Over the course of the last year, readers of this blog are aware that the United States has strayed away from the firm monetary policy1 as outlined in the U. S. Constitution.2
The following video is part one of a three part series about the history – as well as the causes and effects – of hyperinflation. Although it is somewhat partisan, the video provokes a discussion about the competing forces over control of U. S. monetary policy.
Since 1913, the same year the Federal Reserve Act was enacted3, the dollar,
. . . has lost 96% of its purchasing power due to inflation. A common misconception today is that prices for goods and services have been going up. The truth of the matter is that prices have remained nearly the same in precious metals terms; it is the value of the dollar that has declined. It simply takes more and more dollars to buy the same products, since the dollar’s value has become less and less. Gold and silver were scrapped as a “control” mechanism for our economy, and ever since, we have been circulating a “robust paper” in place of real money. This “robust paper” is now the world’s reserve currency in central banks. From 2002 – 2005, the U.S. dollar lost over 40% of its value to the Euro, and had similar losses to other major currencies of the world.”4
As the government continues its inflationary policies based on Keynesian economics5, China and other nations continue to push for replacing the dollar as the international reserve currency.6
How should the U.S. solve its insolvency problem? (Pun intended.)
Sources:
- Money.↩
- Gold and Silver Coin as Tender in Payment.↩
- Federal Reserve Act”. Wikipedia. 1 Oct 2009.↩
- “U.S. Dollar”. First National Bullion. 1 Oct 2009.↩
- Keynesian Economics and Savings.↩
- Dollar as Reserve Currency. See also, Goldstein, Matthew. “Q=A – Replacing the Dollar as the Reserve Currency”. 8 Jul 2009. Reuters. 1 Oct 2009.↩
Related posts
Tags: China, Constitution, Federal Reserve, Money
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Jeremy
on October 1, 2009 at 10:25 am
“How should the U.S. solve its insolvency problem?”
I’m not an economist, but I am a thinker (Glenn Beck). The only way I see us solving this issue is through a lot of pain and suffering of the citizens of this great country. Unfortunately, we have indoctrinated the majority of the citizens of this country into reliance on government entitlements – entitlements that cost a lot of money and only grow in size each year. Wasteful entitlements must stop – and people must earn their bread by the sweat of their own brow (not by the brow of others). By removing the entitlements, our government could easily reduce the debt and regain the confidence of the world as the reserve currency.
However, such a move would result in millions without entitlement means that they had come to rely upon over the years, thereby requiring the American people to own up to living in a free country and take care of our own. Sadly, this will likely not occur because of the sloth and pride of our day.
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Greg
on October 1, 2009 at 2:39 pm
Jeremy – I’d argue that in addition to removing entitlements, that the government end its profligate ways and stop pouring more and more money into the economy which causes hyperinflation. Inflation is a hidden tax on citizens.
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Doc
on October 3, 2009 at 7:22 pm
Interesting fact that I’ll bet Glenn Beck is unaware of- Joseph Smith was a strong proponent of the creation of a central bank after his experience in Kirtland, and made it a central plank in his run for the U.S. presidency. But then, he was no economist, just a prophet.
I mention this just as food for thought, more to show things may not be as simple as they are sometimes made out to be by the pundits. Perhaps you should take the lead when you hit Medicare and Social Security eligibility and donate your share to pay the national debt in return for congress no longer being able to use SS tax income to cover holes in the budget.
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Greg
Doc, although the video contains statements by a number of “pundits” (thus my reference above that the video is “somewhat partisan”), economists such as Ludwig von Mises (The Causes of the Economic Crisis), Murray Rothbard (Case Against the Fed and The Origins of the Federal Reserve), and Friedrich A. von Hayek all pointed out the failings of the central bank system.
Joseph Smith did in fact propose a central bank, however, there are key differences between his proposal and the one created by the Federal Reserve Act in 1913. These differences will be outlined in a future post. However, one difference that he proposed is that the profits accrued by the central bank would not go into the pockets of private individuals. In contrast, the current Federal Reserve System essentially operates as a private cartel. Perhpas this is one reason why Federal Reserve Chairman Ben Bernanke refused to tell Congress where the stimulus money went – “It would not be productive” – to let the cat out of the bag.
You appear to have hit the nail on the head in your last comment about the fundamental problems with the welfare state and entitlement programs such as Medicare and Social Security. This is the type of social Collectivism that has been created in society.
Although I am unaware of your personal situation (Agony on a Worldless Wednesday), my comments on your blog and here are not meant to be a personal crticism. While I may disagree with you (e.g. the present health care system in the United States appears to be almost all state-run and bares little resemblance to a free market system – see How Medical Boards Nationalized Health Care) I enjoy reading your posts and wish you the best.
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Jack
on October 4, 2009 at 10:13 am
If you are serious about this topic, please quote some reputable LDS economists or other scholars instead of that carnival huckster, Glenn Beck. What possible qualifications does he have to speak intelligently on this subject?
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Greg
Jack – That’s already been done. Please see the comments above.
It is unnecessary to quote “some reputable LDS economists” when others such as the Austrian economists have already pointed this out.
