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Federal Reserve and the Constitution

January 15, 2010 in Money by Greg | 1 comment

Congressman Ron Paul (R-Texas) wrote about the role of the Federal Reserve in relationship to the Constitution. After providing a brief U.S. history lesson of the debate over paper money, its attendant danger of inflation, and the role of a central bank in society, he wrote:

Federal Reserve global tentacles The lack of respect for the Constitution even in the nineteenth century set the stage for the Federal Reserve Act of 1913. Fear, misinformation, and ignorance allowed government to ram bad policies down the throat of the American people. This is not unlike giving the president authority to go to war and to bail out those least deserving help in an economic crisis. The rationalization that the state’s interest supersedes the interests and the rights of the people is embedded in the arguments as to why the American people had to go along with those who hate commodity money and love central banking.

The Fed was established as a result of the public and banking clamor for an elastic currency, and an elastic currency is nothing more than one that can be arbitrarily increased in volume at the discretion of the monetary managers. Sometimes they argue over who exactly will have the authority to do so, the central bank or Congress or private banks themselves. Increasing the supply of money and credit is the proper definition of inflation, meaning that when the demands were heard for an elastic currency, all they were looking for was a legal right to inflate the currency for the benefit of whatever special interests they were concerned for at the moment.

Noble intentions are always used to justify the inflation, but the real reasons are far more sinister. Those who get the control over the money are the beneficiaries, not the people as a whole.

Economist John Maynard Keynes, before he became the champion of inflation, wrote quite correctly of the grave danger of inflation. Like Greenspan, he changed his tune as the years moved on. Keynes stated in his book The Economic Consequences of the Peace:

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.1

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  1. John Maynard Keynes, The Economic Consequences of the Peace (New York: Harcourt, Brace, 1920), pp. 235-236.↩

Thomas Paine and Paper Money

November 21, 2009 in Money by Greg | 10 comments

The following is the first in a series of articles exploring the history and effects of paper money.

Thomas Paine is well known as one of the Founding Fathers of the United States as well as an author and pamphleteer. In January 1776 Mr. Paine published Common Sense, the pro-independence monograph he anonymously published shortly after his immigration to America in 1774.

In 1786 Thomas Paine wrote about the effects of paper money in comparison to Gold and Silver Coin as Tender in Payment of debts.1 He wrote:

Thomas Paine Man has no share in making gold or silver; all that his labors and ingenuity can accomplish is, to collect it from the mine, refine it for use and give it an impression, or stamp it into coin.

Its being stamped into coin adds considerably to its convenience but nothing to its value. It has then no more value than it had before. Its value is not in the impression but in itself. Take away the impression and still the same value remains. Alter it as you will, or expose it to any misfortune that can happen, still the value is not diminished. It has a capacity to resist the accidents that destroy other things. It has, therefore, all the requisite qualities that money can have, and is a fit material to make money of — and nothing which has not all those properties can be fit for the purpose of money.

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  1. Paine, Thomas. “Thomas Paine on Paper Money”. 24 Apr 2008. Ludwig von Mises Institute. 21 Nov 2009.↩

China and the Weakening Dollar

October 24, 2009 in Money by Greg | 4 comments

Recently, Forbes reported why a weakening U.S. dollar continues to threaten America and why China is changing its monetary policy. Earlier this week Michael Pento wrote,

It seems nobody in this country wants to take responsibility for the secular decline in the value of the U.S. dollar. When Fed Chairman Ben Bernanke is asked about the currency’s decline, he refers the query to the Treasury Department. When the president is asked about the dollar, he often gives the tired old platitude that the U.S. has a strong dollar policy, but his vacuous words seem more like a perfunctory utterances than a bona fide dollar-boosting strategy.

Chinese flag Recently, in an interview with CNBC’s Maria Bartiromo, Treasury Secretary Timothy Geithner had some startling comments about the world’s reserve currency. When asked about its chronic weakness, and what specifically he was doing to safeguard the dollar, Mr. Geithner said, “…if you look generally, you know, I don’t talk about developments in the exchange markets.” He continued, “If you look at what’s happened over the last year, you’ve seen really a lot of confidence in the U.S. economy. When the crisis was at its peak … you saw the dollar rise when people were most concerned about the future of the world.”

Now that the U.S. dollar is once again caught up in a vicious secular bear market, losing nearly 16% of its value since March alone, the Treasury Secretary is once again opting to plead the fifth. Even worse, he claims that last year was a good example of global confidence in the currency, even though it was down over 8% for the year.

Can he really be counting on another collapse in the global economy to pull the dollar out of its downtrend? To use the previous year as an example of confidence and strength in the country, or the currency, is spurious in nature. It illustrates that our Treasury Secretary either tacitly condones a falling dollar or has no idea what causes a weak currency.1

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  1. “Mr. Geithner: Stop Passing the Buck on the Dollar”. 21 Oct 2009. Forbes. 23 Oct 2009.↩

Dollar as Reserve Currency

October 8, 2009 in Money by Greg | 4 comments

For a number of decades, the U.S. dollar has acted as the world’s reserve currency. A reserve currency is essentially a currency,

. . . which is held in significant quantities by many governments and institutions as part of their foreign exchange reserves. It also tends to be the international pricing currency for products traded on a global market, such as oil, gold, etc. This permits the issuing country to purchase the commodities at a marginally lower rate than other nations, which must exchange their currency with each purchase and pay a transaction cost. . . It also permits the government issuing the currency to borrow money at a better rate, as there will always be a larger market for that currency than others.1

Dollars Over the course of the last year, the dollar’s role as the world’s reserve currency has come under attack. The other day it was noted,

In the most profound financial change in recent Middle East history, Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar. Secret meetings have already been held by finance ministers and central bank governors in Russia, China, Japan and Brazil to work on the scheme, which will mean that oil will no longer be priced in dollars. . . .

This sounds like a dangerous prediction of a future economic war between the US and China over Middle East oil – yet again turning the region’s conflicts into a battle for great power supremacy.2

Continue reading Read the rest of this entry »

  1. “Reserve Currency”. Wikipedia. 7 Oct 2009.↩
  2. Fisk, Robert. “The Demise of the Dollar“. 7 Oct 2009. The Independent. 7 Oct 2009.↩

Hyperinflation Video

October 1, 2009 in Money by Greg | 11 comments

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

YouTube Preview Image

How should the U.S. solve its insolvency problem? (Pun intended.)

Sources:

  1. Money.↩
  2. Gold and Silver Coin as Tender in Payment.↩
  3. Federal Reserve Act”. Wikipedia. 1 Oct 2009.↩
  4. “U.S. Dollar”. First National Bullion. 1 Oct 2009.↩
  5. Keynesian Economics and Savings.↩
  6. Dollar as Reserve Currency. See also, Goldstein, Matthew. “Q=A – Replacing the Dollar as the Reserve Currency”. 8 Jul 2009. Reuters. 1 Oct 2009.↩

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