Chris Yuhas Blog: True Economics and Politics

Strip the Federal Reserve of all powers using The Free Competition in Currency Act of 2009

Posted in Economics by Christopher Yuhas on February 24, 2010

The best way to destroy the capitalist system is to debauch the currency. – Vladimir Lenin

A chilling revelation from a person who succeeded in destroying free markets and liberty in his own country. Any prudent individual who believes in the economic liberty that capitalism provides, would do everything to stop this. Even if you did not believe in capitalism, I’ve never heard of the thunderous roar from any man or woman that enjoys to make the same amount of wages while losing purchasing power.

Lets put the Federal Reserve in perspective and in very simple terms. The Federal Reserve is like a national bartender serving only one brand of Beer while making all others brands of beer illegal. Here is the scenario. The Federal Reserve Bar only has enough beer to serve 20 customers. But every year since 1969 there have been more than 20 customers looking for Federal Reserve Beer. Since there is no other beer that may be served the Federal Reserve, adds water, dilutes the beer supply, thus reducing the potency, and provides for all the guests that show up after that maximum of 20 have been served. Each guest now gets the same volume of Federal Reserve Beer, however, diluted to the point where you may now call it non-alcoholic. That’s the Federal Reserves power over our money supply in a nutshell.

Now with a simplified explanation of their monopolistic position over the American currency, how do they create the money which dilutes wealth? The Federal Reserve has three tools in which they manipulate the money supply.

  1. Open Market Operations. Open Market operations are purchases or sales of US Treasuries by the FOMC (Federal Open Market Committee) of the Federal Reserve. When the Federal Reserve purchases treasuries, they simply deposit money into the seller’s bank account and voila, money created in the banking system. When they sell treasuries they take payment of from buyers which reduces money in the banking system. Thus “printing” money out of thin air.
  2. Discount Rate. The discount window loan is where banks go to borrow money from the Federal Reserve when they cannot borrow from any other institution for just about any reason. When the loan is made, the Federal Reserve deposits the loan in the banks account, thus money being created out of thin air, regardless of any guarantee.
  3. Reserve Ratio. The current rate on 50M or over is 10%. That means a banking institution may take a savings deposit of $5,000,000.00 transfer 10% of it to the Federal Reserve, which eventually pumps $50,000,000.00 into the money supply to loan to the public. Thus the member banks themselves creating money out of thin air mostly at interest!

Now lets examine the effect on the monetary system when currencies are allowed to compete, and given full convertibility in depository institutions, even allowing the Federal Reserve to continue to do everything it does with the exception of forcing the public, through Legal Tender Laws, to use its brand of currency.

  1. Open Market Operations. The Federal Reserve begins to purchase treasuries thus increasing the money supply. Those in a free currency system, may now convert their Federal Reserve Notes (incorrectly called Dollars) to whatever currency they wish in their depository institution; possibly a new gold backed currency, possibly a new silver backed currency, the Yen, the Yuan, or any other. This in turn increases the supply of the Federal Reserve Notes from lack of confidence and the person who converted their notes into other currency, and lowers the value of it until the Federal Reserve proves they have a generally acceptable increase of tangible assets or reduces their supply to stabilize its worth.Thus a check and balance on this action of the Federal Reserve.
  2. Discount Rate. People holding Federal Reserve notes in their depository institution see that the Federal Reserve just made a large loan at the discount window to a bank. This loan is deposited in that banks account thus creating money out of thin are. The holders of the Federal Reserve Notes are not confident in the company that the loan was made to because it increased the money supply and their financial troubles might not be solved by the loan, therefore, because of the Freedom of Currency they may convert their Federal Reserve Notes to any other currency with their depository institution. Thus a check and balance on this action of the Federal Reserve.
  3. Reserve Ratios. An institution that receives a $5,000,000.00 deposit now transfers 10% of that money into the Federal Reserve. The system eventually pumps $50,000,000.00 of Federal Reserve Notes in the monetary system. Thus money created out of thin air. From audits of either the Federal Reserve, or the banking institution, the people see that the Federal Reserve has increased the money supply and is now diluting wealth. They may now convert their Federal Reserve Notes at their banking institution into any other currency thus protecting themselves from inflation on that currency. Thus a check and balance on this action of the Federal Reserve.

