January 21, 2019

I, Interest Rate

interestIt is often said, “Don’t kill the messenger,” but that is precisely what everyone seems to want to do in my case. I’m not sure why because the news I bring is neither good nor bad. It is simply the truth; and it is a very sad day when telling the truth can foster such ill will. There are some who go so far as to declare my very existence wicked simply for providing information people use to engage in a specific type of voluntary exchange that, although of immense benefit to society, has somehow acquired an unsavory reputation.

As you may have surmised, I am the rate of interest, the price difference between present goods and future goods. Now, many economists mistakenly identify me merely as the price of borrowing money over time, but that is only one of the many messages I carry. I also represent the price spread in the various stages of production, where capitalists purchase present goods in the form of factors of production in the hopes of selling what is produced by those factors for a higher price than what they spent. I am also this difference in price.

Nobody but me can gather the information I gather, for my message is determined by billions of individual transactions occurring simultaneously all over the economy. I consider the individual supply and demand schedules of hundreds of millions, sometimes billions of individual consumers and producers, along with the uncertainty involved in every time transaction, to determine the current price levels for transactions that involve time at any given moment.

In the case of individual borrowers, the uncertainty I mentioned includes that borrower’s previous behavior, which is generally called a “credit rating.”

While it is only one of the many prices I make available to the market, an inordinate amount of attention is paid to the price of borrowing money. That is likely for two reasons. One, as I said, is that most people erroneously believe it is the only information I impart. Two, people seem to be borrowing a lot more than they did previously in history for reasons I will explain shortly. As a result, it is regarding the price of borrowing money where I am most slandered and abused.

Because this price of borrowing is above zero, there are some who consider my existence alone as evil. They say I’m a party to a crime they call “usury,” which is a very strange concept. When everyone is acting honestly, money is a scarce commodity, so any loan by Person A to Person B requires a sacrifice on the part of A. Person A must forego consumption in the present in order to lend to B.

It is no different than if A were saving for a new car or some other expensive item for himself. He must forego eating out as much, or buying new clothes, or going on vacation this year in order to put aside money to buy the expensive item next year.

By loaning money to B, A is allowing B to skip this sacrifice and purchase the expensive item now. It seems a very peculiar notion that A should forego spending his own money on himself only to let B use it for free when needed. How did this obligation to serve B free of charge come about? Aren’t all men created equal?

Read the rest at Foundation for Economic Education…

Tom Mullen is the author of Where Do Conservatives and Liberals Come From? And What Ever Happened to Life, Liberty and the Pursuit of Happiness? Part One and A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.

The Federal Reserve runs the economy, not Congress or the President


BUFFALO, March 18, 2015 – Janet Yellen told the markets what they wanted to hear today and the indexes rocketed out of negative territory to finish up over 1 %. As usual, speculation abounds on precisely what was in the minds of investors.

Journalists tend to overstate the causal importance of breaking news when the market makes big moves. Often, those moves were predicted months in advance by serious traders and what happened that day had little to do with what the market did. Not true for the Fed’s announcements. They do move the markets immediately.
What most people don’t know, or at least don’t acknowledge, is that the Federal Reserve really runs the entire economy. When the Fed inflates the supply of money and credit, indexes go up, growth occurs and the economy “improves.” When it deflates the supply of money and credit, indexes go down, contraction occurs and the economy “slows.”

That’s really the whole story of the American economy. Think about that for a moment.

It doesn’t matter who is president, which party controls Congress or what any of those people do or don’t do. Yes, regulations and tax rates have some effect on the economy. Liberals might say more regulation is a good thing, conservatives might say it is bad.

But taxes and regulations haven’t really had much effect at all in the past 40 years. Before that, when taxes were at 90%, they mattered, but not when the top rate fluctuates between 35% and 39%. Do the math. It’s not that significant.

Read the rest of the article at The Huffington Post…


Tom Mullen is the author of A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.


Repealing Glass-Steagall did not create the banking monster

TAMPA, August 22, 2012 – As we approach the Republican and Democratic National Conventions with two major party candidates that don’t substantively disagree on anything, debate about the causes of the housing bubble and what should be done about it will inevitably recur.

