How Government / Bank Cabals Take the People’s Money
The great trouble is that money wasn’t allowed to develop. After two or three hundred years of the use of coins, governments stopped any further developments. We were not allowed to experiment on it, so money hasn’t been improved, it has rather become worse in the course of time. Menger, and before him Hume and Mandeville, named law, language, and money as the three paradigms of spontaneously occurring institutions. Now fortunately, law and language have been allowed to develop. Money was frozen in its most primitive form. What we have had since was mostly government abuses of money.—F. A. Hayek1Friedrich A. Hayek. Interview by James U. Blanchard III, May 1, 1984. Cato Institute Policy Report May/June 1984. https://www.cato.org/policy-report/may/june-1984/exclusive-interview-fa-hayek#.
The economic sphere has lagged behind the cultural and political spheres in institutional evolution. In the cultural sphere, the Protestant Reformation promoted individual sovereignty, freeing personal belief and thought from the control of the church. Modern liberal democracies responded to demands for personal freedom and sovereignty in the political sphere. In the economic sphere, private property ownership has been established, but the institutions of money creation and banking have not promoted equal opportunity
The Federal Reserve in the U.S. and the European Central Bank are systems of economic feudalism in which money creators control its distribution. In the Dark Ages, feudal lords controlled land distribution. New money distribution is a form of economic injustice not widely understood and referred to as a secret or mystery.2Murray N. Rothbard, The Mystery of Banking, Second ed. (Auburn AL: Ludwig von Mises Institute, 1983). This economic injustice cannot exist in an integral society. Economic sovereignty needs to catch up with evolving cultural and political sovereignty.
Economic injustice is opposed by churches, Marxists, and movements like Occupy Wall Street. There are many slogans calling for the end of “capitalism” or “corporate greed” based on the effects of economic injustice. However, these are reactions to economic injustice without a functional vision of financial institutions that promote personal economic sovereignty. People calling for state-planned economies and taxing the rich appear oblivious to the injustices of government/bank intrigues that are the source of injustice.
This article provides a brief overview of the nature of money and banking. Government debt-financed money creation is a strategy of government and banking collusion that redirects money from the hard work of citizens and taxpayers to wealthy elites.
Money existed in prehistoric times. As Frederick Hayek noted, it is a spontaneously occurring social institution. Even hunter-gather societies traded among themselves. Barter was commonplace, but some societies used shells, beads, whale teeth, or even stone disks as money. Alan Meltzer described money as follows:
Money, a commodity accepted by general consent as a medium of economic exchange. It is the medium in which prices and values are expressed; as currency, it circulates anonymously from person to person and country to country, thus facilitating trade, and it is the principal measure of wealth.3Alan H. Meltzer, “Money,” Britannica.com https://www.britannica.com/topic/money
Money represents a value of exchange. It is only as good as the faith people have in it. Money can be an agreement between two parties, as in a promissory note. A seller or lender must believe that the borrower will pay over time. Money can also be a society’s standardized medium of exchange, for example, beads, pieces of metal, coins, paper notes, and now cryptocurrencies.
Currency is as good as its value to the people who use it. It is most widely accepted and trusted when it is stable over time. In early Western civilization, the currency had intrinsic value, like grain, blobs of gold or silver, or metal coins. Gold could be turned into jewelry or iron into tools. Paper notes, which have no intrinsic value, were initially backed by assets like gold and silver and could be redeemed for these assets.
Fiat currency has no intrinsic value and cannot be exchanged for assets. It is an official unit of exchange decreed by a government. Fiat currency only works when people have faith in it. This requires the government to prevent inflation and protection against counterfeiting that would increase the money supply.4“Fiat Money,” Corporate Finance Institute. https://corporatefinanceinstitute.com/resources/knowledge/economics/fiat-money-currency/. If a fiat currency is not managed well, people will abandon its use and seek other ways of economic exchange. Despite widespread criticism, fiat currency has been used successfully and stimulated economic growth when well-managed. However, mismanagement of fiat currency causes entire economies to collapse and the widespread suffering of people, causing opposition to its use.
