Pouring money into the private banking system has only fixed the economy for bankers and the wealthy; it has not done much to address either the fundamental problem of unemployment or the debt trap so many Americans find themselves in.
President Obama's $787 billion stimulus plan has so far failed to halt the growth of unemployment: 2.7 million jobs have been lost since the stimulus plan began. California has lost 336,400 jobs. Arizona has lost 77,300. Michigan has lost 137,300. A total of 49 states and the District of Columbia have all reported net job losses.
In this dark firmament, however, one bright star shines. The sole state to actually gain jobs is an unlikely candidate for the distinction: North Dakota. North Dakota is also one of only two states expected to meet their budgets in 2010. (The other is Montana.) North Dakota is a sparsely populated state of less than 700,000 people, largely located in cold and isolated farming communities. Yet, since 2000, the state's GNP has grown 56 percent, personal income has grown 43 percent and wages have grown 34 percent. The state not only has no funding problems, but this year it has a budget surplus of $1.3 billion, the largest it has ever had.
Why is North Dakota doing so well, when other states are suffering the ravages of a deepening credit crisis? Its secret may be that it has its own credit machine. North Dakota is the only state in the Union to own its own bank. The Bank of North Dakota (BND) was established by the state legislature in 1919, specifically to free farmers and small businessmen from the clutches of out-of-state bankers and railroad men. The bank's stated mission is to deliver sound financial services that promote agriculture, commerce and industry in North Dakota.
The Advantages of Owning Your Own Bank
So, how does owning a bank solve the state's funding problems? Isn't the state still limited to the money it has? The answer is no. Chartered banks are allowed to do something nobody else can do: They can create credit on their books simply with accounting entries, using the magic of "fractional reserve" lending. As the Federal Reserve Bank of Dallas explains on its web site:
"Banks actually create money when they lend it. Here's how it works: Most of a bank's loans are made to its own customers and are deposited in their checking accounts. Because the loan becomes a new deposit, just like a paycheck does, the bank ... holds a small percentage of that new amount in reserve and again lends the remainder to someone else, repeating the money-creation process many times."
How many times? President Obama puts this "multiplier effect" at eight to ten. In a speech on April 14, he said:
"[A]lthough there are a lot of Americans who understandably think that government money would be better spent going directly to families and businesses instead of banks - 'where's our bailout?,' they ask - the truth is that a dollar of capital in a bank can actually result in eight or ten dollars of loans to families and businesses, a multiplier effect that can ultimately lead to a faster pace of economic growth."
It can, but it hasn't recently, because private banks are limited by bank capital requirements and by their for-profit business models. And that is where a state-owned bank has enormous advantages: States own huge amounts of capital, and they can think farther ahead that their quarterly profit statements, allowing them to take long-term risks. Their asset bases are not marred by oversized salaries and bonuses; they have no shareholders expecting a sizable cut, and they have not marred their books with bad derivatives bets, unmarketable collateralized debt obligations and mark-to-market accounting problems.
The Bank of North Dakota (BND) is set up as a dba: "the State of North Dakota doing business as the Bank of North Dakota." Technically, that makes the capital of the state the capital of the bank. Projecting the possibilities of this arrangement to California, the State of California owns about $200 billion in real estate, has $62 billion in various investments and has $128 billion in projected 2009 revenues. Leveraged by a factor of eight, that capital base could support nearly $4 trillion in loans.
To get a bank charter, specific investments would probably need to be earmarked by the state as startup capital; but the startup capital required for a typical California bank is only about $20 million. This is small potatoes for the world's eighth largest economy, and the money would not actually be "spent." It would just become bank equity, transmuting from one form of investment into another - and a lucrative investment at that. In the case of the BND, the bank's return on equity is about 25 percent. It pays a hefty dividend to the state, which is expected to exceed $60 million this year. In the last decade, the BND has turned back a third of a billion dollars to the state's general fund, offsetting taxes. California could do substantially better than that. California pays $5 billion annually just in interest on its debt. If it had its own bank, the bank could refinance its debt and return that $5 billion to the state's coffers; and it would make substantially more on money lent out.
Besides capital, a bank needs "reserves," which it gets from deposits. For the BND, this too is no problem, since it has a captive deposit base. By law, the state and all its agencies must deposit their funds in the bank, which pays a competitive interest rate to the state treasurer. The bank also accepts deposits from other entities. These copious deposits can then be plowed back into the state in the form of loans.
Public Banking on the Central Bank Model
The BND's populist organizers originally conceived of the bank as a credit union-like institution that would free farmers from predatory lenders, but conservative interests later took control and suppressed these commercial lending functions. The BND is now chiefly a "bankers' bank." It acts like a central bank, with functions similar to those of a branch of the Federal Reserve. It avoids rivalry with private banks by partnering with them. Most lending is originated by a local bank. The BND then comes in to participate in the loan, share risk and buy down the interest rate.
One of the BND's functions is to provide a secondary market for real estate loans, which it buys from local banks. Its residential loan portfolio is now $500 billion to $600 billion. This function has helped the state to avoid the credit crisis that afflicted Wall Street when the secondary market for loans collapsed in late 2007. Before that, investors routinely bought securitized loans (CDOs) from the banks, making room on the banks' books for more loans. But these "shadow lenders" disappeared when they realized that the derivatives called "credit default swaps" supposedly protecting their CDOs were a highly unreliable form of insurance. In North Dakota, this secondary real estate market is provided by the BND, which has invested conservatively, avoiding the speculative derivatives debacle.
Other services the BND provides include guarantees for entrepreneurial startups and student loans, the purchase of municipal bonds from public institutions and a well-funded disaster loan program. When the city of Fargo was struck by a massive flood recently, the disaster fund helped the city avoid the devastation suffered by New Orleans in similar circumstances; and when North Dakota failed to meet its state budget a few years ago, the BND met the shortfall. The BND has an account with the Federal Reserve Bank, but its deposits are not insured by the FDIC. Rather, they are guaranteed by the State of North Dakota itself - a prudent move today, when the FDIC is verging on bankruptcy.
The Commercial Banking Model: The Commonwealth Bank of Australia
The BND studiously avoids competition with private banks, but a publicly-owned bank could profitably engage in commercial lending. A successful model for that approach was the Commonwealth Bank of Australia, which served both central bank and commercial bank functions. For nearly a century, the publicly-owned Commonwealth Bank provided financing for housing, small business, and other enterprise, affording effective public competition that "kept the banks honest" and kept interest rates low. Commonwealth Bank put the needs of borrowers ahead of profits, ensuring that sound investment flows were maintained to farming and other essential areas; yet, the bank was always profitable, from 1911 until nearly the end of the century.
Indeed, it seems to have been too profitable, making it a takeover target. It was simply "too good not to be privatized." The bank was sold in the 1990s for a good deal of money, but it's proponents consider it's loss as a social and economic institution to be incalculable.
A State Bank of Florida?
Could the sort of commercial model tested by Commonwealth Bank work today in the United States? Economist Farid Khavari thinks so. A Democratic candidate for governor of Florida, he proposes a Bank of the State of Florida (BSF) that would make loans to Floridians at much lower interest rates than they are getting now, using the magic of fractional reserve lending. He explains:
"For $100 in deposits, a bank can create $900 in new money by making loans. So, the BSF can pay 6 percent for CDs, and make mortgage loans at 2 percent. For $6 per year in interest paid out, the BSF can earn $18 by lending $900 at 2 percent for mortgages."
The state would earn $15,000 per $100,000 of mortgage, at a cost of about $1,700, while the homeowner would save $88,000 in interest and pay for the home 15 years sooner. "Our bank will save people about seven years of their pay over the course of 30 years, just on interest costs," says Dr. Khavari. He also proposes 6 percent credit cards and 6 percent certificates of deposit.
The state could earn billions yearly on these loans, while saving hefty sums for consumers. It could also refinance its own debts and those of its municipal governments at very low interest rates. According to a German study, interest composes 30 percent to 50 percent of everything we buy. Slashing interest costs can make projects such as low-cost housing, alternative energy development, and infrastructure construction not only sustainable, but profitable for the state, while at the same time creating much-needed jobs.
Sunday, November 15, 2009
Sunday, July 5, 2009
Whose Country is this anyway?
A political-economic oligarchy has taken over the United States of America. This oligarchy has institutionalized a body of law that protects businesses at the expense of not only the common people but the nation itself.
CNN interviewed a person recently who was seriously burned when his vehicle burst into flames because a plastic brake-fluid reservoir ruptured. Having sued Chrysler, he was now concerned that its bankruptcy filing would enable Chrysler to avoid paying any damages. A CNN legal expert called this highly likely, since the main goal of reorganization in bankruptcy is preserving the company's viability and that those creditors who could contribute most to attaining that goal would be compensated first while those involved in civil suits against the company would be placed lowest on the creditor list since compensating them would lessen the chances of the company's surviving. This rational clearly implies that the preservation of companies is more important than the preservation of people. Of course, similar cases have been reported before. The claims of workers for unpaid wages have often been dismissed as have their contracts for benefits.
But there is an essential difference between a business that lends money or delivers products or services to another company and the employees who work for it. Business is an activity that supposedly involves risk. Employment is not. Neither is unknowingly buying a defective product. Workers and consumers do not extend credit to the companies they work for or buy products from. They are not in any normal sense of the word “creditors.” Yet that distinction is erased in bankruptcy proceedings which preserve companies at the public's expense.
Of course, bankruptcy is not the only American practice that makes use of this principle. The current bailout policies of both the Federal Reserve and the Treasury make use of it. Again companies are being saved at the expense of the American people. America's civil courts are notorious for favoring corporate defendants when sued by injured plaintiffs. Corporate profiteering is not only tolerated, it is often encouraged. The sordid records of both Halliburton and KBR are proof enough. Neither has suffered any serious consequences for their abysmal activities in Iraq while supplying services to the troops deployed there. Even worse, these companies continue to get additional contracts from the Department of State. “A former Army chaplain who later worked for Halliburton's KBR unit ... told Congress ... ‘KBR came first, the soldiers came second.'" [http://www.halliburtonwatch.org/news/deyoung.html] Again, it's companies first, people last. But Major General Smedley Butler made this point in 1935. [See http://www.scuttlebuttsmallchow.com/racket.html] And everyone is familiar with the influence corporate America has over the Congress through campaign contributions and lobbying. For instance, “the U.S. Chamber of Commerce has earmarked $20 million over two years to kill [card check].” [http://www.latimes.com/news/nationworld/nation/la-na-card-check4-2009jun04,0,7195326.story?track=rss] Companies expect returns on their money, and preventing workers from unionizing offers huge returns. And on Thursday June 4, 2009 USA Today reported that, “Republicans strongly oppose a government run [healthcare] plan saying it would put private companies insuring millions of Americans out of business. ‘A government run plan would set artificially low prices that private insurers would have no way of competing with,' Senate Minority Leader Mitch McConnell, R-Ky, said ... .” (Kentucky ranks fifth highest in the number of people with incomes below poverty. Why is he worried about the survival of insurers?)
The profound question is how can any of it be justified?
President Calvin Coolidge did say that the business of America is business and the American political class seems to have adopted this view, but the Constitution cannot be used to justify it. The word “business” in the sense of “commercial firm” occurs nowhere in it. Nowhere does the Constitution direct the government to even promote commerce or even defend private property. The Constitution is clear. It was established to promote just six goals: (1) form a more perfect union, (2) establish justice, (3) insure domestic tranquility, (4) provide for the common defense, (5) promote the general welfare, and (6) secure the blessings of liberty to ourselves and our posterity. Of course, the Constitution does not prohibit the government from promoting commerce or defending private property, but what happens when doing so conflicts with one or more of its six purposes? Shouldn't any law that does that be unconstitutional? For instance, wouldn't it be difficult the claim that a bankruptcy procedure that protects business and subordinates or dismisses the claims of workers and injured plaintiffs establishes justice? How can spending trillions of dollars to save financial institutions and other businesses whose very own actions brought down the global economy be construed as establishing justice or even promoting the general welfare when people are losing their incomes, their pensions, their health care, and even their homes? These actions clearly conflict with the Constitution's stated goals. Shouldn't they have been declared unconstitutional? Although the Constitution does provide people with the right to petition the government for a redress of grievances, it does not clearly provide that right to organizations or corporations and it certainly does not provide to anyone the right to petition the government for special advantages. Yet that is what the Congress, even after its members swear to support and defend the Constitution of the United States, allows special interest groups to do. Where in the Constitution is there a justification for putting the people last?
How this situation could have arisen is a puzzle? Haven't our elected officials, our justices, our legal scholars, our professors of Constitutional Law, or even our political scientists read the Constitution? Have they merely misunderstood it? Or have they simply chosen to disregard the preamble as though it had no bearing on its subsequent articles? Why have no astute lawyers brought actions on behalf of the people? Why indeed?
The answer is that a political-economic oligarchy has taken over the nation. This oligarchy has institutionalized a body of law that protects businesses at the expense of not only the common people but the nation itself. Businessmen have no loyalties. The Bank of International Settlements insures it, since it is not accountable to any national government. (See my piece, A Banker' Economy, http://www.jkozy.com/A_Bankers__Economy.htm.) Thomas Jefferson knew it when he wrote, “Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they draw their gain.” Mayer Amschel Rothschild knew it when he said, "Give me control of a nation's money and I care not who makes the laws." William Henry Vanderbilt knew it when he said, “The public be damned.” Businesses know it when they use every possible ruse to avoid paying taxes, they know it when they offshore jobs and production, they know it when the engage in war profiteering, and they know it when they take no sides in wars, caring not an iota who emerges victorious. IBM, GM, Ford, Alcoa, Du Pont, Standard Oil, Chase Bank, J.P. Morgan, National City Bank, Guaranty, Bankers Trust, and American Express all knew it when they did business as usual with Germany during World War II. Prescott Bush knew it when he aided and abetted the financial backers of Adolf Hitler.
Yet somehow or other the people in our government, including the judiciary, do not seem to know it, and they have allowed and even abetted businesses that have no allegiance to any country to subvert the Constitution. Unfortunately, the Constitution does not define such action as treason.
America's youthful students are regularly taught Lincoln's Gettysburg Address and are familiar with its peroration, “we here highly resolve that these dead shall not have died in vain—that this nation, under God, shall have a new birth of freedom—and that government: of the people, by the people, for the people, shall not perish from the earth.” If that nation ever existed, it no longer does. And when Benjamin Franklin was asked, “Well, Doctor, what have we got—a Republic or a Monarchy?” he answered, “A Republic, if you can keep it.” We haven't. What we have ended up with is merely an Unpublic, an economic oligarchy that cares naught for either the nation or the public.
To argue that the United States of America is a failed state is not difficult. A nation that has the highest documented prison population in the world can hardly be described as domestically tranquil. A nation whose top one percent of the people have 46 percent of the wealth cannot by any stretch of the imagination be said to be enjoying general welfare (“generally true” means true for the most part with a few exceptions). A nation that spends as much on defense as the rest of the world combined and cannot control its borders, could not avert the attack on the World Trade Center, and can not win its recent major wars can not be described as providing for its common defense. How perfect the union is or whether justice usually prevails are matters of debate, and what blessings of liberty Americans enjoy that peoples in other advanced countries are denied is never stated. A nation that cannot fulfill its Constitution's stated goals surely is a failed one. How else could failure be defined? By allowing people with no fastidious loyalty to the nation or its people to control it, by allowing them to disregard entirely the Constitution's preamble, the nation could not avoid this failure. The prevailing economic system requires it.
Woody Guthrie sang, “This Land Is My Land, This Land Is Your Land,” but it isn't. It was stolen a long time ago. Although it may have been “made for you and me,” people with absolutely no loyalty to this land now own it. It needs to be taken, not bought, back! America needs a new birth of freedom, it needs a government for the people, it needs a government that puts people first, but it won't get one unless Americans come to realize just how immoral and vicious our economic system is.
CNN interviewed a person recently who was seriously burned when his vehicle burst into flames because a plastic brake-fluid reservoir ruptured. Having sued Chrysler, he was now concerned that its bankruptcy filing would enable Chrysler to avoid paying any damages. A CNN legal expert called this highly likely, since the main goal of reorganization in bankruptcy is preserving the company's viability and that those creditors who could contribute most to attaining that goal would be compensated first while those involved in civil suits against the company would be placed lowest on the creditor list since compensating them would lessen the chances of the company's surviving. This rational clearly implies that the preservation of companies is more important than the preservation of people. Of course, similar cases have been reported before. The claims of workers for unpaid wages have often been dismissed as have their contracts for benefits.
But there is an essential difference between a business that lends money or delivers products or services to another company and the employees who work for it. Business is an activity that supposedly involves risk. Employment is not. Neither is unknowingly buying a defective product. Workers and consumers do not extend credit to the companies they work for or buy products from. They are not in any normal sense of the word “creditors.” Yet that distinction is erased in bankruptcy proceedings which preserve companies at the public's expense.
