CHAPTER 9
BANKING ON AGGRESSION
BANKING ON AGGRESSION
In the previous chapters, we've seen how the Pyramid of Power we've created controls us more with each layer of aggression. The First Layer of licensing laws stops us at gunpoint, if necessary from choosing whoever serves us best. The Second Layer, exclusive licensing, creates monopolies that exploit us. The Third Layer forces us to subsidize these monopolies, often to the detriment of the environment. The Fourth Layer then forces us to use the subsidized service. One example of Fourth Layer aggression is the money monopoly.
To understand why it is the apex of the Pyramid of Power, we must first
understand how money works. The banker gave the depositor a promissory note, which
was a promise to return the gold to the depositor whenever the note was
returned to the bank. A bank with many customers could usually count on
being able to make this promise good, because it was unlikely that everyone
would want to withdraw his or her money at the same time. In the interim,
the depositor could exchange the promissory note for goods and services
as if it were gold. Thus, these notes began to function as money or claim
checks for the available goods and services. Our U.S. dollars were once
promissory notes of this type, which were redeemable in the gold and silver
that people had stored with their local banker. For example, assume that your bank needs to put 20% of its funds on reserve to operate optimally. You deposit $100 in your favorite bank; the bank puts $20 into reserve and loans out the other $80. The person who borrowed the $80 deposits it in his or her checking account. That person's bankbook says he or she has $80. Yours says you have $100. Together, the two of you have $180 in the bank. But wait! Only $100 is there to begin with! The bank has created the $80 it lends out! The process continues. The bank puts 20% of the newly deposited $80 (i.e., $16) in reserve and lends out the remaining $64, which is then redeposited and goes through the same process. When the reserve is 20%, the $100 eventually becomes $500. The lower the reserve requirement, the more money is created. For example, when the required reserve is 10%, every deposit is multiplied by 10 instead of 5. How amazed I was when my father, a bank manager and economics teacher, first explained this process to me! Creating this extra money can cause price inflation when there is no compensating increase in goods and services. In the board game Monopoly®, each player starts out with $1,500 and struggles around the board several times before being able to acquire enough property and enough money to build houses and hotels. If players each had $7,500 at the start instead, the houses and hotels could be built much earlier in the game. A boom in building would result. When the starting money was only $1,500, players might sell some properties to other players to get enough money to build their hotels and houses on the remaining ones. When starting with $7,500, property owners might not need to raise the cash. Players without property would probably have to pay owners more in order to entice them to sell. Real estate prices would rise with inflation in Monopoly just as they do in the real world. On the other hand, price deflation can occur when the money supply decreases without a compensating loss in goods and services that people want. Banks can cause deflation by increasing their reserves, keeping money out of circulation instead of lending and creating it. In our Monopoly example, deflation would be simulated by everyone returning a percentage of his or her cash to the bank. Now players are much more likely to be caught short when
their mortgages or rent comes due. If players try to sell their properties,
they find others with less money to buy them. Real estate prices fall, just
as they do in the real world. When the other player is sure to outbid you with new money, the auctioned property will probably sell for a slightly higher price than it otherwise would have. The sellers would thereby acquire some of the newly created money. As they spend that extra money, by outbidding other players for property, it slowly diffuses into other hands by increasing each seller's profit. Several turns may pass before some players get access to the new money. Those who have no property may never get part of the new money. They are worse off relative to the other players than they would have been if no new money had been created at all! In real life, the banks that create money use it first.
Those wealthy enough to put up collateral can borrow the money and use it
next. Since governments are the biggest borrowers, they benefit at the expense
of those who have little property and savings. As we've seen, government
officials tend to support special interests with the wealth they control.
