(It is valuable to read forecasts published prior to a debacle such as the 2008 financial meltdown. Below is an analysis that first appeared in an important financial newsletter, The Moneychanger, published in Westpoint, Tenn., in 2005. Some of the financial details are out of date, and I have deleted the source reference links that now come up “404 error.” The value of this forward- and backward-looking analysis is its principle idea. That is the impossibility of reform, the inevitability of continuing financial disaster and the need to understand the U.S. economy as unstable. As our skepticism of national economy increases and its shares slip, so rises the value of shares in local economy. — DJT)
Washington — fighting inflation is job No. 1 these days for the Federal reserve.
— AP news release, May 4, 2005
By Franklin Sanders
The heavens must roar with laughter when they read a line like the one above. The Fed is not now, or ever, “fighting inflation.” The Fed was conceived in inflation, born in inflation, raised up in inflation, flourishes in inflation and will perish in inflation. The Fed is inflation.
If you’re the engineer type, this can be speedily proved by glancing at any chart of money supply forward from 1913, the year the Fed was spawned. Alas, unrigorous slouch that I am, I must sneak up on the same conclusion a more roundabout and poetic way. Still, there is something to be said for having the numbers on your side, too.
And whether the heavens laugh at lines like “the Fed is fighting inflation” or not, surely the insiders who run the scam must be paralysed with laughter.
It’s not money, it’s credit
If you get only one point from this article, it ought to be this: The bankers (1) have substituted credit for money. The money supply is “inflated” by pumping up bank credit. The history of money in the last five centuries covers the course of bank credit crowding out money. Bankers inflating the money supply causes the boom/bust economic cycle as they expand and contract bank credit.
Medieval bankers spawned credit. It wasn’t a new idea, of course, and had been around from Babylonian times. However, credit came to be more and more centered in banks, as a means to circumvent the “limitations” that metallic money imposed on trade.
Whoa! Stop right there and examine “limitations.” Certain people — those who had the most to gain — considered insufficient the money that nature had put at hand for them to use. Since people always clothe their greed in the gorgeous robes of altruism & public interest, this desire for greater “liquidity” actually aimed at something else. It aimed at creating a perpetual money machine for the people who controlled it. The trend from the Middle Ages until now has been to increase the supply of credit available for trading by liquefying capital. The aim is to convert wealth to money, making real assets pass as liquid currency (popularly but not precisely “money”). By making real assets as liquid as money, the amount of traffic — and the opportunities to trade — would be vastly multiplied.
Don’t miss, either, the change this trend must inevitably work on national character. As people concentrate more and more on trading and money profits, they concentrate less and less on production and wealth. Traders, merchants, and speculators replace producers.
The desire to put everything into economic motion as merchandise carried credit expansion through an evolution.
From using capital as collateral, a mortgage, for example, or pawnshop (hypothecation) credit evolved into fractionalisation (fractional reserve banking) and beyond, ending at today’s purely imaginary money. Presto! I present the U.S. Federal reserve note. (2)
At the collateralized stage, collateral backs credit at a one-to-one ratio. At the fractionalised stage, collateral backs credit partially. At purely imaginary money, no collateral backs credit at all. Rather, debt backs credit. The link between abstract and reality has been completely severed.
Medieval bankers realised that all depositors never showed up on the same day to demand all their money. In the meantime the bankers could lend out the depositors’ money and keep only a fractional reserve against their deposits, hence “fractional reserve banking.”
Through this evolution credit departed further and further from any connection to real assets, and eventually evolved into the abstract monster fiat money, where no collateral at all backs the credit. In fact, credit itself has become money, borrowed into existence.
When the bank lends you something, what does it lend? Do the bank pay out Federal reserve notes? Of course not. They create a loan on their books, against which you, you lucky serf, may write checks. In due course, other suckers will take your check, and the bank will repay their efforts with — credit.
The bank lends you its credit, not money.
In the financial world, the derivatives revolution of the 1980s and 1990s squared, cubed, and then squared again hypothecation and fractionalisation. Every form of asset has been launched into the market as a trading vessel, subject to derivatives, derivatives of those derivatives, and so on. In a speech May 2005 in Chicago, Alan Greenspan quoted the Bank for International Settlements’ last word on the notional principal value of derivatives world wide: US$220 trillion in June 2004. Place that figure in perspective. It amounts to six times the total world Gross Domestic Product of US$36.5 trillion, and about 22 times U.S. gross domestic product. It’s gotten worse since then.
