Over the years I have lamented the level of ignorance of the “average” American as to how the financial system in the uS really works. Then I recently became engaged in a FaceBook group discussion and realized that even anarcho-capitalists hold many of the commonly held misconceptions about “public finance.” It is actually worse than I had thought. So here is a very fundamental and simplified version.
Extracted from Agricultural Economics: Text, Workbook and Study Guide
by Dr Jimmy T (Gunny) LaBaume
What the propagandists call “Keynesian Economics” is actually thinly, but very cleverly, disguised centralized economic planning that the nomenklatura and their apparatchik of the former USSR only wish they would have thought of. Let us see if we can clear some of these commonly held misconceptions about “public finance.”
According to Keynes’ theory, the economy can be controlled with two tools–fiscal policy and monetary policy.
Fiscal policy involves government spending and taxation. In theory anyway, if the economy needs a boost, we either increase spending, reduce taxes or a combination of the two and vice versa for a slowing down of an overheated economy. Fiscal policy is highly political (witness the annual congressional fight over the “budget”) and therefore cumbersome to use. But never the less, it is administered (along with issuing of currency) by the Treasury Department which collects the taxes and manages the budget, which includes issuing Government Securities to pay for programs. This has become what is known as our national debt, which is backed by nothing but the “full faith and confidence in the uS government.” (As you will soon come to know, to be totally truthful, the phrase should read “backed by the full faith and confidence in the uS government’s ability to muster whatever firepower necessary to collect whatever tax it decides to collect).
On the other hand, monetary policy involves manipulating the money supply and is carried out by the Federal Reserve System. The problem with the Federal Reserve (FED) is that it is neither. Neither is it federal, nor is there any reserve. It is actually owned by its member banks. Yes, that’s right, the folks that have control over our money are not government officials. They are bankers. The FED also distributes the currency (through its member banks) that the Treasury Department prints and is one of their biggest security customers (more on that below).
In essence, the FED has three tools that it can use to manipulate the supply of money. One is the reserve requirement. Each member bank has to keep a designated percentage of its customer’s deposits on deposit with the FED. So, if they decide to increase the money supply, they would reduce this reserve requirement leaving the local bankers more money to lend and vice versa if they wanted to shrink the money supply. They don’t use this alternative very much, but it is available.
Another tool they have is the discount rate. The FED being the banker’s bank (where the banker goes to borrow money), controlling the interest rate charged to these commercial bankers in effect controls the interest they charge their commercial customers and again we have a way of manipulating the money supply. If the FED decides that the economy needs a boost it will increase the money supply by lowering the discount rate. This, in turn, means that commercial bankers can pass this along to their customers. This resulting decrease in the price of money (interest rate) will result in increased demand—e.g. customers will borrow more money and the economy will receive a “shot in the arm” or so goes the “party line.” In turn, they would increase interest rates in order to contract the money supply and “cool the economy off.”
The last tool available to the FED is “open market activities.” Here is where those government securities come into play. If the FED wants to increase the money supply, it will buy securities–securities come in, money goes out into the private sector and, of course, vice versa for decreasing the money supply.
All three of these activities are what are often referred to by the layman as “printing money.”
Now, take out whatever denomination of currency that you might have in your wallet and look at it carefully. If you can find the word “money” anywhere on it, I will match it. You won’t because it isn’t money. It is a “Federal Reserve Note.” (That’s how the Department of the Treasury gets away with issuing this “funny money” under the Constitution which clearly says that the only money is gold, silver or certificates redeemable therein.)
Now, where I come from a “Note” is a debt instrument and is very often accompanied by collateral. So where is the collateral? It is the Assets of the Federal Reserve.
What assets does the FED have? There are a couple of buildings and some office furniture. But, the bulk of its assets are GOVERNMENT SECURITIES, which are, again, backed by nothing more than “full faith and confidence….”
Here is how the scam actually works. The Department of the Treasury, in order to finance the “deficit” (where spending exceeds taxes and, over time, accumulates into what we know as the “national debt”), issues bonds. The Fed buys these bonds, say $100 million worth. It then records them on its books with a simple bookkeeping entry—a debit to the asset account (Government Bonds) with the offsetting credit to the liability account (the uS government’s checking account). In other words, they have created “money” out of thin air by turning debt into “money.” Economists refer to this process as “monetizing the debt.”
But that is not where the scam ends. The government then spends this “money” on its pork barrel projects (that most of us don’t want in the first place). The first level recipients of this largesse deposit their receipts with their commercial banks and the “multiplier effect” goes to work. Under the concept called “fractional reserve banking,” commercial banks are allowed to lend more funds than they have available. Remember the Fed’s “reserve requirement?” They are the only businesses in the country who are allowed to operate in such a manner. Everyone else calls it “insolvency which ultimately leads to “bankruptcy.” The “multiplier effect” is due to “fractional reserve banking.” By the time the $100 million works its way through the system—suppliers, of suppliers, of suppliers are paid—it may amount to a total increase in the “money” supply of, say, $600 million.
Meantime, Joe Sixpack is scratching his head and wondering why ends no longer meet. He is troubled by the situation. Although he does not know or fully understand what is happening to him, he feels frustrated because he senses something is wrong. And there is—it is the collateral, stupid.
Where is the REAL collateral? It is every ounce of every Joe’s entrepreneurship, every drop of their labor and every square foot of their land. That so-called greatest generation used us for collateral for its mortgage–and we haven’t really delved into the Social Security fiasco yet.
So you see, the great-unwashed mass that has been convinced that they should “pay their fair share” because “it takes money to move the wheels of America” has been duped. Under this Ponzi scheme, the government really doesn’t need to collect taxes. All it would have to do to finance any and all of its insidious social programs would be to crank up the old press and print some more money (or issue more of those “Government Securities” backed by the full faith…. well, you know).
So how does this insidious armed robbery actually manifest itself? If you said inflation, you are absolutely right. So, you see, inflation is nothing but a tax–the most sinister tax of all because it comes through the backdoor and most people are mystified by it (In fact, a while back I heard a professional Financial Advisor say on TV that “a little inflation is a good thing.”)
So why don’t they do it that way? Why do they even bother going through the motions of collecting taxes? Simple, that’s the way they keep their real scheme concealed. All the income tax does is lend legitimacy to the con job. Without it and our having been convinced that we must pay “our fair share” the system would simply collapse. We would refuse to go along with it.
Jimmy T (Gunny) LaBaume, PhD, ChFC is a retired full professor of Agricultural Economics and Agribusiness. He is currently the President and CEO of Land & Livestock International, Inc., a ranching and ranch management consulting firm. Send him mail.
Murray N. Rothbard was the father of what some call Radical Libertarianism or Anarcho-Capitalism which Hans-Hermann Hoppe described as “Rothbard’s unique contribution to the rediscovery of property and property rights as the common foundation of both economics and political philosophy, and the systematic reconstruction and conceptual integration of modern, marginalist economics and natural-law political philosophy into a unified moral science: libertarianism.”
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