As you'll remember from last month, one of the key messages that
Dr. Robert Murphy presented in his segment was that signals mean something when it comes to the economy's performance. Following up on that idea, speaker
Carlos Lara takes us back into history to show us why our economy ended up in the current mess and what can be done to get us out of the quagmire that exists.
According to Lara, much of today's economic distress begins at the Central Bank -- our Federal Reserve System. This institution is shrouded in mystery, is accountable to no one, is not audited and has no oversight by any Congressional committee. Yet, it is in complete control of our nation's money supply, which means it also controls our personal money supply. The Federal Reserve and the commercial banks are linked in a system that create dollars out of thin air, which has brought us to our current crisis.
But how did the concept of a central bank get started? Banking is an ancient industry -- first we bartered in order to get what we needed, then we began to use agreed upon items -- mostly gold -- as a medium of exchange. Therefore, it was the goldsmith who prevailed and created a form of what we now call a 'central bank."
With gold as the prevalent medium of exchange, people stored their gold in the goldsmith's 'money warehouse' and were given a receipt in exchange. Over a period of time, it evolved that people simply traded the receipts for payment of goods -- creating a form of paper money.
Eventually, the goldsmith's figured out that they could mass produce or counterfeit the receipts and earn money by circulating them in the marketplace. As long as no one -- either individuals or other goldsmiths running money warehouses -- brought the receipts in for redemption in gold, the system worked. Now mind you, this is a highly inflationary process and morally wrong.
To maintain this kind of a banking system -- lending money when there is not enough gold to cover redemption -- requires a structure of deceipt and collusion. It misrepresents to the public that all of their money is stored back safely at the 'money warehouse' when only a fraction of it is really there.
The goldsmiths' fear was always that all of those holding receipts would demand their gold on the same day and cause a 'run on the bank' or that some competitor warehouse would present a receipt for more gold than was stored. To remedy this, the goldsmiths agreed among themselves and their most powerful clients, not to present each other with more receipts than any one of them could exchange for gold.
This agreement was the seed of the central bank as we know it today. The first formal central bank was the Bank of England formed in 1694 the result of a crooked deal between a near bankrupt government and a corrupt group of financial promoters. Our central bank -- the Federal Reserve was formed in 1913 by some of the most powerful banking names (Morgan, Rockefeller, et. al.) in the United States.
According to Lara, our money and our society has not been the same since the Fed was established. He also notes that 'personal income tax also began at the same time.
Fiat vs Real Money
As we know from the above history, money was created by society as a necessity. Bartering was way too inconvenient and so gold and silver became the exchange mediums of choice. This was considered 'real money' and was often called 'sound money.'
At one time, all coins in the US were made of gold or silver and paper money was often a 'silver or gold certificate.' Holders of gold or silver certificates could demand either silver or gold coins to redeem the paper certificates. Our money supply was tied to the amount of gold or silver available.
Fiat money on the other hand is money that the supreme law of the land declares as legal tender - in the US it's the dollar, in Europe the Euro and so on. When fiat money came into being in the US -- during the 1930s, people began to hoard gold and so President Roosevelt took gold out of circulation and placed it in Fort Knox to promote the use of fiat money. The money supply was still backed by gold, but citizens could no longer hoard gold or use it as a medium of exchange.
In 1944, the dollar, backed by gold, became the basis for all the fiat money worldwide. When the value of the dollar eventually weakened, foreign governments began to demand gold for their US dollars. This eventually lead to President Nixon taking the US off the gold standard in 1971, which left us with dollars that could be created as needed to fund government. Creating money became a game of paper chasing paper, which could easily be inflated or deflated at the discretion of the central banks.
What Is Inflation?
Many people think inflation is higher prices, but one has to look deeper to really understand that this argument only deflects attention away from the real cause, and ultimately, the real cure of inflation.
When Nixon fully disconnected the US dollar -- our fiat money - from gold, what he did was de-value our currency, essentially making it worthless. It has only the value that the government says it has. In essence, he did what the goldsmiths did when they flooded the market with counterfeit gold storage receipts -- he promised to make good on the nation's debts without having enough 'real money' (gold) in the warehouse to satisfy these debts.
Given that, what we now know, is that inflation is not only high prices -- it is the de-valuing of the currency by increasing the money supply. The more money the Fed creates by lowering interest rates, the lower the value of the money. The lower the value of the money, the more money that is needed to purchase goods and services, hence prices rise.
Unfortunately, the signal it sends to investors, entrepreneurs and others is that things are booming, when in fact, it is the Fed increasing the volume of money into the economy to falsely create a boom cycle. The higher the volume of money, the less it is worth and we experience inflation, higher prices and eventually collapse.
There are many examples throughout history but the fall of the Roman Empire is perhaps the most telling since it really began much earlier than the date of its collapse. Many historians believe it actually started when Caesar debased the Roman coins by mixing the gold with less valuable metals in order to increase the volume of money available to finance the extravagances of the government -- eventually they became worthless and the Empire collapsed.
If this sounds familiar, it should -- it is inherent in the nature of governments to tamper with the money supply for their own benefit. It is also exactly what Ben Bernanke and the Fed have been doing with the quantitative easing program, which is explained in detail in the video below.
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| Quantitative Easing Explained |
What they are doing is pouring money into the system by buying assets like government bonds, and all the while driving prices up and sending the wrong signals. It's the same process that lead us to the collapse of 2008, as well as the previous 'busts' of the last several decades.
Remember, governments have no money of their own -- it can only spend what it can take from its citizens. Taxes are never enough, yet it's spending trillions. Where does it come from? It sells assets -- like bonds. Who's the biggest buyer of government bonds? The Federal Reserve. Where does the Fed get its money? In the old days they printed it, now a days, they simply create it electronically. We're now $14 trillion in debt with no mechanism in place to buy back the bonds.
On top of this, the commercial banks are part of the problem with their ability to loan $9 for every $1 they take in as a deposit. The more money they pump into the economy, the higher the prices.
No matter how you look at it -- inflation is really the pumping of money into the economy, i.e., increasing the volume of money or the money supply. The end result of this action is higher prices and eventual collapse.
Keynes' Pandora's Box
The US and many other industrialized countries practice the theories of economist John Maynard Keynes. In 1936, he put forth The General Theory ..., which basically stated that the way to get economies moving was to spend your way out of the downturn even if it meant deficit spending, and don't worry about how to pay the debt. In essence, he believed that:
All Spending = All Income and All Income = All Spending
And so, what we've seen for the past several decades in the US, is the Fed and the government deficit spending in order to stimulate the economy. While this appears to work, what we've also seen is that about every eight to ten years, we experience a 'bust' cycle, each one worse than the previous one. As the world's money supply becomes more unified, the effects are felt worldwide.
How Do We Get Out of This Mess?
Now that we've painted a pretty complete picture of the forces that brought us to this economic mess we're in, how do we get out it? There are many economic theories that contain kernels of a solution but we believe that the Austrian School of Economics offers the most complete solution: The Sound Money Solution, which advocates three actions:
- Tie the dollar back to gold or 'sound money' -- thereby ending the ability to create money out of thin air and putting an end to inflation.
With these three actions in place, our taxes would go down, we would save more and as Dr. Robert Murphy explained -- it is savings that fuel investments -- and ultimately, our economy could get strong again.
The economic problems of this country did not happen overnight as you can see by Carlos Lara's history lesson. They will not be solved overnight but you can take matters into your own hands right now by becoming more knowledgeable about how
