I’ve been doing my best to read about and understand the complexities of the monetary system, but it’s a massive undertaking with a very long history.   Today I was having an email exchange with a colleague, Eric O’Keefe, on the subject.  In response to my questions, he delivered the best short synopsis I have ever read.  If you find this whole discussion as overwhelming as I do, I think you will find Eric’s explanation both simple and illuminating.  I’m sorry to say, you won’t find it encouraging.

“On money — you could get mired in studying money for months, or years. I have done so, starting in the 1970s.

Here are the key things you need to know about money:

Money was a creation of the market — not of government.  Based on all evidence, it evolved in voluntary transactions which drove people to use items compact, incorruptible, and not easy to find or replicate.  In the more advanced trading economies, from China and India to Greece and Rome, and Europe and America, that evolved into precious metals.

Governments early on discovered the potential of monopolizing and then corrupting money as a form of hidden taxation.  This was done rather crudely at first – with “coin clipping,” literally peeling the outside edge off of coins to steal some of the metal, and then to pass them along at their face value.

Governments facilitated the process by having coins based on something other than weight.  An honest money should just have been a certain weight of metal — say a British “pound” of silver — the original source of the name for British fiat money.  Today, by the way, a pound of silver is worth about $500, and a British pound is worth about $1.60.

The Romans went from clipping to simply changing from precious metals to cheap metals for their coins, and then minted them by the millions, which is why ancient Roman coins can still be purchased for low prices.  This process was replicated in the U.S. in the 20th century, and now there are discussions about switching from relatively expensive base metals in our coins to even cheaper base metals, as the copper and zinc in a penny already costs more than a penny, and the metals in other coins are on the same journey.

But modern states are much more ambitious, and have followed the Communist Manifesto on this point:

Centralization of credit in the hands of the State, by means of a national bank with State capitaland an exclusive monopoly.  (From Chapter 2 of the Communist Manifesto – Karl Marx – this is one of the ten planks of Communism)

Paper money was introduced privately as a proxy for precious metals; many U.S. banks issued “bank notes” in the 19th century; the same in Europe.  This worked well in some times and places, but of course some banks issued more notes than they could back, and instead of focusing on that irresponsibility, bankers and governments conspired to centralize the practice.

Governments recognized the potential, and came in big, eventually outlawing private bank notes and monopolizing the process.   So what governments did was steal, via a gradual process, the goodwill of hard money based on precious metals, and transfer it to their own fiat (“it shall be so”) money.   Now they were free to fabricate money without limit, except for the ambiguous limits imposed by the market via inflation and credibility.

Today the amount of paper money in circulation in the U.S. is entirely based on demand for paper money — the Fed and treasury create as much cash as the market wants, with no action by Congress.   And the demand for that money is of course heavily influenced by the creation of credit, which is most heavily influenced by how much, if any, credit is artificially created by the Fed.  And that has been two trillions monetized in the past four years, whereas it was a total of $800 billion from 1913 to 2007.

This “monetization,” or “quantitative easing,” is the purchase of government debt — or other debt — by the Fed, with electronic credits recognized as money.   It is money from nothing, and it is what is floating our fake economy, financing government profligacy, bailing out Wall St., and robbing savers along the way.  It is a straight-out wealth transfer from savers to borrowers, and from the most solid citizens to the profligate and the connected.

It requires no action by Congress.  The Fed is a creation of Congress, but Congress disclaims any responsibility for actions of the Fed, and of course is well served by the process.

If the Fed were to cease monetization and attempt to restore sound money now, a depression would start — except that the screaming from Wall St. would force the resignation of Bernanke and the appointment of another puppet.

It is difficult to see any good end to this — the government and powerful parts of the economy are addicted to subsidized credit; they are stealing without accountability.  Why would they stop?  They will take what they can get until some historic crisis kills the goose, or otherwise cuts off their access to our wealth.

While this monetary situation prevails, only the international markets and the world economy’s tolerance for more dollars and more profligacy from the U.S. limits the wealth that the U.S. government can absorb and destroy.  Congress will fiddle away, and act the victim when it all blows up.  Yet like so much else in our system, Congres and only Congress has the power to address this.

This type of money — fiat money, backed by nothing but the self-restraint of governments and the tolerance of markets, prevails around the world.  There is no sound money, and therefore the depreciation of all paper moneys against gold is the best measure we have of the market’s confidence in this paper money.

Every paper money story in history has ended the same way, and so will this.”

Not exactly uplifting, but it seems to be an accurate reflection of reality.  And while reality is an acquired taste, in regard to monetary policy and its effects, it’s one we all ought to acquire sooner rather than later.
(Image courtesy of Images_of_money at Flickr – http://www.flickr.com/photos/[email protected]/)

About The Author

Mark was a co-founder of the Tea Party Patriots, and served as the national coordinator. He left the organization to work more broadly on expanding the self-governance movement beyond the partisan divide. Mark appears regularly on television in outlets as diverse as MSNBC, ABC, NBC, Fox News, CNN, Bloomberg, Fox Business and the BBC. He’s highly sought after for the tea party perspective from print and electronic media outlets, from the Wall Street Journal, New York Times, L.A. Times, Washington Examiner, Politico and the The Hill. Mark blogs at MarkMeckler.com, and his opinion editorials regularly run in many of the leading political newspapers both on and offline. Mark has a BA in English from San Diego State University and graduated with honors from University of the Pacific, McGeorge School of Law in 1988. He practiced real estate and business law for almost a decade. For the last eleven years of his legal career he specialized in Internet advertising law. When not fighting for the future of our nation, Mark is an avid horseman, and lives in rural northern California with his wife Patty and two children.

2 Responses

  1. Sisyphus

    I think the author is missing an important point about our system of money, more broadly understood. While the Treasury and Federal Reserve directly create currency and electronic funds in demand deposits, that is only what economists call M1. There are other forms of money beyond currency, however, and the most important of those in the modern economy is credit (which together with currency, demand deposits, money market funds, and some other stuff is called M3). Most credit is created privately, and the amount of available credit dwarfs the amount of currency and demand deposits in existence, because of fractional banking. M3 is something like 85% private/15% publicly created currently. So the broader money supply is still mostly privately created.

    In fact, by many measures the Federal Reserve is not doing enough money creation, because the private sector isn’t providing enough credit, and hence not creating enough M3 to match demand or trendline growth. The private sector’s problem in turn is partly the economy, but also Dodd-Frank (which increased regulations and capital requirements), the Basel III accords (which increased regulations and capital requirements), and the Fed’s payment of interest on reserves (a policy begun by Bernanke just after Lehman fell). Until the private sector is lending again at something close to normal, we will continue to suffer deflation-like economic effects, because in the M3 sense we are experiencing deflation.

  2. Donny

    consider that Romney would have let real estate as well as GM Quickly find a bottom. Still short range. Debt based currency is always unstable. Stupid to have a gold standard, the key is that we will have booms and busts until we eliminate the federal reserve system altogether. we need a fiat currency that is stable in supply relative to GNP. plus a huge effort to pass right to work legislation in all fifty states.


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