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by Free Market Duck

Wherein lies the value of today's paper money?...
The solution: abolish fractional reserve central banking, the Federal Reserve and govt monopoly of money; allow private minting and free choice of currencies - Part 5

(Sep 25, 2007)

In 1914, Germany’s Fed Reserve, the Reichsbank, suspended conversion of its paper money into gold.  By November 1923, after continual “injections of liquidity,” Reich Marks in circulation soared past 92.8 quintillion Marks and skyrocketed past 496 quintillion Marks through July of 1924.  On Oct 25, 1923, the Reichsbank apologized that it had been able to only print 120 quadrillion Marks that day, but the demand was for one quintillion Marks.  Finally, after nobody would accept the Mark, the Reichsbank devalued to a new Rentenmark convertible at 1 trillion to one.  By Nov 1923, circulation had increased 245 billion times and prices 1,380 billion times.  Inflation finally stopped in one day when 4.2 Rentenmarks (4.2 trillion old Marks) exchanged for 1 Dollar, which was convertible into gold.  Germany, via the Dollar, finally went back to the gold standard, after destroying its entire economy in 9 years through hyperinflation of its non-backed paper money. – Dr. H. Hazlitt, Economist

Today, in 2007, after FDR dumped the gold standard in 1933 and Nixon cut all dollar ties to gold in 1971, our derivative markets currently exceed a half a quadrillion dollars or $500,000,000,000,000 – five hundred trillion dollars – of non-collateralized paper fueled by America’s central bank, the Federal Reserve.  And what is it that everybody is screaming for more of?  The injection of billions and billions of more non-collateralized paper money as “liquidity” to “spur” the “growth” of the economy.

Sound familiar?

New York, NY – Those who fail to understand history are bound to repeat the same mistakes.  As we have discussed in Parts 1, 2, 3, and 4 of Wherein lies the value of paper money, a common theme runs through all hyperinflations, recessions, depressions, and wars – from earliest Roman times when Roman dictators clipped gold coins and debased them into pewter, through hyperinflation of French Assignats, through the Great German Hyperinflation described above, through modern hyperinflations in Latin American and other Third World nations, to today’s global hyperinflation of every nation’s non-collateralized paper money and derivatives such as subprime mortgages.  That common theme is:  a group of government-sanctioned central bankers (1) suspend the people’s free choice of a gold standard, (2) print up tons and tons of irredeemable paper money, (3) force their paper currency down everybody’s throats and thus, (4) transfer everybody’s wealth into the bankers pockets.

   Those of you who still think that central bankers such as the Federal Reserve are your best buddies and are not the culprits in this Great Monetary Robbery by Inflation, have not been paying attention to both history and our discussion in Parts 1, 2, 3, and 4.  Those of you who think ex Fed Chief Alan Greenspan and current Chief Ben Bernanke are economic geniuses who can use higher mathematical models to “manage” a free market, do not understand the meaning of individual rights, freedom of trade, the difference between money and a paper receipt for money, how prices are formed, the role of qualitative prices in a market, and how profits and losses tell entrepreneurs which direction to go.  I suggest you re-read the above intro about The German Hyperinflation.

   If individual rights philosophy as the basis for free market economics doesn’t move you, try looking at history.  The entire history of mankind has been one of government dictatorships with no individual rights until the American Revolution.  It is not unscrupulous individuals in a free economy that bothers me.  We have laws to take care of them.  It is unscrupulous individuals who BECOME the government, who BECOME the law, that we should worry about since they will strip you of your freedoms and the market.  Witness Congress, the Presidency, and the Federal Reserve after we moved off the gold standard.  Objective rules in the free market have morphed into dog-eat-dog no holds barred in the political arena as the entire now-dysfunctional American economy hangs on every vowel and consonant of the Chairman of the Federal Reserve Board.  Will he increase or decrease the non-backed paper money supply?  By how much?  In whose favor?

   If empirical data from history, including The German Hyperinflation described above, still doesn’t convince you, try reading Ayn Rand’s book Atlas Shrugged to find out exactly the type of America that you will soon be living in if nothing changes.  A quick review of George Orwell’s Animal Farm, Orwell’s 1984, Aldus Huxley’s Brave New World, and “V” for Vendetta should open your eyes.  Otherwise, go back to sleep.