The underlying foundation of imaginary money is the U.S. Federal reserve note, which, being redeemable by nothing, purely expresses and represents the Federal reserve bank’s credit. But in fact, the Federal teserve note, the paper currency, does not form the bulk of the U.S. money supply. Rather, that is composed mostly of private bank credit, in the form of bank deposits and credit card debt. The various M measures of the money supply plainly reflect this composition. (3)
On April 25, 2005, of M1 (the narrowest and most liquid definition of money) 51.6% was currency in circulation; of M2, 10.9%; of MZM, 10.6%; of M3, 7.3%. (4) Since these figures do not include credit card debt, which is privately issued credit money, they considerably understate the true money supply. It gives me a headache just thinking about it. Would you include the present credit card debt as the total amount of credit-card-private-credit- money issued? Or would you include the total amount of credit authorised for all credit cards as the potential money supply, always ready to be called into being at the swipe of a card? And what about other privately issued money, like Frequent Flyer Miles, American Express points? Or other government money, like USDA food stamps? Or tax credits?
Point is, private banks, not government, create most of the “inflation” although the government-connected Fed is the cartel established to control the inflating. (5)
Cartel for credit: central bank
From the idea of credit there is only a short step to monopolising credit creation. The ideal instrument for that purpose is a national central bank. The success of the [Wissel] Bank of Amsterdam (founded in 1609), the Bank of Hamburg (1619) and the Bank of Sweden (1656), attracted attention from eager monopolists in England.
According to the Bank of England’s charmingly candid website,
“From the middle of the 17th century, England and London in particular, buzzed with ideas — indeed the era has been dubbed ‘the age of projects’ — but one which kept coming to the fore was the notion of a national bank. People sensed that the country was on the brink of a tremendous expansion of trade, but one vital element was lacking: what was needed was a bank or ‘fund of money’ — more liquidity, in modern parlance — to drive the trade of the country.
“They looked with some envy across to the continent at the example of the Dutch who were then pre-eminent in Europe. Central to the success of the Dutch was the Amsterdam Wisselbank … founded in 1609. It provided the motive power for the Dutch economy by lending to the City of Amsterdam, the State in the form of the Province of Holland, and trade in the shape of the Dutch East India Company, as well as being responsible for coinage and, of course, exchange. Much later, in 1683, it was empowered to lend to private customers. Payments over a certain amount had to pass through it and it therefore was convenient for the important finance houses to hold accounts with it. Thus not only was it in a position to oversee the Dutch financial scene, it was also able to act as a stabilising influence on it.*** “The political economist Sir William Petty had recognised from the example of the Dutch that successful credit-based trading could benefit a nation in many ways and help to enlarge its sphere of influence. He wrote in 1682, ‘What remedy is there if we have too little money? We must erect a Bank, which well computed doth almost double the Effect of our coined Money; and we have in England Materials for a Bank which shall furnish Stock enough to drive the Trade of the whole Commercial World.’”
King and bank vs. the people
About 1694 royal and private interests flowed together to change the current of history. The resulting combination — King & Bank versus the People — defined relations for all central banks and governments to follow. If you fail to mark, learn, and inwardly digest this alignment of interests, you will miss the most important, and most basic, relation determining the nature of today’s money. Miss this fact, and you will never understand how the federal government, the Federal reserve, and banks actually work together, or what is inevitable in their behaviour.
In England the civil war and the Restoration had thrown the financial world into a state of cowed terror. At one time the rich stored their silver and gold in the Tower of London for safe- keeping, until the king, needing money, helped himself to it all. The Stuart kings also had a penchant for “forced loans” (the name explains everything). Then the King of Holland, William of Orange, with his Stuart wife, crossed the channel to help the English get rid of James Stuart II in the Glorious Revolution of 1688.
But the English oligarchy, having just rid themselves of a homegrown king, weren’t eager to trust an exotic import. William wanted to fight wars, mostly for Holland’s sake, but the English didn’t want to pay for them, for taxation’s sake. Loans to the king, thanks to his Stuart prede- cessors’ somewhat less than creditworthy performance, were not easy to come by. He raised one £100,000 loan from the City of London at a modest 30% interest.