Of course, bankruptcy is not the only American practice that makes use of this principle. The current bailout policies of both the Federal Reserve and the Treasury make use of it. Again companies are being saved at the expense of the American people. America's civil courts are notorious for favoring corporate defendants when sued by injured plaintiffs. Corporate profiteering is not only tolerated, it is often encouraged. The sordid records of both Halliburton and KBR are proof enough. Neither has suffered any serious consequences for their abysmal activities in Iraq while supplying services to the troops deployed there. Even worse, these companies continue to get additional contracts from the Department of State. “A former Army chaplain who later worked for Halliburton's KBR unit ... told Congress ... ‘KBR came first, the soldiers came second.'" [http://www.halliburtonwatch.org/news/deyoung.html] Again, it's companies first, people last. But Major General Smedley Butler made this point in 1935. [See http://www.scuttlebuttsmallchow.com/racket.html] And everyone is familiar with the influence corporate America has over the Congress through campaign contributions and lobbying. For instance, “the U.S. Chamber of Commerce has earmarked $20 million over two years to kill [card check].” [http://www.latimes.com/news/nationworld/nation/la-na-card-check4-2009jun04,0,7195326.story?track=rss] Companies expect returns on their money, and preventing workers from unionizing offers huge returns. And on Thursday June 4, 2009 USA Today reported that, “Republicans strongly oppose a government run [healthcare] plan saying it would put private companies insuring millions of Americans out of business. ‘A government run plan would set artificially low prices that private insurers would have no way of competing with,' Senate Minority Leader Mitch McConnell, R-Ky, said ... .” (Kentucky ranks fifth highest in the number of people with incomes below poverty. Why is he worried about the survival of insurers?)
The profound question is how can any of it be justified?
President Calvin Coolidge did say that the business of America is business and the American political class seems to have adopted this view, but the Constitution cannot be used to justify it. The word “business” in the sense of “commercial firm” occurs nowhere in it. Nowhere does the Constitution direct the government to even promote commerce or even defend private property. The Constitution is clear. It was established to promote just six goals: (1) form a more perfect union, (2) establish justice, (3) insure domestic tranquility, (4) provide for the common defense, (5) promote the general welfare, and (6) secure the blessings of liberty to ourselves and our posterity. Of course, the Constitution does not prohibit the government from promoting commerce or defending private property, but what happens when doing so conflicts with one or more of its six purposes? Shouldn't any law that does that be unconstitutional? For instance, wouldn't it be difficult the claim that a bankruptcy procedure that protects business and subordinates or dismisses the claims of workers and injured plaintiffs establishes justice? How can spending trillions of dollars to save financial institutions and other businesses whose very own actions brought down the global economy be construed as establishing justice or even promoting the general welfare when people are losing their incomes, their pensions, their health care, and even their homes? These actions clearly conflict with the Constitution's stated goals. Shouldn't they have been declared unconstitutional? Although the Constitution does provide people with the right to petition the government for a redress of grievances, it does not clearly provide that right to organizations or corporations and it certainly does not provide to anyone the right to petition the government for special advantages. Yet that is what the Congress, even after its members swear to support and defend the Constitution of the United States, allows special interest groups to do. Where in the Constitution is there a justification for putting the people last?
How this situation could have arisen is a puzzle? Haven't our elected officials, our justices, our legal scholars, our professors of Constitutional Law, or even our political scientists read the Constitution? Have they merely misunderstood it? Or have they simply chosen to disregard the preamble as though it had no bearing on its subsequent articles? Why have no astute lawyers brought actions on behalf of the people? Why indeed?
The answer is that a political-economic oligarchy has taken over the nation. This oligarchy has institutionalized a body of law that protects businesses at the expense of not only the common people but the nation itself. Businessmen have no loyalties. The Bank of International Settlements insures it, since it is not accountable to any national government. (See my piece, A Banker' Economy, http://www.jkozy.com/A_Bankers__Economy.htm.) Thomas Jefferson knew it when he wrote, “Merchants have no country. The mere spot they stand on does not constitute so strong an attachment as that from which they draw their gain.” Mayer Amschel Rothschild knew it when he said, "Give me control of a nation's money and I care not who makes the laws." William Henry Vanderbilt knew it when he said, “The public be damned.” Businesses know it when they use every possible ruse to avoid paying taxes, they know it when they offshore jobs and production, they know it when the engage in war profiteering, and they know it when they take no sides in wars, caring not an iota who emerges victorious. IBM, GM, Ford, Alcoa, Du Pont, Standard Oil, Chase Bank, J.P. Morgan, National City Bank, Guaranty, Bankers Trust, and American Express all knew it when they did business as usual with Germany during World War II. Prescott Bush knew it when he aided and abetted the financial backers of Adolf Hitler.
Yet somehow or other the people in our government, including the judiciary, do not seem to know it, and they have allowed and even abetted businesses that have no allegiance to any country to subvert the Constitution. Unfortunately, the Constitution does not define such action as treason.
America's youthful students are regularly taught Lincoln's Gettysburg Address and are familiar with its peroration, “we here highly resolve that these dead shall not have died in vain—that this nation, under God, shall have a new birth of freedom—and that government: of the people, by the people, for the people, shall not perish from the earth.” If that nation ever existed, it no longer does. And when Benjamin Franklin was asked, “Well, Doctor, what have we got—a Republic or a Monarchy?” he answered, “A Republic, if you can keep it.” We haven't. What we have ended up with is merely an Unpublic, an economic oligarchy that cares naught for either the nation or the public.
To argue that the United States of America is a failed state is not difficult. A nation that has the highest documented prison population in the world can hardly be described as domestically tranquil. A nation whose top one percent of the people have 46 percent of the wealth cannot by any stretch of the imagination be said to be enjoying general welfare (“generally true” means true for the most part with a few exceptions). A nation that spends as much on defense as the rest of the world combined and cannot control its borders, could not avert the attack on the World Trade Center, and can not win its recent major wars can not be described as providing for its common defense. How perfect the union is or whether justice usually prevails are matters of debate, and what blessings of liberty Americans enjoy that peoples in other advanced countries are denied is never stated. A nation that cannot fulfill its Constitution's stated goals surely is a failed one. How else could failure be defined? By allowing people with no fastidious loyalty to the nation or its people to control it, by allowing them to disregard entirely the Constitution's preamble, the nation could not avoid this failure. The prevailing economic system requires it.
Woody Guthrie sang, “This Land Is My Land, This Land Is Your Land,” but it isn't. It was stolen a long time ago. Although it may have been “made for you and me,” people with absolutely no loyalty to this land now own it. It needs to be taken, not bought, back! America needs a new birth of freedom, it needs a government for the people, it needs a government that puts people first, but it won't get one unless Americans come to realize just how immoral and vicious our economic system is.
Thursday, July 2, 2009
What the Big Banks have Won
The trouble started 24 months ago, but the origins of the financial crisis are still disputed. The problems did not begin with subprime loans, lax lending standards or shoddy ratings agencies. The meltdown can be traced back to the activities of the big banks and their enablers at the Federal Reserve. The Fed's artificially low interest rates provided a subsidy for risky speculation while deregulation allowed financial institutions to increase leverage to perilous levels, creating trillions of dollars of credit backed by insufficient capital reserves. When two Bear Stearns hedge funds defaulted in July 2007, the process of turbo-charging profits through massive credit expansion flipped into reverse sending the financial system into a downward spiral.
It is inaccurate to call the current slump a "recession", which suggests a mismatch between supply and demand that is part of the normal business cycle. In truth, the economy has stumbled into a multi-trillion dollar capital hole that was created by the reckless actions of the nation's largest financial institutions. The banks blew up the system and now the country has slipped into a depression.
Currently, the banks are lobbying congress to preserve the "financial innovations" which are at the heart of the crisis. These so-called innovations are, in fact, the instruments (derivatives) and processes (securitization) which help the banks achieve their main goal of avoiding reserve requirements. Securitization and derivatives are devices for concealing the build-up of leverage which is essential for increasing profits with as little capital as possible. If Congress fails to see through this ruse and re-regulate the system, the banks will inflate another bubble and destroy what little is left of the economy.
On June 22, 2009, Christopher Whalen, of Institutional Risk Analysis, appeared before the Senate Committee on Banking, Housing and Urban Affairs, and outlined the dangers of Over-The-Counter (OTC) derivatives. He pointed out that derivatives trading is hugely profitable and generates "supra-normal returns" for banking giants JP Morgan, Goldman Sachs and other large derivatives dealers. He also noted that, "the deliberate inefficiency of the OTC derivatives market results in a dedicated tax or subsidy meant to benefit one class of financial institutions, namely the largest OTC dealer banks, at the expense of other market participants." As Whalen testified:
"Regulators who are supposed to protect the taxpayer from the costs of cleaning up these periodic loss events are so captured by the very industry they are charged by law to regulate as to be entirely ineffective....The views of the existing financial regulatory agencies and particularly the Federal Reserve Board and Treasury, should get no consideration from the Committee since the views of these agencies are largely duplicative of the views of JPM and the large OTC dealers."
Whalen's complaint is heard frequently on the Internet where bloggers have blasted the cozy relationship between the Fed and the big banks. In fact, the Fed and Treasury are not only hostile towards regulation, they operate as the de facto policy arm of the banking establishment. This explains why Bernanke has underwritten the entire financial system with $12.8 trillion, while the broader economy languishes in economic quicksand. The Fed's lavish gift amounts to a taxpayer-funded insurance policy for which no premium is paid.
Whalen continues:
"In my view, CDS (credit default swaps) contracts and complex structured assets are deceptive by design and beg the question as to whether a certain level of complexity is so speculative and reckless as to violate US securities and anti-fraud laws. That is, if an OTC derivative contract lacks a clear cash basis and cannot be valued by both parties to the transaction with the same degree of facility and transparency as cash market instruments, then the OTC contact should be treated as fraudulent and banned as a matter of law and regulation. Most CDS contracts and complex structured financial instruments fall into this category of deliberately fraudulent instruments for which no cash basis exists."
No one understands these instruments; they are deliberately opaque and impossible to price. they should be banned, but the Fed and Treasury continue to look the other way because they are in the thrall of the banks. This phenomenon is known as "regulatory capture".
Credit default swaps (CDS) are a particularly insidious invention. They were originally designed to protect against the possibility of bond going into default, but quickly morphed into a means for massive speculation which is virtually indistinguishable from casino-type gambling. CDS can be used to doll-up one's credit rating, short the market or hedge against potential losses. CDS trading poses a clear danger to the financial system (The CDS market has mushroomed to $30 trillion industry) but the Fed and other regulators have largely ignored the activity because it is a cash cow for the banks.
Whalen again:
"It is important for the Committee to understand that the reform proposal from the Obama Administration regarding OTC derivatives is a canard; an attempt by the White House and the Treasury Department to leave in place the de facto monopoly over the OTC markets by the largest dealer banks led by JPM, GS and other institutions....
The only beneficiaries of the current OTC market for derivatives are JPM, GS and the other large OTC dealers.... Without OTC derivatives, Bear Stearns, Lehman Brothers and AIG would never have failed, but without the excessive rents earned by JPM, GS and the remaining legacy OTC dealers, the largest banks cannot survive and must shrink dramatically." (Statement by Christopher Whalen to the Committee on Banking, Housing and Urban Affairs, Subcommittee on Securities, Insurance, and Investment, United States Senate, June 22, 2009)
The Geithner-Summers “reform” proposals are a public relations scam designed to conceal the fact that the banks will continue to maintain their stranglehold on OTC derivatives trading while circumventing government oversight. Nothing will change. Bernanke and Geithner's primary objective is to preserve the ability of the banks to use complex instruments to enhance leverage and maximize profits.
The banks created the financial crisis, and now they are its biggest beneficiaries. They don't need to worry about risk, because Bernanke has assured them that they will be bailed out regardless of the cost. Financial institutions that have explicit government guarantees are able to get cheaper funding because lending to the bank is the same as lending to the state.
It is inaccurate to call the current slump a "recession", which suggests a mismatch between supply and demand that is part of the normal business cycle. In truth, the economy has stumbled into a multi-trillion dollar capital hole that was created by the reckless actions of the nation's largest financial institutions. The banks blew up the system and now the country has slipped into a depression.
Currently, the banks are lobbying congress to preserve the "financial innovations" which are at the heart of the crisis. These so-called innovations are, in fact, the instruments (derivatives) and processes (securitization) which help the banks achieve their main goal of avoiding reserve requirements. Securitization and derivatives are devices for concealing the build-up of leverage which is essential for increasing profits with as little capital as possible. If Congress fails to see through this ruse and re-regulate the system, the banks will inflate another bubble and destroy what little is left of the economy.
On June 22, 2009, Christopher Whalen, of Institutional Risk Analysis, appeared before the Senate Committee on Banking, Housing and Urban Affairs, and outlined the dangers of Over-The-Counter (OTC) derivatives. He pointed out that derivatives trading is hugely profitable and generates "supra-normal returns" for banking giants JP Morgan, Goldman Sachs and other large derivatives dealers. He also noted that, "the deliberate inefficiency of the OTC derivatives market results in a dedicated tax or subsidy meant to benefit one class of financial institutions, namely the largest OTC dealer banks, at the expense of other market participants." As Whalen testified:
"Regulators who are supposed to protect the taxpayer from the costs of cleaning up these periodic loss events are so captured by the very industry they are charged by law to regulate as to be entirely ineffective....The views of the existing financial regulatory agencies and particularly the Federal Reserve Board and Treasury, should get no consideration from the Committee since the views of these agencies are largely duplicative of the views of JPM and the large OTC dealers."
Whalen's complaint is heard frequently on the Internet where bloggers have blasted the cozy relationship between the Fed and the big banks. In fact, the Fed and Treasury are not only hostile towards regulation, they operate as the de facto policy arm of the banking establishment. This explains why Bernanke has underwritten the entire financial system with $12.8 trillion, while the broader economy languishes in economic quicksand. The Fed's lavish gift amounts to a taxpayer-funded insurance policy for which no premium is paid.
Whalen continues:
"In my view, CDS (credit default swaps) contracts and complex structured assets are deceptive by design and beg the question as to whether a certain level of complexity is so speculative and reckless as to violate US securities and anti-fraud laws. That is, if an OTC derivative contract lacks a clear cash basis and cannot be valued by both parties to the transaction with the same degree of facility and transparency as cash market instruments, then the OTC contact should be treated as fraudulent and banned as a matter of law and regulation. Most CDS contracts and complex structured financial instruments fall into this category of deliberately fraudulent instruments for which no cash basis exists."
No one understands these instruments; they are deliberately opaque and impossible to price. they should be banned, but the Fed and Treasury continue to look the other way because they are in the thrall of the banks. This phenomenon is known as "regulatory capture".
Credit default swaps (CDS) are a particularly insidious invention. They were originally designed to protect against the possibility of bond going into default, but quickly morphed into a means for massive speculation which is virtually indistinguishable from casino-type gambling. CDS can be used to doll-up one's credit rating, short the market or hedge against potential losses. CDS trading poses a clear danger to the financial system (The CDS market has mushroomed to $30 trillion industry) but the Fed and other regulators have largely ignored the activity because it is a cash cow for the banks.
Whalen again:
"It is important for the Committee to understand that the reform proposal from the Obama Administration regarding OTC derivatives is a canard; an attempt by the White House and the Treasury Department to leave in place the de facto monopoly over the OTC markets by the largest dealer banks led by JPM, GS and other institutions....
The only beneficiaries of the current OTC market for derivatives are JPM, GS and the other large OTC dealers.... Without OTC derivatives, Bear Stearns, Lehman Brothers and AIG would never have failed, but without the excessive rents earned by JPM, GS and the remaining legacy OTC dealers, the largest banks cannot survive and must shrink dramatically." (Statement by Christopher Whalen to the Committee on Banking, Housing and Urban Affairs, Subcommittee on Securities, Insurance, and Investment, United States Senate, June 22, 2009)
The Geithner-Summers “reform” proposals are a public relations scam designed to conceal the fact that the banks will continue to maintain their stranglehold on OTC derivatives trading while circumventing government oversight. Nothing will change. Bernanke and Geithner's primary objective is to preserve the ability of the banks to use complex instruments to enhance leverage and maximize profits.
The banks created the financial crisis, and now they are its biggest beneficiaries. They don't need to worry about risk, because Bernanke has assured them that they will be bailed out regardless of the cost. Financial institutions that have explicit government guarantees are able to get cheaper funding because lending to the bank is the same as lending to the state.
Friday, June 26, 2009
MBE-Barter, A Smart Alternative to Cash
Not a day goes by without my hearing or reading about economic, credit, or cash flow problems. That’s what happens when you work in the barter industry. Thankfully it is very refreshing to be able to talk to people I meet about the solution and not just agree with them and be part of the problem. For many small business owners they cannot even access the equity in their homes and refinance to improve cash flow, and many banks are scared to lend to those that need it.
Barter is nothing new – it’s been around since the dawn of Man – and I’m glad such an old and tried-and-tested method of doing business is actually getting its proper and fair share of the limelight in the local and national press. If one were to be totally honest, barter is the only stable part of our global economy. Look back to the economic collapse of Argentina in 2002. It took them going back to bartering to set their economy back on track. Seven years later over 500,000 people and businesses still hold strongly to barter, because they don’t trust their cash economy. Unfortunately many other western countries are teetering dangerously close to the Argentinean scenario.
That’s obviously good news for the barter industry, and especially for Merchants Barter Exchange (www.merchantsbarter.com) with their new form of trading: MBE-barter. Like the barter our cavemen ancestors participated in, organized barter is nothing new and actually dates back to the mid-1950s here in America. The challenge has always been controlling the flow of internal currency (usually referred to as “barter dollars”) and maintaining the integrity of the barter economy (not letting members inflate prices, or take part payment in cash, or in any other way tarnish the initial reputation of the membership.)
That’s where Merchants Barter Exchange and MBE-barter stands head and shoulders above practically all the other barter organizations out there today. Because of their internal systems and “checks and balances” procedures, you will never incur any of those bad practices when utilizing MBE-barter. In fact, any member caught trying to damage the integrity of the exchange is immediately expelled from the system, thus ensuring only the very highest quality standards in the industry. Unfortunately for their competition, the only way any existing barter exchange hindered by the old way of doing things can even begin to compete on the same level is to start from scratch – that puts them almost ten years behind Merchants Barter Exchange. That’s an impressive head-start and that keeps them ahead of the pack.
