The Federal Reserve System:
a Fatal Parasite on the
American Body Politic
By Dr. Edwin Vieira, Jr.
Dr. Edwin Vieira, Jr.,
has condensed into this Monograph the substance of addresses he has given
to small groups that represent a cross-section of American citizens concerned
with fundamental monetary and banking reform.
Dr. Vieira's purpose
is to present an analysis of the Federal Reserve System, its fiat
paper currency, and "fractional-reserve" banking that infrequently, if ever,
appears in the popular press, in the media, in the discourse of legislators
or political candidates, or (worse yet) in the nation's schools. This analysis,
however, is crucial to popular understanding of what the Federal Reserve
System is, what it does, and the dangers it poses to America's economy and
republican institutions of government. And such an understanding is crucial
to sweeping legislative or judicial reform of the monetary and banking systems
- hopefully, before the Federal Reserve System causes an economic
and social catastrophe; but, if not, at least after such a catastrophe makes
painfully clear to every thinking man and woman the urgent necessity of such
reform along constitutional lines.
Dr. Vieira's central
theme is that today's scheme of Federal-Reserve-System fiat currency
and fractional-reserve banking is plainly unconstitutional, inherently
fraudulent, economically unworkable in the long run, and subversive of America's
political traditions of individual liberty and private property. This
may appear, at first blush, a harsh indictment of a system in existence since
1913, and which the vast majority of Americans apparently accepts (albeit
on next to no real knowledge). But, harsh or not, it is an indictment substantial
political-economic theory and historical evidence support.
Hopefully, Dr. Vieira's
message will prove to be a warning that comes, if none too soon, at least
not too late.
Richard L. Solyom,
Chairman
Sound Dollar Committee
INTRODUCTION
Although the press,
the media, and major political figures never mention it the major
cause of the financial dangers facing America today is the incestuous relationship
between the national government and the quasi-public, but largely
private banking cartel deceptively called the Federal Reserve System (FRS).
Although historians can state with little difficulty when various
stages in the establishment and evolution of the FRS took place, understanding
what the FRS has done to America's money, and how and why the
FRS has done it, is not quite so easy. Rather, it requires careful attention
to certain critical details of American monetary and banking theory and history
that are usually forgotten in discussions of the problems the FRS has caused.
ANALYSIS
I.
Most contemporary debate on the FRS focuses on whether what people call the
"dollar" should, in some way, be "linked to" or "backed by" gold or another
valuable commodity. The fundamental, unexamined, and utterly fallacious assumption
in this debate is that the paper currency the FRS generates, the Federal
Reserve Note (FRN), is, as a matter of fact and a matter of law, a "dollar"
at all. As American constitutional law and history show, the FRN is not a
"dollar", has never been declared by Congress to be a "dollar'; and could
never be an actual "dollar" notwithstanding all the statutes or resolutions
Congress might enact. Rather, as cited in the Constitution and as historically
defined in the Coinage Act of 1792, a "dollar" is a specific coin containing
371-1/4 grains of fine silver. Very simply put, the Constitution fixes the
monetary unit of the United States as this (silver) "dollar", empowers Congress
to coin silver and gold coins the values of which are to be "regulate[d]"
in relation to the "dollar", prohibits any government from issuing what the
Founding Fathers denominated "Bills of Credit" (and what we today would understand
as paper currency redeemable in silver or gold), and outlaws any form of
"legal tender" except silver and gold coins. Thus, from the constitutional
perspective, it is literally senseless to talk about making the "dollar" redeemable,
or adopting a "silver-" or "gold-backed" "dollar". And that such debate
as occurs on the FRS and the FRN fixes on this senseless point demonstrates
how confused the American people are concerning their own monetary system.
II.
Defining the "dollar" constitutionally, however, is only the first step in
explaining the real problem the FRS poses. Three other matters require careful
consideration:
First, the evolution
of the FRS exemplifies the typical historical devolution - or corruption
- of monetary systems throughout the world in the last two centuries from
commodity money, to fiduciary money, to fiat money.
Here, accurate definitions of various forms of money are useful.
*
A commodity money is a medium
of exchange the units of which are fixed amounts of an actual commodity that
has value other than as money alone. Historically, silver and gold coins
of known, standard weights and designs have emerged as the preferred commodity
monies of the entire civilized world. In the case of a commodity money, the
actual commodity - silver or gold - is both the medium of exchange and the
standard of value (that is, the unit in which prices are stated in the marketplace).
