Friday, September 11, 2009

Central Banks and Competitive Currency

Correspondent Eugene P. summarizes the history of central banking in the U.S. and suggests an alternative to our debauched dollar.

In response to Has Central Bank Management of the Economy Failed?, Correspondent Eugene P. cogently summarized the history of central banking in the U.S. and then posed a provocative alternative to the declining U.S. dollar: private-sector competitive currencies.

Eugene P.

A few thoughts on your most recent essay re: Central Banking.

Some of the Founding Fathers despised Central Banking, particularly Thomas Jefferson, who saw it as an engine for speculation, financial manipulation, and corruption. He said in 1816, "I sincerely believe...that banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale."

Some of the Founding Fathers loved Central Banking, particularly Hamilton. (Coincidentally, Hamilton also disliked the concept of a Bill of Rights, finding it unnecessary, and really disliked the fact that States had rights that the Federal Government couldn't automatically override. Sound like anyone familiar?)

We had about 150 years of common sense (i.e., no central banking) here, with several blips on the radar screen: the first was the 1st Bank of the United States (1791-1796). The second was the 2nd Bank of the United States (1816-1836), which was created by James Madison (over Jefferson's objections) because he needed a way to fund the War of 1812. It was later dismantled by President Andrew Jackson, who viewed it as a form of systemic corruption that benefited his enemies.

The third was the National Banking Act of 1863, which was created for, among other reasons, funding the Civil War. War is, after all, an expensive proposition, a lesson learned by the Egyptians, the Romans, the Greeks, the Carthaginians, the Mongols, et. al, but clearly, this lesson has not sunk into current humanity's brain yet. Maybe sometime in the future. I can hope.

Still, despite this legislation, bank runs were occurring on a semi-regular basis, and this annoyed (and busted) bankers who made their money engaging in the enjoyable pastime of speculation. They wanted a lender of last resort (a central bank) to bail them out if their bets went bad. Seven men met to discuss the best way to re-introduce central banking into the US in 1910. They were:

1. Nelson W. Aldrich (Republican whip in the Senate; father-in-law to John D. Rockefeller, Jr.)
2. A. Piat Andrew (Assistant Secretary of the Treasury)
3. Henry P. Davison, Sr. (partner in JP Morgan Company)
4. Charles D. Norton (President, 1st National Bank of New York)
5. Benjamin Strong (head of JP Morgan's Bankers Trust, later chairman of the Federal Reserve)
6. Frank A. Vanderlip (President, National City Bank of New York, representing William Rockefeller)
7. Paul M. Warburg (partner in Kuhn, Loeb & Company, representing the European banking families of the Rothschilds and the Warburgs).

Thus, the winds shifted in 1913, with the introduction of the Federal Reserve Act upon the Congressional floor. As with most things in life, you can read this sequence of events through two lenses: one of well-intentioned and unforeseen consequences, or one of dark, conspiratorial corruption. Depending on who you talk to, these were well-meaning statesmen who tried their best to ensure financial stability and minimize banking panics, or they got together expressly to make more crooked money by spreading around crooked money.

Woodrow Wilson, the great "Progressive" president, who admittedly knew little of finance, economics, or banking, preferring to become learned in matters like religion, his outright racism and white supremacism, his suppression of anti-WWI sentiment, his institution of the Federal Income tax, and his penchant for intervening in foreign countries to spread democracy to them, signed the Federal Reserve Act in law on 23 December, 1913 (back then, those legislators worked right on up until Christmas. They earned their pay).

Wilson had a case of buyer's remorse later, stating in 1916, "A great industrial nation is controlled by its system of credit. Our system of credit is privately concentrated. The growth of the Nation, therefore, and all our activities are in the hands of a few men... We have come to be one of the worst ruled, one of the most completely controlled and dominated, governments in the civilized world—no longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and the duress of small groups of dominant men."

Too bad he couldn't have realized this before signing the bill. And too bad he wasn't singing the criticisms of central banking when it was supplying him with all the money he needed to fight World War I.

Anyone can see why bankers like central banking. It allows them to create credit out of thin air, charge interest on that credit, take their profits before the sh*t hits the fan, and retire to their colonial houses on their private islands. What a spectacular system. Parasitism at its finest.