Fraud and the Debasing of Money
Fraud is the misrepresentation of the value of what someone is receiving for their money. The promise of money is a great temptation for the abuse of trust by individuals and social institutions. There are well-established laws against fraud committed by individuals, such as embezzlement, mail fraud, investment fraud, and fraudulent advertising.
In ancient times currency fraud occurred by rigging scales, showing a false weight and value of gold or silver. Early laws in Babylon penalized these types of fraud. Lydia’s King Alyattes stepped in to regulate coinage about 600 b.c. by minting the stater. Rulers put a stamp on coins after they authenticated its weight and content.
But after governments began minting coins, new ways to commit fraud developed. Governments could debase the value of metal coins by diluting the percentage of the precious metal in the object and falsely authenticating it. Individuals tried to abuse government coins by shaving the weight and melting the shavings, and counterfeiting arose.
Today governments are used for committing fraud by borrowing money for expenses that do not represent the consent of the taxpayers who . are on the hook for this debt. Omnibus legislation is a way such fraud is committed. Fraud is also committed in the misuse of public money by members of government agencies who spend without a consciousness that they have a sacred duty to use public money ethically or not correctly using government grants or research money. Classifying documents is a way to hide misspent money.
How can a government be a referee or authenticator of money if it spends money it creates? That is a conflict of interest. In the United States, the state governments cannot print money to pay off loans They have to balance their budgets and not cause inflation. However, the U.S. Federal Reserve, the Bank of England, and the European Central Bank print money for governments to cover the previous debt, placing unlimited burdens on taxpayers and future generations for bureaucratic and military expenditures. The recipients of this new money earn higher wages than those paying the taxes. This is a form of exploitation and structural injustice.
Who guards the guardian? Marxism is not a solution; it makes the government a player rather than a referee. The solution is to prevent the government from being a player and its access to new money through government/bank cabals.
Government as Economic Referee, Not Player
Some governments are good economic referees. The ancient Greek drachma contained 67 grams of silver from Solon (594 b.c.) to Alexander and 65 grains afterward. When other governments fiddled with their coins, the drachma became widely used in Asia and Europe well into the 2nd-century a.d.5Meltzer, “Money,” op. cit. This stable currency with intrinsic value aided the rise of the Greek economy and the spread of Greek civilization.
Rome introduced its currency introduced in 87 b.c. It remained uncorrupted until the time of Nero in 54 a.d. The debasing of money was slight at the beginning and had little impact on society through the reign of the Five Good Emperors. Between the third and fifth centuries a.d., currency debasement contributed to the destruction of the middle-class and the Empire.
In the twentieth century, there has been inflation with government-printed fiat currencies. In the U.S., gold went up ten times from $35 per ounce in 1971 to $350 per ounce in 2002. That is an average of 7.5% inflation over 30 years. Hyperinflation is inflation that spirals out of control when governments try to print their way out of money mismanagement. Here is what happened in the Weimar Republic:
One dozen eggs cost a half-Reichsmark in 1918 and three Reichsmarks in 1921. In 1923, the market price increased to 500 (January) then 30 million (September) and four billion Reichsmarks (October)….
Before World War I, one US dollar had purchased about four Reichsmarks…. At the worst of the hyperinflation in late 1923, the exchange rate for one US dollar had skyrocketed to 48,000 Reichsmarks (January) then 192,000 (June) 170 billion (October) and four trillion (November).6Jennifer Llewellyn, Steve Thompson, “The hyperinflation of 1923,” Alpha History, September 26, 2019. https://alphahistory.com/weimarrepublic/1923-hyperinflation/.
More recently, Venezuela’s hyperinflation reached 10 million percent in 2018. The oil-rich country was bankrupt because its money was worth practically nothing, and its economy was producing almost nothing, forcing people to barter or trade in other currencies. The flow of money follows natural principles that governments cannot change by force. Governments can referee exchanges, but can’t produce more goods and services people want by printing money. Only a well-refereed economy that gives citizens economic sovereignty can do that.