Both candidates advocate massive government intervention. They just disagree about the details.

Neil Barofsky weighs in with the generally accepted argument that the repeal of Glass-Steagall was the creator of what he calls “the monster,” highly leveraged investment banks taking extraordinary risks that led to the 2008 financial meltdown.

Barofsky is right about Wall Street being a monster, but the repeal of Glass Steagall wasn’t its Frankenstein. As Tom Woods explains in his bestseller, Rollback,

“But did the repeal of two provisions of Glass-Steagall allowing affiliation of commercial banks with securities firms through their control by the same holding company contribute to the losses and risk that permeated the system? Certainly not. For one thing, commercial banks bought mortgage-backed securities for their AAA rating, their attractive return, and the minimal capital requirements associated with holding them; they did not acquire these assets because they were connected to investment banks that were trying to unload them.

Moreover, severe regulatory firewalls essentially prevent this kind of affiliation from contributing to losses or increased risk on the part of the commercial bank involved. The reverse problem, that affiliation with a commercial bank might bring down and investment bank, is exceedingly unlikely, given the relative magnitudes of assets held by each institution. The commercial banks’ assets were only a tiny fraction of those held by the investment banks they were affiliated with. These banks were in no position to cause the investment banks any serious problem, much less their complete downfall.”

If that’s true, then why was that “sucker going down,” as President Bush so eloquently put it?

Continue at Washington Times Communities…

The Mullen Minute: Audit the Fed

Audit the Fed first shot in Ron Paul’s revolution

TAMPA, August 3, 2012 – “When I was your age, I went to the movies for a dime and bought a big bag of popcorn and a soda for a nickel.”

My father said that to me a hundred times when I used to pay $2.75 to go to the movies and another $1.25 for the popcorn and soda. For five generations, Americans have understood steadily rising prices as an immutable law of nature. Yet history shows that this just isn’t true.

The Federal Reserve of Minnesota publishes historical inflation figures on its website going back to 1800. The attached chart from that website shows annual inflation rates from 1800 through 2008. I added the last column to calculate the price movements of a basket of goods that cost $100 in 1800.

You don’t need a Ph.D. in finance for the numbers to jump off the page. The basket of goods that cost $100 in 1800 only cost $58.10 in 1913 (the year the Federal Reserve System was created). For that entire first full century of American history, steadily decreasing prices were something Americans took for granted.

In the ninety-nine years since the creation of the Federal Reserve System, that same basket of goods has risen to $1,265.14.

Continue at Washington Times Communities…

How the Fed Steals for the 1% (Tom Mullen on the Huffington Post)

It is ironic that Occupy Wall Street is reportedly very low on cash. This is something that Wall Street itself never has to worry about. They have ready access at all times to as much cash as they need. The Occupiers mistakenly blame capitalism, but it is not capitalism that is behind this inequity. It is the completely anti-capitalist Federal Reserve System.

The Fed purports to stimulate economic growth by expanding the volume of money and credit. This forces down interest rates and makes more money available to start new businesses or expand existing ones. However, while the currency units are created out of thin air, the purchasing power is not. The purchasing power has to come from somewhere.

As I’ve explained before, the expansion of money and credit really redistributes wealth from the holders of existing currency units to whoever receives the new money. When an individual “redistributes wealth” without the consent of its current owner, most people call it “stealing.” Now, the Occupy movement may not have a problem with that if it results in less disparity between rich and poor. However, that’s not what the Federal Reserve System is all about. The Fed steals for the 1%.

Read the rest of the article at The Huffington Post…

Gilligan, The Skipper, and the Federal Reserve

Now here’s another tale of our castaways.

Imagine if life on the island were different. Instead of seven stranded castaways, there were only four: Gilligan, the Skipper, Mr. Howell, and Ben Bernanke.