The supply of commodity money is self-limited by the costs of mining, refining,
and coining silver and gold. New supplies of commodity money will be coined
only to the extent that coinage is economically profitable in comparison to
alternative investments of the capital needed to mine the precious metals.
*
A fiduciary money is a medium
of exchange composed of some intrinsically valueless substance (such as paper)
which the issuer promises to redeem on demand in a commodity money (such
as silver or gold coin) or in a monetary commodity (such as silver or gold
bullion). Historically, private bank notes and government treasury notes
were fiduciary monies in general circulation prior to the 1930s. In the case
of a fiduciary money, the paper promise to pay is the medium of day-to-day
exchange, but the actual money and the ultimate standard of value
remains the promised medium of payment, the silver or gold coin with
which the note is to be redeemed. The supply of a fiduciary money is also
self limited by the requirement of redemption. In a free market system,
new supplies of a fiduciary money will be issued only to the extent the issuer
is confident it can satisfy demands for redemption of its notes in a commodity
money. The condition "in a free-market system" is crucial, because the self-limiting
aspect of fiduciary money historically has failed in an economic regime in
which the government or powerful private interests license the issuers of
fiduciary monies to suspend or repudiate entirely their promises to redeem
those monies on demand in coin.
*
Finally, a fiat money is a medium
of exchange composed of some intrinsically valueless substance which the
issuer does not promise to redeem in a commodity or a fiduciary money.
Because a fiat money has no direct legal connection to a commodity
money (in terms of redemption) and, therefore, no real economic cost to its
production, the supply of a fiat money can never be self-limiting;
and the value of a fiat money is always largely a matter of public
confidence in the economic or political stability of the issuer. For these
reasons, historically every major fiat money have self-destructed
in what is popularly called "hyperinflation" (that is, extreme decreases
in purchasing-power) caused by either unlimited increases in the supply of
that fiat money by the issuer or accelerating loss of public confidence
in the continued value of the money or the economic or political fortunes
of its issuer, or both.
Second, the theory and history
of fiduciary money (which is also largely the theory and history of
banking) must always focus on the ever-present problem of redemption.
Emphasis on the noun "problem" is warranted, because a fiduciary money is,
by definition, a promise to pay the real, commodity money of the country.
A piece of commodity money - typically, a silver or gold coin - is itself
payment because it contains a fixed weight of precious metal. But a unit
of fiduciary money - typically, a bank or government-treasury note - is only
a contingent and uncertain payment that depends upon the ability or
the willingness of the issuer to redeem. And there always exists a temptation
for issuers to renege on their promises to redeem. Thus, fiduciary
money always threatens to become fraudulent money. Not surprisingly,
therefore, the history of fiduciary money has been more or less the history
of monetary fraud, both economic and political.
Third, the danger
of fraud in the issuance of fiduciary money becomes particularly acute in
the case of modern "fractional-reserve banking". Under fractional-reserve
banking, the bank always issues more units of fiduciary money, supposedly
"payable on demand", than it has units of commodity money available for redemption,
counting on the unlikelihood that the majority of its customers will ever
seek redemption at one time. Thus, modern fractional-reserve banking is inherently
fraudulent, because:
*
For the bank simultaneously to fulfill
all its promises to redeem its outstanding notes "on demand" is
impossible.
*
> The bank's managers know that
complete redemption "on demand" is impossible, and therefore that the bank's
promises to pay are false. And,
*
The bank's customers, by and large,
are ignorant of how the fractional-reserve scheme works, and the dangers
it poses to them.
III. Fully to
comprehend the significance of the FRS also requires recognition that no such
thing as "politically neutral" or "politically independent" money exists.
For, ultimately, money is a medium both for storing wealth and for exchanging
wealth. Thus, money is both itself a form of property and a mechanism for
implementing contracts that transfer other kinds of property from one party
to another. So, even in a free-market economy with a limited government,
money exhibits a necessarily political character, inasmuch as the degree
to which the government protects the monetary system from private fraud and
public looting reflects the degree to which the government respects and protects
private property and the right of private contract. A free-market economy
will have one kind of money; a "mixed" or "fascist" economy, another kind
of money; a "socialist" economy, yet another kind; and so on - but in each
case, the monetary system will accurately reflect the values of the political
system.