When the government acts as a referee and protects the stability of money, the economy can grow, and the people prosper. However, when government becomes a player and uses its monopoly power to create debased money for the elite, it destroys the economy and the lives of productive citizens.
Banks of Deposit, Exchange, and Lending
Banks are fundamental financial institutions that store or exchange money. The earliest form of banking was charging a storage fee for the safekeeping of gold or other assets. These are called banks of deposit. They stored money or precious objects in a vault until the owner wanted it back. Banks could not use this money for lending or speculation because it was not theirs.
Lending money began as a separate business. A moneylender would lend his own money, which the borrower would repay with agreed-upon interest. However, bankers sitting on quantities of money that belong to someone else are always tempted to lend or invest it as if it was theirs. In the Middle Ages, when modern banking was born in Italy, some bankers used a portion of the money they were storing for depositors for lending or other investments, assuming they would have enough reserves to pay when requested.
But when the banks got caught cheating, depositors would make a run on the bank to withdraw their deposits and cause bankruptcy.
The Venetian government initially got involved as a referee to stop this behavior. In 1361, the Senate passed a law prohibiting banks from misusing deposits. But many bankers ignored the law, outspent reserves, and went bankrupt. The next step was for the government, in 1524, to create a board of bank examiners to inspect banks to ensure all deposits remained in storage. Bank examiners must have been tempted by bribes from bankers, for in 1584, the largest bank in Italy, the house of Pisano and Tiepolo, failed when it could not pay depositors from reserves.
Next, the government set up a state bank, the Banco Della Piazza del Rialto, that was not allowed to make loans. The bank was only allowed to earn money from fees for services: coin storage, currency exchange fees, transfers of payments between customers, and notary signatures.7John Kenneth Galbraith, Money: Whence It Came, Where It Went (Princeton University Press, 2017, first published 1976), p. 19. This was honest banking. The paper notes issued by the Banco Della Piazza del Rialto became more valuable than coins because they were more dependable than money with unknown levels of purity.
Functional and stable deposit banking was established. The state had set up the Banco Della Piazza del Rialto, primarily as a referee that earned no profit from it. The laws regarding the bank treated individual depositors as sovereigns, as an integral society requires. While people trusted this bank, it was eventually replaced by other banks that engaged in lending from reserves. As long as lending was modest, banks survived, but there was always a possibility of collapse.
In 1609 the Bank of Amsterdam was created as an exchange bank. The small country was awash in coins and currencies from various issuers. Some coins were debased, and it was hard for merchants to know what coins were worth. Merchants want a place to settle payments in foreign currencies safely. The Bank of Amsterdam brokered the exchange of money and guaranteed the settlements in an accounting unit called the florin. The charter of the bank forbade lending.
The florin was the first instance of what is now called stablecoin.8Jon Frost, Hyun Song Shin and Peter Wierts, “An early stablecoin? The Bank of Amsterdam and the governance of money.” BIS Working Papers, No 902, November 2020. It was an exchange unit for business transactions. It was based on the different currencies’ gold and silver asset value. Stablecoin is a recent term developed to describe cryptocurrencies whose value is pegged to some outside reference, either hard assets or stable fiat money like the dollar, to maintain price stability for commercial transactions.
The City Council chartered the Bank of Amsterdam was chartered to perform the job of a monetary referee. The bank formed a single economic function that escaped many government conflicts of interest. The separation of the economic and government spheres made it an integral institution whose mission was the reliable exchange of money.
This bank emerged as the first central bank:
By the end of the seventeenth century, the Bank of Amsterdam was performing three functions that are routinely carried out by central banks today: operating a large-value payment system, creating a form of money not directly redeemable for coins, and managing the value of this money through open market operations.9Stephen Quinn and William Roberds, “An Economic Explanation of the Early Bank of Amsterdam, Debasement, Bills of Exchange, and the Emergence of the First Central Bank,” Federal Reserve Bank of Atlanta, Working Paper 2006-13. September 2006. https://www.atlantafed.org/research/publications/wp/2006/13.