Additionally, through these higher quality standards and control systems, MBE-barter allows members to conduct much bigger trades than is even remotely possible with lesser exchanges. A few examples of trades possible via MBE-barter all at 100% (something no other barter company can promote) are $100,000 printing jobs, brand new forklifts, new home and office furniture, vehicles – the list is practically endless. Because everything is transacted at the same cash price and 100% bartered, there is no difference using MBE-barter for needed goods and services as using cash or credit, except for the obvious economic and marketing benefits a member gains.
Therefore, as an alternative to cash, MBE-barter is the best substitute by far, and actually has mechanisms in place to protect existing cash business. Obviously in this Internet-age, there are many web-based barter organizations emerging, however they have simply put a “modern” face on the flawed, old ways of doing barter, which cannot stamp out blending cash and barter for trades, cannot control pricing, cannot effectively co-ordinate member trades to keep the economy balanced and flowing with integrity. In short, they probably won’t last as long as their older companions, or grow to be more than a fleeting fad.
Existing Merchants Barter Exchange members are sitting pretty and patting themselves on the back for getting involved when they did. The good news for non-members, however, is that membership is very simple and the company is expanding incredibly rapidly around the US. Most likely they coming to a city and town near you within the next twelve months (that is, if they are not already strongly established in your town!) For a nominal, lifetime membership fee almost any business can join. The rest of the costs involved with membership are minimal and predominantly pay-per-use transaction fees on purchases made.
No article concerning commerce would be totally complete without at least a slight mention of Uncle Sam. The days of tax-free barter went out the window in the 1980s when barter companies gained the same standing (third-party record keepers) as banks and credit card companies. All barter revenue is considered the same as cash as far as the IRS is concerned and all barter companies must issue 1099b forms to all members for tax reporting purposes.
The economic outlook still looks very bleak (both nationally and globally) and no educated person remotely believes an about-turn any time soon is even a concept. Dumping trillions of dollars into the pot can lead to only two certainties: higher inflation and a tax burden being passed along somewhere. It’s good news for Merchants Barter Exchange and their members, not too promising for those dependent upon the cash world, though.
Barter is nothing new – it’s been around since the dawn of Man – and I’m glad such an old and tried-and-tested method of doing business is actually getting its proper and fair share of the limelight in the local and national press. If one were to be totally honest, barter is the only stable part of our global economy. Look back to the economic collapse of Argentina in 2002. It took them going back to bartering to set their economy back on track. Seven years later over 500,000 people and businesses still hold strongly to barter, because they don’t trust their cash economy. Unfortunately many other western countries are teetering dangerously close to the Argentinean scenario.
That’s obviously good news for the barter industry, and especially for Merchants Barter Exchange (www.merchantsbarter.com) with their new form of trading: MBE-barter. Like the barter our cavemen ancestors participated in, organized barter is nothing new and actually dates back to the mid-1950s here in America. The challenge has always been controlling the flow of internal currency (usually referred to as “barter dollars”) and maintaining the integrity of the barter economy (not letting members inflate prices, or take part payment in cash, or in any other way tarnish the initial reputation of the membership.)
That’s where Merchants Barter Exchange and MBE-barter stands head and shoulders above practically all the other barter organizations out there today. Because of their internal systems and “checks and balances” procedures, you will never incur any of those bad practices when utilizing MBE-barter. In fact, any member caught trying to damage the integrity of the exchange is immediately expelled from the system, thus ensuring only the very highest quality standards in the industry. Unfortunately for their competition, the only way any existing barter exchange hindered by the old way of doing things can even begin to compete on the same level is to start from scratch – that puts them almost ten years behind Merchants Barter Exchange. That’s an impressive head-start and that keeps them ahead of the pack.
Additionally, through these higher quality standards and control systems, MBE-barter allows members to conduct much bigger trades than is even remotely possible with lesser exchanges. A few examples of trades possible via MBE-barter all at 100% (something no other barter company can promote) are $100,000 printing jobs, brand new forklifts, new home and office furniture, vehicles – the list is practically endless. Because everything is transacted at the same cash price and 100% bartered, there is no difference using MBE-barter for needed goods and services as using cash or credit, except for the obvious economic and marketing benefits a member gains.
Therefore, as an alternative to cash, MBE-barter is the best substitute by far, and actually has mechanisms in place to protect existing cash business. Obviously in this Internet-age, there are many web-based barter organizations emerging, however they have simply put a “modern” face on the flawed, old ways of doing barter, which cannot stamp out blending cash and barter for trades, cannot control pricing, cannot effectively co-ordinate member trades to keep the economy balanced and flowing with integrity. In short, they probably won’t last as long as their older companions, or grow to be more than a fleeting fad.
Existing Merchants Barter Exchange members are sitting pretty and patting themselves on the back for getting involved when they did. The good news for non-members, however, is that membership is very simple and the company is expanding incredibly rapidly around the US. Most likely they coming to a city and town near you within the next twelve months (that is, if they are not already strongly established in your town!) For a nominal, lifetime membership fee almost any business can join. The rest of the costs involved with membership are minimal and predominantly pay-per-use transaction fees on purchases made.
No article concerning commerce would be totally complete without at least a slight mention of Uncle Sam. The days of tax-free barter went out the window in the 1980s when barter companies gained the same standing (third-party record keepers) as banks and credit card companies. All barter revenue is considered the same as cash as far as the IRS is concerned and all barter companies must issue 1099b forms to all members for tax reporting purposes.
The economic outlook still looks very bleak (both nationally and globally) and no educated person remotely believes an about-turn any time soon is even a concept. Dumping trillions of dollars into the pot can lead to only two certainties: higher inflation and a tax burden being passed along somewhere. It’s good news for Merchants Barter Exchange and their members, not too promising for those dependent upon the cash world, though.
Monday, June 22, 2009
Economics 101
An insight on how the U. S. conducts business these days.
It is a slow day in the East Texas town of
Madisonville.
It is raining, and the little town looks
totally deserted. Times are tough, everybody is in debt and everybody lives on credit.
On this particular day a rich tourist from the
East is driving through town.
He enters the only hotel in the sleepy town and lays a hundred dollar bill on the desk stating he wants to inspect the rooms upstairs in order to pick one to spend the night.
As soon as the man walks up the stairs, the hotel proprietor takes the hundred dollar bill and runs next door to pay his debt to the butcher.
The butcher takes the $100 and runs down the
street to pay his debt to the pig farmer. The pig farmer then takes the $100 and heads off to pay his debt to the supplier of feed and fuel.
The guy at the Farmer's Co-op takes the $100
and runs to pay his debt to the local prostitute, who has also been facing hard times and has lately had to offer her "services" on credit.
The hooker runs to the hotel and pays off her debt with the $100 to the hotel proprietor,
paying for the rooms that she had rented when she brought clients to that establishment.
The hotel proprietor then lays the $100 bill back on the counter so the rich traveler will not suspect anything.
At that moment the traveler from the East walks back down the stairs, after inspecting the rooms.
He picks up the $100 bill and states that the
rooms are not satisfactory...... Pockets the
money and walks out the door and leaves town.
No one earned anything. However the whole town is now out of debt, and looks to the future with a lot of optimism.
And that ladies and gentlemen, is how the United
States Government is conducting business today.
If that doesn't scare the hell out of you, then I don't know what will.
It is a slow day in the East Texas town of
Madisonville.
It is raining, and the little town looks
totally deserted. Times are tough, everybody is in debt and everybody lives on credit.
On this particular day a rich tourist from the
East is driving through town.
He enters the only hotel in the sleepy town and lays a hundred dollar bill on the desk stating he wants to inspect the rooms upstairs in order to pick one to spend the night.
As soon as the man walks up the stairs, the hotel proprietor takes the hundred dollar bill and runs next door to pay his debt to the butcher.
The butcher takes the $100 and runs down the
street to pay his debt to the pig farmer. The pig farmer then takes the $100 and heads off to pay his debt to the supplier of feed and fuel.
The guy at the Farmer's Co-op takes the $100
and runs to pay his debt to the local prostitute, who has also been facing hard times and has lately had to offer her "services" on credit.
The hooker runs to the hotel and pays off her debt with the $100 to the hotel proprietor,
paying for the rooms that she had rented when she brought clients to that establishment.
The hotel proprietor then lays the $100 bill back on the counter so the rich traveler will not suspect anything.
At that moment the traveler from the East walks back down the stairs, after inspecting the rooms.
He picks up the $100 bill and states that the
rooms are not satisfactory...... Pockets the
money and walks out the door and leaves town.
No one earned anything. However the whole town is now out of debt, and looks to the future with a lot of optimism.
And that ladies and gentlemen, is how the United
States Government is conducting business today.
If that doesn't scare the hell out of you, then I don't know what will.
Sunday, May 24, 2009
History of Barter
Barter both as a form of direct trade, and as a book-keeping entry, has been around much longer than the current “fiat” money that operates in society today. “Barter Dollars” today are essentially commodity-backed money, something which has been in existence since time began.
The origin of barter [commodity-backed] money requires goes back to the beginning of trade in ancient societies, which started with temples and clay tablets in Mesopotamia and Egypt:
“Tax payments [by farmers] became standardised in terms of quantities of wheat or barley grain. These grain standards formed the basis for all the early money of account units, such as the mina, shekel, lira, and pound. Money, then originated not as a cost minimizing medium of exchange, but as the unit of account in which debts to the palace (tax liabilities) were measured. As the area over which taxes were imposed increased, palaces found it useful to farm out tax collections to private farmers. The first evidence of lending at interest comes from the practice of payment of taxes by the tax farmers, who then took bondservants and charged interest on the village debts. ... The clay shubati (received) tablets record these and other debts. Each tablet indicated a quantity of grain, the word shubati, the name of the person by whom received, the date, and the seal of the receiver. The tablets were either stored in temples where they would be safe from tampering, or sealed in cases, which would have to be broken to get to the tablet. Unlike the tablets stored in temples, the case tablets could and did circulate. A debt could be cancelled and taxes paid by delivering a tablet recording another’s debt whereupon the case which recorded the cancelled debt could be broken to verify the debt terms. This was general practice for several thousand years …. In other words, taxes, debts, and price lists existed for thousands of years, with clay tablets circulating before anyone had the bright idea of reducing transactions costs by creating money through stamping precious metals to coins. ... From the earliest times, markets operated on the basis of credits and debits, and even the smallest sales to consumers took place on credit, which could be carried on the books of the merchant for years before being cleared.” Wray, L. R. (2000)., Modern money, in: Smithin, J. (eds) What is Money?, London: Routledge International Studies in Money and Banking, pp. 43/44.
When we refer to the term “barter dollars” in today’s economy we actually refer to what has historically been known as “commodity-backed money” or “representative money”.
The origin of barter [commodity-backed] money requires goes back to the beginning of trade in ancient societies, which started with temples and clay tablets in Mesopotamia and Egypt:
“Tax payments [by farmers] became standardised in terms of quantities of wheat or barley grain. These grain standards formed the basis for all the early money of account units, such as the mina, shekel, lira, and pound. Money, then originated not as a cost minimizing medium of exchange, but as the unit of account in which debts to the palace (tax liabilities) were measured. As the area over which taxes were imposed increased, palaces found it useful to farm out tax collections to private farmers. The first evidence of lending at interest comes from the practice of payment of taxes by the tax farmers, who then took bondservants and charged interest on the village debts. ... The clay shubati (received) tablets record these and other debts. Each tablet indicated a quantity of grain, the word shubati, the name of the person by whom received, the date, and the seal of the receiver. The tablets were either stored in temples where they would be safe from tampering, or sealed in cases, which would have to be broken to get to the tablet. Unlike the tablets stored in temples, the case tablets could and did circulate. A debt could be cancelled and taxes paid by delivering a tablet recording another’s debt whereupon the case which recorded the cancelled debt could be broken to verify the debt terms. This was general practice for several thousand years …. In other words, taxes, debts, and price lists existed for thousands of years, with clay tablets circulating before anyone had the bright idea of reducing transactions costs by creating money through stamping precious metals to coins. ... From the earliest times, markets operated on the basis of credits and debits, and even the smallest sales to consumers took place on credit, which could be carried on the books of the merchant for years before being cleared.” Wray, L. R. (2000)., Modern money, in: Smithin, J. (eds) What is Money?, London: Routledge International Studies in Money and Banking, pp. 43/44.
When we refer to the term “barter dollars” in today’s economy we actually refer to what has historically been known as “commodity-backed money” or “representative money”.
History of Money
In the Beginning: Barter
Barter is the exchange of resources or services for mutual advantage, and may date back to the beginning of humankind. Some would even argue that it's not purely a human activity; plants and animals have been bartering—in symbiotic relationships—for millions of years. In any case, barter among humans certainly pre-dates the use of money. Today individuals, organizations, and governments still use, and often prefer, barter as a form of exchange of goods and services.
9,000—6,000 BC: Cattle
Cattle, which include anything from cows, to sheep, to camels, are the first and oldest form of money. With the advent of agriculture came the use of grain and other vegetable or plant products as a standard form of barter in many cultures.
1,200 BC: Cowrie Shells
The first use of cowries, the shell of a mollusc that was widely available in the shallow waters of the Pacific and Indian Oceans, was in China. Historically, many societies have used cowries as money, and even as recently as the middle of this century, cowries have been used in some parts of Africa. The cowrie is the most widely and longest used currency in history.
1,000 BC: First Metal Money and Coins
Bronze and Copper cowrie imitations were manufactured by China at the end of the Stone Age and could be considered some of the earliest forms of metal coins. Metal tool money, such as knife and spade monies, was also first used in China. These early metal monies developed into primitive versions of round coins. Chinese coins were made out of base metals, often containing holes so they could be put together like a chain.
500 BC: Modern Coinage
Outside of China, the first coins developed out of lumps of silver. They soon took the familar round form of today, and were stamped with various gods and emperors to mark their authenticity. These early coins first appeared in Lydia, which is part of present-day Turkey, but the techniques were quickly copied and further refined by the Greek, Persian, Macedonian, and later the Roman empires. Unlike Chinese coins which depended on base metals, these new coins were made from precious metals such as silver, bronze, and gold, which had more inherent value.
118 BC: Leather Money
Leather money was used in China in the form of one-foot-square pieces of white deerskin with colorful borders. This could be considered the first documented type of banknote.
800 - 900 AD: The Nose
The phrase "To pay through the nose" comes from Danes in Ireland, who slit the noses of those who were remiss in paying the Danish poll tax.
806 AD: Paper Currency
The first paper banknotes appeared in China. In all, China experienced over 500 years of early paper money, spanning from the ninth through the fifteenth century. Over this period, paper notes grew in production to the point that their value rapidly depreciated and inflation soared. Then beginning in 1455, the use of paper money in China disappeared for several hundred years. This was still many years before paper currency would reappear in Europe, and three centuries before it was considered common.
1500s: Potlach
"Potlach" comes from a Chinook Indian custom that existed in many North American Indian cultures. It is a ceremony where not only were gifts exchanged, but dances, feasts, and other public rituals were performed. In some instances potlach was a form of initiation into secret tribal societies. Because the exchange of gifts was so important in establishing a leader's social rank, potlach often spiralled out of control as the gifts became progressively more lavish and tribes put on larger and grander feasts and celebrations in an attempt to out-do each other.
1535: Wampum
The earliest known use of wampum, which are strings of beads made from clam shells, was by North American Indians in 1535. Most likely, this monetary medium existed well before this date. The Indian word "wampum" means white, which was the color of the beads.
1816: The Gold Standard
Gold was officially made the standard of value in England in 1816. At this time, guidelines were made to allow for a non-inflationary production of standard banknotes which represented a certain amount of gold. Banknotes had been used in England and Europe for several hundred years before this time, but their worth had never been tied directly to gold. In the United States, the Gold Standard Act was officialy enacted in 1900, which helped lead to the establishment of a central bank.
1930: End of the Gold Standard
The massive Depression of the 1930's, felt worldwide, marked the beginning of the end of the gold standard. In the United States, the gold standard was revised and the price of gold was devalued. This was the first step in ending the relationship altogether. The British and international gold standards soon ended as well, and the complexities of international monetary regulation began.
The Present:
Today, currency continues to change and develop, as evidenced by the new $100 US Ben Franklin bill.
The Future: Electronic Money
Digital cash in the form of bits and bytes will most likely become an important new currency of the future.
Barter is the exchange of resources or services for mutual advantage, and may date back to the beginning of humankind. Some would even argue that it's not purely a human activity; plants and animals have been bartering—in symbiotic relationships—for millions of years. In any case, barter among humans certainly pre-dates the use of money. Today individuals, organizations, and governments still use, and often prefer, barter as a form of exchange of goods and services.
9,000—6,000 BC: Cattle
Cattle, which include anything from cows, to sheep, to camels, are the first and oldest form of money. With the advent of agriculture came the use of grain and other vegetable or plant products as a standard form of barter in many cultures.
1,200 BC: Cowrie Shells
The first use of cowries, the shell of a mollusc that was widely available in the shallow waters of the Pacific and Indian Oceans, was in China. Historically, many societies have used cowries as money, and even as recently as the middle of this century, cowries have been used in some parts of Africa. The cowrie is the most widely and longest used currency in history.
1,000 BC: First Metal Money and Coins
Bronze and Copper cowrie imitations were manufactured by China at the end of the Stone Age and could be considered some of the earliest forms of metal coins. Metal tool money, such as knife and spade monies, was also first used in China. These early metal monies developed into primitive versions of round coins. Chinese coins were made out of base metals, often containing holes so they could be put together like a chain.
