The Fed's Money Monopoly (Ron Paul)

U.S. Rep. Ron Paul, R-Texas, 14th District ^ | 2009-12-14

[rabscuttle385]

Last week, in the name of protecting the little guy from Wall Street, the House passed HR 4173 to increase the little guy’s false sense of security in the financial system. This mammoth piece of legislation would massively increase government regulation and oversight in the banking industry under the misguided reasoning that more government could have stopped faulty lending practices, when in actuality it caused them. This bill would also greatly increase the powers of the Federal Reserve, which too many in Congress still see as savior rather than perpetrator in this mess.

One silver lining is that the amendment to audit the Fed is still attached to the bill, and if it survives the Senate, the Fed will no longer operate in secrecy. If any version of HR 4173 becomes law, the Fed will be intervening and bailing out more rather than less, as it will gain enormous new powers in addition to those it already has. Whatever happens, the Fed and its defenders have seen that people are becoming very wary of its methods of operation, and many are downright angry at its very existence. Never again will the Fed be immune from the scrutiny of its critics. This is very positive.

Because of legal tender laws that force acceptance of the dollar, the Fed has absolute power over the currency. This absolute power is leading to the absolute corruption of our currency. The money supply has doubled in the last year or so, which is extremely dangerous. The banks seem to be hoarding liquidity now but once these dollars make their way into the economy, hyperinflation and economic chaos will be a real possibility.

Every time hyperinflation rips through an economy, the middle class gets completely wiped out. It is very alarming to watch the purchasing power of an entire life savings reduced to that of a few pennies. Those savings represent years of real labor, real time, effort and sacrifice exchanged for corruptible pieces of paper that politicians and bankers can destroy at whim.

Legal tender laws force the people to become subject to this risk for the benefit of the rulers. Artificial demand for currency allows the authorities to create arbitrary amounts of it to pay for wasteful projects, like frivolous wars and an ever-expanding public sector. This saps the private economy of jobs and purchasing power, yet the temptation proves too great for politicians, time and time again. Our government is no different. Although our dollar has taken nearly a century to lose 98f its purchasing power, the fact that we are all obliged to participate in this slow burn of the economy on pain of imprisonment is anathema to the principles of liberty.

I introduced the Free Competition in Currency Act last week to free the people from these governmental threats. HR 4248 would repeal legal tender laws, prohibit taxation on certain coins and bullion, and repeal certain laws related to coinage. The prospect of people turning away from the dollar towards alternate currencies should provide incentive for Congress to regain control of the dollar and halt its downward spiral. Restoring soundness to the dollar will remove the government's ability and incentive to inflate the currency and keep us from launching unconstitutional wars that burden our economy to excess. With a sound currency, everyone is better off, not just those who control the monetary system.

Texas Straight Talk is considered public domain and may be reproduced without permission.

[djf]

Repeal legal tender laws?

So if somebody owes you 100 bucks, and they walk up and slap a C-note in the palm of your hand, you get to wad it up and toss it back and say “...I want Gold...”?

[rabscuttle385]

*Ping!*

[HuntsvilleTxVeteran]

The Federal(not federal) Reserve(No reserves) Bank(Not
a real Bank) loans banks fiat dollars.
The main idea of fractional reserve is a scam whereby
a banker could loan money he didn't have and never had.

It actually permitted banks to create new money, based
not on gold, nor on his own credit, but on the credit
of his customers.

[lmr]

This mammoth piece of legislation would massively increase government regulation and oversight in the banking industry under the misguided reasoning that more government could have stopped faulty lending practices, when in actuality it caused them.

There is much with Ron Paul that I disagree with, but he is spot on here.

[LizardQueen]

Heh, I read the title as “Monopoly Money”, rather than “Money Monopoly”. It still makes sense that way too.

LQ

[Nick Danger]

The main idea of fractional reserve is a scam

Let's find out whether you've actually thought that through.

