There is a growing belief that the Federal Reserve Board is one of the larger scams perpetrated on the American people, propping up government schemes both right and left with tax dollars and debt. Below are excerpts of a recent exchange I had on the topic. Read through it and let me know in a comment if you think a gold standard or market standard would be a superior replacement for the Federal Reserve system.
Gordon: The Fed helped cause the depression in the 1930s because it failed to act responsibly in a way that would correct the run on banks, etc.–the reason for which it was ostensively created. It creates concentrated economic power. Any form of concentrated power is dangerous, political or economic.
The current round of bubbles indicate that American consumers have been milked for everything they have. There is a parasitic class of bankers that have been relying on lending money to consumers to buy products. This class gets rich on the interest on these loans, and the manipulation of money. It all worked fine as long as there was full employment to prop up the system. However, the flow of jobs in the production of real goods from the US to Asia, undercut the existence of such consumers to fund the credit system. The destruction of the middle class that propped up the banking class, ultimately means the end of this banking class. The TARP bailout was an attempt to use fictitious money and it was followed by an attempt to create fictitious jobs (non-productive government jobs) to prop up consumerism and a credit based economy. But those strategies are dead in the water because they only further destroy the producer class that creates the goods that underpin the value of the dollar. They only hasten the collapse of the money system.
The only things that will turn this around are (1) laws that once again protect ownership of private property, which includes reduction of the taxes and frivolous lawsuits that create a form of theft of private property, and (2) after the protection of property is assured, the revival of the traditional work ethic that relied on savings and delayed gratification and leads to the production of goods and services that create a middle class.
Peter: Precisely, Gordon, why I recently speculated in an article that in six months to a year, we should be seeing some of the unfortunate effects of the bailouts, tarp,etc., accompanied by a huge accumulation of assets by the moneyed class to whom all this money shifted. They will buy tangible goods with their surplus cash now, so when the dollar plummets, they will be sitting pretty. That’s what’s happening right now, a massive transfer of wealth, which is why we are seeing an uptick of gold prices. They know the writing on the wall.
Gordon: They are buying gold and silver today, but they will also be buying up real estate that is priced low due the credit crisis they created. I would not be surprised if US tax dollars are used to help the wealthy class buy up all the property on which they can build apartments to house their serfs.
Peter: Just one more comment on this interesting topic. The constitution pretty much spells out what kind of monetary system we will have. The federal government coins gold and silver, and the states must use that coinage. The government is not allowed to create money. They can coin it, which is to merely put it in a convenient form for commercial transactions, savings, etc. The money was actually created with the big bang–gold and silver. The states are told they cannot make anything a tender in payment of debts but gold and silver coin. That is the constitution. And the monetary system that results is a good one, as best as we can have. The banks should not have a role in it. This type of system functioned quite well for much of US history. The use of bank notes for money is an opportunity, an invitation, for abuse. Right now, I dare say our monetary system is unconstitutional. The founding fathers understood all about this question, and thus spelled out the Federal government’s role, and the role of the states in very simple terms.
John: Although I agree in general with what is said by Gordon and Peter above, I’m not so sure if going back to the gold standard is the best solution. Money has the meaning of token. Basically, it stands for something created or produced. As more goods are produced in the world, more money will be needed. Also, gold and silver are raw materials used for various technologies. The value of gold and silver is influenced by the value they have for such technologies. Mining gold gets more and more expensive. This means that using gold as monetary standard can be confusing in many ways.
When the Spaniards brought shiploads of gold from America to Europe, that caused inflation. So the gold standard is not a simple solution for the problems in the monetary system.
I don’t see anything inherently wrong with using paper money as long as there is a way to guarantee the value of these tokens. It’s clear that the FED hasn’t done a good job for that.
Gordon: I agree with John on this point. We had paper money in the colonies called colonial script. As Ben Franklin argued, as long as it represented the value of the goods and services in the economy, there was not problem. The problem came when England forced unsound money on the colonies and banned the colonial script.
You can have seashells or paper money that will work fine as a medium of exchange, so long as the aggregate money supply represents the actual value of the goods and service in the economy.
It is wrong to expect that this determination of value can be made by either a government or a private institution like the Federal Reserve. Hayek and Friedman suggested that it would be superior to let the market determine the value. Thus whoever manages the money supply must take the market as his ultimate authority, and he simply adjusts the supply to match the volume of goods and services in the market.
John: Well, we have clever economists. Should they not be able to adequately measure the volume of goods and services in the market and adapt the money supply based on that?
There’s a hook here however for the ‘services’ part. Services in a society can only be delivered on the basis of goods that are produced. For example, a medicine man in a primitive society can only provide full-time service to the tribe if the tribe can feed and nurture him well. The goods produced generate value that can be represented by tokens of money. Services are dependent on these but don’t produce new external value. They produce higher internal value for a society.
If many services are given well, that will result in higher production, because healthy people produce more than sick or dead people. Eventually the services will become visible in the production of more and better goods.
Gordon: You have hit the nub of the problem. Therefore you need a system that prevents “clever economists” from manipulating the money supply in a way that does not represent the actual value of the economy.
One possibility would be to have something similar to the Dow Industrial Average, where you take 300 of the top goods and commodities (and perhaps some services) and let them represent the entire economy. For example, the price of gold, oil, wheat, televisions and 296 other items. You would pint money so this composite average remained constant.
Some goods in this average might grow scare and their value increase relative to the other 299. For example, if the entire amount of gold was mined and no new reserves were found, the price would increase due to scarcity. In this case, gold might be taken out of the 300 because it was known not to be stable. It would be replaced by another item that have a recent history of price stability.
The reverse would be the oversupply of items, like excessive numbers of televisions, dropping their price. In this case televisions would be dropped from the 300 indicators and another more stable item added in their place.
In this case the “clever economist” could try to fudge the rise or decline of an item like gold or televisions, like the climate gate scientists, but I would think a transparent system that other people could verify would catch such attempts to manipulate the data early on, never getting us to the point of a serious monetary bubble.
John: Sounds like a very good idea, Gordon.
I imagine that if a government is responsible for this measuring and issuing of new money, and an economy grows, then the government is justified and even obliged to print more money. Where should this new money go?
If a government really is for the people and can be trusted, then there are various ways that the money could be made available. For example by paying government servants and officials (who serve the people, not bully them), or by improving the infrastructure of a country, or for medical aid etc. It all would be based on the real economy and if a country does well, there would be no need for income tax either.
Gordon: There would need to be a transparent way to both introduce and recall money from the money supply. I imagine that you could make it available through a central bank to state banks through a banking system constrained by the ability to print the way we have discussed above.
Peter: Unfortunately, IMHO, society will have to come to the realization that resources must be dedicated to the money supply, and there is no way around it. An automobile needs oil to run, and that will cost you, no matter how annoying it may seem. The idea that one may print money and expect to avoid dedicating real resources to the monetary regime (gold, or silver, or tobacco, or eggs, or whatever you want to use as money) is, I believe, misguided. One must dedicate resources to the monetary system. Those resources are “tied up,” but that’s life.
Tokens cannot retain value. Coins, when they were made of metals of value, were not “tokens.” Money is not a token, but a commodity with a marketable value that is formed into coins. What we have now are “tokens,” but before the 1960s, they were coined monetary metal, with the quantity of metal in each coin reflecting its face value. Not sure whether pennies and nickels were tokens or not, but it would depend upon the amount of metal they contained, and the market value with respect to gold or silver. But the silver coins were coined monetary metals, and not tokens.