The Nation's Most Mild-Mannered Revolutionary
A 4th of July Daily Reckoning Guest Essay
Think of the Federal Reserve System as a senior producer in an international fiat money drug cartel. Think of Alan Greenspan as its godfather. He uses commercial banks as his pushers.
When users build up tolerance to the existing supply of fiat money, the FED has to increase the dosage in order to maintain the economic boom. In this system, the economy is never allowed to “get clean.” The addiction to fiat money is forever.
But Greenspan is a kindly godfather. He means to produce no serious harm. He doesn’t want to see America as a nation of helpless addicts to the really hard stuff. He wants the whole world to move from the heroin of fiat money to methadone. If we will just keep coming down to the banks for our regular supply of the drug, we will be able to postpone the horrors of going cold turkey. Economic “cold turkey” is a recession that is not overcome by a wave of fiat money. The Great Depression was cold turkey.
The whole world today is addicted to fiat money and long-term debt. Long-term debt makes sense when the money supply is constantly being expanded. You can pay off your debts with depreciated money. But the debt system keeps the addicts coming back for more. The longer the addiction process continues, the more dependent every section of the economy becomes on a continuing supply of fiat money.
Today’s users are counting on the easy availability of the central bank-supplied methadone. The universal assumption of the cartel’s directors is this: methadone does not produce the fearful effects of long-term resistance to the drug’s stimulating effects. Addiction is a permanent condition, but it can be handled emotionally by the addicts.
The problem is this: the addict has no incentive to get well by breaking his addiction. The central bank continually adds to the money supply, generation after generation. This makes the level of accumulated debt ever greater. The addicts keep building up their IOU’s.
The biggest addict today is the U.S. government. It has made promises to voters regarding Social Security and Medicare. These promises involve unfunded debts so huge that they cannot be paid off in terms of money with anything like today’s purchasing power. To put it bluntly, the U.S. government is on methadone today, just like everyone else, but this methadone dependence must lead, statistically speaking, to the heroin habit.
For the United States, the day of demographic reckoning may be as far away as 2017, but 2011 should see preliminary signs of crisis in the Social Security/Medicare systems. The first Baby Boomers were born in 1946. They will reach age 65 in 2011. For Japan, the crisis will begin soon: In 2003. For Italy, 2005. The other major industrial nations will follow in short order. The United States is at the end of the row of dominoes.
We can see it coming. But methadone-addicted users in Washington see nothing coming further out than the next Congressional election.
I realize that my analogy may sound a bit nutty, but it is closer to the truth than most people think. I wrote the initial version of this essay in 1964, which was published as a booklet, “Inflation: The Economics of Addiction.” Since that time, the dollar is down in its purchasing power by about 75%.
There is an addiction effect with fiat money. The world found out in the 1930’s what happens when the flow of fiat money ceases. Politicians are determined never to allow this to happen again.
So far, the voting public agrees. The central banks of the world continue to keep the funds flowing. A national economy has its ups and downs, but it never falls into the disaster-level mode of 1932. This seems positive.
But the relentless pressure of debt never decreases. The public, along with their governments, continue to make assumptions about the future that cannot possibly come true with today’s money supply and price level.
So, the central banks continue to increase the money supply, general prices never fall, and aging populations remain unconcerned with the statistical brick wall that faces all of us, in every industrial nation.
Addicts ignore unpleasant reality.
July 4, 2001
For The Daily Reckoning
At age 25, Dr. Gary North was the youngest elected member of the Economists’ National Committee on Monetary Policy. He served as a senior staff member of the Foundation for Economic Education and as a research assistant to U.S. Congressman Ron Paul. To receive Gary’s free e-letter, Reality Check, send an e-mail request to: firstname.lastname@example.org
In a shortened trading session yesterday, all the major indexes fell – but not by much. The Dow fell 22 to 10,571… the S$P 500 lost a couple to close at 1234… and the Nasdaq shed 7, closing doors at 2140.
Going into the Independence holiday, and what is effectively the end of the “first half,” the net result of 6 fed rate cuts is ‘nul’ – as they say here in the French office. The Dow has lost 2% of its value, the S&P is down 6.5% for the year and the Nasdaq follows up the rear… down 13% YTD.
The markets are, of course, closed today…Bill and Eric have taken what Eric called “an uninterrupted day to celebrate our nation’s independence from the tyranny of the British.” So, since the celebration of liberte in France won’t begin for another 10 days, I offer you a single holiday salute.