Due to its sound financial practices, the Bank of Amsterdam’s currency became a reserve currency, the dominant currency in Europe in the 17th and 18th centuries.10Stephen Quinn and William Roberds, “Death of a Reserve Currency,” International Journal of Central Banking, December 2016, pp. 63-103. The bank eventually lost that status after abandoning its mission. As had been the case in Venice, the bank finally succumbed to temptation, first allowing depositors to overdraw their accounts and later secretly lending to the Dutch East India Company, which ran up massive debt in 1779 that it could not repay. Depositors lost trust, and a bank run made it technically insolvent.11This was not a complete insolvency, but a policy insolvency, because it carried more debt than reserves.
The lesson provided by the history of the Bank of Amsterdam is that it succeeded as a central bank when it was a referee and not a player. It accomplished what no central bank has done since, acting strictly as a referee. Stephen Quinn and William Roberds argue the Bank of Amsterdam avoided two questionable functions of modern central banks:
Ironically, the Bank of Amsterdam may be best remembered for what it did not do, i.e., take on what are now viewed as the definitive central-bank functions of circulating note issue, operation of a discount window, and the purchase of government securities.12Stephen Quinn and William Roberds, “An Economic Explanation… .,” op. cit.
Honest financial services of storing, lending, and exchanging currency do not involve new money creation through fractional reserve banking.
Fractional Reserve Banking and Abuse
Fractional reserve banking refers to a policy that requires banks to keep a fraction of their deposits “in reserve” rather than retaining them all in storage or lending them all out. The rationale for allowing this is that not every depositor will withdraw all deposits simultaneously. Keeping enough reserve to meet the withdrawal demand enables the bank to lend out more, creating money for additional use. The loans used for new businesses can grow the economy.
In the Middle Ages, fractional reserve banking was illegal and considered cheating or theft because the bank’s used other people’s stored deposits. Fractional reserve banking as we know it today began in 1668 with the Riksbank in Sweden and quickly expanded to other central banks, including the United States, in 1791.13“A simple guide to fractional reserve banking,” CORO. https://coro.global/blog/a-simple-guide-to-fractional-reserve-banking/ Today fractional reserve banking is a standard practice around the world.
Fractional reserve banking is an accounting process in which “new money” is created through debt financing. The entire economy expands when the debt is used for asset production, like building houses and cars. When the loan is repaid, the bank’s assets are increased. A central bank adds the needed currency to the economy. Fractional reserve lending enables the economy to expand and borrowers to start new businesses.
Today, fractional reserve lending is practiced unethically because the principal payments on the loans go to the banks and not the depositors whose assets back the loans. This process would be ethical if (1) the income from the fractional reserve lending went to the depositors, (2) the income from the interest is split between the depositor and the bank, and (3) the bank is allowed to take a service fee for originating and maintaining the loan instead of the principal payment.
The current lending process enables banks to receive an estimated 97 percent of the new money.14See, 97 % Owned, a documentary on this problem. http://97percentowned.com/press/ This unethical lending process creates an ever-expanding wealth gap. Loans, by nature, are a form of economic serfdom similar to the indentured servitude that ancient Rome used to enable immigrants to earn their freedom. People are willing to borrow voluntarily and engage in financial servitude if it means a better life in the future. The practice of delayed gratification enables people to become self-sufficient and the economy to grow.
Abuse of society by financial institutions is not limited to a corrupt method of fractional reserve lending. Much of the lending gets used for non-productive purposes. New money gets used for risky stock speculation, secondary financial paper like sub-prime mortgages and derivatives, and government borrowing for bureaucratic expansion and military arms. These activities do not produce assets leading to economic growth. Instead, they lead to inflation, a hidden tax on consumers.
This bank speculation contributed to the stock market bubble that collapsed in 1929. Belief in the stock market created fast money in the roaring 20s as businesses and the economy rapidly expanded. Banks joined in this boom, speculating with depositors’ money, artificially inflating the bubble. Bank failures followed the stock market collapse. Gambling with depositor money is far riskier than lending from reserves. The government stepped in as a referee to stop unethical bank speculation.