About the time William ran out of money a Scotsman, William Paterson, approached him with a scheme. He would raise £1,200,000 to loan the king at 6.5%, and the king would never have to pay back the principal. It would be a perpetuity, just paying interest forever. Oh, and he wanted to make the bills of his bank a legal tender. Paterson couldn’t wring that concession from Parliament, but after suggesting several other plans, eventually won a charter for the Bank of England. The wealthy subscribed the £1,200,000 in only 10 days. The rest, as they say, is history. (6)
Just as the Bank of England became the model for later central banks, the British national debt became the model for other national debts. From 1694 until 1749 “[T]he owners of the Bank had loaned considerable sums to the government in perpetuity at fixed rates of interest. By 1743, the sum was well in excess of nine million pounds.” (7)
Nine million pounds, in case you are curious, amounts to 2,118,600 troy ounces of fine gold. The value of all English coin minted, silver and gold, from 1660 – 1760 totalled only £44.4 million. (8)
The bank had a perpetuity amounting to over a fifth of all the gold and silver coined in 100 years.
From £1,200,000 in 1700, the national debt had grown to £850,000,000 by 1815 (200 million ounces of gold).
A perpetuity. An advance claim on all the production of everyone in the country, forever.
King & Bank versus the People, forever.
The apotheosis of credit
Again, the Bank of England’s website explains the sequel with smiling candour:
“One particularly significant development around this time lay in the perception of credit or ‘imaginary money’ as it was then called. It represented a fundamental and distinctive principle in the new thinking that was so prevalent during this age of ideas and experiments. Projec- tors had begun to recognise the existence of an untapped source of assets, albeit non-metallic, such as stocks of merchandise, tax receipts, revenues on land and commercial obligations, against which ‘credit’ or ‘imaginary money’ could be raised. Credit could be, they argued, the seed corn of wealth.
“But what was the money? To the man in the street, money simply meant coins, but the new thinking was overturning that Shibboleth: it was suggesting that money could take other forms which would have no intrinsic value and yet still possess qualities to enable it to be used to make payments thereby fuelling and lubricating the economy. It was inevitable, therefore, that when theory became practice and the funded National Debt was born that crucial element, paper money, almost simultaneously completed the equation.”
In the single best exposition of monetary history ever written, Money and Man, Elgin Groseclose explains. “The Bank of England, which is the pattern of modern banks of issue, and around which the English banking and money system is built, was created not with the object of bringing the money mechanism under more intelligent control, but to provide means outside the onerous sources of taxes and public loans for the financial requirements of an impecunious government. Such has been the motivating force leading to the establishment of all the great banks of issue of modern times. Banking became, in the eyes of the 19th [and every other] century, the magic wand, the Midas-touch, with which to turn the solid substance of capital into the glistening and fluid thing of money.” (9)
The cataclysmic change: The end of representative government
At the time, no one seemed to notice the true significance of what had happened between William and the Bank of England. What did he really accomplish? The King circumvented the brake that taxation put on his actions. He freed himself of need to tax in order to wage war. He could simply borrow the money.
Think of it, ponder it well. The collusion of king and bank enabled him to carry on war or any other policy without reference to the people. He didn’t have to depend on them for taxation. He had thrown off that galling leash called “power of the purse.” 10
Ponder further. Very shortly, almost instantaneously, the bank (which includes the entire banking system) had become more important than the people to hinder or help the King’s ac- tions. From there it was only a short step to complete symbiosis, where king and bank merge into one entity. That evolution is speeded along by Parliament (or Congress) because the oligarchs that own the bank also exercise power in Parliament. Before too long, they own Parliament, too.
Now the King-Banking symbiosis can do anything it wants.
Now change “King” to “State” or “federal government.”
You have arrived at 2014
2 witnesses: smoking guns in the criminals’ hands
Of course, this might just be my crazed money-nut spin on historical events. Fortunately for my reputation, a bona-fide, 24 karat member of the Banking Establishment, confirmed my conclusion.
In 1945, Beardsley Ruml, chairman of the Federal Reserve Bank of New York (the only one that counts — the others are just window dressing) spoke to the American Bar Association. He very candidly admitted that, a central banking system and an incontrovertible currency free a sovereign national government from money worries so that it no longer need levy taxes to raise spending money. “The necessity for a government to tax in order to maintain both its independence and its solvency is true for state & local governments, but it is not true for a national government. Two changes of the greatest consequence have occurred in the last twenty-five years which have substantially altered the position of the national state with respect to the financing of its current requirements.
“The first of these changes is the gaining of vast new experience in the management of central banks.
“The second change is the elimination, for domestic purposes, of the convertibility of the currency into gold.” (11)
Chairman Ruml was not slow to draw the implication of this power. Taxes were no longer needed for revenue, so their sole purpose becomes social engineering.