“They will come to learn in the end, at their own expense, that it is better to endure competition for rich customers than to be invested with monopoly over impoverished customers.” – Frederic Bastiat

To stop the tyranny of inflation we must stop the monopoly of the money supply. Yes the Federal Reserve should be audited, but lets take the real power away from them which is not their secrecy, although the secrecy must be removed to bring criminal charges to those involved with financial tyranny, we must repeal legal tender laws which IS the monopoly of the money supply.

We as Americans were founded to not even give the Government a monopoly of violence, thus the Second Amendment, and even the Declaration of Independence confirms this. Why would we allow the banking institutions to just control another currency just to create a monopoly over it. We must allow private minting of coin, private issuance of currency, and allow foreign currency to use to settle contracts and cut a monopoly right out of the picture.

HR 4248 the Freedom of Currency Act 2009 does just this. It repeals Legal Tender Laws and prevents capital gains on certain coins and bullions. I believe it requires an amendment for depository institutions to allow the convertibility of one currency to another upon demand of the consumer to reduce the delay in the actual convertibility. Surely they may have some transactional fee for doing this, however what’s a processing fee when you have Federal Reserve Notes that lost over 95% of their purchasing power since 1913? End the Fed, by giving us capitalism, which is the freedom of currency!

If the American people ever allow private banks to control the issue of their currency, first by inflation then by deflation, the banks and the corporations will grow up around them, will deprive the people of all property until their children wake up homeless on the continent their fathers conquered. – Thomas Jefferson

Recommended read:

Denationalisation of Money: The Argument Refined ISBN: 0255362390

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Federal Reserve or the Gold Standard?

Posted in Economics by Christopher Yuhas on October 19, 2009

CPI Chart

The Federal Reserve is charged with combating inflation and providing a more stable monetary and financial system by authority of the US Congress under the Federal Reserve Act of 1913. They have failed that responsibility. Due to the fact that they have an unchallenged authority to dictate monetary policy, which is setting interest rates and the money supply, they are solely to blame for the 95% devaluation of the American dollar since 1913, following the Keynesian economic ideology that promotes fiat currency, centralized banking, and heavy intervention to the economy it serves.

From the brief analysis given below, the argument for an immediate implementation of the gold standard, will be substantiated by showing that gold in free markets can regulate the inflation of currency than the Federal Reserve.

In any particular school of economics, a widely accepted truth is that inflation’s primary causes are interest rates and the money supply. When any central bank, like the Federal Reserve Corporation, wants to slow down inflation, the first order of business is that interest rates must be raised. When interest rates rise, people are less likely to borrow money. When borrowers have to pay a premium over a longer period of time it discourages riskier investments, thus the economy becomes limited in available money for investment since individuals and institutions are more likely to save.

10 Year FED Rate

If economists from many economic schools and perspectives teach that inflation of currency can be slowed by raising interest rates, it seems from the historical data chart from the Federal Reserve Corporation’s own data, that interest rates are dropping, which is encouraging more spending, usually with traditional risk assessment non existent,  thus causing more inflation.

US Currency in Circulation

The second major action a central bank has in its arsenal to combat inflation, is the direct manipulation of the money supply. A simple rule of supply and demand can easily explain why this method is effective. If you want to increase the value of anything, make it less available. For instance, a Mickey Mantle rookie card can fetch a premium in the $200,000.00 dollar range because of the rarity of the commodity. If there were to be a sudden increase of Mickey Mantle rookie cards, in the millions for example, the commodity is now diluted its luster to fetch a premium because buyers know it is not that rare. The same rule with any currency applies, such as the United States dollar. The US currency has declined over 95% since 1913, and knowing this simple rule, some currency should be removed from circulation to maintain the strength of the currency. The exact opposite is happening today. The money supply has more than doubled in the last two years, adding to even more inflation, contrary to sound rules of economics.