The Glass-Steagall Act of 1933 corrected two serious problems. First, it prohibited banks from using deposits for speculation rather than traditional lending. Second, it established the FDIC to protect sovereign citizens from institutional malfeasance. The Glass-Steagall Act was one of the best pieces of financial legislation in U.S. history. Unfortunately, it was repealed in 1999 and immediately followed by unethical practices and scandals like Enron and WorldCom.
A new form of bank abuse emerged. Adopting an “originate to distribute” model of bank lending introduced new risks into the financial system.15Vitaly M. Bord and João A. C. Santos, “The Rise of the Originate-to-Distribute Model and the Role of Banks in Financial Intermediation,” RBNY Economic Policy Review / July 2012, pp. 21-34. If a bank originates a loan and immediately resells it to investors, it takes a profit off the top and passes all loan risks to the buyers. Traditionally, a bank holds the loan it issues, so it is careful to originate a sound loan. However, if a bank can resell its loans to investors in secondary markets, it will be motivated to make as many risky loans as possible and let others take the risk. This practice dramatically increased after the Glass-Steagall Act was repealed:
In 1993, all together, nonbank investors acquired 13.2 percent of the term loans originated that year. In 2007, they acquired 56.3 percent of the term loans originated in that year, a 327 percentage point increase from fifteen years earlier.16Vitaly M. Bord and João A. C. Santos, “The Rise of the Originate-to-Distribute Model and the Role of Banks in Financial Intermediation,” RBNY Economic Policy Review / July 2012, pp. 22.
Many economists argue that banks must hold the loans they originate to maturity and not sell in secondary markets.17Vitaly M. Bord and João A. C. Santos, “The Rise of the Originate-to-Distribute Model and the Role of Banks in Financial Intermediation,” RBNY Economic Policy Review / July 2012, pp. 22. Banks must take responsibility for the loans they originate. The secondary financial market activities of loan bundling, syndication, derivatives, and insurance were not even well-understood by the investment companies that bought them. The risky loans created a housing bubble followed by foreclosures and the housing market crash of 2007. The unethical lending practices hurt thousands of homeowners and investors, depriving them of personal economic sovereignty. The government failed to act as a referee as it had done in 1933, bailing out the institutions that had harmed society, making them more powerful. Small community banks, best suited to monitor the loans they originate, disappeared.
The obvious solution would have been to reign in the banks by reimposing the Glass-Steagall Act as former Federal Reserve Chairman Paul Volker recommended:
The New York Times today has an article about former Federal Reserve Chairman Paul Volcker’s crusade to bring back the Glass-Steagall Act. Obama isn’t listening. The Act used to keep separate commercial and investment banking activities. The Gramm-Leach-Bliley Act of 1999 repealed it. Consequently “full service” banking behemoths like Citigroup and JP Morgan came to be, now allowed to participate in every financial activity imaginable. Many, including Volcker, believe this was a big mistake, and one of the causes of the financial crisis. I don’t see it. At all.18The Atlantic, October 21, 2009. Italics mine.
The above quote from The Atlantic was written as a defense of the banks. Corporate-owned media, like the Atlantic, promoted hollow legislation like the Sarbanes-Oxley Act and the Dodd-Frank Act, drafted by the financial institutions that owned them. These acts were unethical legislation that enabled the most politically influential financial firms to continue at the expense of the more productive small firms.
On the right, several politicians like Ron Paul argued to “end the Fed” or return to the gold standard. Those on the left got behind the Occupy Wall Street Movement to “tax the rich” that staged a sit-in around Zuccotti Park in lower Manhattan on September 17, 2011.19“Occupy Wall Street Begins,” History .com. https://www.history.com/this-day-in-history/occupy-wall-street-begins-zuccotti-park. The problems were not fixed but got worse. The banks continued to print money, trade derivatives, credit swaps, adjustable-rate mortgages, and other risky investments. They managed to avoid inflation by driving interest rates to zero, further harming small banks.