“God, who hath given the world to men in common,” said John Locke, Jefferson’s philosopher, and spiritual leader behind the Declaration of Independence, “hath also given them reason to make use of it to the best advantage of life and convenience.”
Reason, it is believed by many, empowers man to remake the world to his advantage. At the Daily Reckoning, we often take a more skeptical view. In fact, on this 4th of July, 2001, it might be worth a look at what reason hath also wrought: The Creature From Jeckyll Island.
In a book of the same title, Edward Griffin, notes the basic plan for today’s Federal Reserve was drafted at a secret meeting held in November of 1910 at the private resort of J.P. Morgan on Jeckyll Island off the coast of Georgia. It was the brainchild of Paul Warburg, a partner in Kuhn, Loeb & Company, representing the Rothschilds and Warburgs in their European holdings.
The purpose? According to Griffin, “a primary objective [of the meeting] was to involve the federal government as an agent for shifting the inevitable losses from the owners of those banks [being represented] to the taxpayers.”
Griffin quotes Paul Warburg: “Picture a party of the nation’s greatest bankers stealing out of New York on a private railroad car under the cover of darkness, stealthily hieing hundreds of miles South, embarking on a mysterious launch and sneaking on to an island deserted by all but a few servants, living there for a full week under such rigid secrecy that the names of not one of them was once mentioned lest the servants learn the identity and disclose to the world this strangest, most secret expedition in the history of American finance.”
“I am not romancing,” Warburg claimed in 1930. “I am giving the world, for the first time, the real story of how the famous Aldrich report, the foundation of our new currency system, was written.”
“The composition of the Jekyll Island meeting was a classic example of a cartel structure,” says Griffin. “A cartel is a group of independent businesses which join together to coordinate the production, pricing, or marketing of their members. The purpose of the cartel is to reduce competition and thereby increase profitability. This is accomplished through a shared monopoly over the industry which forces the public to pay higher prices for their goods or services than would otherwise be required under free-enterprise competition.”
At the risk of appearing too simplistic, I submit, the cartel achieved as much – and more. In 1913, the Federal Reserve act became law. At that time you could have purchased a simple pair of men’s shoes for $5.50. By 1938, when Hitler was just beginning the Anschluss of Austria and Czechloslovakia, the same pair of shoes would have cost you $7.38; in 1969, when Armstrong was taking large leaps for mankind in his own moonboots, they would have cost you $20.39… and today, on July 4th, 2001, while George W. exhorts us in his Presidential Statement On Independence Day to “remember the achievements of our great statesmen, social reformers, inventors and artists,” that $5.50 pair of shoes will set you back $100.
In 1910, “Wall Street was still the biggest kid on the block,” writes historian and former assistant managing editor of The Washington Post, William Greider, of the founding of the Fed. “This trend was a crucial fact of history, a misunderstood reality that completely alters the political meaning of the reform legislation that created the Fed. At the time, the conventional wisdom in Congress, widely shared and sincerely espoused Progressive reformers, was that a government institution would finally harness the ‘money trust,’ disarm its powers and establish broad democratic control over money and credit… the results were nearly the opposite.”
Unbeknownst to the “reformers” of the time, the world’s most wily capitalists had harnessed the machinations of government and the popular will to serve their own ends.
“Paul Warburg,” wrote his biographer Harold Kellock, “is probably the mildest-mannered man that ever conducted a revolution. It was a bloodless revolution: he did not attempt to rouse the populace to arms. He stepped forth armed with a simple idea. And he conquered. That’s the amazing thing. A shy, sensitive man, he imposed his idea on a nation of a hundred million people.”
And yet, today, as a nation, we celebrate the spirit of Independence from tyranny of the few over the many. “…Men enter into society,” wrote Locke, for “the preservation of their property; and the end, while they choose and authorize a legislative, is that there may be laws made and rules set as guards the properties of all society, to limit the power…of every part and member of that society.
“Whensoever…the legislative shall transgress this fundamental rule of society, and either by ambition, fear, folly, or corruption, endeavor to grasp themselves, or put in the hands of any other, an absolute power over the lives, liberties, and estates of others by this breach of trust, they forfeit the power of the people…and it devolves the people, who have a right to resume their original liberty, and by the establishment of a new legislative, provide for their own safety and security…” Who in America feels as strongly today?
Today, as you “celebrate with pomp and parade…guns, bells and bonfires,” the revolutionaries who’ve long since past, don’t forget the unsung among them, who have also given us our nation… and our currency.