankers:

As Rothbard observed, a bank that fails to meet its deposit obligations is just another insolvent, not an embezzler. Following the British ruling in Foley v. Hill and Others in 1848, U.S. courts consider that money left with a banker is, "to all intents and purposes, the money of the banker, to do with as he pleases.”  This holds even if the banker engages in "hazardous speculation." Thus, according to the state there can be no embezzlement because the money belongs to the bank, not the depositor.  (JRD, Ch. 4)

A bankers’ bank without government

The desire of bankers for a bankers’ bank is not misguided, as long as it’s disconnected from the government. 

In the interval between the War of 1812 and the Civil War, banking was de-centralized into state-chartered banks issuing banknotes redeemable in gold or silver coins. One of the highlights of this period was the development of a clearinghouse in Boston called the Suffolk Bank.   

Formed by prominent merchants, the Suffolk System allowed New England banks to accept the notes of other banks, including country banks, at par with specie. Members of the system had to keep a sufficient reserve of specie at Suffolk to redeem all the notes it received. Suffolk could not keep banks from inflating but it could remove them from the list of approved banks and cause their notes to trade at discount.  (JRD, Ch. 11)

Conclusion

The federal reserve was never a sound system that has grown corrupt.  It was always a corrupt system that has grown more corrupt.

Ron Paul has the right approach — End the Fed.  Get it the hell out of our lives and restore monetary freedom — the right to choose a medium of exchange.