Besides non-existent ratings without Ginger and Mary Ann, some other things would be different. Imagine that there was only one thing to buy on the island, coconuts. Now, of course, this takes a willing suspension of disbelief, because we know that these four people would need more than just coconuts to survive. They would need clothing and shelter and might want other comforts that the island might conceivably provide. They would all provide different services to each other and trade them for the services of their fellow castaways. But in this example, the only thing that they trade for are coconuts.

Mr. Howell owns the coconut orchard, which produces 100 coconuts per year. Mr. Bernanke is in charge of the currency, the Island Reserve Notes (IRNs). In order to purchase the only available product for sale on the island, one must use IRNs. Barter or the use of other commodities to make this purchase is prohibited. Each coconut costs 1 IRN.

Gilligan and the The Skipper each perform different services for each other and the other two which they trade for these paper notes in order to buy coconuts. At a given point in time, Gilligan and The Skipper each have 50 IRNs.

There are a few things that are true. The first is  that the IRNs held by Gilligan and the Skipper have no value of their own. Their value is wholly derived from the coconuts that they can buy with the IRNs. Neither do the ISNs have any value off the island. Back in civilization, the currency is not recognized, although if a mainlander were to acquire some IRNs, he would be able to purchase coconuts with them if he ever found himself stranded on the island.

Secondly, Gillligan and the Skipper are equally wealthy, not because they both have the same amount of IRNs, which don’t have any intrinsic value, but because they are both able to buy an equal quantity of the available products. They are each able to buy one half of all coconuts produced in one year in Mr. Howell’s orchard. In other words, each has the same purchasing power in the island economy.

Now, suppose Mr. Bernanke decided to print 5 additional IRNs and give them to the Skipper. The Skipper would immediately be wealthier, as his  purchasing power has now increased by 10 percent. He can now buy 55 coconuts instead of 50. But where did this new purchasing power come from? Was it really created out of thin air just by printing additional IRNs?

Mr. Bernanke might say yes. However, there are still only 100 coconuts available to purchase. Since there is no way for Mr. Howell’s orchard to produce more than 100 coconuts during the current year, it would seem that Gilligan can still buy 50 coconuts, the Skipper can likewise buy 50 and his 5 additional IRNs are worthless until there are more coconuts available to purchase. How can the Skipper take advantage of the additional IRNs?

Obviously, there is only one way. Rather than trading 1 IRN for each coconut, the Skipper will now offer Mr. Howell more than $1.00 IRN per coconut. While he may offer different prices at different times, depending upon how hungry he is, let’s say that the average price he offers Mr. Howell over the year is $1.05. This is the new market price, which Gilligan has to pay as well. Mr. Howell certainly isn’t going to sell coconuts to Gilligan at 1 IRN apiece when he can get 1.05 from the Skipper. So, with Gilligan and the Skipper each paying on average 1.05 per coconut, the Skipper is now able to buy 52.4 coconuts, while Gilligan can only buy 47.6.

What we have seen is a transfer of wealth. The Skipper is now 2.4 coconuts wealthier. However, this new purchasing power was not magically created simply by printing the 5 extra IRNs. It was transferred from Gilligan, who can now afford only 47.6 coconuts, even though he has the same amount of IRNs that he had before. No one snuck into Gilligan’s hut and removed any of his money. He still has the exact same amount. But he has been robbed nonetheless. Regardless of how laudable the reasons given for printing the new IRNs and giving them to the Skipper – to stimulate the economy, create new jobs, etc. – it was nevertheless accomplished through theft.

It should also be noted that no additional wealth has been created. The total number of coconuts that Gilligan and the Skipper are able to purchase is still 100. The wealth has simply been redistributed from Gilligan to the Skipper. Imagine if this were to go on for decades. At some point, the Skipper would be fabulously wealthy and Gilligan would be destitute.

Now, the only reason that this theft is possible is the law that forces Gilligan to use the IRNs. If he were able to pick bananas and offer them in trade for the coconuts, he might be able to produce enough in bananas to buy more coconuts than the Skipper. Only the power invested in Mr. Bernanke allows him to transfer wealth and it is the only power he has. He doesn’t produce a single coconut himself. He simply decides how those coconuts are going to be distributed.