500 BC: Modern Coinage
Outside of China, the first coins developed out of lumps of silver. They soon took the familar round form of today, and were stamped with various gods and emperors to mark their authenticity. These early coins first appeared in Lydia, which is part of present-day Turkey, but the techniques were quickly copied and further refined by the Greek, Persian, Macedonian, and later the Roman empires. Unlike Chinese coins which depended on base metals, these new coins were made from precious metals such as silver, bronze, and gold, which had more inherent value.
118 BC: Leather Money
Leather money was used in China in the form of one-foot-square pieces of white deerskin with colorful borders. This could be considered the first documented type of banknote.
800 - 900 AD: The Nose
The phrase "To pay through the nose" comes from Danes in Ireland, who slit the noses of those who were remiss in paying the Danish poll tax.
806 AD: Paper Currency
The first paper banknotes appeared in China. In all, China experienced over 500 years of early paper money, spanning from the ninth through the fifteenth century. Over this period, paper notes grew in production to the point that their value rapidly depreciated and inflation soared. Then beginning in 1455, the use of paper money in China disappeared for several hundred years. This was still many years before paper currency would reappear in Europe, and three centuries before it was considered common.
1500s: Potlach
"Potlach" comes from a Chinook Indian custom that existed in many North American Indian cultures. It is a ceremony where not only were gifts exchanged, but dances, feasts, and other public rituals were performed. In some instances potlach was a form of initiation into secret tribal societies. Because the exchange of gifts was so important in establishing a leader's social rank, potlach often spiralled out of control as the gifts became progressively more lavish and tribes put on larger and grander feasts and celebrations in an attempt to out-do each other.
1535: Wampum
The earliest known use of wampum, which are strings of beads made from clam shells, was by North American Indians in 1535. Most likely, this monetary medium existed well before this date. The Indian word "wampum" means white, which was the color of the beads.
1816: The Gold Standard
Gold was officially made the standard of value in England in 1816. At this time, guidelines were made to allow for a non-inflationary production of standard banknotes which represented a certain amount of gold. Banknotes had been used in England and Europe for several hundred years before this time, but their worth had never been tied directly to gold. In the United States, the Gold Standard Act was officialy enacted in 1900, which helped lead to the establishment of a central bank.
1930: End of the Gold Standard
The massive Depression of the 1930's, felt worldwide, marked the beginning of the end of the gold standard. In the United States, the gold standard was revised and the price of gold was devalued. This was the first step in ending the relationship altogether. The British and international gold standards soon ended as well, and the complexities of international monetary regulation began.
The Present:
Today, currency continues to change and develop, as evidenced by the new $100 US Ben Franklin bill.
The Future: Electronic Money
Digital cash in the form of bits and bytes will most likely become an important new currency of the future.
Thursday, May 21, 2009
The Economy's search for the "New Normal"
When the reality of the economic crisis first made itself known, many who realized what was happening dubbed it “the greatest crisis since the Great Depression.” This description was more than bombast; it was a sober analysis of the immensity of the economic problems in the country — problems that had been building up for years.
The mainstream media is now — for political reasons — in a constant clamor for the economy's elusive “rock bottom.” This is so people will be more hopeful, less agitated, and more willing to let those who destroyed the economy continue running the country un-challenged. Every time a new economic indicator comes out that wasn't “as bad as expected,” Wall Street cheers and politicians give their “we've turned the corner” speeches. Reality is thus turned on its head.
Regardless of what the media says, the reasons for calling this crisis the “worst since the Great Depression,” still exist. Not only this, but new problems are being created that are compounding the old.
One of the original, major concerns of the economy was the fact that the banks were bankrupt. This problem still persists, even after trillions of dollars of taxpayer money was given away, not to mention a “stress test” where the banks in fact “negotiated” the terms of the test. By pretending this problem doesn't exist, the Obama administration is continuing the Bush-era approach to the banks: don't ask, don't tell. Banks will thus continue to be bailed out when their problems are too explosive to be ignored; credit will continue to be restricted, and a general level of instability will taint the system itself.
Another major problem of the economy is that consumers are bankrupt. Unemployment continues to skyrocket, ensuring that every month hundreds of thousands of less people will be able to consume, driving more establishments out of business. The people who lose their jobs thus fail to pay their mortgages, credit cards, student loans, etc., all furthering the losses of the banks.
The issue of debt is fundamental to understanding the current crisis: households, corporations, banks, and the government have all taken on massive levels of debt.
Getting rid of the debt is often referred to as “de-leveraging.” On all levels of society a gigantic de-leveraging is taking place; and only after this process is done will the elusive “bottom of the recession” be found, amidst a society that looks far different than the one we're used to.
For example, households are rapidly getting rid of expenses they can no longer afford, due to either joblessness, low wages or lack of credit. They are thus saving more than they are spending. For an economy that depends on 70 percent consumer spending, this is a huge problem, not only for the U.S., but for the world as well, since many countries constructed their economies as export machines directed towards U.S. consumers.
Is this problem likely to go away anytime soon? Probably not. The recession is creating such dramatic effects on so many people that the consuming culture is being changed, much like what happened after the Great Depression. The New York Times notes:
“...forces that enabled and even egged on consumers to save less and spend more — easy credit and skyrocketing asset values — could be permanently altered [!] by the financial crisis that spun the economy into recession.” (May 9, 2009)
If the U.S. consumer can no longer be the driving force of the economy, what will replace it? The elitist Economist magazine offered a cure: because consumer spending will be debilitated, “something else will have to grow more quickly. Ideally that would be exports and investment.” (May 6, 2009)
There is in fact little else that can be done if one is playing by the strict rules of the market economy. Obama again gave his allegiance to this broken system by agreeing with the Economist, when he stated, “We must lay a new foundation for growth and prosperity, where we consume less at home and send more exports abroad.”
The average person will be totally uninspired by this “solution.” Nevertheless, Obama should have answered an important question: why isn't the U.S. an exporting economy now? And what would it take for it to be one in the future? The answers to these questions are intertwined with Obama's proposal that Americans “consume less.”
In order for US corporations to sell products (export) on the world marketplace, they must have competitive prices. Labor is a key ingredient in determining the price of a commodity, since the other ingredients have relatively stable prices. The price of labor in the U.S. was, in part, the result of a strong labor movement, which achieved a living wage. This not only drove down profits for corporations, but made them less competitive on the world market — they consequently defected to countries that pay slave wages.
How, then, does Obama plan to “send more exports abroad?” The answer is simple: by insuring that Americans are able to “consume less.” For example, Obama's Auto Task Force told Chrysler and GM workers that their incomes were too high, that they needed to make less so that their companies could “remain viable” (compete) on the global market. They were thus threatened with bankruptcy if they did not offer “significant concessions.” The workers conceded, and bankruptcy happened anyway — a phenomenon bound to happen again soon at GM — unless workers fight back.
If such a “restructuring” happens at a company the size of GM, the precedent would be haunting. Corporations of all kinds are looking to “de-leverage” in the same way to successfully survive the recession. They need to balance the books, and workers' wages are one of the few options they have. Obama's Auto Task Force is overseeing the destruction of the U.A.W., and clearing the path for this restructuring to happen across the U.S.
But falling wages have a negative side effect, aside from disgruntled workers. As Nobel Prize- winner Paul Krugman points out:
“Families are trying to work that debt down by saving more than they have in a decade — but as wages fall, they're chasing a moving target. And the rising burden of debt will put downward pressure on consumer spending, keeping the economy depressed.” (New York Times, May 3, 2009 )
His conclusion is sobering: “The risk that America will turn into Japan — that we'll face years of deflation and stagnation — seems, if anything, to be rising.”
Equally concerning is the amount of debt the U.S. government has taken in bailing out banks and fighting foreign wars. The New York Times notes:
“[the national debt] has prompted warnings from the Treasury that the Congressionally mandated debt ceiling of $12.1 trillion [!] will most likely be breached in the second half of this year.” (May 3, 2009)
The debt is so high that those financing it are getting worried, and thus demanding a higher rate of interest in repayment (since they correctly think they'll be paid back in inflated dollars). Already the U.S. pays $176 billion a year in simply paying the interest on the debt, a number that is expected to reach $806 billion by 2019, according to the Congressional Budget Office.
This debt is of course unsustainable. There are numerous signs that overseas' buyers are likely to reduce their investment, worried as they are about the U.S. money printing bonanza. In an effort to bolster confidence, Obama has plans to balance the budget by the end of his presidency. Again, a massive de-leveraging of debt will need to happen. Obama has made no secret of where this restructuring will come from: he has made repeated references to “reforming entitlement programs” (Social Security, Medicare, etc.).
It should be noted that the only other way Obama could balance the budget is if he taxed the super rich at a high rate while slashing military spending, neither of which is going to happen on its own. Nevertheless, these items must be central demands for the American worker, who is already under immense economic pressure, with more to come.
The recession is creating a “fight or die” environment for corporations and governments around the world. The super rich that currently control both entities are using their influence to ensure that workers carry the brunt of this burden. It doesn't have to be so.
The fight for jobs, a living wage, progressive taxation, social security, and single payer healthcare are all topics capable of uniting the vast majority of U.S. citizens. If properly organized, and with the Labor Movement playing a leading role, such a coalition would have no problem overcoming the objections of those who oppose it — the tiny group of super rich benefiting from how things are currently.
The mainstream media is now — for political reasons — in a constant clamor for the economy's elusive “rock bottom.” This is so people will be more hopeful, less agitated, and more willing to let those who destroyed the economy continue running the country un-challenged. Every time a new economic indicator comes out that wasn't “as bad as expected,” Wall Street cheers and politicians give their “we've turned the corner” speeches. Reality is thus turned on its head.
Regardless of what the media says, the reasons for calling this crisis the “worst since the Great Depression,” still exist. Not only this, but new problems are being created that are compounding the old.
One of the original, major concerns of the economy was the fact that the banks were bankrupt. This problem still persists, even after trillions of dollars of taxpayer money was given away, not to mention a “stress test” where the banks in fact “negotiated” the terms of the test. By pretending this problem doesn't exist, the Obama administration is continuing the Bush-era approach to the banks: don't ask, don't tell. Banks will thus continue to be bailed out when their problems are too explosive to be ignored; credit will continue to be restricted, and a general level of instability will taint the system itself.
Another major problem of the economy is that consumers are bankrupt. Unemployment continues to skyrocket, ensuring that every month hundreds of thousands of less people will be able to consume, driving more establishments out of business. The people who lose their jobs thus fail to pay their mortgages, credit cards, student loans, etc., all furthering the losses of the banks.
The issue of debt is fundamental to understanding the current crisis: households, corporations, banks, and the government have all taken on massive levels of debt.
Getting rid of the debt is often referred to as “de-leveraging.” On all levels of society a gigantic de-leveraging is taking place; and only after this process is done will the elusive “bottom of the recession” be found, amidst a society that looks far different than the one we're used to.
For example, households are rapidly getting rid of expenses they can no longer afford, due to either joblessness, low wages or lack of credit. They are thus saving more than they are spending. For an economy that depends on 70 percent consumer spending, this is a huge problem, not only for the U.S., but for the world as well, since many countries constructed their economies as export machines directed towards U.S. consumers.
Is this problem likely to go away anytime soon? Probably not. The recession is creating such dramatic effects on so many people that the consuming culture is being changed, much like what happened after the Great Depression. The New York Times notes:
“...forces that enabled and even egged on consumers to save less and spend more — easy credit and skyrocketing asset values — could be permanently altered [!] by the financial crisis that spun the economy into recession.” (May 9, 2009)
If the U.S. consumer can no longer be the driving force of the economy, what will replace it? The elitist Economist magazine offered a cure: because consumer spending will be debilitated, “something else will have to grow more quickly. Ideally that would be exports and investment.” (May 6, 2009)
There is in fact little else that can be done if one is playing by the strict rules of the market economy. Obama again gave his allegiance to this broken system by agreeing with the Economist, when he stated, “We must lay a new foundation for growth and prosperity, where we consume less at home and send more exports abroad.”
The average person will be totally uninspired by this “solution.” Nevertheless, Obama should have answered an important question: why isn't the U.S. an exporting economy now? And what would it take for it to be one in the future? The answers to these questions are intertwined with Obama's proposal that Americans “consume less.”
In order for US corporations to sell products (export) on the world marketplace, they must have competitive prices. Labor is a key ingredient in determining the price of a commodity, since the other ingredients have relatively stable prices. The price of labor in the U.S. was, in part, the result of a strong labor movement, which achieved a living wage. This not only drove down profits for corporations, but made them less competitive on the world market — they consequently defected to countries that pay slave wages.
How, then, does Obama plan to “send more exports abroad?” The answer is simple: by insuring that Americans are able to “consume less.” For example, Obama's Auto Task Force told Chrysler and GM workers that their incomes were too high, that they needed to make less so that their companies could “remain viable” (compete) on the global market. They were thus threatened with bankruptcy if they did not offer “significant concessions.” The workers conceded, and bankruptcy happened anyway — a phenomenon bound to happen again soon at GM — unless workers fight back.
If such a “restructuring” happens at a company the size of GM, the precedent would be haunting. Corporations of all kinds are looking to “de-leverage” in the same way to successfully survive the recession. They need to balance the books, and workers' wages are one of the few options they have. Obama's Auto Task Force is overseeing the destruction of the U.A.W., and clearing the path for this restructuring to happen across the U.S.
But falling wages have a negative side effect, aside from disgruntled workers. As Nobel Prize- winner Paul Krugman points out:
“Families are trying to work that debt down by saving more than they have in a decade — but as wages fall, they're chasing a moving target. And the rising burden of debt will put downward pressure on consumer spending, keeping the economy depressed.” (New York Times, May 3, 2009 )
His conclusion is sobering: “The risk that America will turn into Japan — that we'll face years of deflation and stagnation — seems, if anything, to be rising.”
Equally concerning is the amount of debt the U.S. government has taken in bailing out banks and fighting foreign wars. The New York Times notes:
“[the national debt] has prompted warnings from the Treasury that the Congressionally mandated debt ceiling of $12.1 trillion [!] will most likely be breached in the second half of this year.” (May 3, 2009)
The debt is so high that those financing it are getting worried, and thus demanding a higher rate of interest in repayment (since they correctly think they'll be paid back in inflated dollars). Already the U.S. pays $176 billion a year in simply paying the interest on the debt, a number that is expected to reach $806 billion by 2019, according to the Congressional Budget Office.
This debt is of course unsustainable. There are numerous signs that overseas' buyers are likely to reduce their investment, worried as they are about the U.S. money printing bonanza. In an effort to bolster confidence, Obama has plans to balance the budget by the end of his presidency. Again, a massive de-leveraging of debt will need to happen. Obama has made no secret of where this restructuring will come from: he has made repeated references to “reforming entitlement programs” (Social Security, Medicare, etc.).
It should be noted that the only other way Obama could balance the budget is if he taxed the super rich at a high rate while slashing military spending, neither of which is going to happen on its own. Nevertheless, these items must be central demands for the American worker, who is already under immense economic pressure, with more to come.
The recession is creating a “fight or die” environment for corporations and governments around the world. The super rich that currently control both entities are using their influence to ensure that workers carry the brunt of this burden. It doesn't have to be so.
The fight for jobs, a living wage, progressive taxation, social security, and single payer healthcare are all topics capable of uniting the vast majority of U.S. citizens. If properly organized, and with the Labor Movement playing a leading role, such a coalition would have no problem overcoming the objections of those who oppose it — the tiny group of super rich benefiting from how things are currently.
Sunday, May 10, 2009
Web of Debt: The Inner Workings of The Monetary System
This is the first of several articles on Ellen Brown's superb 2007 book titled "Web of Debt," now updated in a December 2008 third edition. It tells "the shocking truth about our money system, (how it) trapped us in debt, and how we can break free." Given today's global economic crisis, it's an appropriate time to review it and urge readers to digest the entire work, easily gotten through Amazon or Brown's webofdebt.com site. Her book is a remarkable achievement - in its scope, depth, and importance.
In the forward, banker/developer Reed Simpson said:
"I have been a banker for most of my career, and I can report that even most bankers (don't know) what goes on behind (top echelon) closed doors....I am more familiar than most with the issues (Brown covered, and) still found it an eye-opener, a remarkable window into what is really going on....(Although many banks follow high ethical practices), corruption is also rampant, (especially) in the large money center banks, in one of which I worked."
"Credible evidence (reveals) a world (banking) power elite intent on gaining absolute control over the planet and its natural resources, including its subservient human (ones)." Money is their "lifeblood," and "fear (their) weapon." Ill-used, they can "enslave nations and ensure perpetual wars and bondage." Brown exposes the scheme and offers a solution.
Debt Bondage
What president Andrew Jackson called "a hydra-headed monster...." entraps entire nations in debt. Financial commentator Hans Schicht listed how:
-- by making concentrated wealth invisible;
-- "exercising control through leverage(d) mergers, takeovers" or other holdings "annexed to loans;" and
-- using a minimum of insider front-men to exercise "tight personal management and control."
Powerful bankers want to rule the world by creating and controlling money, the very lifeblood of world economies without which commerce would cease. Professor Henry Liu calls the monetary system a "cruel hoax" in that (except for government issued coins) "there is virtually no 'real' money in the system, only debts" - to bankers "for money they created with accounting entries....all done by a sleight of hand," only possible because governments empowered them to do it.
The solution is simple but untaken. As the Constitution mandates, money-creation power must "be returned to the government and the people it represents." Imagine the possibilities:
-- the federal debt could be eliminated, at least a more manageable amount before it mushroomed to stratospheric levels;
-- federal income taxes could as well; entirely for low and middle income people and at least substantially overall;
-- "social programs could be expanded....without sparking runaway inflation;" and
-- financial resources would be available to grow the nation economically and produce stable prosperity.