Further, they increased reserve rates on small banks that did nothing to cause the meltdown, forcing many out of business or takeover by the large banks. Dodd-Frank regulation made it difficult for new banks to start up. Ellen Brown observed that by 2014,
The number of small banks in the U.S. ha(d) shrunk by 9.5% just since the Dodd-Frank Act was passed in 2010, and their share of U.S. banking assets ha(d) shrunk by 18.6%.20Ellen Brown, “Why Do Banks Want Our Deposits? Hint: It’s Not to Make Loans,” The Web of Deby Blog. Oct. 26, 2014. https://ellenbrown.com/2014/10/26/why-do-banks-want-our-deposits-hint-its-not-to-make-loans/.
In March 2020, the Federal Reserve reduced the reserve rate to zero, putting the entire system at greater risk. Congress approved trillions in government loans that fed a government-bank cabal ready to collapse.
Government / Bank Cabals
Governments that use fractional reserve lending and a central bank to finance their debt participate in a cabal using money that belongs to citizens who do not receive the payment on the debt. Instead, they pay the debt to the central bank. The new money created by this debt goes to the bank, and some may get returned to the treasury. The process is shrouded in mystery.21Murray N. Rothbard, The Mystery of Banking, Second ed. (Auburn AL: Ludwig von Mises Institute, 1983). This type of cabal robs citizens of their economic sovereignty.
The Bank of England, chartered in 1694, was the first modern government/bank cabal. King William needed money for war, but the government, unable to increase taxes or borrow, became desperate for another way to obtain money. Parliament gave the new Bank of England the advantage of holding all government deposits, as well as the power to issue new notes to pay for the government debt. Murray Rothbard describes what followed:
The Bank of England promptly issued the enormous sum of £760,000, most of which was used to buy government debt. This had an immediate and considerable inflationary effect, and in the short span of two years, the Bank of England was insolvent after a bank run, an insolvency gleefully abetted by its competitors, the private goldsmiths, who were happy to return to it the swollen Bank of England notes for redemption in specie.
It was at this point that a fateful decision was made, one which set a grave and mischievous precedent for both British and American banking. In May 1696, the English government simply allowed the Bank of England to “suspend specie payment”—that is, to refuse to pay its contractual obligations of redeeming its notes in gold—yet to continue in operation, issuing notes and enforcing payments upon its own debtors. The Bank of England suspended specie payment, and its notes promptly fell to a 20 percent discount against specie, since no one knew if the Bank would ever resume payment in gold.
The straits of the Bank of England were shown in an account submitted at the end of 1696, when its notes outstanding were £765,000, backed by only £36,000 in cash. In those days, few note holders were willing to sit still and hold notes when there was such a low fraction of cash.
Specie payments resumed two years later, but the rest of the early history of the Bank of England was a shameful record of periodic suspensions of specie payment, despite an ever-increasing set of special privileges conferred upon it by the British government.22Murray N. Rothbard, The Mystery of Banking, p. 180.
The Bank of England was the first bank declared “too big to fail.” The bank created fiat money and earned eight percent interest on loans to the government. The government received easy access to this money to finance wars and other political agendas without an upfront tax on citizens. The bank convinced the government to abandon new bank charters, declare notes from the Bank of England the only legal tender, and pass a law that put counterfeiters to death. Only a cartel with government protection can enjoy such insulation from the workings of a free market in money. The pattern of government-central bank cabal was established and has become widespread.
The U.S. was divided over implementing such a legalized cabal. Alexander Hamilton argued for it, and Thomas Jefferson opposed it. Hamilton’s model eventually won. Banks were not well-regulated and frequently failed, causing panic and financial ruin for citizens. In the 1830s, Andrew Jackson advocated the separation of banking and the state. Banking was centralized during the Civil War and was followed by several inflations and recessions.
In an integral society, the government needs to referee banks. The absolute separation of banks from the state, free banks,23 Rothbard, The Mystery of Banking, p. 215. allows banks to fail and leaves consumers at their peril. It does not protect personal economic sovereignty. The opposite extreme is when the government is a player, profiting from a new money cabal where elites appropriate most of the wealth.
The U.S. Federal Reserve Act of 1913, modeled on the British system, introduced a private central bank in which the government was the primary player, not a referee. The government immediately used the system to create debt to fund the First World War.