One might also argue that the Skipper might invest the extra 5 IRNs in capital goods and thus expand production on the island. It is possible. However, it is less likely that the Skipper is going to make wise decisions on what capital goods to invest in with purchasing power that was stolen from someone else than with money he saved himself. After all, if he decides to invest in a scheme that doesn’t pan out, he can go back to Mr. Bernanke and get more IRNs. In reality, these funds are loaned to the Skipper and he must pay them back with interest. However, he is really getting an involuntary loan from Gilligan and using Gilligan’s purchasing power to acquire capital goods. Each time he does, he becomes wealthier and Gilligan becomes poorer. Adding insult to injury, the Skipper gets to retain ownership of the new capital goods and keep all of the profits from the investment – with the cost of the investment provided by Gilligan!

Eventually, production might expand, but it will have expanded far less than if the Skipper had been forced to accumulate his capital by consuming less coconuts. This would put downward pressure on the price of coconuts, making Gilligan wealthier while the Skipper became wealthier still once he realized a return on his investment.

Of course, no economy is this simple. There is never only one product or service to purchase in any economy. Neither have we accounted for the coconuts that Mr. Howell consumes, nor for the presence of Ginger, Mary Ann, the professor, or Mrs. Howell, who could all conceivably produce other products or services to offer each other in the island economy.

However, even if there were seven castaways – or 300 million – the principle would remain the same. There would be some finite amount of wealth that all of their efforts combined could produce. All other factors being equal, printing new IRNs and distributing them unequally among the inhabitants would produce the same increase in prices and the same redistribution of wealth.

The only honest way to expand production would be for some of the islanders to save some of their earnings and invest them in capital goods. This would have the effect of raising the overall wealth of the island and any disparity in individual wealth would be the result of those individuals producing more for the other islanders to consume, not from redistribution through the production of new paper currency.  Moreover, since production could only be expanded by real savings, instead of by a privilege granted by Mr. Bernanke, they would all have an equal opportunity to save themselves and compete with those producing more. All of these factors would tend to make income disparity decrease, instead of increase as it does under the IRN System.

There is only one question that remains. Why does Gilligan allow the IRN System to continue?

Tom Mullen is the author of A Return to Common Sense: Reawakening Liberty in the Inhabitants of America.

Progressives Should Target the Real Robber Barons

The political winds have shifted wildly over the past four years. After decisive defeats in both the 2006 and 2008 elections, the Republican Party’s prospects seemed dreary.  There was widespread talk of how the party needed to “remake itself.”  There was even speculation from some quarters that it would fade from influence permanently, as had its predecessors, the Whigs and Federalists. Certainly, the conservative movement needed a rallying point in order to regain a foothold upon public sentiment.

That rallying point was public aversion to the radically socialist agenda of Barack Obama and the Pelosi Congress. Regardless of whether the Republicans had any new ideas to offer, they were able to remake their image quickly by jumping aboard and partially co-opting the Tea Party phenomenon. Somehow, they have again established themselves in the minds of most Americans as the party of small government, free markets, and individual liberty, their consistent behavior while in power notwithstanding.

Now, it is the Democrats who find themselves on the wrong end of a one-sided mid-term election defeat, with more of the same looming over the 2012 presidential elections. As much as the 2008 elections were a repudiation of George W. Bush and all associated with his philosophy, 2012 will be a repudiation of Obama and all associated with his. If the modern “conservative” philosophy had been thoroughly discredited two years ago, the modern “liberal” philosophy has been annihilated this year. Nothing that Democrats won on in 2006 and 2008 is going to fly with voters right now. The left needs a rallying point that will resonate with voters and make them forget why they voted them out of office just two years earlier, just as those same voters forgot why they had voted the Republicans out merely two years before the 2010 mid-terms.