It's not pie-in-the-sky. It happened successfully under Abraham Lincoln and early colonists. More on that below.
Brown's book explains that:
-- the Federal Reserve isn't federal; it's a private banking cartel owned by its major bank members in 12 Fed districts;
-- except for coins, they "create" money called Federal Reserve notes, in violation of the Constitution under Article I, Section 8 that gives Congress alone the right "To coin (create) money (and) regulate the value thereof....;"
-- "tangible currency (coins and paper money comprise) less than 3 percent of the US money supply;" the rest is in computer entries for loans;
-- money that banks lend is "new money" that didn't exist before;
-- 30% of bank-created money "is invested for their own accounts;"
-- banks once made productive loans for industrial development; today they're "a giant betting machine" using countless trillions for high-risk casino-type operations - through devices like derivatives and securitization scams;
-- since Andrew Jackson's presidency (1829 - 1837), the federal debt hasn't been paid, only the interest - to private bankers and other owners of US obligations;
-- the 16th Amendment authorized Congress to levy an income tax; it was done "to coerce (the public) to pay interest to the banks on the federal debt;"
-- the amount has mushroomed to about $500 billion annually and keeps rising;
-- creating money doesn't cause inflation; it's "caused by banks expanding the money supply with loans;"
-- developing nations' inflation was caused "by global institutional speculators attacking local currencies and devaluing them on international markets;"
-- it could happen in America or anywhere else just as easily; and
-- escaping this trap is simple if Washington reclaims its money-issuing power; early colonists did it; so did Lincoln.
As long as bankers control our money, we'll remain in a permanent "web of debt" and experience cycles of boom, bust, inflation, deflation, instability and crisis. Yet none of this has to be nor repeated and inevitable bubbles - created by design, not chance, to advantage empowered "moneychangers," much like today with its fallout causing global havoc.
Prior to the Fed's creation, the House of Morgan was dominant in contrast to the early colonists' model. Operating out of Philadelphia, the nation's first capital, it favored state-issued and loaned out money, collecting the interest, and "return(ing) it to the provincial government" in lieu of taxes.
Lincoln used the same system to finance the Civil War, after which he was assassinated and bankers reclaimed their money-issuing power. Wall Street's "silent coup (was) the passage of the (1913) Federal Reserve Act," the most destructive ever congressional legislation, thereafter extracting a huge toll amounting to permanent debt bondage with national wealth transference from the public to private bankers - with most people none the wiser.
From Gold to Federal Reserve Notes
After the 1862 Legal Tender Act was rescinded (the so-called Greenback law letting the government issue its own money), new legislation replaced it empowering bankers by making all money again interest-bearing. Here's the problem. "As long as the money supply (is an interest-bearing) debt owed back to private bankers....the nation's wealth (will) continue to be drained off into private vaults, leaving scarcity in its wake."
Dollars should belong to everyone. Early colonists invented them as "a new form of paper currency backed by the 'full faith and credit' of the people." Today, a private banking cartel issues them by "turning debt into money and demanding" due interest be paid.
Ever since, it's controlled the nation and public by entrapment in permanent debt bondage, and they do it through the Federal Reserve that's neither federal nor has reserves. It doesn't have money. It creates it with electronic entries, any amount at any time for any purpose, the main one being to enrich its owner banks.
This body is a power unto itself, secretive, unaccountable, and independent of congressional oversight or control. It's a money-creating machine by turning debt into money, but only a small fraction of the total money supply. Individual commercial banks create most of it.
A 1960s Chicago Fed booklet (called Modern Money Mechanics) explained how - through "fractional reserve" alchemy. It states:
(Banks) do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts."
Money is created by "building up" deposits in the form of loans. They, in turn, become deposits, not the reverse. "This unique attribute of banking" goes back centuries, the idea being that paper receipts could be issued and loaned out for the same gold (in those days) many times over, so long as enough gold was held in "reserve" so depositors had access to their money. "This sleight of hand (became known) as 'fractional reserve' banking," using money to create multiples more of it.
As for credit market debt, William Hummel (on the web site Money: What It Is, How It Works) explains that banks create only about 20% of it. The rest is by other non-bank financial institutions, including finance companies, pension and mutual funds, insurance companies, and securities dealers. They "recycle pre-existing funds, either by borrowing at a low interest rate and lending at a higher (one) or by pooling (investor) money and lending it to borrowers." In other words, just like banks, "they borrow low and lend high, pocketing the 'spread' as their profit."
But banks do more than borrow. They also "lend the deposits they acquire....by crediting the borrower's account with a new deposit." Banks thus increase total bank deposits that grow the money supply. It amounts to a sleight of hand like "magically pull(ing) money out of an empty hat."
The US "money supply is the federal debt and cannot exist without it. (To) keep money in the system, some major player has to incur substantial debt that never gets paid back; and this role is played by the federal government." It's why the nation's debt can't be repaid under a banker-controlled system. Today's size and debt service compounds the problem, around double the amount Brown cited, growing exponentially to unimaginable levels.
Colonial Paper Money - Another Way Predating the Republic's Birth
In 1691, three years before the Bank of England's creation, Massachusetts became "the first local government to issue its own paper money...." in the form of a "bill of credit bond or IOU....to pay tomorrow on a debt incurred today." This money "was backed by the full 'faith and credit' of the government."
Other colonies then did the same, some as IOUs redeemable in gold or silver or as "legal tender" money to be legally accepted to pay debts. Cotton Mather, a famous New England minister, later redefined money - not as gold or silver, but as a credit: "the credit of the whole country."
Benjamin Franklin so embraced the "new medium of exchange" that he's called "the father of paper money," then called "scrip." It made the colonies independent of British banks and let them "finance their local governments without" taxation. It was done in two ways, and most colonies used both:
-- direct issue "bills of credit" or "treasury notes;" essentially government-backed IOUs to be repaid by future taxes, with no interest owed bankers or foreign lenders; "they were just credits issued and sent into the economy on goods and services;" and
-- a system of generating "revenue in the form of interest by taking on the lending functions of banks; a government loan office called a 'land bank' (issued) paper money and (loaned) it to residents (usually farmers) at low interest rates....the interest paid....went into the public coffers, funding the government;" it was the preferred way to assure a stable currency rather than by issuing "bills of credit."
Pennsylvania did it best. It's 1723-established loan office showed "it was possible for the government to issue new money (in lieu of) taxes without inflating prices." For over 25 years, it collected none at all. The loan office provided adequate revenue, supplemented by liquor import duties. Throughout the period, prices remained stable.
Prior to this system, Pennsylvania lost "both business and residents (for) lack of available currency." With it, its population grew and commerce prospered. The "secret was in not issuing too much, and in recycling the money back to the government in the form of principal and interest on government-issued loans."
Colony-based British merchants and financiers objected strongly to Parliament. Enough so that in 1751, King George II banned new paper money issuance to force colonists to borrow it from UK bankers. In 1764, Franklin petitioned Parliament to lift the ban. In London, Bank of England directors asked him to explain colonial prosperity at a time Britain experienced rampant unemployment and poverty. It's because Colonial Scrip was issued, he stated, "our own money" with no interest owed to anyone. He added:
"You do not have too many workers, you have too little money in circulation, and that which circulates, all bears the endless burden of unrepayable debt and usury."
With banks loaning money into the economy, more was "owed back in principle and interest than was lent in the original loans (so) there was never enough in circulation to pay interest and still keep workers fully employed." Unlike banks, government can both lend and spend money in circulation - enough to pay "interest due on the money it lent, (keep) the money supply in 'proper proportion' and (prevent) the 'impossible contract' problem (of having) more money owed back on loans than was created (from) the loans themselves."
Franklin's efforts notwithstanding, the Bank of England got Parliament to pass a Currency Act making it illegal for the colonies to issue their own money. It turned prosperity into poverty because the money supply was halved with not enough to pay for goods and services. According to Franklin:
"the poverty caused by the bad influence of the English bankers on the Parliament" got colonists to hate the British enough to spark the Revolutionary War. "The colonies would gladly have borne the little tax on tea and other matters (if) England (hadn't taken their money), which created unemployment and dissatisfaction." So much that outraged people again issued their own money in spite of the ban. As a result, they successfully financed a war against a major power - with almost no hard currency and no taxation. Thomas Paine called it the Revolution's "corner stone."
However, British bankers responded by attacking its "competitor's currency," the Continental, driving down its value by flooding the colonies with counterfeit scrip. It was "battered but remained stable." Where Britain failed, speculators succeeded - "mostly northeastern bankers, stockbrokers and businessmen, who bought up the revolutionary currency at a fraction of its value after convincing people it would be worthless after the war." It had "to compete with states' paper notes and British bankers' gold and silver coins....The problem might have been avoided by making the Continental the sole official currency, but the Continental Congress (didn't have) the power to enforce" such an order - with no courts, police or authority to collect taxes "to redeem the notes or contract the money supply."
Having just rebelled against British taxation, colonists weren't about to let Congress tax them. Speculators took advantage and traded Continentals at discounts enough to make them worthless and give rise to the expression "not worth a Continental."
How the Government Was Persuaded to Borrow Its Own Money
John Adams once said: "there are two ways to conquer and enslave a nation. One is by the sword. The other is by debt." The latter method is stealth enough so people don't know what's happening and submit to their own bondage. Openly, nothing seems changed, yet a whole new system becomes master "in the form of debts and taxes" that people think are for their own good, not tribute to their captors. That's today's America writ large.
After the Revolutionary War, "British bankers and their Wall Street vassals" pulled it off by acquiring a controlling interest in the new United States Bank. It discredited paper scrip through rampant Continental counterfeiting and so disillusioned the Founders that they omitted mentioning paper money in the Constitution. Congress was given power to "coin money (and) regulate the value thereof, (and) to borrow money on the credit of the United States...." It left enough wiggle room for bankers to exploit to their advantage - but only because Congress and the president let them.
Alexander Hamilton bears much blame, the nation's first Treasury Secretary and Tim Geithner of his day (1789 - 1795). He argued that America needed a monetary system independent of foreign control, and that required a federal central bank - to handle war debts and create a standard form of currency. In 1791, it was created, hailed at the time as a "brilliant solution to the nation's economic straits, one that disposed of an oppressive national debt, stabilized the economy, funded the government's budget, and created confidence in the new paper dollars....It got the country up and running, but left the bank largely in private hands" - to be manipulated for private gain, much like today. Worse still, "the government ended up in debt for money it could have generated itself."
Instead, it had to pay interest on its own money in lieu of creating it interest free. Today, Hamilton is acclaimed as a model Treasury Secretary. For Jefferson, he was a "diabolical schemer, a British stooge pursuing a political agenda for his own ends." He modeled the Bank of the United States on the Bank of England against which colonists rebelled. It so angered Jefferson that he told Washington he was a traitor. It fostered a bitter feud between them with Jefferson ultimately prevailing.
Hamilton's Federalist Party disappeared after 1820 while Jefferson and Madison's Democratic-Republicans became the forerunner of today's Democrats after the party split into two factions, the Whigs no longer in existence and Jacksonians that by 1844 officially became the Democratic Party. Shamefully they veered far from Jacksonian and Jeffersonian principles.
For his part, Hamilton wasn't entirely bad. He stabilized the new economy and got the country on its feet. He restored the nation's credit, established a national currency, and made it economically independent. However, his legacy has a dark side - a "privileged class of financial middlemen (henceforth able) to siphon off a perpetual tribute in the form of interest." He delivered money power into private hands, "subservient to an elite class of oligarchical financiers," the same Wall Street types today holding the entire nation hostage - in permanent debt bondage.
From Abundance to Debt
Charging excessive interest is called "usury," but originally it meant charging anything for the use of money. The Christian Bible banned it, and the Catholic Church enforced anti-usury laws through the end of the Middle Ages.
Old Testament scripture was more lenient, prohibiting it only between "brothers." Charging it to foreigners was allowed and encouraged, which is why Jews unfairly were called "moneychangers." They, like others, suffered greatly from money-lending schemes. For centuries, they were "persecuted for the profiteering of a few," then scapegoated to divert attention from the real offenders.
Fiat money is legal tender by government decree - a simple tally representing units of value to be traded for goods and services. Paper money was invented in 9th century Mandarin China and successfully used to fund its long and prosperous empire. The same was true in medieval England. The tally system worked well for over five centuries before banker-controlled paper money began demanding payment in the form of interest.
History portrays the Middle Ages as backward, impoverishing, and a form of economic enslavement only the Industrial Revolution changed. In fact, the era was entirely different, characterized by 19th century historian Thorold Rogers as a time when "a labourer could provide all the necessities for his family for a year by working 14 weeks," leaving nearly nine discretionary months to work for himself, study, fish, travel, or do what he pleased, something today's overworked, over-stressed, underpaid workers can't imagine.
Some attribute Middle Age prosperity to the absence of usurious lending. Instead of paying tribute in the form of interest, "people relied largely on interest-free tallies." They avoided depressions and inflation since the supply and demand for goods and services grew in proportion to each other, thus holding prices stable. "The tally system provided an organic form of money that expanded naturally as trade (did) and contracted (the same way) as taxes were paid."
No bankers set interest rates or manipulated markets to their advantage. The tally system kept Britain stable and thriving until the mid-17th century, "when Oliver Cromwell (1599 - 1658)....needed money to fund a revolt against the Tudor monarchy."
The Moneylenders Take Over England
In the 19th century, the Rothchild banking family's Nathan Rothchild said it well:
"I care not what puppet (sits on) the throne of England to rule the Empire on which the sun never sets. The man who controls Britain's money supply controls the British empire, and I (when he ran the Bank of England) control the British money supply."
Centuries early, moneylender power was absent. But after the 1666 Coinage Act, money-issuing authority, once the sole right of kings, was transferred into private hands. "Bankers now had the power to cause inflations and depressions at will by issuing or withholding their gold coins."
King William III (1672 - 1702), a Dutch aristocrat, financed his war against France by borrowing 1.2 million pounds in gold in a secret transaction with moneylenders, the arrangement being a permanent loan on which debt would be serviced and its principle never repaid. It came with other strings as well:
-- lenders got a charter to establish the Bank of England (in 1694) with monopoly power to issue banknotes as national paper currency;
-- it created them out of nothing, with only a fraction of them as reserves;
-- loans to the government were to be backed by government IOUs to serve as reserves for creating additional loans to private borrowers; and
-- lenders could consolidate the national debt on their government loan to secure payment through people-extracted taxes.
It was a prescription for huge profits and "substantial political leverage. The Bank's charter gave the force of law to the 'fractional reserve' banking scheme that put control of the country's money" in private hands. It let the Bank of England create money out of nothing and charge interest for loans to the government and others - the same practice central banks now employ.
For the next century, banknotes and tallies circulated interchangeably even though they weren't a compatible means of exchange. Banker money expanded when "credit expanded and contracted when loans were canceled or 'called,' producing cycles of 'tight' money and depression alternating with 'easy' money and inflation." In contrast, tallies were permanent, stable, fixed money, making banknotes look bad so they had to go.
For another reason as well - because of King William's disputed throne and fear if he were deposed, moneylenders again might be banned. They used their influence to legalize banknotes as the money of the realm called "funded" debt with tallies referred to as "unfunded," what historians see as the beginning of a "Financial Revolution." In the end, "tallies met the same fate as witches - death by fire."
They were money of the people competing with moneylending bankers. After 1834 monetary reform, "tally sticks went up in flames in a huge bonfire started in a House of Lords stove." Ironically, it got out of control and burned down Westminster Palace and both Houses of Parliament, symbolically ending "an equitable era of trade (by transferring power) from the government to the" central bank.
Henceforth, private bankers kept government in debt, never demanding the return of principle, and profiting by extracting interest, a very lucrative system always paying off "like a slot machine" rigged to benefit its operators. It became the basis for modern central banking, lending its "own notes (printed paper money), which the government swaps for bonds (its promises to pay) and circulates as a national currency."
Government debt is never repaid. It's continually rolled over and serviced, today with no gold in reserve to back it. Though gone, tallies left their mark. The word "stock" comes from the tally stick. Much of the original Bank of England stock was bought with these sticks. In addition, stock issuance began during the Middle Ages as a way to finance businesses when no interest-bearing loans were allowed.
In America, "usury banks fought for control for two centuries before" getting it under the 1913 Federal Reserve Act. An issue that once "defined American politics," today is no longer a topic for debate. It's about time it was reopened.
Jefferson and Jackson Sound the Alarm
Moneylenders conquered Britain, then aimed to entrap America - by provoking "a series of wars. British financiers funded the opposition to the American War for Independence, the War of 1812, and both sides of the American Civil War." They caused inflation, heavy government debt, the chartering of the Bank of the United States to fund it, thus giving private interests the power to create money.
Jefferson opposed the first US Bank, Jackson the second, and both for similar reasons:
-- distrust of profiteers controlling the nation's money; and
-- concern about the nation's banking system falling into foreign hands.
Jefferson got Congress to refuse to renew the first US Bank charter in 1811 and learned on liquidation that two-thirds of its owners were foreigners, mostly English and Dutch and none more influential than the Rothschilds. Later, Madison signed a 20-year charter. However, when Congress renewed it, Jackson vetoed it.
The Powerful Rothschild Family
The House of Rothschild was British in name only. In the mid-18th century, it was founded in Frankfort, Germany by Mayer Amschel Bauer, who changed his name to Rothschild, fathered 10 children, and sent his five sons to open branch banks in major European capitals. Nathan was the most astute and went to London. "Over the course of the nineteenth century, NM Rothschild would become the biggest bank in the world, and the five brothers would come to control most of the foreign-loan business of Europe."