Now we come to an even more amazing and powerful development. Not only can the state, freed from the need to tax, do anything it wants, but it can now also turn the cannon of taxation onto the people’s behaviour, pass out economic favours, manipulate the dollar’s exchange rate, and re-distribute wealth. Let Ruml speak for himself.
Federal taxes can be made to serve four principle purposes of a social and economic character. These purposes are:
♦ 1. As an instrument of fiscal policy to help stabilise the purchasing power of the dol lar;
♦ 2. To express public policy in the distribution of wealth and of income, as in the case of the progressive income and estate taxes;
♦ 3. To express public policy in subsidising or in penalising various industries and economic
♦ 4. To isolate and assess directly the costs of certain national benefits, such as highways and social security.
The 2nd witness speaketh
As if Beardsley Ruml weren’t witness enough, fifty years later another witness stepped forward: Alan Greenspan. In a speech at the Catholic University Leuven in Leuven, Belgium on January 14, 1997, Greenspan confessed,
Central banks can issue currency, a non-interest-bearing claim on the government, effectively without limit. They can discount loans and other assets of banks or other private depository institutions, thereby converting potentially illiquid private assets into riskless claims on the government in the form of deposits at the central bank. That all of these claims on government are readily accepted reflects the fact that a government cannot become insolvent with respect to obligations in its own currency.
In other words, “Taxes for revenue are obsolete.” Governments with central banks cannot default on obligations to pay their own currency, because the central bank can create as much currency as the government needs.
Greenspan also lifted central banking’s power to emit unlimited credit from a sovereign national to an international level. He claims that central banks acting in concert can (and, we must assume, do) manipulate — or rather, suppress — gold’s price. Speaking to the House Committee on Banking and Financial Services on July 24, 1998, he said,
Nor can private counterparties restrict supplies of gold, another commodity whose derivatives are often traded over-the-counter, where central banks stand ready to lease gold in increasing quantities should the price rise.
The Fed’s purpose
From this historical perspective we now can observe the expansive, grand edifice of social and economic control founded and raised upon the Federal Reserve System. At last, we come to the amusing proposition that the Fed is “fighting inflation.” Let us put to death this silly notion once and forever. The Fed was founded to inflate. History teaches us that is its purpose.
More, the Fed must inflate because its monetary system works by borrowing money into circulation. When money must be borrowed into circulation, an ever greater amount must be borrowed every year to pay the interest burden of the amounts borrowed into existence the year before. Otherwise, there’s not enough money to pay the interest, and the system goes bankrupt. Besides that, there is the whole vast network of government/Fed control that reaches even the edges of society and economy, and all of this control depends on inflation.
So, the system’s operators may inflate faster or slower — to keep their inflation from “overheating,” as they like to euphemise — but inflate they must. Inflate or die. To allow deflation would cause widespread bankruptcy and a domino effect of “cascading cross defaults” (Greenspan’s overworked term) as borrowers became unable to pay. And that would threaten to shake down the entire edifice of iron control and endless profit. If the Siamese twins who run government and Fed understand anything, they understand this. Just as primates grow nervous in open fields without protecting trees to climb, the Feddies have inherited their own ancestral terror, passed down from the Great Depression: they fear deflation above all things. Each element of the institutional framework (laws, regulations, statutes, agencies) installed since the 1930s aims at choking deflation before it can start and stoking inflation.
What does it all mean?
Therefore we can forecast with the utmost confidence, that, unless a widespread panic forces sudden mass defaults — cascading cross defaults — our present economic debacle, caused by inflation, will end in inflation, and not deflation. And we can lay our investment plans accordingly. Keep on remembering this in the coming weeks and months as the press and the media beat the panic drum of “deflation coming,” and keep your head.
Likewise, it is possible to predict that eventually (although no one can predict the date) the US dollar will collapse and vanish. Why? Simply because every scheme of this kind from the beginning of the world — from the Banco dello Piazzo del Realto in Venice to the Bank von Hamburg to the Wisselbank of Amsterdam to Law’s Banc Generale in Paris to the Reichsbank and Bank of Hungary and Bank of China — to all the silly central banks of today, has collapsed. Why? Because they won’t work. Success begets excess, excess begets bubbles, and bubbles collapse.
Untreated, the Tapeworm inevitably kills its host.