Example 1 concerns what Milton Friedman used to call "the life cycle of income." The basic idea is that the need for "stuff" like houses, shoes, etc. is highest in early adulthood when people are forming families and raising the nation's children. The income to pay for all that stuff, however, typically doesn't arrive until later in life when the 'young parents' are in their 40's or 50's and have much better jobs than they could have qualified for in their 20's.

Our society solves this problem through the miracle of "lending," by which younger people essentially borrow the savings of older people, which they will repay when they get older themselves. This allows the nation's children to grow up with shoes, in actual houses. On the whole it works well.

Your plan would cause the banks to have to hold 100% of the older people's savings in reserve. They could lend none of it. Not to put too fine a point on it, but this would make a lot of people unhappy with you in the event you became King and imposed your policy.

For example 2 let's use some bright and ambitious fellow who wants to open a pizza parlor, but whose family, the Monaghans, don't have a lot of money. He goes to the bank for a small business loan, but thanks to you, banks no longer lend money. They're sort of Scrooge McDuck money bins where wealth piles up invested in nothing.

Please don't sell that idea here. It would be the biggest brake on upward mobility and the American Dream since the days of landed gentry, their serfs, and the lack of any way for a serf to open a pizza parlor. Plus it would leave most parents of young children living hand-to-mouth and depriving their children of many things that they can afford, but only out of money they won't earn for twenty more years.

[HuntsvilleTxVeteran]

“It actually permitted banks to create new money, based
not on gold, nor on his own credit, but on the credit
of his customers.”

You left out or did not read the above part!

The upward mobility only used to work for the
people that had some moral and credit worthiness.

[Nick Danger]

You left out or did not read the above part!

That was part of what you called a "scam." Your definition of the "scam" was precisely this:

The main idea of fractional reserve is a scam whereby a banker could loan money he didn't have and never had.

It actually permitted banks to create new money, based not on gold, nor on his own credit, but on the credit of his customers.

Are you now saying that lending to creditworthy customers is not a scam? I would applaud that, but you will have to withdraw your proposal to eliminate fractional-reserve banking. Otherwise the banks will have to keep all their deposits in the vault, lent out to no one.

[HuntsvilleTxVeteran]

The scam is when there is no credit worthiness on the part
of too many of the “customers” there is no upward mobility
on the people but downward mobility on the part of the
people that are credit worthy.

[djsherin]

Ping

[Nick Danger]

The scam is when there is no credit worthiness on the part of too many of the “customers” there is no upward mobility on the people but downward mobility on the part of the people that are credit worthy.

Oh, OK. So you'd agree that your original statement that "the main idea of fractional-reserve banking is a scam" is looney-tunes.

Surely, the "main idea" is not to lend money to people who won't pay it back. That might be Barney Frank's main idea, and Chris Dodd's main idea, but the banks got roped into making loans they knew were bad by political pressure that had little to do with "fractional reserve banking" and everything to do with craven politicians totally abusing their positions as government officials to interfere in the operations of banks.

[Bokababe]

"Example 1 concerns what Milton Friedman used to call "the life cycle of income." The basic idea is that the need for "stuff" like houses, shoes, etc. is highest in early adulthood when people are forming families and raising the nation's children. The income to pay for all that stuff, however, typically doesn't arrive until later in life when the 'young parents' are in their 40's or 50's and have much better jobs than they could have qualified for in their 20's.

That economic disparity between youth and middle age has always existed, often creating -- out of necessity-- much different societies than we have today.

For example, 100 years ago, young men had several choices: live with their parents, sometimes even after marriage, until they were able to take over their aging parents financial legacy; leave home single and make their way in the world, only marrying when they achieved some financial security; or, for the wealthier, go to school and then join the family business.

In many cases, men didn't marry & have children until they had some way of supporting them based on something other than "potential future earnings". The wives of these men were often much younger than they were, but they rarely starved.