Thus once again, the
contemporary debate over whether and to what degree the FRS should be "politically
independent" of Congress and the United States Treasury is badly misdirected.
Originally, the Constitution made Americans' money independent of electoral
politics, by fixing the monetary unit as the (silver) "dollar", outlawing
"Bills of Credit", and allowing only silver and gold coin to operate as "legal
tender" in the payment of debts. But the Constitution is itself the basic
political charter of the country - so, far from making money "politically
independent" or "politically neutral", the Constitution actually settled
on one, very specific political formula for money: namely, a commodity money
of historically proven intrinsic value, the supply of which the political
authorities could not manipulate at will.
Creation of the FRS
in 1913 did not render FRNs "politically independent" or "politically neutral",
but merely changed the political character of the monetary system by empowering
a small, unelected clique of self-professed "experts" and self-interested
bankers and politicians to control the supply of FRNs, interest rates, and
other monetary and banking phenomena. Thus, as contrasted with the constitutional
system, the FRS actually politicized money, by enabling politicians,
administrators, and a few selected special-interest groups to exercise the
very influence over this country's monetary and banking systems that the
Constitution had originally disallowed.
Americans tend to accept
the description of the FRS as "politically independent" because, although
control of the monetary and banking systems has serious political significance,
the apologists for the FRS have been successful, over the years, in removing
monetary and banking issues from the agenda of political parties and candidates
and stifling public discussion of those issues. Yet,
*
It is of vital political importance
that no major political movement now advocates the immediate restoration
of America's original constitutional monetary system of silver and gold coinage.
*
It is of vital political importance
that no major political movement demands that all the paper currencies of
private banks be true fiduciary monies - that is, be redeemable in silver
or gold, or some other commodity with intrinsic value.
*
It is of vital political importance
that no major political movement attacks inherently fraudulent fractional-reserve
banking.
*
It is of vital political importance
that no major political movement denounces the incestuous and corrupt relationship
between the national government and the banking industry through the FRS,
the Federal Deposit Insurance Corporation, and so on.
*
It is of vital political importance
that no major political movement challenges the government's use of the monetary
and banking systems to "regulate" the economy and to impose pervasive police-state
surveillance on individuals.
*
It is of vital political significance
that the short-run effects of the FRS's monetary and banking policies are
very unclear to the average American, and that identifying in the long run
who gains and who loses, what is gained and lost, and why all this happens
is also very difficult for even economists and political scientists.
*
It is of vital political significance
that members of Congress apparently lack incentives - or actually labor under
disincentives - to investigate, let alone to correct, the misguided
and harmful policies of the FRS. And,
*
It is of vital political significance
that the general public is simply unable to devise effective strategies for
dealing with the FRS as a supposed "agency of the government".
Obviously, a group that could completely
excise these matters from political discourse in the United States, without
complaint by any significant part of the public, must be powerful indeed.
Now, how the apologists for the FRS have been successful since 1913
in stifling political debate on money and banking the history books do not
satisfactorily explain. What is clear enough, nonetheless, is that the
FRS was established to remove the Constitution as the arbiter of national
monetary policy on behalf of all Americans, and to guarantee instead that
certain special-interest groups are disproportionately (indeed, monopolistically)
represented in the determination of that policy, for the peculiar benefit
of those groups and at everyone else's expense. Here, more than one level
of analysis is pertinent.
A.
At the first level, the FRS appears as primarily a mechanism to "stabilize"
the inherently fraudulent fractional-reserve banking system. From this perspective,
the purpose of the FRS is not necessarily to do what the bankers want,
but always to do what they need. Consider the devolution of the monetary
system from a regime of commodity money to one of fiat money:
Under a regime of commodity
money, the bankers employ the inherently fraudulent fractional-reserve system
to expand the supply of fiduciary money (that is, bank-notes and deposit-currency)
beyond the supply of commodity money (that is, gold and silver coin) available
for redemption. This has two effects.
1. The bankers can loan more
"money" than otherwise, thereby increasing their profits. And
2. The holders of the fiduciary money
become unknowing (and presumably unwilling) "partners" with the bankers in
these excessive loans, thereby spreading the risk of those loans throughout
society and indirectly "insuring" the bankers at the expense of the general
public.
Because the expansion of the supply of
this inherently fraudulent fiduciary money is limited by the possibility of
widespread demands for redemption (so-called "bank runs"), followed by bankruptcy
of the issuing banks, the bankers as a class support a series of steps designed
to insulate the fractional-reserve scheme from collapse.
