Little Green Lies
Gary North

We want to believe those on whom we are dependent. If we are being betrayed, then we are at risk. If we are being betrayed on life-and-death matters, then we are at extreme risk. So, in life-and-death matters, we dearly want to believe. We become soft touches, marks, and suckers for those who prey on trusting souls.

The voters know that politicians in general are liars who will say anything to get elected. But they except their Congressman, who shook hands with them once at a fund-raiser. Parents know that the American public schools are disintegrating. But they except the local public school to which they send their children, which somehow has avoided the decay. And so it goes, liar by liar, fraud by fraud. People want to believe. The more dependent they are, the more they want to believe.

We are all dependent. The division of labor makes us rich by offering so many alternatives. So, we transfer to others the decision to produce a good product. But we learn, as President Reagan said of the Soviets, to trust, but verify. When a company keeps selling us substandard products, we buy from a rival. We retain our right to say "no." We reserve our right to ask: "What have you done for me lately?"

This is why liars seek monopolies. They don’t like competition. Competition makes it profitable for buyers to scrutinize sellers. When there are no legal alternatives, the buyer learns that it isn’t worth the time to monitor the exclusive seller.

THE ULTIMATE MONOPOLY

Take a dollar bill out of your wallet. Look for these words:

This note is legal tender for all debts, public and private.

Now, that’s a monopoly! It’s a legal monopoly of debt repayment. The creditor must accept it. You hold a monopoly in your wallet. But if you have lent money, the debtor holds a similar monopoly in his wallet. And the United States Treasury holds a monopoly on us all.

Governments resent competition, which is why it is not easy to trade in foreign currencies. Thirty years ago, it was almost impossible. Even today, I know of only one bank that lets you buy short-term debt certificates in the Chinese yuan: Everbank. There is not much demand in America for yuan accounts. The American public still trusts the United States government to see to it that the dollar is as good as . . . what? And the answer is - "May I have the envelope, please?" - the dollar!

American voters trust the U.S. government. The government has licensed the Federal Reserve System, a quasi-public bank, to determine monetary policy. This was done, officially, to keep monetary policy independent of the government. No other industry has this protection. No other industry has the guts to come before the general public and say, "We deserve a government-granted monopoly because you can’t trust the politicians." Any other industry that attempted this would be hooted off the stage. Special interests are special, but not that special. But central bankers tell this to voters in every nation, and the voters buy it. "Nice work if you can get it, and if you get it, tell me how."

My favorite example is a student essay contest held by the Minneapolis Federal Reserve Bank, which does not have the legal authority to use the government’s free postage "frank" because it isn’t an agency of the U.S. government. (The Board of Governors of the FED is.) You’ll love this!

Students Answer the Question:

Is the Federal Reserve Too Independent?

"One matures over time."

That was Paul Volcker’s response when he was reminded that he once suggested the Federal Reserve System should be placed under the direction of the Treasury Department.

The former Federal Reserve Board chairman made the suggestion about 40 years ago in an undergraduate thesis.

That public reminder of Volcker’s college thesis was all in good fun, but the issue of external control is no laughing matter for the Fed. It’s been a matter of contention since passage of the Federal Reserve Act in 1913 and strikes at the heart of 76 years of debate.

In that spirit of debate, and to commemorate the Fed’s 75th anniversary, the Minneapolis Fed sponsored an essay contest for Ninth District high school students last fall. The 90 participants, whose entries were reviewed by a panel of district educators and economists, addressed this question:

Should the current structure and independent status of the Federal Reserve be maintained, or should it be modified to give Congress more control?

While the majority of students said the Fed should remain independent, some echoed Volcker’s earlier sentiments and suggested that the Fed has too much unsupervised power.

Indeed, one of the winners, Julian Dolby of Ham Lake, Minn., who supports the idea of Fed independence, posed this question:

"Does this mean I think this is the best Federal Reserve possible? Not at all." Dolby went on to explain that he supports change in the way monetary policy is formed, and he encouraged greater cooperation among the Fed and other branches of government. But, he added, "Keep the Federal Reserve independent of all branches of government, particularly the U.S. Congress."

Dolby shared second-place honors with Erin Magnus of Bovey, Minn., and her conclusion reflects the majority opinion:

"The loss of independence to the Fed would deal a serious blow to the American economy. Monetary policies would be subject to political browbeating and games-playing. The notorious red-tape delays of Congress would seriously hamper the effectiveness of the Federal Reserve that had lost its autonomy."

The first-place essay, submitted by Pam Bernicke of Eau Claire, Wis., and reprinted below, argues that the Fed’s independence is essential for establishing long-range economic policies.

Bernicke, Bond, Magnus and each of the 31 finalists received US savings bonds as prizes, along with an invitation to spend a day at the Minneapolis Fed for an educational workshop. The students’ teachers and parents were also invited to the program.

This attitude extends into every economics department in every state-accredited college in America. The most free-market of all first-year economic textbooks is the one written by Gwartney and Stroup. This is the only one written by members of the "public choice" school of economics, which is famous for arguing that every government employee is governed by the same self-interest as anyone else, including capitalists. In the 4th edition (1987), we read:

Central banks are charged with the responsibility of carrying out monetary policy. The major purpose of the Federal Reserve System (and other central banks) is to regulate the money supply and provide a monetary climate that is in the interest of the entire economy (p. 281).