Banks and lending eventually became "the great social equalizer" in many ways -- now your parents didn't have to start with either a family farm or family business in order for you (& the bank) to eventually own one. Now, your parents don't have to be wealthy for you to go college. You no longer are forced to "make your way" before marrying, instead all that you have to have are "good future financial prospects" for banks to lend your future earnings to you now.

Banks & lending made a place for themselves in the lives of ordinary people over the last hundred years, in ways that they never had before. Without the perpetual access to credit that we've come accustomed to, alterations to society itself would like adapt and make up the difference by reverting to past successful models for seeking personal financial stability.

[Nick Danger]

I had high hopes for your theory. But then I asked myself: what if these facts of yours aren't actually facts? What if your note were like ClimateGate, full of stuff you made up that wasn't necessarily so?

For instance, what if it weren't true that 100 years ago, men had to wait longer than they do now to get married? What if 100 years ago they were getting married at pretty much the same age they do now, or even younger?

We need to care about this, because it turns out that's the case. According to the census bureau, the average age at marriage for both men and women has wobbled around a bit, but isn't significantly different now than it was in 1890.

And the fact that 100 years ago wives were "much younger" than their husbands turns out to be mislabeled. It's not a fact at all. On average the age difference at marriage between men and women has changed two — count 'em — two years since 1890. So let's take that out of the "fact" pile and put it in the "you made that up" pile.

What we're left with is that the existence or lack of banks doesn't seem to have much effect on when people get married. The biggest difference they seem to make is that those born to less-than-wealthy parents are able to give their children somewhat better lives than they would otherwise.

I suppose there will always be people who say, "That stinks. Poor people were meant to suffer. Let's stop this silly 'lending' nonsense and return to the successful days of yesteryear, when my family was the only one in town not living in a trailer."

I dunno, that 'serfs and nobles' stuff doesn't sound all that American to me. America should be about upward mobility; about making the most of your talents. Not about being born to the right family.

[Bokababe]

"I had high hopes for your theory. But then I asked myself: what if these facts of yours aren't actually facts? What if your note were like ClimateGate, full of stuff you made up that wasn't necessarily so?"

Silly to compare me to "Climatagatists", given that I can't see a way that I'd gain fame or fortune from a FR post.

Actually, it wasn't "made up", it was however anecdotal based on many of the immigrant families that I knew of my father's generation and my grandparents' generation.

There were many men who came to the US to make their fortunes before seeking a wife, especially during that great immigration period from the 1860's to the 1920's. They'd work for years to get their citizenship and save enough to be able to afford to marry.

I never suggested that both the husband and wife would be older because in earlier times men were considered men at an earlier age, but rather that the wives would be much younger. This proved not to be as significant as I would have expected based on those numbers. But, while the average age difference between them on those charts has only decreased by two years -- another way of putting it would be to say that the difference has since been cut in half -- not insignificant, but also not compelling.

Yet I really do wonder whether the immigrant numbers in those statistics are accurately represented. And immigrants to the US were a sizable percentage of the US population.

Again, only anecdotal, but I doubt an isolated phenomena -- many of the women that I knew who came to the US lied about their ages.

There were, at various points, immigration age restrictions for single women back then. US officials were looking for single women who could work and/or have babies, so they restricted the immigration age for single women not traveling with their parents, to something like ages 18-25. I knew many, many women who were much younger (14 & 15), whose parents had arranged their marriages from the old country to men in America, so the young women lied about their ages. My grandmother was the only one I knew who lied downward -- she was actually 27 and said that she was 24. My grandmother was more than ten years older that the women she traveled to the US with, as they all lied to meet the age restrictions.

I think that while the statistics you used were useful, I am really not clear that they were a truly accurate representation of what was really happening. Between the inability of many to speak accurate English, those telling officials what they wanted to hear, and the vast expanses of open space, the US Census ability to take an accurate picture of the precise ages of the population anywhere other than the major cities was possibly pretty sketchy.

Nick, the point here is to get an accurate picture, not to prove you or me to be wrong. I am not rejecting the US Census, only questioning whether it was a completely accurate barometer.