First, they
use every available means of propaganda, agitation, and disinformation to
instill unjustified confidence in the holders of fiduciary money, so as to
minimize redemption and thereby facilitate ever-greater expansion of the
supply of that money. Underfunded "deposit-insurance" schemes (either private
or public) typify this deceptive tactic.
Second, if "bank
runs" do occur, the bankers importune the government to authorize "suspensions
of specie payments": temporary refusals on the part of the issuers of the
fiduciary money to redeem their notes with commodity money. This permits the
bankers to remain in business even though they are bankrupt. "Suspensions
of specie payments" are a key indicator of the breakdown of the free-market
economy, because they are a governmentally protected repudiation of contracts
- in effect, governmentally licensed theft.
Third, to prevent
"bank runs" altogether, the bankers lobby for governmental permission to
repudiate their fiduciary money totally and permanently - that is, to transform
their fiduciary money into fiat money. This generally requires that
the government activate some mechanism for the "forced circulation" of the
fiat money, such as
*
by making that money the unit for payment
of taxes and for public expenditures;
*
by declaring that money "legal tender"
for all debts; or
*
by outlawing contracts payable in any
other form of money, especially commodity money.
These steps substitute the government
- actually, the taxpayers - for the banks and their shareholders as the ultimate
guarantors of the fiat money, in return for which the banks agree
to two requirements:
1. They "monetize" the public
debt, in effect enabling the government to use the fiat-money system
as an instrument of taxation. And,
2. They cooperate in a cartel or other
self-regulatory scheme to control their expansion of the supply of fiat
currency within limits that maintain public confidence in the banking
system and the government.
In short, the government and the banks
agree to divide the amount that can be looted from the general public by
manipulation of the money supply, and to moderate that looting so that the
public never catches on.
The FRS is simply an
elaborate device set up to accomplish these rather simple ends in a highly
convoluted, and thereby deceptive, way. The FRS was the response of bankers
and their political cronies to decades of failures in the fractional-reserve
banking system at the local and regional levels throughout the United States.
The FRS was an attempt to maintain that system in perpetuity - first, at
the national level with the Federal Reserve Act in 1913, and then at the
international level with the Bretton Woods Agreement in 1944. "Was" is the
appropriate verb, because the Bretton Woods Agreement collapsed in 1971,
with President Nixon's repudiation of redemption of FRNs in gold internationally;
and mounting strains in the system have been appearing domestically since
the 1970s.
The key dates in the
devolution of the FRS are as follows:
1913 - Congress creates the FRS; permits
the emission of FRNs, redeemable in "lawful money"; and declares FRNs to
be "obligations of the United States", but not "legal tender". In
practice, the Federal Reserve Banks and the United States Treasury redeem
FRNs for gold coin on demand. FRNs are a fiduciary currency.
1933 - Congress repudiates redemption
of FRNs in gold for United States citizens, and declares that FRNs shall be
"legal tender". The government continues to redeem FRNs in gold for foreigners;
and United States citizens can redeem FRNs for "lawful money" (such as United
States Treasury Notes and silver certificates), which is redeemable in silver
coins. Therefore, FRNs remain a fiduciary currency, redeemable directly in
gold internationally and indirectly in silver domestically.
1968 - Congress repudiates redemption
of all forms of "lawful money" in silver, thus turning FRNs into a fiat
currency domestically for the first time.
1971 - President Nixon repudiates
redemption of FRNs in gold, thus turning FRNs into a fiat currency
internationally for the first time.
So, today, Americans suffer under a regime
of fiat money and unlimited fractional-reserve banking. In this system,
the FRS plays a very simple, but vital role: When public confidence in the
monetary and banking systems weakens, the FRS acts to "restore confidence".
The FRS may use what the public considers "drastic means" in this alleged
"fight", but never means so drastic that they precipitate genuine economic
collapse or seriously endanger the long-term interests of the banking cartel,
its satellite industries, and its political cronies.