Belatedly, Jefferson caught on to the scheme - that "private debt masquerading as paper money....owed to bankers" placed the nation in bondage. In his words, "deliver(ing) itself bound hand and foot to bold and bankrupt adventurers and bankers...." Jefferson's idea for a national bank was a wholly government-owned one issuing its own credit without having to borrow it from private interests.
Jackson believed the same thing in calling the Bank of the United States "a hydra-headed monster." When the bank charter was renewed, he promptly vetoed it, yet understood that the battle was just beginning. "The hydra of corruption is only scotched, not dead," he said.
He was right. The Bank's second president, Nicolas Biddle, retaliated "by sharply contracting the money supply. Old loans were called in and new ones refused. A financial panic ensued, followed by a deep economic depression." However, Biddle's victory was short-lived. In April 1834, the House rejected re-chartering the Bank, then January 1835 became Jackson's "finest hour."
He did something never done before or since. He paid off the first installment of the national debt, then reduced it to zero and accumulated a surplus. In 1836, the Bank's charter expired. Biddle was arrested and charged with fraud. He was tried and acquitted but spent the rest of his life in litigation over what he'd done. "Jackson had beaten the Bank." Imagine today if Obama defeated the Fed and its Wall Street puppeteers instead of embracing them with limitless riches.
Lincoln Foils the Bankers and Pays with His Life
Like Jackson, Lincoln faced assassination attempts, before even being inaugurated. "He had to deal with treason, insurrection, and national bankruptcy" during his first days in office. Considering the powerful forces against him, his achievements were all the more remarkable:
-- he built the world's largest army;
-- "smashed the British-financed insurrection,"
-- took the first steps to abolish slavery; it became official on December 6, 1865 when the 13th Amendment was ratified, eight months after Lincoln was assassinated;
-- during and after his tenure, the country became "the greatest industrial giant" in the world;
-- "the steel industry was launched; a continental railroad system was created; the Department of Agriculture was established; a new era of farm machinery and cheap tools was promoted;"
-- the Land Grant College system established free higher education;
-- the Homestead Act gave settlers ownership rights and encouraged new land development;
-- government supported all branches of science;
-- "standardization and mass production was promoted worldwide;"
-- labor productivity increased by 50 - 75%; and
-- still more was accomplished "with a Treasury that was completely broke and a Congress that hadn't been paid" as a result.
It was because the government issued its own money. "National control was reestablished over banking, and the economy was jump-started with a 600 percent increase in government spending and cheap credit directed at production." Roosevelt did the same thing with borrowed money. Lincoln did it with United States Notes called Greenbacks. They financed the war, paid the troops, spurred the nation's growth, and did what hasn't been done since - let the government print its own money, free from banker-controlled debt slavery, the very system strangling us today the way Lincoln feared would happen.
His advisor was Henry Carey, a man historian Vernon Parrington called "our first professional economist." Lincoln endorsed his prescription:
-- "government regulation of banking and credit to deter speculation and encourage economic development;"
-- its support for science, public education and national infrastructure development;
-- "regulation of privately-held infrastructure to ensure it met the nation's needs;"
-- government-sponsored railroads and "scientific and other aid to small farmers;"
-- "taxation and tariffs to protect and promote productive domestic activity;" and
-- "rejection of class wars, exploitation and slavery, physical or economic, in favor of a 'Harmony of Interests' between capital and labor."
Leaders like Jefferson, Jackson and Lincoln are sorely missed, but for Lincoln it was costly.
He Loses the Battle with "the Masters of European Finance"
German Chancellor Otto von Bismark (1815 - 1898) called them that in explaining how they engineered the "rupture between the North and the South" to use it to their advantage, then later wrote in 1876:
"The Government and the nation escaped the plots of the foreign bankers. They understood at once that the United States would escape their grip. The death of Lincoln was resolved upon." The last Civil War battle ended on May 13, 1865. Lincoln was assassinated on April 15.
European bankers tried but failed to trap him "with usurious war loans," at 24 - 36% interest had he agreed. Using government-issued Greenbacks shut them out entirely, so they determined to fight back - eliminate the thorn, then get banker-friendly legislation passed, achieved through the National Bank Act reversing the Greenback Law. It was "only a compromise with bankers, (but) buried in the fine print," they got what they wanted.
Although the Controller of the Currency got to issue new national banknotes, it was just a formality. In fact, the new law "authorized the bankers to issue and lend their own paper money." They "deposited" bonds with the Treasury, but owned them so "immediately got their money back in the form of their own banknotes." It was an exclusive franchise to control the nation's money forcing government back into debt bondage where it never had to be in the first place. A whole series of private banks were then chartered, all empowered to create money in lieu of debt free Greenbacks.
One other president confronted bankers and paid dearly as well - James Garfield. In 1881, he charged:
"Whoever controls the volume of money in any country is absolute master of all industry and commerce....And when you realize that the entire system is very easily controlled, one way or another, by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate."
Garfield took office on March 4, 1881. On July 2, he was shot. He survived the next two and half months, then died on September 19. It was a time of depression, mass unemployment, poverty, and starvation with no safety net protections. "The country was facing poverty amidst plenty," because bankers controlled money and kept too little of it in circulation - an avoidable problem if government printed its own.
Gold v. Inflation - Debunking Common Fallacies
The classical "quantity theory of money" holds that "too much money chasing too few goods" causes inflation, excess demand over supply forcing up prices. The counter argument is that if paper money is tied to gold, an inflation-free stable money supply will result. Another fallacy is that adding money (demand) raises prices only if supply remains fixed.
In fact, if new money creates new goods and services, prices stay stable. For thousands of years, the Chinese kept prices of its products low in spite of their money supply being "flooded with the world's gold and silver, and now with the world's dollars....to pay for China's cheap products."
What's important is not what money consists of but who creates it. "Whether the medium of exchange (is) gold or paper or numbers in a ledger," when created by and owed to private lenders with interest, "more money would always be owed back than was created...spiraling the economy into perpetual debt....whether the money takes the form of gold or paper or accounting entries."
Today's popularism is associated with the political left. However, 19th century Populists saw "a darker, more malevolent force....private money power and the corporations it had spawned, which was threatening to take over the government unless the people intervened."
Lincoln also feared it saying:
"I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. Corporations have been enthroned, an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until the wealth is aggregated in the hands of a few and the Republic is destroyed."
Today's America is the reality he feared. A tiny elite own the vast majority of the nation's wealth in the form of stocks, bonds, real estate, natural resources, business assets and other investments. In contrast, 90% of Americans have little or no net worth. Of all developed nations, concentrated wealth and inequality extremes are greatest here with powerful bankers sitting atop the pyramid, now more than ever with their new riches extracted from public tax dollars and Fed-created money.
In the forward, banker/developer Reed Simpson said:
"I have been a banker for most of my career, and I can report that even most bankers (don't know) what goes on behind (top echelon) closed doors....I am more familiar than most with the issues (Brown covered, and) still found it an eye-opener, a remarkable window into what is really going on....(Although many banks follow high ethical practices), corruption is also rampant, (especially) in the large money center banks, in one of which I worked."
"Credible evidence (reveals) a world (banking) power elite intent on gaining absolute control over the planet and its natural resources, including its subservient human (ones)." Money is their "lifeblood," and "fear (their) weapon." Ill-used, they can "enslave nations and ensure perpetual wars and bondage." Brown exposes the scheme and offers a solution.
Debt Bondage
What president Andrew Jackson called "a hydra-headed monster...." entraps entire nations in debt. Financial commentator Hans Schicht listed how:
-- by making concentrated wealth invisible;
-- "exercising control through leverage(d) mergers, takeovers" or other holdings "annexed to loans;" and
-- using a minimum of insider front-men to exercise "tight personal management and control."
Powerful bankers want to rule the world by creating and controlling money, the very lifeblood of world economies without which commerce would cease. Professor Henry Liu calls the monetary system a "cruel hoax" in that (except for government issued coins) "there is virtually no 'real' money in the system, only debts" - to bankers "for money they created with accounting entries....all done by a sleight of hand," only possible because governments empowered them to do it.
The solution is simple but untaken. As the Constitution mandates, money-creation power must "be returned to the government and the people it represents." Imagine the possibilities:
-- the federal debt could be eliminated, at least a more manageable amount before it mushroomed to stratospheric levels;
-- federal income taxes could as well; entirely for low and middle income people and at least substantially overall;
-- "social programs could be expanded....without sparking runaway inflation;" and
-- financial resources would be available to grow the nation economically and produce stable prosperity.
It's not pie-in-the-sky. It happened successfully under Abraham Lincoln and early colonists. More on that below.
Brown's book explains that:
-- the Federal Reserve isn't federal; it's a private banking cartel owned by its major bank members in 12 Fed districts;
-- except for coins, they "create" money called Federal Reserve notes, in violation of the Constitution under Article I, Section 8 that gives Congress alone the right "To coin (create) money (and) regulate the value thereof....;"
-- "tangible currency (coins and paper money comprise) less than 3 percent of the US money supply;" the rest is in computer entries for loans;
-- money that banks lend is "new money" that didn't exist before;
-- 30% of bank-created money "is invested for their own accounts;"
-- banks once made productive loans for industrial development; today they're "a giant betting machine" using countless trillions for high-risk casino-type operations - through devices like derivatives and securitization scams;
-- since Andrew Jackson's presidency (1829 - 1837), the federal debt hasn't been paid, only the interest - to private bankers and other owners of US obligations;
-- the 16th Amendment authorized Congress to levy an income tax; it was done "to coerce (the public) to pay interest to the banks on the federal debt;"
-- the amount has mushroomed to about $500 billion annually and keeps rising;
-- creating money doesn't cause inflation; it's "caused by banks expanding the money supply with loans;"
-- developing nations' inflation was caused "by global institutional speculators attacking local currencies and devaluing them on international markets;"
-- it could happen in America or anywhere else just as easily; and
-- escaping this trap is simple if Washington reclaims its money-issuing power; early colonists did it; so did Lincoln.
As long as bankers control our money, we'll remain in a permanent "web of debt" and experience cycles of boom, bust, inflation, deflation, instability and crisis. Yet none of this has to be nor repeated and inevitable bubbles - created by design, not chance, to advantage empowered "moneychangers," much like today with its fallout causing global havoc.
Prior to the Fed's creation, the House of Morgan was dominant in contrast to the early colonists' model. Operating out of Philadelphia, the nation's first capital, it favored state-issued and loaned out money, collecting the interest, and "return(ing) it to the provincial government" in lieu of taxes.
Lincoln used the same system to finance the Civil War, after which he was assassinated and bankers reclaimed their money-issuing power. Wall Street's "silent coup (was) the passage of the (1913) Federal Reserve Act," the most destructive ever congressional legislation, thereafter extracting a huge toll amounting to permanent debt bondage with national wealth transference from the public to private bankers - with most people none the wiser.
From Gold to Federal Reserve Notes
After the 1862 Legal Tender Act was rescinded (the so-called Greenback law letting the government issue its own money), new legislation replaced it empowering bankers by making all money again interest-bearing. Here's the problem. "As long as the money supply (is an interest-bearing) debt owed back to private bankers....the nation's wealth (will) continue to be drained off into private vaults, leaving scarcity in its wake."
Dollars should belong to everyone. Early colonists invented them as "a new form of paper currency backed by the 'full faith and credit' of the people." Today, a private banking cartel issues them by "turning debt into money and demanding" due interest be paid.
Ever since, it's controlled the nation and public by entrapment in permanent debt bondage, and they do it through the Federal Reserve that's neither federal nor has reserves. It doesn't have money. It creates it with electronic entries, any amount at any time for any purpose, the main one being to enrich its owner banks.
This body is a power unto itself, secretive, unaccountable, and independent of congressional oversight or control. It's a money-creating machine by turning debt into money, but only a small fraction of the total money supply. Individual commercial banks create most of it.
A 1960s Chicago Fed booklet (called Modern Money Mechanics) explained how - through "fractional reserve" alchemy. It states:
(Banks) do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts."
Money is created by "building up" deposits in the form of loans. They, in turn, become deposits, not the reverse. "This unique attribute of banking" goes back centuries, the idea being that paper receipts could be issued and loaned out for the same gold (in those days) many times over, so long as enough gold was held in "reserve" so depositors had access to their money. "This sleight of hand (became known) as 'fractional reserve' banking," using money to create multiples more of it.
As for credit market debt, William Hummel (on the web site Money: What It Is, How It Works) explains that banks create only about 20% of it. The rest is by other non-bank financial institutions, including finance companies, pension and mutual funds, insurance companies, and securities dealers. They "recycle pre-existing funds, either by borrowing at a low interest rate and lending at a higher (one) or by pooling (investor) money and lending it to borrowers." In other words, just like banks, "they borrow low and lend high, pocketing the 'spread' as their profit."
But banks do more than borrow. They also "lend the deposits they acquire....by crediting the borrower's account with a new deposit." Banks thus increase total bank deposits that grow the money supply. It amounts to a sleight of hand like "magically pull(ing) money out of an empty hat."
The US "money supply is the federal debt and cannot exist without it. (To) keep money in the system, some major player has to incur substantial debt that never gets paid back; and this role is played by the federal government." It's why the nation's debt can't be repaid under a banker-controlled system. Today's size and debt service compounds the problem, around double the amount Brown cited, growing exponentially to unimaginable levels.
Colonial Paper Money - Another Way Predating the Republic's Birth
In 1691, three years before the Bank of England's creation, Massachusetts became "the first local government to issue its own paper money...." in the form of a "bill of credit bond or IOU....to pay tomorrow on a debt incurred today." This money "was backed by the full 'faith and credit' of the government."
Other colonies then did the same, some as IOUs redeemable in gold or silver or as "legal tender" money to be legally accepted to pay debts. Cotton Mather, a famous New England minister, later redefined money - not as gold or silver, but as a credit: "the credit of the whole country."
Benjamin Franklin so embraced the "new medium of exchange" that he's called "the father of paper money," then called "scrip." It made the colonies independent of British banks and let them "finance their local governments without" taxation. It was done in two ways, and most colonies used both:
-- direct issue "bills of credit" or "treasury notes;" essentially government-backed IOUs to be repaid by future taxes, with no interest owed bankers or foreign lenders; "they were just credits issued and sent into the economy on goods and services;" and
-- a system of generating "revenue in the form of interest by taking on the lending functions of banks; a government loan office called a 'land bank' (issued) paper money and (loaned) it to residents (usually farmers) at low interest rates....the interest paid....went into the public coffers, funding the government;" it was the preferred way to assure a stable currency rather than by issuing "bills of credit."
Pennsylvania did it best. It's 1723-established loan office showed "it was possible for the government to issue new money (in lieu of) taxes without inflating prices." For over 25 years, it collected none at all. The loan office provided adequate revenue, supplemented by liquor import duties. Throughout the period, prices remained stable.
Prior to this system, Pennsylvania lost "both business and residents (for) lack of available currency." With it, its population grew and commerce prospered. The "secret was in not issuing too much, and in recycling the money back to the government in the form of principal and interest on government-issued loans."
Colony-based British merchants and financiers objected strongly to Parliament. Enough so that in 1751, King George II banned new paper money issuance to force colonists to borrow it from UK bankers. In 1764, Franklin petitioned Parliament to lift the ban. In London, Bank of England directors asked him to explain colonial prosperity at a time Britain experienced rampant unemployment and poverty. It's because Colonial Scrip was issued, he stated, "our own money" with no interest owed to anyone. He added:
"You do not have too many workers, you have too little money in circulation, and that which circulates, all bears the endless burden of unrepayable debt and usury."
With banks loaning money into the economy, more was "owed back in principle and interest than was lent in the original loans (so) there was never enough in circulation to pay interest and still keep workers fully employed." Unlike banks, government can both lend and spend money in circulation - enough to pay "interest due on the money it lent, (keep) the money supply in 'proper proportion' and (prevent) the 'impossible contract' problem (of having) more money owed back on loans than was created (from) the loans themselves."
Franklin's efforts notwithstanding, the Bank of England got Parliament to pass a Currency Act making it illegal for the colonies to issue their own money. It turned prosperity into poverty because the money supply was halved with not enough to pay for goods and services. According to Franklin:
"the poverty caused by the bad influence of the English bankers on the Parliament" got colonists to hate the British enough to spark the Revolutionary War. "The colonies would gladly have borne the little tax on tea and other matters (if) England (hadn't taken their money), which created unemployment and dissatisfaction." So much that outraged people again issued their own money in spite of the ban. As a result, they successfully financed a war against a major power - with almost no hard currency and no taxation. Thomas Paine called it the Revolution's "corner stone."
However, British bankers responded by attacking its "competitor's currency," the Continental, driving down its value by flooding the colonies with counterfeit scrip. It was "battered but remained stable." Where Britain failed, speculators succeeded - "mostly northeastern bankers, stockbrokers and businessmen, who bought up the revolutionary currency at a fraction of its value after convincing people it would be worthless after the war." It had "to compete with states' paper notes and British bankers' gold and silver coins....The problem might have been avoided by making the Continental the sole official currency, but the Continental Congress (didn't have) the power to enforce" such an order - with no courts, police or authority to collect taxes "to redeem the notes or contract the money supply."
Having just rebelled against British taxation, colonists weren't about to let Congress tax them. Speculators took advantage and traded Continentals at discounts enough to make them worthless and give rise to the expression "not worth a Continental."
How the Government Was Persuaded to Borrow Its Own Money
John Adams once said: "there are two ways to conquer and enslave a nation. One is by the sword. The other is by debt." The latter method is stealth enough so people don't know what's happening and submit to their own bondage. Openly, nothing seems changed, yet a whole new system becomes master "in the form of debts and taxes" that people think are for their own good, not tribute to their captors. That's today's America writ large.