But frankly, I'm flabbergasted that we had honest politicians in this country for so long, resisting the siren's call of central banking. Central banking is awesome for politicians, too. It allows them to inflate debt, instead of having to raise taxes to pay the debt off. Citizens only vaguely understand the notion of "inflation." The most concrete example they can think of is "Man, I remember when a hot dog at the ball park cost 5 cents! That gold-durned inflation, eh?" But citizens definitely understand taxes. "Taxes?! I hate taxes! Except when they're used to pay for stuff I need."

Central banking allows politicians to create credit out of thin air to pay for all the social programs that the country *can't* actually afford in any normal universe, you know, the ones with limited resources. Social Security, Federal Deposit Insurance, Fannie Mae, Freddie Mac, Sallie Mae, Medicare, Medicaid, ack, the list is hundreds of pages long. The timescale and sleight-of-hand of central banking is long enough that people forget that this stuff has to get paid for, and they simply come to assume that it will always exist. At the same time, the President responsible for instituting said social program goes down in history as a "humanitarian," a "man of the people," a "just and moral leader," blah, blah, blah.

But perhaps most importantly, central banking allows politicians to pay for war. (emphasis added: CHS) Central banking allowed FDR to pay for WWII, Truman to pay for the Korean War, Ike+JFK+LBJ+Nixon to pay for Vietnam (and the rapidly expanding military-industrial-congressional complex), Bush the Lesser to pay for Gulf II, and Obama to pay for Afghanistan. The greatest benefit here in a globalized economy is that US citizens don't even have to buy war bonds anymore - we just sell our debt, on an electronic exchange, to the Chinese, to the Saudis, to the French, to the Japanese, to anyone who wants to take their turn at the central banking casino table.

Interestingly enough, Bush the Elder refused to inflate away his administration's debt, electing instead to renege on his famous campaign promise ("Read my lips; no new taxes"). While the military's success in Gulf I temporarily dampened this mistake, it came back to bite him during the election season of 1992. The man was the head of the CIA, and yet, couldn't understand the concept of inflating debt away through the magic of central banking? I worry about those boys down in Langley.

I'll take this opportunity to suggest that the only real safeguard against this sort of financial chicanery is competitive legal tender.(emphasis added: CHS) No, I didn't suggest returning to a gold (or any other name-your-precious-commodity) standard, since the temptation is too great to muck with it (as FDR did when he confiscated everyone's gold; as Nixon did when he simply abandoned the gold standard). Right now, we exist in a world where the federal government has a monopoly on money. You can't pay for anything owed to the government (read: taxes) with anything but the toxic, fiat money it generates at the touch of a computer button. And as a consequence, all the other stuff you need to buy, stuff that you need, has to be paid for with the same toxic dollars: food, water, clothing, shelter, and the rest. And since the government seems content to manipulate the currency on a daily basis to appease their Masters on Wall Street, the folks on Main Street are visibly upset, handcuffed to a currency that seemingly loses a little more purchasing power with each passing day.

But imagine if you didn't have to pay for your eggs and milk and cheese with US dollars. Instead, your locally-owned credit union (perhaps run by your neighbor) has issued Anytown dollars, which are accepted by a number of merchants in Anytown. Perhaps in the next county over, the city of Neighbor-town has issued their own currency, Neighbor-dollars, which are accepted by a number of merchants in Neighbor-town. Perhaps your two towns freely exchange Anytown dollars and Neighbor-town dollars as they see fit, without coercion, without speculation, with financial skullduggery. And so forth and so on. Currencies based on shaky foundations and financial manipulation, for example, Goldman-Sachs dollars, or Bank-of-America dollars, or Citigroup dollars, are quickly found out and dumped in favor of something else. And the utopian dream lives on.

At least, I hope it would. But since this system effectively neuters the government tax collectors, it will not come to pass, short of a constitutional convention. Go ahead, try it, issue your own currency. See how quickly the IRS comes knocking on your door to levy fines and drag you to jail.

What a country.

Thank you, Eugene, for an excellent essay on a key topic. In this context, let's recall Gresham's Law: "Bad money drives out good." In essence, good money is hoarded and bad money passed off as quickly as possible to the next sucker.

No wonder central banks ban competing currencies. Which would you rather hold--dollars, yen, euros, yuan, pesos, etc. or private-sector gold-backed 'quatloos'?


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