Deficit spending, which occurs when the government needs to borrow, is really
a redistribution of wealth from the poor to the rich. Those who get the new money last are worse off than if there had been no inflation at all. Inflation through new money creation artificially increases the claim checks on goods and services for the wealthy, but not for the poor. This redistributing of wealth to the banks and the well-to-do by increasing the claim checks (money) that these groups have is frequently referred to as the inflation tax. The U.S. banking system alternates inflation with deflation. Without alternating the cycles, inflation would run rampant, as it has in several Latin American countries. In nations that inflate rapidly, getting the new money even a few hours later than someone else makes a person very much worse off. That is why workers in such countries rush to buy goods and services as soon as they receive their paycheck! Alternating inflation and deflation creates other problems. When the rate of new money creation slows, people and businesses cannot borrow as readily as before. Consumers cannot buy goods; businesses must cut back production; workers get paid less or are laid off. Those who have little savings find themselves unable to make their mortgage payments. As a result, banks repossess many more homes in times of deflation. The same people who were hurt by inflation usually find
themselves crippled by deflation as well. People without property and without
savings suffer the most. Alternating inflation and deflation bankrupts those
living on the edge. Creditors repossess the homes and belongings of these
unfortunates. The rich get richer and the poor get poorer. This could be a very confusing situation unless every bank and service vendor accepted each note at face value. In Scotland, everyone did so because banks had to make good on their promises. If a bank ran out of reserves, its owners (stockholders) had to pay the depositors out of their own pockets. Each bank was thus highly motivated to limit the amount of new money it created to what was truly needed. Limiting inflation attenuated deflation as well. In the marketplace ecosystem free from aggression, the poor would be protected from the devastating effects of alternating these two policies. Occasionally, a bank would foolishly print so many notes that it could not meet deposi-tors' demands. If the stockholders of a failing bank were unlikely to be able to pay off their debts, sound banks sometimes did so to retain the confidence of the Scottish people and gain grateful new customers. Scottish prosperity was attributed in part to the efficient banking system that evolved in the marketplace ecosystem free from aggression. Across the border, the English depositors did not fare
so well. In 1841, total losses to Scottish depositors over the preceding
48 years were estimated at 32,000 pounds, while public losses in London
were twice that amount for the previous year alone! (2) Although records
do not allow a precise correction for differences in population and per
capita deposits, English citizens appeared to be exposed to 24 times more
risk than the Scots. (3) The English were at the mercy of the central bank,
an exclusive monopoly-by-aggression. Unfortunately, we are too! Before the creation of the Fed, banks found they needed reserves of approximately 21% so that they would have enough money on hand when their customers wanted to make a withdrawal. When the Fed took over the reserves of the national banks, it lowered the reserve requirement to half that. (4) The Fed itself used a reserve system: it kept only 35% of the reserves entrusted to it by the member banks! (5) The balance was loaned out, mostly to the government, with the wealth of the American people as collateral. Lowering reserves resulted in the creation of more money. As a result, the money supply doubled between 1914 and 1920 (6) and once again from 1921 to 1929. (7) In contrast, gold in the reserve vault increased only 3% in the 1920s. (8) The bankers would obviously be unable to keep their promise to deliver gold to depositors if a large number of people withdrew their money at the same time. Businesses could not use all the newly created money the banks wished to loan, so stock speculators were encouraged to borrow. (9) Many people got heavily into debt, thinking that the boom would continue. In 1929, the Fed started deflation by slowing the creation of new money. (10) People who had counted on renewing their loans to cover stock speculations or other investments found they could no longer borrow. They were forced to sell their securities, and a stock market plunge ensued. The mini-crash in October 1987 also may have been triggered by the Fed's slowing the creation of new money. (11) People who lost money spent less on goods and services; business began to slow. With banks unwilling to renew loans, (12) businesses began to reduce their work force. People nervously began withdrawing their gold deposits as banks in other countries quit honoring their promise to return the gold. Rumors circulated that the Federal Reserve would soon be bankrupt as well. (13) Naturally, there was no way for the banks to exchange the inflated dollars for gold. As people withdraw their bank funds, the money supply decreases_just the reverse of what happens when they