After the Revolutionary War, "British bankers and their Wall Street vassals" pulled it off by acquiring a controlling interest in the new United States Bank. It discredited paper scrip through rampant Continental counterfeiting and so disillusioned the Founders that they omitted mentioning paper money in the Constitution. Congress was given power to "coin money (and) regulate the value thereof, (and) to borrow money on the credit of the United States...." It left enough wiggle room for bankers to exploit to their advantage - but only because Congress and the president let them.
Alexander Hamilton bears much blame, the nation's first Treasury Secretary and Tim Geithner of his day (1789 - 1795). He argued that America needed a monetary system independent of foreign control, and that required a federal central bank - to handle war debts and create a standard form of currency. In 1791, it was created, hailed at the time as a "brilliant solution to the nation's economic straits, one that disposed of an oppressive national debt, stabilized the economy, funded the government's budget, and created confidence in the new paper dollars....It got the country up and running, but left the bank largely in private hands" - to be manipulated for private gain, much like today. Worse still, "the government ended up in debt for money it could have generated itself."
Instead, it had to pay interest on its own money in lieu of creating it interest free. Today, Hamilton is acclaimed as a model Treasury Secretary. For Jefferson, he was a "diabolical schemer, a British stooge pursuing a political agenda for his own ends." He modeled the Bank of the United States on the Bank of England against which colonists rebelled. It so angered Jefferson that he told Washington he was a traitor. It fostered a bitter feud between them with Jefferson ultimately prevailing.
Hamilton's Federalist Party disappeared after 1820 while Jefferson and Madison's Democratic-Republicans became the forerunner of today's Democrats after the party split into two factions, the Whigs no longer in existence and Jacksonians that by 1844 officially became the Democratic Party. Shamefully they veered far from Jacksonian and Jeffersonian principles.
For his part, Hamilton wasn't entirely bad. He stabilized the new economy and got the country on its feet. He restored the nation's credit, established a national currency, and made it economically independent. However, his legacy has a dark side - a "privileged class of financial middlemen (henceforth able) to siphon off a perpetual tribute in the form of interest." He delivered money power into private hands, "subservient to an elite class of oligarchical financiers," the same Wall Street types today holding the entire nation hostage - in permanent debt bondage.
From Abundance to Debt
Charging excessive interest is called "usury," but originally it meant charging anything for the use of money. The Christian Bible banned it, and the Catholic Church enforced anti-usury laws through the end of the Middle Ages.
Old Testament scripture was more lenient, prohibiting it only between "brothers." Charging it to foreigners was allowed and encouraged, which is why Jews unfairly were called "moneychangers." They, like others, suffered greatly from money-lending schemes. For centuries, they were "persecuted for the profiteering of a few," then scapegoated to divert attention from the real offenders.
Fiat money is legal tender by government decree - a simple tally representing units of value to be traded for goods and services. Paper money was invented in 9th century Mandarin China and successfully used to fund its long and prosperous empire. The same was true in medieval England. The tally system worked well for over five centuries before banker-controlled paper money began demanding payment in the form of interest.
History portrays the Middle Ages as backward, impoverishing, and a form of economic enslavement only the Industrial Revolution changed. In fact, the era was entirely different, characterized by 19th century historian Thorold Rogers as a time when "a labourer could provide all the necessities for his family for a year by working 14 weeks," leaving nearly nine discretionary months to work for himself, study, fish, travel, or do what he pleased, something today's overworked, over-stressed, underpaid workers can't imagine.
Some attribute Middle Age prosperity to the absence of usurious lending. Instead of paying tribute in the form of interest, "people relied largely on interest-free tallies." They avoided depressions and inflation since the supply and demand for goods and services grew in proportion to each other, thus holding prices stable. "The tally system provided an organic form of money that expanded naturally as trade (did) and contracted (the same way) as taxes were paid."
No bankers set interest rates or manipulated markets to their advantage. The tally system kept Britain stable and thriving until the mid-17th century, "when Oliver Cromwell (1599 - 1658)....needed money to fund a revolt against the Tudor monarchy."
The Moneylenders Take Over England
In the 19th century, the Rothchild banking family's Nathan Rothchild said it well:
"I care not what puppet (sits on) the throne of England to rule the Empire on which the sun never sets. The man who controls Britain's money supply controls the British empire, and I (when he ran the Bank of England) control the British money supply."
Centuries early, moneylender power was absent. But after the 1666 Coinage Act, money-issuing authority, once the sole right of kings, was transferred into private hands. "Bankers now had the power to cause inflations and depressions at will by issuing or withholding their gold coins."
King William III (1672 - 1702), a Dutch aristocrat, financed his war against France by borrowing 1.2 million pounds in gold in a secret transaction with moneylenders, the arrangement being a permanent loan on which debt would be serviced and its principle never repaid. It came with other strings as well:
-- lenders got a charter to establish the Bank of England (in 1694) with monopoly power to issue banknotes as national paper currency;
-- it created them out of nothing, with only a fraction of them as reserves;
-- loans to the government were to be backed by government IOUs to serve as reserves for creating additional loans to private borrowers; and
-- lenders could consolidate the national debt on their government loan to secure payment through people-extracted taxes.
It was a prescription for huge profits and "substantial political leverage. The Bank's charter gave the force of law to the 'fractional reserve' banking scheme that put control of the country's money" in private hands. It let the Bank of England create money out of nothing and charge interest for loans to the government and others - the same practice central banks now employ.
For the next century, banknotes and tallies circulated interchangeably even though they weren't a compatible means of exchange. Banker money expanded when "credit expanded and contracted when loans were canceled or 'called,' producing cycles of 'tight' money and depression alternating with 'easy' money and inflation." In contrast, tallies were permanent, stable, fixed money, making banknotes look bad so they had to go.
For another reason as well - because of King William's disputed throne and fear if he were deposed, moneylenders again might be banned. They used their influence to legalize banknotes as the money of the realm called "funded" debt with tallies referred to as "unfunded," what historians see as the beginning of a "Financial Revolution." In the end, "tallies met the same fate as witches - death by fire."
They were money of the people competing with moneylending bankers. After 1834 monetary reform, "tally sticks went up in flames in a huge bonfire started in a House of Lords stove." Ironically, it got out of control and burned down Westminster Palace and both Houses of Parliament, symbolically ending "an equitable era of trade (by transferring power) from the government to the" central bank.
Henceforth, private bankers kept government in debt, never demanding the return of principle, and profiting by extracting interest, a very lucrative system always paying off "like a slot machine" rigged to benefit its operators. It became the basis for modern central banking, lending its "own notes (printed paper money), which the government swaps for bonds (its promises to pay) and circulates as a national currency."
Government debt is never repaid. It's continually rolled over and serviced, today with no gold in reserve to back it. Though gone, tallies left their mark. The word "stock" comes from the tally stick. Much of the original Bank of England stock was bought with these sticks. In addition, stock issuance began during the Middle Ages as a way to finance businesses when no interest-bearing loans were allowed.
In America, "usury banks fought for control for two centuries before" getting it under the 1913 Federal Reserve Act. An issue that once "defined American politics," today is no longer a topic for debate. It's about time it was reopened.
Jefferson and Jackson Sound the Alarm
Moneylenders conquered Britain, then aimed to entrap America - by provoking "a series of wars. British financiers funded the opposition to the American War for Independence, the War of 1812, and both sides of the American Civil War." They caused inflation, heavy government debt, the chartering of the Bank of the United States to fund it, thus giving private interests the power to create money.
Jefferson opposed the first US Bank, Jackson the second, and both for similar reasons:
-- distrust of profiteers controlling the nation's money; and
-- concern about the nation's banking system falling into foreign hands.
Jefferson got Congress to refuse to renew the first US Bank charter in 1811 and learned on liquidation that two-thirds of its owners were foreigners, mostly English and Dutch and none more influential than the Rothschilds. Later, Madison signed a 20-year charter. However, when Congress renewed it, Jackson vetoed it.
The Powerful Rothschild Family
The House of Rothschild was British in name only. In the mid-18th century, it was founded in Frankfort, Germany by Mayer Amschel Bauer, who changed his name to Rothschild, fathered 10 children, and sent his five sons to open branch banks in major European capitals. Nathan was the most astute and went to London. "Over the course of the nineteenth century, NM Rothschild would become the biggest bank in the world, and the five brothers would come to control most of the foreign-loan business of Europe."
Belatedly, Jefferson caught on to the scheme - that "private debt masquerading as paper money....owed to bankers" placed the nation in bondage. In his words, "deliver(ing) itself bound hand and foot to bold and bankrupt adventurers and bankers...." Jefferson's idea for a national bank was a wholly government-owned one issuing its own credit without having to borrow it from private interests.
Jackson believed the same thing in calling the Bank of the United States "a hydra-headed monster." When the bank charter was renewed, he promptly vetoed it, yet understood that the battle was just beginning. "The hydra of corruption is only scotched, not dead," he said.
He was right. The Bank's second president, Nicolas Biddle, retaliated "by sharply contracting the money supply. Old loans were called in and new ones refused. A financial panic ensued, followed by a deep economic depression." However, Biddle's victory was short-lived. In April 1834, the House rejected re-chartering the Bank, then January 1835 became Jackson's "finest hour."
He did something never done before or since. He paid off the first installment of the national debt, then reduced it to zero and accumulated a surplus. In 1836, the Bank's charter expired. Biddle was arrested and charged with fraud. He was tried and acquitted but spent the rest of his life in litigation over what he'd done. "Jackson had beaten the Bank." Imagine today if Obama defeated the Fed and its Wall Street puppeteers instead of embracing them with limitless riches.
Lincoln Foils the Bankers and Pays with His Life
Like Jackson, Lincoln faced assassination attempts, before even being inaugurated. "He had to deal with treason, insurrection, and national bankruptcy" during his first days in office. Considering the powerful forces against him, his achievements were all the more remarkable:
-- he built the world's largest army;
-- "smashed the British-financed insurrection,"
-- took the first steps to abolish slavery; it became official on December 6, 1865 when the 13th Amendment was ratified, eight months after Lincoln was assassinated;
-- during and after his tenure, the country became "the greatest industrial giant" in the world;
-- "the steel industry was launched; a continental railroad system was created; the Department of Agriculture was established; a new era of farm machinery and cheap tools was promoted;"
-- the Land Grant College system established free higher education;
-- the Homestead Act gave settlers ownership rights and encouraged new land development;
-- government supported all branches of science;
-- "standardization and mass production was promoted worldwide;"
-- labor productivity increased by 50 - 75%; and
-- still more was accomplished "with a Treasury that was completely broke and a Congress that hadn't been paid" as a result.
It was because the government issued its own money. "National control was reestablished over banking, and the economy was jump-started with a 600 percent increase in government spending and cheap credit directed at production." Roosevelt did the same thing with borrowed money. Lincoln did it with United States Notes called Greenbacks. They financed the war, paid the troops, spurred the nation's growth, and did what hasn't been done since - let the government print its own money, free from banker-controlled debt slavery, the very system strangling us today the way Lincoln feared would happen.
His advisor was Henry Carey, a man historian Vernon Parrington called "our first professional economist." Lincoln endorsed his prescription:
-- "government regulation of banking and credit to deter speculation and encourage economic development;"
-- its support for science, public education and national infrastructure development;
-- "regulation of privately-held infrastructure to ensure it met the nation's needs;"
-- government-sponsored railroads and "scientific and other aid to small farmers;"
-- "taxation and tariffs to protect and promote productive domestic activity;" and
-- "rejection of class wars, exploitation and slavery, physical or economic, in favor of a 'Harmony of Interests' between capital and labor."
Leaders like Jefferson, Jackson and Lincoln are sorely missed, but for Lincoln it was costly.
He Loses the Battle with "the Masters of European Finance"
German Chancellor Otto von Bismark (1815 - 1898) called them that in explaining how they engineered the "rupture between the North and the South" to use it to their advantage, then later wrote in 1876:
"The Government and the nation escaped the plots of the foreign bankers. They understood at once that the United States would escape their grip. The death of Lincoln was resolved upon." The last Civil War battle ended on May 13, 1865. Lincoln was assassinated on April 15.
European bankers tried but failed to trap him "with usurious war loans," at 24 - 36% interest had he agreed. Using government-issued Greenbacks shut them out entirely, so they determined to fight back - eliminate the thorn, then get banker-friendly legislation passed, achieved through the National Bank Act reversing the Greenback Law. It was "only a compromise with bankers, (but) buried in the fine print," they got what they wanted.
Although the Controller of the Currency got to issue new national banknotes, it was just a formality. In fact, the new law "authorized the bankers to issue and lend their own paper money." They "deposited" bonds with the Treasury, but owned them so "immediately got their money back in the form of their own banknotes." It was an exclusive franchise to control the nation's money forcing government back into debt bondage where it never had to be in the first place. A whole series of private banks were then chartered, all empowered to create money in lieu of debt free Greenbacks.
One other president confronted bankers and paid dearly as well - James Garfield. In 1881, he charged:
"Whoever controls the volume of money in any country is absolute master of all industry and commerce....And when you realize that the entire system is very easily controlled, one way or another, by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate."
Garfield took office on March 4, 1881. On July 2, he was shot. He survived the next two and half months, then died on September 19. It was a time of depression, mass unemployment, poverty, and starvation with no safety net protections. "The country was facing poverty amidst plenty," because bankers controlled money and kept too little of it in circulation - an avoidable problem if government printed its own.
Gold v. Inflation - Debunking Common Fallacies
The classical "quantity theory of money" holds that "too much money chasing too few goods" causes inflation, excess demand over supply forcing up prices. The counter argument is that if paper money is tied to gold, an inflation-free stable money supply will result. Another fallacy is that adding money (demand) raises prices only if supply remains fixed.
In fact, if new money creates new goods and services, prices stay stable. For thousands of years, the Chinese kept prices of its products low in spite of their money supply being "flooded with the world's gold and silver, and now with the world's dollars....to pay for China's cheap products."
What's important is not what money consists of but who creates it. "Whether the medium of exchange (is) gold or paper or numbers in a ledger," when created by and owed to private lenders with interest, "more money would always be owed back than was created...spiraling the economy into perpetual debt....whether the money takes the form of gold or paper or accounting entries."
Today's popularism is associated with the political left. However, 19th century Populists saw "a darker, more malevolent force....private money power and the corporations it had spawned, which was threatening to take over the government unless the people intervened."
Lincoln also feared it saying:
"I see in the near future a crisis approaching that unnerves me and causes me to tremble for the safety of my country. Corporations have been enthroned, an era of corruption in high places will follow, and the money power of the country will endeavor to prolong its reign by working upon the prejudices of the people until the wealth is aggregated in the hands of a few and the Republic is destroyed."
Today's America is the reality he feared. A tiny elite own the vast majority of the nation's wealth in the form of stocks, bonds, real estate, natural resources, business assets and other investments. In contrast, 90% of Americans have little or no net worth. Of all developed nations, concentrated wealth and inequality extremes are greatest here with powerful bankers sitting atop the pyramid, now more than ever with their new riches extracted from public tax dollars and Fed-created money.
Saturday, May 2, 2009
Is Economics Rational???
Classical/neoclassical economics has consistently protected the wealth of the privileged; it has preserved the status quo. This is capitalism's intent, and the evidence for it is overwhelming. It has impeded the improvement of the human condition for two hundred years, and unless it is scrapped, it will continue to do so. No mere change in government can stop it.
Aristotle defined human beings as rational animals, and even today, few people would openly describe themselves as irrational; yet many are. Even so, people don't generally go around calling their decisions, choices, and expectations rational or calling what they do rational activity. Except, that is, economists! They modify sundry and diverse nouns with "rational." In a short search of a few documents, the nouns actors, calculations, choices, decisions, expectations, firms, foundations, investors, outcomes, prices, responses, self-interest, societies, systems, and workers are all modified by "rational," and some seem oxymoronic when so modified. For instance, how is it possible to have an irrational self-interest? And if that isn't possible, what sense does modifying "self-interest" with "rational" make? Why economists feel the need to continually cite the rationality of classical economics is curious. Astronomers, physicists, chemists, biologists, mathematicians, engineers, and others have never felt a similar need. Physicists never speak of rational forces, rational particles, or rational mass. Chemists don't speak of rational reactions. Mathematicians never speak of rational calculations. One begins to wonder whether economists can be likened to the proverbial errant child who almost automatically utters, "I didn't do it!" when everyone knows that s/he did. One wonders whether they continually call themselves and economics rational because that's the only exculpatory response they can think of when what they proclaim turns out, as it so often does, to be wrong.
But if rationality is a human attribute, it is at best a latent one. Activating it requires care and nurture. And some studies have suggested that the ability to activate it declines as people age. Anyone who has tried to teach even basic logic to college students knows that most never acquire enough facility to become even moderately proficient. Many professors who are tasked with teaching it lack the ability to construct even moderately advanced chains of valid reasoning, and for decades, the most used textbook for such courses presented a set of logical rules so deficient that even if a student mastered them all, s/he would have been unable to apply them efficiently. Furthermore the findings of psychologists who have devised experiments to measure rationality claim to have shown that few people consistently behave in rational ways. But this finding is not interesting. Who, other than economists, hasn't known it? Even Aristotle must have known it more than two millennia ago; after all, he was familiar with the irrational claims Plato clearly exposed in his Socratic Dialogues. So the acute question is why economists don't know it, why they persist in accepting classical economic theory?