The U.S. Constitution had to be changed to establish the Federal Reserve. The Constitution forbade the direct taxation of citizens and required all taxes to be apportioned.24The Constitution, Article I, section 9, clause 4. “No Capitation, or other direct, Tax shall be laid, unless in Proportion to the Census or enumeration herein before directed to be taken.” The 16th Amendment was necessary to tax citizens directly to finance the loans. The state governments were bypassed, violating the principle of subsidiarity.
The Federal Reserve could purchase government debt with money created out of thin air. The U.S. Congress abandoned its responsibility to balance the budget, as individuals and other institutions must do, and just increased the debt. Politicians unable to control their spending had a new means to fund lobbyists and political parties. Deprived of economic sovereignty, citizens were forced to pay unwanted expenses through inflation. Economist John Maynard Keynes described this shifted wealth from the masses to elites:
By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth.25John Maynard Keynes, The Economic Consequences of the Peace, Chapter 5. http://www.gutenberg.org/etext/15776.
The Federal Reserve has no incentive to reduce government debt and the hidden costs of inflation. It describes its mission as:
The goals of monetary policy are to promote maximum employment, stable prices and moderate long-term interest rates. By implementing effective monetary policy, the Fed can maintain stable prices, thereby supporting conditions for long-term economic growth and maximum employment.26Federal Reserve Eductaion.org https://www.federalreserveeducation.org/about-the-fed/structure-and-functions/monetary-policy.
After the Dodd-Frank legislation of 2010, the complexity of the cabal increased. Banks are allowed to borrow from the Fed short-term loans at close to zero percent interest, and they can use this money to buy Treasury Bonds and mortgage-backed bonds in the secondary market. Banks can then sit back and earn money on this interest differential without needed deposits or lending:
Lending is no longer the banks’ core activity. Instead, banks make most of their income from trading—for example, in 2010, the six largest bank holding companies generated 74 percent of their pretax income from trading (Wilmers 2011) and yield-curve riding courtesy of the Fed.
The Fed’s interest rate policy allows banks to borrow short-term at close to zero and invest at around 3 percent in long-term Treasuries and even more in mortgage-backed bonds, which are now openly guaranteed by the federal government. This enables them to sit back with 3 percent spreads leveraged 15 times or so to make a comfortable 45 percent or more return. Becoming a yield curve player is far more profitable and avoids all that tiresome bother and risk of lending to small businesses.27Kevin Dowd, Martin Hutchinson, and Gordon Kerr “The Coming Fiat Money Cataclysm and the Case for Gold” Cato Journal, Vol. 32, No. 2 (Spring/Summer 2012).
Governments are non-productive institutions, and banks as “yield curve players,” also become non-productive institutions. The new non-productive fiat money produced governments and bank cabals, causing inflation borne by citizens doing the productive work. The producers work, and the non-producers get the money.
This system creates an inflationary bubble followed by an economic recession. Government debt-produced fiat money is the core problem, not the idea of fiat money itself. Restraints on government debt are necessary, but there are no institutional restraints on either banks or the government.
A more integral economic system would, like the Glass-Steagall Act, limit government and economic institutions to specific missions designed to serve the citizens. It is a conflict of interest for a government to borrow money it can print. The type of bank cabal that began in England more than three hundred years ago and spread throughout the world needs to end. Governments should directly borrow from their citizens or independent institutions. A central bank can act as a clearing house, but it should not be allowed to fund government debt.
Fiat currency can be stable if it is regulated well and trusted. Bank notes were traditionally backed by gold and silver, but the value of precious metals also fluctuates based on supply and demand. Economist David Ricardo proposed the best fix for an inflationary fiat system was to require money to be backed by some type of asset. While gold and silver are not perfect money assets, he stated: “They are, however, the best with which we are acquainted.”28David Ricardo, The Works and Correspondence of David Ricardo: Pamphlets 1815- 1823, Piero Sraffa, ed. (Cambridge: Cambridge University Press, 1951), Vol. IV, p.58-62. Throughout the 19th century, British and American governments created an official price of gold at £4.25 and approximately $2029From 1791-1833, gold was $19.39 and from 1834-1933 $20. In 1933 U.S. President Roosevelt demanded citizens turn in all gold and notes redeemable in gold and then reset the price to $35 per ounce in 1934. Citizens were not allowed to own gold until 1974. for an ounce, respectively. Their notes were redeemable in gold. International trade flourished when gold backed many national currencies, causing global monetary stability. After World War I, many countries had to adjust the value of their money.