deposit it. The banks' failure to loan coupled with massive withdrawals, caused even greater deflation. People lost their savings and their purchasing power; in turn, businesses lost their customers and laid off workers. Each loss contributed to the next, resulting in the most severe depression Americans had ever known. Had this happened in Scotland between 1793 and 1845, bank owners (stockholders) would have to make their promises good by digging into their own pockets. In our country, however, the government enforcement agents were instructed to come after the American citizenry instead! Franklin Roosevelt convinced Congress to pass a bill making it illegal for Americans to own gold. (14) Everyone had to exchange their valuable gold for Federal Reserve notes, which had no intrinsic value. Gold was still given to foreigners who brought their dollars to be exchanged for gold, but not to Americans! While U.S. banks failed in the early 1930s and Americans were shorn of their gold, no Canadian banks failed. Between 1921 and 1929, American depositors lost an estimated $565 million, while Canadian losses were less than 3% of that. (15) Canada enjoyed a banking system similar to the one described earlier for Scotland few licensing laws and no central bank with an exclusive monopoly on currency issue. (16) Each bank issued its own notes and protected itself and the public by refusing to loan to inflating banks. Just as in Scotland, the stockholders of the banks were obligated to make good the inflated currency. Unfortunately for Canada, the aggression of licensing laws was instituted in 1935. (17) Why did the Canadians switch from a system that protected them from bankruptcy? Why did England eventually impose its inferior system on Scotland? Why was the Fed introduced in the United States and relieved of its promise to return gold that was deposited by our great-grandparents and their contemporaries? Why did the Fed slow money creation in 1929, precipitating the stock market crash? Why does the Fed alternate inflation and deflation at the expense of the American public today? Several authors have proposed that the evolution of central banks represents a collusion between politicians and a small elite with ownership/control of major banking institutions. (18) Bank owners want to create as much money as possible, without having to dig into their own pockets when depositors want their money. Politicians long to fulfill their grandiose campaign promises without visibly taxing their constituency. Central banking can give both groups what they want. First, through the aggression of exclusive licensing, politicians give the central bank a monopoly on issuing currency. As long as banks must make good on their promises to depositors, however, they are still subject to the regulation of the marketplace ecosystem. The politicians encourage the aggressive practice of fraud by refusing to make banks and similar institutions (i.e., Savings & Loans, known as "S&Ls") keep promises to depositors. Instead, owners and managers who make risky loans can simply walk away from their mistakes, as President Bush's son Neil did. (19) Depositors either lose their life savings or are reimbursed from taxes taken at gunpoint, if necessary from their neighbors. The bankers, of course, must give the politicians something in return. When the ranchers, loggers, or other special interest groups want more subsides, our representatives need not incur the wrath of the populace by suggesting more taxes. Instead, they borrow some of the Fed's newly created money! When it comes time to pay the loan back with interest, the politicians pay it back with a bigger loan using our wealth as collateral. The special interest groups thank the politicians by funding their reelections. As a result, our national debt has grown so big that the interest alone consumed 25% of 1989 federal outlays! (20) The single largest holder of the national debt is the Federal Reserve itself. As mentioned in the previous chapter, our pension and investment plans often buy the government I.O.U.s. For our pension funds to pay us, we may first have to pay higher taxes to cover the I.O.U.s. How much higher will our taxes be? The 1989 national debt was more than $11,000 for every man, woman, and child! (20) Like any special interest group, the Fed is inclined to help the politicians who protect it. By manipulating the money supply to cause boom or bust at the appropriate times, the Fed controls the illusion of prosperity an illusion that determines which politicians people will vote for or against. Like any other special interest group, the Fed can control our government to a significant extent. For example, the exclusive monopoly of the Second Bank
of the United States was scheduled to end in 1836. Andrew Jackson swore
not to renew it if he were reelected president in 1832. Soon after his victory,
he removed the government's deposits from the central bank. The bank's president,
Nicholas Biddle, attempted to bring about a depression by cutting back on
the creation of money, just as the Federal Reserve would do almost 100 years
later. Biddle hoped to blackmail Congress into renewing the banks's monopoly
by making the voters miserable. Fortunately, these tactics were not successful.
(21) The American people were not fooled and the bank charter was not renewed.