The unavoidable problem,
of course, is that any system of fractional-reserve banking suffers from
inherent instability that increases over time, because at base fractional-reserve
banking is a kind of "Ponzi" or "pyramid" scheme. For that reason, fractional-reserve
banking is a "confidence game" in both senses of that term. The FRS, the banking
cartel, and the politicians of the American one-party system operate on the
theory that "You can fool all of the people some of the time, and some of
the people all of the time - and that's good enough!" But they forget
that, as Lincoln concluded, "You can't fool all of the people all of the
time." Over time, some people - often large numbers of them - do learn. And
people who have learned tend to act on their knowledge. So the remaining
lifetime of the FRS "confidence game" may, and likely will, be relatively
short.
B.
On a higher level of analysis, the FRS is not simply a control-mechanism
for the national banking cartel, but also one of the most important mechanisms
in a pervasive system of fascistic "economic regulation" that has been set
up in this country, slowly but surely, since the turn of the century. This
explains the "political independence" of the FRS in a way more logical than
the idea that money and banking are no longer politically important, divisive,
or even interesting subjects. If a fascistic state is to "regulate" the economy
with relative autonomy from the electoral public and most special-interest
groups, then its monetary agency must claim "political independence".
(Actually, in a fascistic state, all of the regulatory agencies must
claim "political independence" to some degree - which claim, not surprisingly,
is advanced by essentially every administrative agency of the national government
today. But the degree of "political independence" will vary with the importance
of the agency to the overall scheme of centralized regulation of society.)
Thus, the "political independence" the FRS claims is precisely expectable
were it part of an anti-democratic mechanism of economic and political
control. And that no constitutional branch of the national government
- not the Congress, not the President, and not the Judiciary - disputes the
FRS's supposed "independence" proves that those branches, too, have been
co-opted as agencies of the fascistic state.
In sum, contemporary
political money and the politicized banking system that generates it have
five major consequences:
*
First, modern political money
is the prime means by which the government operates a scheme of OPPRESSIVE,
HIDDEN TAXATION through increases in the supply of money that generate systematic
increases in the prices of goods and services (what the public calls "inflation").
*
Second, by operating as a system
of hidden taxation, modern political money licenses the dominant financial
and political oligarchy of this country to "REDISTRIBUTE" THE NATION'S WEALTH
from one group to another - more than $6 trillion since World War II, according
to the American Institute for Economic Research.
*
Third, by functioning as a mechanism
for "redistributing" wealth, modern political money SYSTEMATICALLY CORRUPTS
THE ELECTORAL PROCESS, enabling politicians to buy votes with promises of
new or expanded governmental spending-programs made possible only by the
banking system's ability to "monetize" the public debt.
*
Fourth, by linking the banking
system to the public debt, modern political money licenses the banks to LOOT
THE PUBLIC TREASURY, initially by guaranteeing FRNs as "obligations of the
United States" and specially privileging those notes as "legal tender", and
ultimately by providing taxpayer-funded "bail outs" of the bankers when the
scheme of inherently fraudulent fractional-reserve banking collapses.
*
Fifth and last, modern political
money and political banking function as key mechanisms in the scheme of FASCISTIC
CENTRAL ECONOMIC PLANNING that misdirects and wastes resources and thereby
lowers the standard of living of the vast mass of Americans for the benefit
of a privileged few.
IV. Although long
a powerful - and today still a politically untouchable - institution, the
FRS faces a dismal future. This can be assessed by considering the contemporary
political-economic conditions that have given rise to the problem of collapsing
domestic banks.
A.
The first of these conditions is the essentially fictional and fraudulent
nature of modern paper money and fractional-reserve banking.
The fictional and fraudulent
character of contemporary paper money is a demerit additional to the inescapable
economic disparity between all paper money and real money (that is, silver
and gold coins). Paper money can never be economically equivalent to real
money because:
*
A transfer of real money between two
persons immediately transfers a real asset: the silver or gold that
comprises the coins.
*
Unlike real money (which is itself
the monetary substance), paper money is merely a promise to pay real
money at some future date, subject to various contingencies, and always uncertain.
*
For that reason, a transfer of paper
money between two persons does not and cannot transfer the underlying monetary
asset immediately, only the promise to pay - that is, the liability
of the maker of the promise. And,
*
In as much as the promise may be more
or less secure due to the credit-worthiness or -unworthiness of its maker,
a transfer of paper money transfers not only a claim to the underlying real
monetary asset but also a risk of loss should the promise of payment
(redemption) not be honored, in whole or in part.