The Bretton Woods Agreement after World War II tied all currencies to the dollar and the dollar to gold at $35 per ounce. The U.S. held the world’s largest reserves of gold, and the dollar became the world reserve currency. U.S. gold reserves dwindled to less than half their post-war amount by 1971. President Nixon took the U.S. off of the gold standard, and paper currency was all that backed the “world reserve currency” after that.
Trading of world petroleum in dollars, the “petrodollar,” added some stability to the dollar after the gold standard was abandoned. Energy is required for most production and correlates more closely to economic growth than gold. One alternative proposal is tying money to energy.30https://energybackedmoney.com/. https://www.bu.edu/synapse/2009/04/27/powering-up-the-economy/.
Economists are also devising other formulas that describe economic growth, many of which include GDP as a factor. Governments and central banks resist such procedures because they have become addicted to the cabals providing “funny money”31The term “funny money” is defined a artificially inflated currency, or counterfiet money. It is used to describe the effect of these cabals. https://www.merriam-webster.com/dictionary/funny%20money. to elites.
The hegemony of the U.S. dollar ended in 2022. Excessive printing of COVID-19 relief money not tied to production caused inflation and loss of confidence in the dollar. Then during the Russia-Ukraine war, Western sanctions on Russia and other countries stimulated a new reserve currency created by Russia, China, Brazil, and others.32Jamie Redman, “Targeting the U.S. Dollar’s Hegemony: Russia, China, and BRICS Nations Plan to Craft a New International Reserve Currency,” Bitcoin.com. https://news.bitcoin.com/targeting-the-us-dollars-hegemony-russia-china-and-brics-nations-plan-to-craft-a-new-international-reserve-currency/. Oil and other international commodities began trading in Russian Rubles and other currencies.
Cryptocurrencies like Bitcoin were created to avoid government malfeasance and make money reliable. However, the experimental nature of cryptocurrency has led to wide swings in value. So far, attempts to create stable cryptocurrencies or stablecoin have been unsatisfactory because they get tied to the dollar and don’t escape government manipulation. Central banks are looking at ways to continue government/bank cabals with their digital currencies, eliminating fiat paper money.
Honest Money and Banking in an Integral Society
Honest money and banking mean no theft, direct or indirect, shrouded in mystery. Honoring ownership of money is essential for any economy and ,“Thou shalt not steal” is a foundational principle of civilization and individual economic sovereignty. Fractional reserve banking, as currently practiced, is a form of theft.
Creating “new money” that concentrates wealth in the hands of a few elites while imposing a hidden tax on the masses through inflation is unethical. Modern government-bank cabals continue this theft in a shroud of secrecy. Ill-gotten gains are used to fund wars and line the pockets of cronies, shackling ordinary citizens.
On the left, socialists and communists voice opposition to the “capitalist system” through movements like Occupy Wall Street. However, their proposals to make government the sole player will create serfdom with new elites in charge.33F. A. Hayek, The Road the Serfdom, Chicago: University of Chicago Press, 1944. But the current form of capitalism is not the answer either; it is a corrupt cabal. On the right, this system is attacked by economists like Frederick Hayek and Murray Rothbard. Senator Ron Paul’s movement advocates “End the Fed” and returning to the gold standard. The solution requires laws that forbid government/bank debt cabals.
An integral society requires changes in the system that distributes new money as capital in a just way. One proposal is to divide principal payments on all loans to the bank depositors and provide banks with a service fee. Another idea is to distribute new money equally to all citizens through capital homestead accounts. Such proposals would be an ethical way to reform capitalism.
How Government / Bank Cabals Take the People’s Money — No Comments
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