   So, girl friends, now that you understand more about real economics, qualitative economics, than 95% of all the PhD Econometricians in the world – including ex Federal Reserve Chief Alan Greenspan and current Fed Chief Ben Bernanke, all of whom can best be characterized as simply Historical Price Modeling Interventionists for Government Bureaucrats and Special Interest Groups, it’s time to come up with a solution to our current economic debacle:  today’s monetary meltdown and impending recession.

   Quick review.  You have already learned that:

  • All individuals are born with inherent rights and freedoms, obtained from Nature, not the government,
  • Inherent individual rights lead to freedom of exchange,
  • Unequal subjective priorities of each trader is what drives all trades,
  • The qualitative theory of value shows how value resides in service rendered, not in labor per se or commodities per se,
  • Qualitative exchange ratios reflecting supply & demand create prices,
  • Free market prices allow market calculations,
  • Profits or loss reflect consumer satisfaction,
  • If one destroys qualitative price creation, one destroys the market,
  • Money is a commodity; paper money is a receipt for a commodity,
  • Economics is the study of human action, the process of subjective choice,
  • Econometrics is simply the quantitative modeling of historical market prices, attempting to mimic physics, which is fundamentally erroneous for the subjective field of economics,
  • Central bankers (such as the Federal Reserve) have caused our monetary meltdown and impending recession by unconstitutionally playing Mathematical Modelers of our Economy, dumping the gold standard, continually manipulating non-collateralized paper money & derivatives and attempting to “manage” the free market -- an oxymoron.

   Does that about cover what you learned in Parts 1, 2, 3, & 4 of Wherein lies the value of paper money, mes amies?  Yep.

   Basic logic says that if the problem is  Federal Reserve central bankers going off the gold standard, intervening into the economy with fractional reserve banking, hyperinflation of paper money, and attempting to “manage” the market, thus destroying true market prices, then the obvious solution is to stop doing those erroneous actions.

   Thank you very much, and how do you propose to implement a solution, Mr. Duckster?

   Getting back to basics, let’s ask a simple question.  Why is it axiomatic that the function of government – or a “legalized” subsidiary of government -- is to control and regulate everybody’s money and/or paper receipts for money?  Since money can be any medium of economic exchange freely chosen by free people, money could be tobacco, computers, electric toasters, cars or any other commodity.  And paper money would be redeemable receipts for these commodities.

   So, if we chose computers as money, instead of gold, should the government or Federal Reserve grab control of IBM, Dell, Intel, Microsoft and all other computer companies in order to control or regulate our “computer” money?  Why not?  That’s exactly what the government and the Fed used as excuses to grab control of all private mints and banks in the twentieth century because some of them failed.  We could carry this computer-as-money analogy further but just this much should suffice to show that it is not the function of the government in a limited republic and free market to obtain a monopoly over everybody’s money and paper money no matter what commodity free citizens choose as their money.  The only function of government is to protect individuals from force or fraud, whether in banking or other industry, not to take over all businesses -- including banks -- to save everybody from possible future crooks.  The real reason the government took over the banks with a Federal central bank is for power and control over the people, not to save them.  He who controls the money supply controls the nation.  The existence of a central bank and a free market are contradictory.

   The first concept we must understand is that free people have the inherent right to create, use, and distribute their own choice of money.  The right to create and distribute paper receipts for money should fall under our current contracts law, which means no fractional reserve banking – i.e., issuing paper receipts beyond the quantity of the commodity held.  It is just that simple.  We do not need a central bank, the Federal Reserve, to confiscate our gold, go off the gold standard, or issue non-collateralized fiat paper because some private banks went belly up any more than we need the government or a Federal Reserve to confiscate every computer manufacturer’s computers, ban everybody else from making computers, and issue fake receipts for non-existent computers in order to save our economy from future computer business failures.  We already have bankruptcy laws in case Bank ABC or IBM Computer Company flops.  We just need to enforce the law.  The entire notion of a central bank controlling the people’s money in order to save us from a few unscrupulous businesses – whether banking or computers -- is absolutely ridiculous at its fundamental premise.  In fact, the last entity you want controlling money and attempting to “manage” the free market IS the government.  Objective laws against contractual fraud, yes; “managing” the economy, no.