Used by permission. Originally published January 2006. Franklin Sanders is publisher of The Moneychanger, a privately circulated monthly newsletter that focus on gold and silver and the application of Christianity to economics, culture and family life. We have subscribed to this newsletter for more than 20 years, and consider it a must read. F$149 a year. Franklin is an active trader in gold and silver (he’ll swap your green Federal Reserve rectangles and give you real money in return). He trades with savers and investors outside Tennessee. Subscribe to his daily price report and market commentary on the website.
1 I use the term “bankers” to refer to an interest group, not to delineate a “grand conspiracy through the ages.” Maybe one exists, but that goes beyond what we need to prove for an investment strategy. Besides, once entrenched, interest groups will do everything necessary to defend their interests. If you had a legal monopoly that allowed you to create money out of thin air, would you defend your monopoly? Does a cow give milk?
Don’t confuse “central bankers” with the fellow who smiles at your from his desk in the Hadleyville Local Bank. He doesn’t know as much about the banking system as a hog knows about a sidesaddle.
2 I use “Federal reserve” instead of “Federal Reserve” because, oddly enough, it appears that way in the U.S. statutes authorising it. Whether that lack of capitalisation means anything or not, I couldn’t say.
3 The very fact that “money supply” must be subjected to so many definitions reinforces my point that liquefaction of assets defines and determines the trend in monetary evolution. As Alan Greenspan famously admitted before congress, no one can define “money” today. No one knows where you draw the line to say, “This asset is liquid enough to call it ‘money’.” The various M-measures each include increasingly illiquid classes of financial assets, as if to say, “Well, let’s throw in this class.
It’s pretty near immediately spendable, too.” The inability to define “money” also argues that what we presently use as “money” is not money at all, but a “money substitute.” Data comes from the St. Luis Fed. Definitions:
M1: The sum of currency held outside the vaults of depository institutions, Federal reserve Banks, and the U.S. Treasury; travelers checks; and demand and other checkable deposits issued by financial institutions (except demand deposits due to the Treasury and depository institutions), minus cash items in process of collection and Federal reserve float.
M2: M1 plus savings deposits (including money market deposit accounts) and small-denomination (less than $100,000) time deposits issued by financial institutions; and shares in retail money market mutual funds (funds with initial investments of less than $50,000), net of retirement accounts.
M3: M2 plus large-denomination ($100,000 or more) time deposits; repurchase agreements issued by depository institutions; Eurodollar deposits, specifically, dollar-denominated deposits due to nonbank U.S. addresses held at foreign offices of U.S. banks worldwide and all banking offices in Canada and the United Kingdom; and institutional money market mutual funds (funds with initial investments of $50,000 or more).
MZM includes the zero maturity, or immediately available, components of M3. MZM equals M2 minus small-denomination time deposits, plus institutional money market mutual funds (that is, the money market mutual funds included in M3 but excluded from M2).
4 M figures as of 4/25/2005. Calculated by dividing “Currency in circulation” into the M figure: $706 bn currency in circulation versus total M1 of $1,368 bn, M2 of $6,480.2 bn, MZM of $6,659.4 bn, and M3 of $9,604.7 bn
5 The Federal reserve banks are private corporations, according to the Federal courts. Notwithstanding all the window dressing of the President appointing the Chairman, the banks paying part of their interest earned back to the treasury, etc., the Federal reserve banks are private entities. Lewis v. US, 680 F2d 1239, 1241 (9th Cir. 1982). See also Scott v. FRB of Kansas City, 04-2357, 8th Cir., 4/28/2005
6 Not much to anybody’s surprise, the Bank of England experienced its first bank run just two years later, in 1696.
7 “A Private Central Bank: Some Olde English Lessons,” by G.J. Santoni. The Federal Reserve Bank of St. Lewis Review, Vol. 66, No. 4, April 1984, page 15
8 Silver Bonanza by James U. Blanchard III & Franklin Sanders. New Orleans: Jefferson Financial, 1993. Page 41
9 Money and Man: A survey of Monetary Experience by Elgin Groseclose, 4th Edition. Norman, Oklahoma: University of Oklahoma Press, 1976. Page 175
10 A hundred years later, at the adoption of the U.S. 1798 constitution, Patrick Henry opposed ratifying the constitution. “I smell a rat. You are giving up the power of the purse and the power of the sword. Without these you cannot control your government.” (My paraphrase)
11 “Taxes for Revenue Are Obsolete” by Beardsley Ruml. American Affairs, January, 1946, Volume VIII, No. 1, page 35