The Federal Reserve Corporation also sets the standards of reserve requirements that banks must hold. For every 1 dollar a US bank saves, they can lend out 10 by creating money in a keystroke. This is called fractional reserve lending. This policy has contributed heavily to the decline of the dollar as banks have feverishly been lending out money, which is only backed by a tenth of the amount. This risky policy equates to US banks being able to have person deposit money into their institution, and then create 10 dollars of money out of thin air to lend, thus diluting the value of the dollar even further. If the reserve requirements were set higher, to at least a 5:1 reserve requirement, and as only a temporary measure, this would force banks to analyze risk more effectively and not engage in the toxic subprime mortgages market, for people who should not have been able to afford the house in the first place.

A prudent individual would then look to the audits of the Federal Reserve Corporation, hoping to discover, bad investments with other central banks and corrections on their fiscal policy, however they have exemptions of being audited on the their most important actions:

(b) Under regulations of the Comptroller General, the Comptroller General shall audit an agency, but may carry out an onsite examination of an open insured bank or bank holding company only if the appropriate agency has consented in writing. Audits of the Federal Reserve Board and Federal reserve banks may not include—
(1) transactions for or with a foreign central bank, government of a foreign country, or nonprivate international financing organization;
(2) deliberations, decisions, or actions on monetary policy matters, including discount window operations, reserves of member banks, securities credit, interest on deposits, and open market operations;
(3) transactions made under the direction of the Federal Open Market Committee; or
(4) a part of a discussion or communication among or between members of the Board of Governors and officers and employees of the Federal Reserve System related to clauses (1)–(3) of this subsection

Given the scope of what the Government Accounting Office, is prevented by law to audit, it would be very difficult to say exactly what is going on behind closed doors. The reality is that the Federal Reserve Corporation deals in the trillions, while the United States Congress only deals in the billions, yet Congress can be fully audited, but the Federal Reserve Corporation cannot under law be scrutinized on the 4 subsections. These exemptions must be removed so that the failures can be assessed and more efficient safeguards to prevent inflation put into place.

The first recommendation is to conduct a full audit of the Federal Reserve Corporation. Only a full audit can determine why interest rates were left unusually low and the money supply was effectively doubled, when economists would agree that the opposite, being raising interest rates and reducing the money supply, would have started a correction for the inflation.

Gold Std

The next recommendation would be the full scale implementation of a 100% gold standard with all currency redeemable in a fixed weight of gold. Gold, as in the CPI index chart (above), quickly corrects the inflation of the currency. The times in US history when inflation went high, on a gold standard, is during times of war, when convertibility of currency to gold was suspended to help fund the campaign. When the wars were concluded gold became convertible, and corrected the value of the currency. This is also a check and balance for risky lending of banks, and putting a strict restraint to prevent Congress from heading to the printing press to fund their next policy. The gold standard effectively puts an end to fractional reserve lending which forces banks to back all holdings with full convertibility to gold. This in turn would force banks to use traditional risk assessment when lending money, rather than the extreme risk that is plaguing the US economy today. Again, the gold standard prevents politicians from running to the printing press, when they want to fund a program or an unpopular war, which would traditionally require people to vote for a tax increase. Politicians usually run to the printing press to fund wars, as most citizens would generally not vote to do so. The 1900’s gave rise to central banking in Europe, and naturally war followed because politicians could run to the printing press to make currency and without being backed by gold or a metallic. They continually dilute the money supply at the expense of the citizens, without a tax being voted on to fund their war. Even former Federal Reserve Chairman Alan Greenspan warned of currency abuses by politicians in the absence of the Gold Standard in his 1966 Gold and Economic Freedom:

“This is the shabby secret of the welfare statists’ tirades against Gold. Deficit spending (inflation of currency) is simply a scheme for the hidden confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism towards the Gold Standard.”

With all information considered, and a recommendation of the 100% Gold Standard, you now have a metallic that has the ability to control inflation by being convertible at all US banking institutions, which is essentially the free market itself. Therefore, there are no needs for a central bank when the 100% Gold Standard with dollars payable on demand in gold. The Gold Standard had been a self regulating and effective tool combat inflation. The Federal Reserve Corporation should be converted to a public organization and restructured under the US Treasury Department. The Federal Reserve System could then be used as a real tool to combat inflation to regulate and inspect all banking institutions across the nation ensuring they are holding sufficient gold for surrender, given the total currency in circulation.