   The only reason that the Federal Reserve came into being is that central bankers wanted to control everybody’s freedoms and redistribute everybody’s wealth – mostly to the central bankers themselves -- by obtaining a government monopoly over gold and the creation, use, and distribution of gold money and paper receipts for money.  The fact that the Federal Reserve has been able to remove the concept, and physical backing, of gold from the U.S. Dollar is a testament to how far the public, and so-called intellectuals at most major universities, have been brainwashed into believing that value resides in paper simply because the government says so and that the Fed Reserve doing more of the same – hyperinflating our fiat money and intervening into the market -- is our only solution to what, ironically, the Fed caused in the first place with the same previous policies.

   So, the first step in the solution to today’s hyperinflation and impending recession is to abolish fractional reserve central banking, abolish the Federal Reserve, and abolish the government’s monopoly over the creation and distribution of money (or any other commodity).  Since we can’t just stop the current fiasco in one day, we must allow private minting and free choice of currencies to circulate alongside our current fake money, Federal Reserve Notes (FRN), allow gold to freely revalue to today’s FRNs, and allow the new good money (gold) to drive out the old bad money (FRNs).

   In general, the following steps are recommended:

  1. Return all U.S. gold bullion from the basement of the Federal Reserve vaults to the U.S. Treasury.
  2. Return all foreign held gold bullion from the Fed vaults to the nations that own it.
  3. Stop the Federal Reserve from intervening in any way into the U.S. economy, including setting of interest rates and issuing paper money or credit.
  4. Stop the Federal Reserve from rigging the buying and selling of gold futures in the Comex market.
  5. Allow the price of gold to rise to the true level of the amount of Federal Reserve Notes outstanding in the global market, i.e., stop rigging the gold futures market with “paper” gold and massive interventions of buying and selling – often on margin since they control the printing presses -- of real and imaginary bullion by mysterious Fed intrusions from offshore institutions.
  6. Allow private mints and private warehouses (banks, etc.) to mint gold and or silver coins and circulate alongside current Federal Reserve Notes.  Let the people choose.
  7. Prevent private banks from practicing fractional reserve banking with gold, silver, or any other certificates since it is a violation of basic contract law to issue fake paper receipts for that which one does not really have.  Hint:  one cannot issue 1,000 copies of 1 pink slip for one ’57 Chevy or 1,000 copies of titles to your house.  We have laws against counterfeiting.
  8. Allow 100% gold backed certificates and gold coins (real money) that state a specific quantity of weight and measure to circulate alongside current Federal Reserve Notes.
  9.  Good money (gold) will soon drive bad money (FRNs) out of circulation because value can then be ascertained.
  10.  We will then be able to abolish the Federal Reserve and retain a freely created gold standard without a huge recession.

   All commodities will then reflect their relative prices to gold.  Politicians, central bankers, and the crooks inventing ridiculous paper derivatives on Wall Street will not be able to continually wreak havoc with America’s economy.

   U.S. citizens will have their rights and freedoms restored as they can then control their politicians who won’t be able to deficit finance it, insert earmarks into Appropriations Bills, over tax us, or send us to fake wars for oil or any other reason without our approval.

   Why?  Because he who controls the money supply controls the nation.  The people -- not their government or a private cartel of central bankers granted monopoly control over a nation’s money – have the right to control their own money.  This is, at its very foundation, an individual rights issue as well as a free market issue.

   The transition to a gold standard and free market will not be easy.  Most people are completely unaware of the current causes of our monetary meltdown and impending recession.  And all the Econometricians and TV Talk Show pundits are busy advocating the exact opposite of what should be done to solve our crisis.  They want more non-backed paper money.  More and more.  Just like in the German Hyperinflation.  They are like idiots standing in Hell screaming, “Hey, it’s not hot enough in here.  Turn up the flames.”

   Note that going back onto a gold standard with private mints and banks will solve, in one fell swoop, all the current political waste, fraud, and abuse of America’s politicians and stop the onslaught of our giant Welfare State.  Gold is an automatic control over our overzealous, power-hungry politicians.  Gold is the concretization of the concept called individual rights and freedom -- mutually agreed upon exchanges of ideas, services, and commodities by free people exercising inherent rights of freedom of speech, freedom of movement, freedom of contracts, and freedom of trade.  Lose gold and you lose everything else.  In short, gold is freedom. – FM Duck

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