Those psychological experiments, however, when examined carefully are difficult to interpret. Although the psychologists claim to be measuring rationality, what, if anything, is really being measured is not easily seen. For instance, Prof. Daniel Kahneman is reported to have devised this experiment:
"let's take two groups of people and ask the first if the tallest tree in the world is taller than 300 meters. Then let's ask them how tall the tallest tree in the world is. Then we repeat the exercise with the second group, asking them whether the tallest tree in the world is taller than 200 meters, and then how tall it is. At the end of the experiment, we find that the first group's average answer to the second question is, around 300 meters, and the second's is around 200 meters. Why? [Because] People tend to latch on to a certain 'anchor"—usually one they come across by chance—instead of trying to use a more rational way to gather and process data and make economic decisions." [http://www.haaretz.com/hasen/spages/1077151.html]
But it is difficult to see how this experiment proves anything about rationality. The experiment requires the participants to merely guess, and guessing is not a rational activity. No rational participant would have even answered the initial question. S/he would have responded by asking something like, How would I know?, and the experiment would have collapsed.
But other experiments are more revealing. For instance,
"One of the more compelling studies described . . . involved trick-or-treaters. A few Halloweens ago, Ariely laid in a supply of Hershey's Kisses and two kinds of Snickers—regular two-ounce bars and one-ounce miniatures. When the first children came to his door, he handed each of them three Kisses, then offered to make a deal. If they wanted to, the kids could trade one Kiss for a mini-Snickers or two Kisses for a full-sized bar. Almost all of them . . . opted for the two-Kiss trade. At some point, Ariely shifted the terms: kids could now trade one of their three Kisses for the larger bar or get a mini-Snickers without giving up anything. In terms of sheer chocolatiness, the trade for the larger bar was still by far the better deal. But, faced with the prospect of getting a mini-Snickers for nothing, the trick-or-treaters could no longer reckon properly. Most of them refused the trade, even though it cost them candy. Ariely speculates that behind the kids' miscalculation was anxiety. As he puts it, “There's no visible possibility of loss when we choose a FREE! item (it's free).” Tellingly, when Ariely performed a similar experiment on adults, they made the same mistake. “If I were to distill one main lesson from the research described..., it is that we are all pawns in a game whose forces we largely fail to comprehend.”
[http://www.newyorker.com/arts/critics/books/2008/02/25/080225crbo_books_kolbert]
What are the problems with this experiment? There is absolutely no evidence that any child or adult involved did any "reckoning," and if no reckoning took place, no "miscalculation" could possibly have occurred. After all, people do make choices on impulse. So how does this experiment prove anything about rationality?
Just ask how a calculation, choice, decision, expectation, outcome, responses, or anything else can be determined to be rational. The only answer is by examining the reasoning process that led to it. But the experiment was built in a way that made any examination of any reasoning involved impossible. The description above says that when the experiment was performed on adults, "they made the same mistake," that is, they selected the free bite-sized Snickers bar. The "mistake" was that they didn't select the larger bar and maximize the amount of chocolate they were receiving. But what if they didn't want to maximize the amount of chocolate? Suppose, for instance, that an adult desired more chocolate than was in the three Hershey Kisses but was also trying to lose weight and didn't want to over indulge. Or suppose that an adult wanted more chocolate, didn't want to eat it immediately, but instead, wanted to put it in a pocket but had no available pocket large enough in which to comfortably place the larger bar. Or again, suppose that an adult wanted more chocolate but wanted to eat it in one bite so that his hands were free for other tasks. In all three of these cases, selecting the mini-Snickers was the rational choice. The mistake made in this experiment was made by the designer, not the participants. He assumed that the only rational choice was the one that maximized the amount of chocolate obtained. But rationality cannot be determined by arbitrary definition. Rationality is an attribute of deliberative processes and nothing that does not involve a deliberative process can be called rational. Human beings do engage in thoughtless activities. When doing so, they are not engaged in rational behavior. But they also sometimes think about what they are doing. When their thinking conforms to well-known norms of logic and is based on true premises, it is rational, when it doesn't, it is not. The thinking, not the result, is the deciding factor.
This experiment, however, is revealing, because economists do exactly what the experiment's designer has done. Defining the maximization of the amount of chocolate is perfectly analogous to maximizing one's income, and economists define that result as the only possibly rational one. Thus everything economists describe as rational is mere tautology. Unfortunately tautological theories, being hollow, are not rational, so neither are classical economics and the economists who advocate it.
In fact, rationality is a poorly understood concept. Consider this quotation from the Haaretz article cited above:
"Psychology today differentiates between two methods of thinking: There is the intuitive method, and there is the rational one. The intuitive method is characterized by rapid learning, and it concludes very quickly that what has happened the last three times will happen forever, again and again."
But what is here described as the intuitive method is nothing but an example of a well-known fallacious mode of reasoning known as hasty generalization, so what is described as "two methods of thinking" amounts to nothing more than good and bad, which is hardly a remarkable observation.
In fact, none of the fifteen nouns mentioned in the first paragraph that economists modify with "rational" are rational in themselves. They can only be called rational after the deliberative processes that lead to them have been examined, but no economic theory could ever do that. And to merely assume they are rational when they lead to a predefined result is as irrational as making choices on impulse. So why do economists believe in their theory?
Once put into practice, rational people judge theories, policies, and practices by how well they satisfy the intentions which led to their implementations. Unless the intentions are known, no sound judgment can be made. For instance, some years ago the Congress enacted harsh, mandatory sentencing of criminals. What was the Congress' intent? If the intent was to reduce crime, the policy has failed. If the intent was to merely punish criminals, it might be said to have succeeded. But what is some Congressmen intended the former and some the latter?
When we look at classical/neoclassical economics, how can it's intent be determined? In the absence of any stated purpose, one can examine the things it does and those it doesn't. In the two plus centuries it has been practiced, orthodox classical capitalism has not brought a growing or even a stable level of prosperity to the peoples who inhabit the countries in which it has been practiced. Spurts of apparent prosperity have been continuously destroyed by economic crashes that have over and over again ruined the lives of millions.
But what if its intent has never been the promotion of the people's prosperity? What, if any, result has it attained consistently? Well, it has consistently protected the wealth of the privileged; it has preserved the status quo. The wealthy privileged increase their wealth in good times and in bad. The system works for the privileged just as the market works for stock brokers who make money when prices are rising and when they are falling. If this is capitalism's intent, and the evidence for it is overwhelming, understanding the Obama administration's, and the developed world's, response to the current economic downturn is easy. As the meager apparent wealth that the common people acquired during the better years now disappears, as they lose their jobs and homes, the wealthy institutions and the people who manage them and created the downturn are rewarded and prevented from failing by obligating the common people to someday repaying a growing colossal national debt incurred for the sake of those privileged. None of this makes sense unless capitalism's intention is to preserve the status quo at the people's expense.
Of course, we're told that a stable financial system is essential to economic prosperity. We're told that credit must be easily acquired again, so that businesses can meet payroll and consumers can resume buying. But these claims are also irrational. Businesses properly should be capitalized by investment and products should be purchased with earnings. So why do governments claim businesses and consumption need to be financed by debt? The answer is really very simple. The wealthy increase their wealth by lending and they do it without even having to use their own money by means of the Ponzi scheme known as fractional reserve banking. And when debtors cannot meet their obligations, their assets are acquired by the wealthy at fire sale prices who then become even wealthier. This is what capitalism does; it does it consistently and spectacularly. It really can have no other purpose. Credit is good only for creditors; debtors always lose.
What is there about this that economists cannot understand? Are they absolutely irrational or complicit? Each must answer for him/herself. But the economic system they advocate is nothing but an irrational tower of Babel that is based on principles derived from simplistic, imaginary situations and assumptions about rationality that are contradicted by hundreds of years of evidence, and is devoted to the worship of Mammon which benefits only the rich. Capitalism has been very successful; it has impeded the improvement of the human condition for two hundred years, and unless it is scrapped, it will continue to do so. No mere change in government can stop it.
Aristotle defined human beings as rational animals, and even today, few people would openly describe themselves as irrational; yet many are. Even so, people don't generally go around calling their decisions, choices, and expectations rational or calling what they do rational activity. Except, that is, economists! They modify sundry and diverse nouns with "rational." In a short search of a few documents, the nouns actors, calculations, choices, decisions, expectations, firms, foundations, investors, outcomes, prices, responses, self-interest, societies, systems, and workers are all modified by "rational," and some seem oxymoronic when so modified. For instance, how is it possible to have an irrational self-interest? And if that isn't possible, what sense does modifying "self-interest" with "rational" make? Why economists feel the need to continually cite the rationality of classical economics is curious. Astronomers, physicists, chemists, biologists, mathematicians, engineers, and others have never felt a similar need. Physicists never speak of rational forces, rational particles, or rational mass. Chemists don't speak of rational reactions. Mathematicians never speak of rational calculations. One begins to wonder whether economists can be likened to the proverbial errant child who almost automatically utters, "I didn't do it!" when everyone knows that s/he did. One wonders whether they continually call themselves and economics rational because that's the only exculpatory response they can think of when what they proclaim turns out, as it so often does, to be wrong.
But if rationality is a human attribute, it is at best a latent one. Activating it requires care and nurture. And some studies have suggested that the ability to activate it declines as people age. Anyone who has tried to teach even basic logic to college students knows that most never acquire enough facility to become even moderately proficient. Many professors who are tasked with teaching it lack the ability to construct even moderately advanced chains of valid reasoning, and for decades, the most used textbook for such courses presented a set of logical rules so deficient that even if a student mastered them all, s/he would have been unable to apply them efficiently. Furthermore the findings of psychologists who have devised experiments to measure rationality claim to have shown that few people consistently behave in rational ways. But this finding is not interesting. Who, other than economists, hasn't known it? Even Aristotle must have known it more than two millennia ago; after all, he was familiar with the irrational claims Plato clearly exposed in his Socratic Dialogues. So the acute question is why economists don't know it, why they persist in accepting classical economic theory?
Those psychological experiments, however, when examined carefully are difficult to interpret. Although the psychologists claim to be measuring rationality, what, if anything, is really being measured is not easily seen. For instance, Prof. Daniel Kahneman is reported to have devised this experiment:
"let's take two groups of people and ask the first if the tallest tree in the world is taller than 300 meters. Then let's ask them how tall the tallest tree in the world is. Then we repeat the exercise with the second group, asking them whether the tallest tree in the world is taller than 200 meters, and then how tall it is. At the end of the experiment, we find that the first group's average answer to the second question is, around 300 meters, and the second's is around 200 meters. Why? [Because] People tend to latch on to a certain 'anchor"—usually one they come across by chance—instead of trying to use a more rational way to gather and process data and make economic decisions." [http://www.haaretz.com/hasen/spages/1077151.html]
But it is difficult to see how this experiment proves anything about rationality. The experiment requires the participants to merely guess, and guessing is not a rational activity. No rational participant would have even answered the initial question. S/he would have responded by asking something like, How would I know?, and the experiment would have collapsed.
But other experiments are more revealing. For instance,
"One of the more compelling studies described . . . involved trick-or-treaters. A few Halloweens ago, Ariely laid in a supply of Hershey's Kisses and two kinds of Snickers—regular two-ounce bars and one-ounce miniatures. When the first children came to his door, he handed each of them three Kisses, then offered to make a deal. If they wanted to, the kids could trade one Kiss for a mini-Snickers or two Kisses for a full-sized bar. Almost all of them . . . opted for the two-Kiss trade. At some point, Ariely shifted the terms: kids could now trade one of their three Kisses for the larger bar or get a mini-Snickers without giving up anything. In terms of sheer chocolatiness, the trade for the larger bar was still by far the better deal. But, faced with the prospect of getting a mini-Snickers for nothing, the trick-or-treaters could no longer reckon properly. Most of them refused the trade, even though it cost them candy. Ariely speculates that behind the kids' miscalculation was anxiety. As he puts it, “There's no visible possibility of loss when we choose a FREE! item (it's free).” Tellingly, when Ariely performed a similar experiment on adults, they made the same mistake. “If I were to distill one main lesson from the research described..., it is that we are all pawns in a game whose forces we largely fail to comprehend.”
[http://www.newyorker.com/arts/critics/books/2008/02/25/080225crbo_books_kolbert]
What are the problems with this experiment? There is absolutely no evidence that any child or adult involved did any "reckoning," and if no reckoning took place, no "miscalculation" could possibly have occurred. After all, people do make choices on impulse. So how does this experiment prove anything about rationality?
Just ask how a calculation, choice, decision, expectation, outcome, responses, or anything else can be determined to be rational. The only answer is by examining the reasoning process that led to it. But the experiment was built in a way that made any examination of any reasoning involved impossible. The description above says that when the experiment was performed on adults, "they made the same mistake," that is, they selected the free bite-sized Snickers bar. The "mistake" was that they didn't select the larger bar and maximize the amount of chocolate they were receiving. But what if they didn't want to maximize the amount of chocolate? Suppose, for instance, that an adult desired more chocolate than was in the three Hershey Kisses but was also trying to lose weight and didn't want to over indulge. Or suppose that an adult wanted more chocolate, didn't want to eat it immediately, but instead, wanted to put it in a pocket but had no available pocket large enough in which to comfortably place the larger bar. Or again, suppose that an adult wanted more chocolate but wanted to eat it in one bite so that his hands were free for other tasks. In all three of these cases, selecting the mini-Snickers was the rational choice. The mistake made in this experiment was made by the designer, not the participants. He assumed that the only rational choice was the one that maximized the amount of chocolate obtained. But rationality cannot be determined by arbitrary definition. Rationality is an attribute of deliberative processes and nothing that does not involve a deliberative process can be called rational. Human beings do engage in thoughtless activities. When doing so, they are not engaged in rational behavior. But they also sometimes think about what they are doing. When their thinking conforms to well-known norms of logic and is based on true premises, it is rational, when it doesn't, it is not. The thinking, not the result, is the deciding factor.
This experiment, however, is revealing, because economists do exactly what the experiment's designer has done. Defining the maximization of the amount of chocolate is perfectly analogous to maximizing one's income, and economists define that result as the only possibly rational one. Thus everything economists describe as rational is mere tautology. Unfortunately tautological theories, being hollow, are not rational, so neither are classical economics and the economists who advocate it.
In fact, rationality is a poorly understood concept. Consider this quotation from the Haaretz article cited above:
"Psychology today differentiates between two methods of thinking: There is the intuitive method, and there is the rational one. The intuitive method is characterized by rapid learning, and it concludes very quickly that what has happened the last three times will happen forever, again and again."
But what is here described as the intuitive method is nothing but an example of a well-known fallacious mode of reasoning known as hasty generalization, so what is described as "two methods of thinking" amounts to nothing more than good and bad, which is hardly a remarkable observation.
In fact, none of the fifteen nouns mentioned in the first paragraph that economists modify with "rational" are rational in themselves. They can only be called rational after the deliberative processes that lead to them have been examined, but no economic theory could ever do that. And to merely assume they are rational when they lead to a predefined result is as irrational as making choices on impulse. So why do economists believe in their theory?
Once put into practice, rational people judge theories, policies, and practices by how well they satisfy the intentions which led to their implementations. Unless the intentions are known, no sound judgment can be made. For instance, some years ago the Congress enacted harsh, mandatory sentencing of criminals. What was the Congress' intent? If the intent was to reduce crime, the policy has failed. If the intent was to merely punish criminals, it might be said to have succeeded. But what is some Congressmen intended the former and some the latter?
When we look at classical/neoclassical economics, how can it's intent be determined? In the absence of any stated purpose, one can examine the things it does and those it doesn't. In the two plus centuries it has been practiced, orthodox classical capitalism has not brought a growing or even a stable level of prosperity to the peoples who inhabit the countries in which it has been practiced. Spurts of apparent prosperity have been continuously destroyed by economic crashes that have over and over again ruined the lives of millions.
But what if its intent has never been the promotion of the people's prosperity? What, if any, result has it attained consistently? Well, it has consistently protected the wealth of the privileged; it has preserved the status quo. The wealthy privileged increase their wealth in good times and in bad. The system works for the privileged just as the market works for stock brokers who make money when prices are rising and when they are falling. If this is capitalism's intent, and the evidence for it is overwhelming, understanding the Obama administration's, and the developed world's, response to the current economic downturn is easy. As the meager apparent wealth that the common people acquired during the better years now disappears, as they lose their jobs and homes, the wealthy institutions and the people who manage them and created the downturn are rewarded and prevented from failing by obligating the common people to someday repaying a growing colossal national debt incurred for the sake of those privileged. None of this makes sense unless capitalism's intention is to preserve the status quo at the people's expense.
Of course, we're told that a stable financial system is essential to economic prosperity. We're told that credit must be easily acquired again, so that businesses can meet payroll and consumers can resume buying. But these claims are also irrational. Businesses properly should be capitalized by investment and products should be purchased with earnings. So why do governments claim businesses and consumption need to be financed by debt? The answer is really very simple. The wealthy increase their wealth by lending and they do it without even having to use their own money by means of the Ponzi scheme known as fractional reserve banking. And when debtors cannot meet their obligations, their assets are acquired by the wealthy at fire sale prices who then become even wealthier. This is what capitalism does; it does it consistently and spectacularly. It really can have no other purpose. Credit is good only for creditors; debtors always lose.
What is there about this that economists cannot understand? Are they absolutely irrational or complicit? Each must answer for him/herself. But the economic system they advocate is nothing but an irrational tower of Babel that is based on principles derived from simplistic, imaginary situations and assumptions about rationality that are contradicted by hundreds of years of evidence, and is devoted to the worship of Mammon which benefits only the rich. Capitalism has been very successful; it has impeded the improvement of the human condition for two hundred years, and unless it is scrapped, it will continue to do so. No mere change in government can stop it.