Regardless, quoting such a source would neither validate – or invalidate – such a claim.
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Mark D.
on October 9, 2009 at 12:25 am
I am no particular fan of a central bank with a fiat currency, but it is worth noting that much of the income the Federal Reserve earns is remitted to the U.S Treasury. Banks are required to purchase stock in a local federal reserve bank equivalent to three percent of their net capital. Then:
After all necessary expenses of a Federal reserve bank have been paid or provided for, the stockholders of the bank shall be entitled to receive an annual dividend of 6 percent on paid-in capital stock (12 USC 289)
6 percent of 3 percent means at most a 0.18% return on equity for a bank attributable to its participation in the Federal Reserve system, which isn’t exactly highway robbery.
The net earnings derived by the United States from Federal reserve banks shall, in the discretion of the Secretary, be used to supplement the gold reserve held against outstanding United States notes, or shall be applied to the reduction of the outstanding bonded indebtedness of the United States under regulations to be prescribed by the Secretary of the Treasury
Apparently, the amount transferred to the Treasury each year exceeds bank dividends by a factor of thirty to one.
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Greg
Mark D. – Thanks for providing information from the Federal Reserve Act, Section 7 – Division of Earnings clause. Although these regulations provide for a modest return on equity, disclosures about the TARP program call into question both the Federal Reserve and Treasury’s credibility, as well as the credibility of those who are and were appointed to run these institutions. For example, was there in fact a liquidity crisis last fall? Or was it an insolvency crisis? Second, if it was the former, why wasn’t that money used to purchase “toxic assets” from financial institutions in the ensuing period of time?
Since the “crisis” last fall, TARP money has been used to partially nationalize the banking industry, purchase ownership in AIG after it was rescued by the Federal Reserve, and provide bailout money to General Motors and Chrysler. As Robert Higgs recently noted in the Great Depressions and Current Recession Compared, the TARP program was only recently implemented to achieve its stated purpose. $3 billion of the original $700 billion is now set aside to purchase “toxic assets” out of an estimated $1.4 trillion of these assets.
Based on these facts, government officials essentially used the proceeds from this program to increase government control over private institutions under the guise of a financial panic all at the taxpayer’s expense. Allowing the government to print money to achieve these types of ends can only lead to inflation. Whether or not recent “stimulus” bills will result in hyperinflation remains to be seen, but is one possibility.
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Mark D.
I agree that TARP is a bit of a scandal. The reason the Bush administration wanted to purchase toxic assets in the first place was to avoid taking ownership stakes in banks. The latter, in terms of “preferred stock” with guaranteed interest doesn’t really satisfy the capital requirements anyway, the only real point is to demonstrate to everyone that the U.S. is not going to stand by while its financial system implodes. Unwelcome interference here and there notwithstanding, any of the government lending to banks will turn out fine as long as they pay us back. And most of the actual commercial banks look like they won’t have a problem with that.
However, I don’t think that we should have bailed out AIG in any circumstances. Any institution that was stupid enough to think that AIG could insure them against systematic credit defaults should suffer the consequences. If we have to lend more to some of those, that’s fine. Better still, we should prohibit commercial banks from relying on credit default swaps in the first place. We ultimately guarantee commercial bank deposits after all.
I also agree that we should have let GM and Chrysler go into ordinary chapter 11 bankruptcy. It’s not the end of the world. The “stimulus” bills are worse. Spending other people’s money on projects of dubious value is bad. Borrowing from the future to spend money on projects of dubious value is far worse.
One last thing, all this Fed lending activity will turn out okay, without hyperinflation, as long as the institutions that borrowed the money pay it back. The number one thing that would cause hyperinflation is if private investors no longer trust in the ability of the United States to make good on its Treasury bonds. Then the Fed would be forced to buy them. Expanding the money supply to finance lending that will never be paid back in real terms is the classic cause of hyperinflation. It is pretty much the only cause, other than helicopter drops from the sky of course.
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Greg
Mark D.:
1 – Government intervention in the economy has well known side effects. These are documented in Robert Higgs’ Crisis and Leviathan which describes in detail how real and perceived crises have been used to justify the expansion of the state. Recent crises which occurred during both the Bush and Obama administrations bear comparison.
2 – In reference to each of the cases cited previously, Market Socialism as advocated above is both a poor substitute for laissez faire and a poor excuse to use other people’s money (i.e. taxpayer dollars).
3 – However, socializing the costs of these types of programs is nothing new. Getting back to the gist of the post, inflation appears to have been “built-in” to the world monetary system following WWII for a reason (Hazlitt, Henry. From Bretton Woods to World Inflation: A Study of Causes & Consequences. Chicago: Regnery Gateway, 1984.).
4 – Inflation in any terms – hyperinflation or otherwise – acts as an indirect tax on a country’s citizens. “All government spending represents a tax . . . [since] printing money to pay for federal spending dilutes the value of the dollar, which causes higher prices for goods and services” (The Inflation Tax).
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Mark D.
I don’t disagree with you there. Or in other words, you are preaching to the choir, man.
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