Unfortunately, this lesson was forgotten, and central banking was reestablished
with the Federal Reserve. Forcing people to use a service prohibits them from providing it for themselves. Even though AT&T has an exclusive monopoly on local phone service, bypassing it is still a legal option. Even though many utilities are exclusive monopolies, we can still provide our own power and septic systems if we choose. Even though we must subsidize the municipal bus system, we don't have to use it. With the exclusive money monopoly, however, we are forced at gunpoint, if necessary to participate whether we want to or not. When everyone uses the money monopoly, it controls the financial fate of the entire nation. In trying to control others, we find ourselves controlled! Without the money monopoly, politicians would be unable to borrow the large sums of money that create deficits. Without these deficits, the enforcement of licensing laws and the provision of special interest subsidies could be financed only by more taxes. The American citizens would be unlikely to support subsidies and waste if the true cost of these items were reflected in their tax bills. The money monopoly makes this sleight of hand possible. Destroying wealth or curtailing its creation makes the world poorer. By forcibly shunting the wealth toward special interests, the gap between the rich and the poor widens. New medicines, old-age cures, advanced space exploration, or a three-day work week with five-day benefits are just a few of the possible increases in wealth we forgo because of the money monopoly. Even people who believe they benivan from the money monopoly are only fooling themselves. The bankers and politicians condemn themselves to a culture that is backward in comparison to what would otherwise be possible. They are like royalty in an ancient civilization, having more than their contemporaries, but less than they would otherwise have in a culture with more abundance. We can hardly blame the politicians and bankers for this state of affairs, however. We elect politicians who promise to cater to our special interests without raising taxes. We encourage them to mask the true cost of the aggression we demand. They give us only what we have asked for. How can we blame the owner-bankers of the Federal Reserve
for asking that we favor them with an exclusive monopoly just as we favored
AT&T? How can we blame them for seeking the same subsidies we are willing
to give the ranchers and timber companies? Like our Biblical ancestors in
the Garden of Eden, we want to blame the serpent because we ate the apple.
As always, the choice and responsibility belongs to us. When we accept our
role in creating the problem, we empower ourselves with the ability to solve
it! A modern banking system free from aggression would be much like the Scottish system described earlier. Since owner/ managers could be liable if the bank lost its depositors' money, they would probably buy liability insurance to protect themselves and their depositors. Unlike the Federal Deposit Insurance Corporation (FDIC) or the Federal Savings and Loan Insurance Corporation (FSLIC) of today, premiums would differ for each institution, depending on how well each bank invested its depositors' money. Poor managers would be saddled with high premiums, just as poor automobile drivers are today. As premiums go up and profits go down, poor managers would be fired. Today, each bank pays the same premium regardless of the way it does business. Managers can make risky loans that generate high closing fees, and walk away if their loans turn sour. The taxpayer then picks up the tab. Estimates made in the early 1990s indicate that every man, woman, and child will pay an average of $6,000 (22 ) to cover recent S&L defaults. This money is essentially a giant subsidy to the poor managers and investors. This is the cost of the Pyramid of Power created by our eagerness to control our neighbors. The money monopoly has international implications as well.
We'll learn more about these in Part IV (Lead Us Not Into Temptation:
Foreign Policy). For now, let's examine another example of Fourth Layer
aggression, the monopoly over our minds. Let's find out why we never learned
in school about the way the world really works! |
By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens... 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. - John Maynard Keynes, English economist and board member of the Bank of England
When the President signs this bill, the invisible government of the Monetary Power will be legalized... - Congressman Charles A. Lindbergh, 1913, referring to the Federal Reserve Act
Depressions and mass unemployment are not cause by the free market but by government interference in the economy. - Ludwig von Mises, THE THEORY OF MONEY AND CREDIT
If the American people ever allow banks to control the issuance of their currency, first by inflation, then by deflation, the corporation that will grow up around them will deprive the people of all of their property until their children will wake up homeless on the continent their forefathers conquered. - Thomas Jefferson, author of the Declaration of Independence
This great government, strong in gold, is breaking its promises to pay gold to widows and orphans... It's dishonor, sir. - Senator Carter Glass, 1933, principal author of the Federal Reserve Act
The entire banking reform movement, at all crucial stages, was centralized in the hands of a few men who for years were linked, ideologically and personally, with one another. - Gabriel Kolko, THE TRIUMPH OF CONSERVATISM
Every effort has been made by the Fed to conceal its power but the truth is-the Fed has usurped the government. It controls everything here and it controls all our foreign relations. It makes and breaks governments at will. - Congressman Louis T. McFadden, 1933, Chairman, Banking and Currency Committee
The bold effort that present bank had made to control government, the distress it had wantonly produced... are but premonitions of the fate that awaits the American people should they be deluded into a perpetuation of this institution or establishment of another like it. - President Andrew Jackson |