The authors then devote ten pages of text to a description of the operations of the FED, without one word of criticism, and openly denying the private legal status of the system: "In reality, it would be more accurate to think of the Fed and the executive branch as equal partners in the determination of policies designed to promote full employment and stable prices" (p. 283). Question: What happened to Congress, which the Constitution assigns exclusive power over the purse? What happened to the frank? What happened to the laws of economics? What happened to self-interest? What happened to the economic analysis of monopoly that the authors apply to every other monopolistic area of the economy?

Public enterprises can thus be expected to use at least some of their monopoly power, not to benefit the wide cross-section of disorganized taxpayers and consumers, but as a cloak for inefficient operation and actions to advance the personal and political objectives of those who exercise control over the firm. Government ownership, like unregulated monopoly and government regulation, is a less ideal solution. It is not especially surprising that those who denounce monopoly in, for instance, the telephone industry seldom point to a government-operated monopoly - such as the Post Office - as an example of how an industry should be run (pp. 466-67).

The authors by this stage in their textbook had already pointed to just such a government monopoly (as they incorrectly and misleadingly defined it), the most powerful and profitable monopoly of all, the monopoly over money creation and monetary policy: central banking. They discussed the FED in Chapter 12, "Money and the Banking System," before they presented Chapter 19, "Monopoly and High Barriers to Entry." The authors fully expect the reader to fail to notice this theoretical discontinuity, as if there were some economic justification of the inapplicability of Chapter 19’s analysis to Chapter 12. This is a safe assumption. Most students do not notice.

Neither does Congress.

If you want the best and clearest analysis of the fraudulent and destructive system known as fractional reserve banking, read the book by the Austrian School’s free market economist, Murray Rothbard: "The Mystery of Banking." It’s posted free on-line.

ENDLESS LIES

Let’s examine this statement:

Central banks are charged with the responsibility of carrying out monetary policy. The major purpose of the Federal Reserve System (and other central banks) is to regulate the money supply and provide a monetary climate that is in the interest of the entire economy (p. 281).

First, who charges them? The government? Consumers?

No one charges them. They are legally independent.

Second, who says the major purpose of central banks is "to regulate the money supply and provide a monetary climate that is in the interest of the entire economy"? That is indeed the two-fold official justification for the monopoly. But official explanations of special interest groups are always suspect, and especially special interest groups that receive a monopoly. The monopoly over money is the largest economic monopoly of all.

Third, how well has the FED carried out its "mandate" since 1913? See for yourself. Go to the Web site of the Bureau of Labor Statistics.

Look for "Inflation Calculator." It’s the second entry under "Inflation & Consumer Spending." Click the link. Up will pop the inflation calculator. Enter the figure 1000 in the box, and then click the down arrow to enter the date: 1913. Then click "Calculate." You will see how much money, after taxes, you would need today to equal the purchasing power of $1,000 in 1913, the year of creation for the FED.

Then assess the success of half of the FED’s supposed mandate, i.e., "provide a monetary climate that is in the interest of the entire economy."

To compare the success of the FED’s monetary policy, recall that gold today is about $400/oz. In 1913, it was $20. That is, gold today is 20 times more valuable, as assessed in dollars, than it was in 1913. Compare this to the resulting figure in the Inflation Calculator. I’m not going to tell you. You should do this exercise for yourself.

What we see is an endless supply of lies about economic stability, stable money, and the need for a government monopoly to control monetary policy independent of the government. These lies I call little green lies. (In other countries, these lies have different colors.) These lies are not new. The footnotes get revised, new editions are published, but the lies remain the same.

These are not errors. They are lies. Anyone in academia or banking or government who starts telling the truth finds that his income, as denominated in dollars, falls a lot faster than the dollars depreciate. So, the lies are not challenged. They are accepted.

THE MONOPOLY IS FADING

The monopoly over money is fading. New kinds of money replace M-1 and its components: currency in circulation and checking accounts. We got M-2, then M-3, then MZM. They vary. The experts do not agree on which is "the real money." They are not sure which has the greatest influence. The central banks do not control them directly. Sometimes, as today, central banks do not seem to control them even indirectly.

In 1992, America’s #2 senior commercial banker emeritus, Walter Wriston of Citibank, wrote a book, The Twilight of Sovereignty. (The senior commercial banker emeritus, then as now, is David Rockefeller.) He admitted that central bankers had lost control over money and the economy. New information technologies have undermined any centralized control. I think he was correct.

As individual entrepreneurs search for profits at the expense of entrenched bureaucrats, including monopolists, they will undermine the dreams and schemes of professional liars. The lies of 1913-2004 will be revealed as lies. A great default is coming.

John Maynard Keynes (B.A. mathematics), the apologist and architect of today’s system of government lies favoring the productive power of taxation, once said, "in the long run, we are all dead." He was correct; we are. The question is: How should we then live?

If you have bet your future on the productivity of government lies, you had better be aware: the economic long run may arrive before you die. The power of free market forces is greater than the power of Mr. Greenspan and his peers in other central banks. When the bough breaks, the cradle will fall. Conclusion: stay out of cradles.

February 7, 2004

Gary North is the author of Mises on Money. Visit http://www.freebooks.com. For a free subscription to Gary North's twice-weekly economics newsletter, click here.