In short, even when paper money is actually
a promise to pay - and potentially fully redeemable in silver or gold - it
remains an asset to its holder only to the extent that the issuer of the
promise ultimately makes good on his liability to redeem, or that other people
are themselves sufficiently confident of the promisor's solvency to accept
the paper money at its face value in exchange for nonmonetary goods and services.
In the final analysis, paper money is an asset only if it can be cashed or
passed without loss in purchasing power as against real money - which the
holder of paper money can determine only when he actually cashes or passes
it.
In the United States,
for example, today's fiat paper currency is neither itself a valuable
commodity nor even a credible promise to pay a valuable commodity in redemption.
No holder of FRNs has any legal right to require that the Federal Reserve
Banks or the United States Treasury redeem them for any amount of any commodity.
And no holder of these notes has any legal right to compel any other ordinary
person to exchange a fixed amount of any good or service for some known nominal
value of this currency proportional to some weight of silver or gold. Indeed,
notwithstanding the statutory mumbo-jumbo mandating their redemption "in
lawful money", guaranteeing them as "obligations of the United States", and
declaring them "legal tender" for all debts, the most a holder of FRNs can
demand as a matter of law is that the national government receive them in
discharge of tax-liabilities. Thus FRNs are largely fictional money: for
they are, in fact and law, a medium of exchange certain exchanges of which
are absolutely refused by their issuers and conditionally refused by everyone
else in the marketplace, and which the government accepts only to set off
antecedent tax-claims the size of which it unilaterally determines in the
first instance. FRNs are, really, just tax-anticipation coupons masquerading
as money.
Similarly, contemporary
"reserve" banking is, not merely "fractional", but rather inherently fictional.
For no bank in the FRS maintains any real "reserves" of money, only
paper notes or bookkeeping-entries that the system can "create out of nothing",
at any moment and in any amount - but the purchasing power of which in real
money (silver or gold) or in any valuable commodity the system cannot guarantee
at any time or to any degree.
Moreover, the essentially
fictional character of contemporary fiat paper currency and "reserve"
banking is the source of their inherent fraudulence - because the fiction
is unknown to (indeed, carefully hidden from) the general public. The special
privilege of the FRS to emit unlimited amounts of irredeemable, "legal-tender"
paper currency, and to loan that currency at interest through the system's
commercial member-banks, amounts to a veritable license to steal -
because the general public is unaware of the economic significance of the
currency's irredeemability, and ignorantly assumes that its designation as
"legal tender" compels its use as a medium of exchange to the exclusion of
all other forms of money.
The abjectly fictional
nature of modern paper currency and fractional-reserve banking encourages
the question: why do fiat FRNs continue to circulate, and banks without
any real monetary reserves continue to function? Those who accept the theory
that "money" is whatever the government decrees would answer that FRNs (or
bank-deposits denominated in FRNs) have value as media of exchange in the
marketplace because people must acquire them in order to pay their taxes.
The obvious fallacy here, though, is that the government accepts payment
of taxes in FRNs precisely because those notes have a finite purchasing-power
in the market, and therefore are usable as "money" by the government. It
is not the present and future taxability of the notes that gives them their
market exchange-value, but their residual market exchange-value that renders
them viable as a medium of taxation. One must recall that FRNs were originally
redeemable, directly or indirectly, in gold coins, silver coins, or both.
For that reason, FRNs had a real exchange-value in the market that reflected
their underlying redemption-values in gold or silver, and depended not at
all on their use as a medium of taxation but indeed made them valuable for
that purpose. When FRNs became wholly irredeemable after 1968/1971, they
lost any fixed or predictable market exchange-value in terms of real money,
and therefore became of increasingly uncertain value as a medium of taxation,
too (at least to the extent they continue to depreciate in market exchange-value,
as they have, steadily, since then).
A more realistic explanation
for the continued circulation of FRNs (or bank-deposits denominated in FRNs)
as "money" is that the general public is the victim of a confidence-game,
in which the government and the banks have foisted off paper liabilities in
the place of real monetary assets in an inverted pyramid of monetary fraud.
At the tip of this upside-down pyramid are real "dollars": silver and gold
coins that are themselves monetary assets and no one's liabilities, and circulate
among those knowledgeable about the differences between real money and paper
money. Next in amount in circulation - and at the first level of the institutionalized
fraud - are the base-metallic token (or "clad") coins of cupro-nickel alloy.
These are monetary assets to the extent of their salvageable metallic content
- which is worth about 2% or less of their face values - , but otherwise
are liabilities of the government which at one time were redeemable in silver,
but are today wholly irredeemable. The next largest fraudulent circulating
medium consists of actual FRNs, today "redeemable" only in "clad" coins.
Finally, the greatest portion of the so-called "money supply" consists of
bank demand-deposits, most of which have been loaned at interest to persons
other than the depositors. Revealingly, not only are these purported deposits
not actually on deposit in the banks at all, but also the deposits are not
even formally "redeemable", because the deposits themselves are not the depositors'
"money", but the banks'! The deposits are loans of money the depositors
(many of them unknowingly) have made to the banks, and which the banks have
then further loaned to third parties.
But how many people
are aware of this situation? Why do the government and the banks not educate
those who are unaware of what is really going on - other than because the
government and the banks knowingly profit from public ignorance and therefore
intentionally promote it? And how long can such a swindle continue?
B.
This question highlights the second of the contemporary political-economic
conditions that underlie the problem of collapsing domestic banks: namely,
the inability of the banks to continue indefinitely to increase the supply
of money within the domestic economy, that is (as the saying goes), to "expand
credit" (because the supply of new money derives from the extension of bank-credit
to borrowers). The answer to the question "How long can this confidence-game
last?" is "Not forever!". If, on the one hand, the banks overly
expand credit, hyperinflation occurs (that is, the purchasing-power of the
monetary unit falls exponentially). If, on the other hand, the banks overly
restrict the expansion of credit in order to avoid hyperinflation, recession
and then depression occurs (that is, people borrow less, and then existing
borrowers in massive numbers default on loans). The bankers' "trick" (and
dilemma) is to continue to expand credit within an expanding, and therefore
essentially noninflationary, economy. The insoluble problem inherent in credit-expansion
through fractional-reserve banking, however, is that expansion of a fiat
money supply inevitably misdirects and wastes real economic resources,
resulting in an increasingly nonrational economy - that is an economy that
does not expand in real terms. In short, credit-expansion by
fractional-reserve banking in the long run guarantees economic collapse,
with resultant social chaos and political crisis.
CONCLUSION
No crystal ball is
necessary to predict that a turning-point in the history of money and banking
in the United States is drawing nigh. The burden of governmental debt - much
of it made possible only by central-bank "monetization" - has approached
levels unsustainable in real terms even with drastically increased confiscation
of Americans' earnings through explicit taxation. But Americans seem reluctant
to accept more taxation to fund the never-ending follies of a spendthrift
welfare state. Thus, repudiation of the debt (in whole or in part)
through extreme depreciation of FRNs and bank-deposits denominated therein
appears likely, if not certain.
For this looming debacle,
Americans can thank the FRS, the "experts" who administered it since 1913,
the politicians who wed it as a "cover" to finance their own careers, the
bankers who profited from their monopoly over the emission of "legal-tender"
paper currency, and the "intellectuals" in academia, the press, and the media
who (quite unlike their counterparts in the last century) remained strangely
silent on the issue of money and banking. That is, Americans can properly
thank these people if Americans become aware of what the FRS is, what
it does, and why it is responsible for having undermined to the point of collapse
the nation's once proudly prosperous economy and staunchly republican political
process.
Hopefully that day
of a new national awareness will soon be at hand.
The above monograph
is the fourth in a series of nine published by The National Alliance for
Constitutional Money, Inc., 13877 Napa Drive, Manassas, Virginia 22111. Each
of the monographs in this series discusses a significant aspect of the current
monetary system and no serious student of the money issue should be without
these articles. If you wish to obtain the remaining monographs, contact the
National Alliance and make a generous contribution.
Dr. Vieira is also
the author of PIECES OF EIGHT: THE MONETARY POWERS AND DISABILITIES OF THE
UNITED STATES CONSTITUTION - A STUDY IN CONSTITUTIONAL LAW. This work is
the most exhaustive and scholarly treatise ever written regarding the legal
history of money in this country. This work is currently being revised and
will be available soon from the National Alliance.
Hopefully, Dr. Vieira
will be persuaded to allow selective portions of the other monographs to
be published on this webpage.
NOTE: In accordance with Title 17 U.S.C. section 107, any copyrighted material herein is distributed without profit or payment to those who have expressed prior interest in receiving this information for non-profit research and educational purposes only. For further information please refer to: http://www.law.cornell.edu/uscode/17/107.shtml
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