If they are not to completely abandon their image as champions of the poor, disadvantaged, and working class against the power of the wealthy elite, they must find a way to restore that perception in the minds of voters without associating themselves at all with socialism, which average Americans have quite obviously choked on and spit out over the past two years. They need their own avenue to tap into the Tea Party phenomenon, or a grass roots movement like it, and appear as the party fighting for the people against a federal government run amok. Their traditional anti-corporate, pro-welfare platform won’t work. For better or worse, Americans right now associate corporatism with the free market and aversion to welfare programs has never been more ascendant. However, there is a rallying point available to the left that is completely consistent with the modern progressive philosophy and which conservatives are completely ignoring.

The left’s political dominance during the 20th century all began with the early progressive movement, which was given its first life under Republican presidents Teddy Roosevelt and William Howard Taft. However, it was the “new freedom” promised by Woodrow Wilson which established and defined the progressive platform, subsequently advanced in great strides by FDR and Lyndon B. Johnson. A core tenet of this philosophy was the need to protect “the little guy” against the robber barons of capitalism – which the progressives successfully defined in the minds of voters as anyone of great wealth, whether they have achieved that wealth legitimately or not.

Indeed, the tragic aspect of the early progressive movement was that they lumped together all successful business people as plunderers and exploiters of the working class, thus discrediting free market capitalism along with the crony capitalism that was as rampant at the time as it is now. Along with corrupt railroad companies that soaked the people for corporate welfare, only to deliver shoddily constructed railroads that all went bankrupt, the early progressives also targeted companies whose success was due to superior products and lower prices, with their profits earned from consumers voluntarily choosing to buy their products.

John D. Rockerfeller’s Standard Oil was one such example. His company was dismantled by the government after more than two decades of offering the public higher quality oil at lower and lower prices. Instead of holding him up as an example of what a truly free market could achieve for the common man, the left attacked Rockerfeller as the definitive robber baron, regardless of facts to the contrary. With his company dismantled by the government, Rockerfeller abandoned the free market and became the robber baron he was wrongly accused of being. He decided to get into banking.

This is not to repeat the mistake of early progressives. All bankers in the 19th and early 20th century were not robber barons, nor is banking a de facto dishonest profession. Like any other business, it offers a service of great value to the public when that service is voluntarily purchased by consumers. When consumers choose to store their savings in a bank or allow the bank to invest their savings by loaning it out at interest, the banks that most conscientiously and wisely protect their depositors’ interests will prosper the most. Those that make good loan decisions will be able to pay higher interest rates to depositors and provide more stability. In a truly free market, they will win, because they benefit average Americans – the political base of the progressives – the most.

However, this is not the banking model that John D. Rockerfeller helped found in 1913. Rockerfeller was no longer interested in competing on a level playing field and relying on talent and hard work to make his fortune. He had already done that successfully and had been plundered by the government for his trouble.  He was not interested in being victimized again. This time, he would be the plunderer. Along with J.P. Morgan, Rockerfeller sent a delegation of men to Jekyll Island in 1913 to devise the mother of all robber baron schemes – the Federal Reserve System.

The Federal Reserve System is the most ingenious fraud in human history. It appeals to the right because it is seen as an institution of capitalism. It appeals to the left because it is seen as a regulator of the financial system that protects the little guy from the supposedly violent machinations of unregulated capitalism. In the meantime, it funnels trillions of dollars of plundered wealth to politically-connected corporations at the expense of average Americans and those corporations which still actually prosper because they offer superior benefits to the public.

Without getting into what really goes on behind the scenes at the Fed, let us consider what the Fed purports to try to do. Ninety-seven years of results notwithstanding, the Fed supposedly regulates the market by maintaining both full employment and price stability. The left supports this agenda because its constituency depends upon jobs and affordable consumer goods in order to survive. They never stop to think about how the Fed attempts to accomplish these goals.

The Fed attempts to maintain full employment through inflation. Inflation is properly defined as an increase in the supply of money and credit, not an increase in consumer prices (more on that in a moment). During periods when unemployment is higher and overall economic growth is lower, the Fed attempts to stimulate investment in new business ventures or expansion of existing ventures by “lowering interest rates.”

However, Mr. Bernanke cannot lower interest rates with a fiat command. Instead, the Fed manipulates the interest rate by buying large quantities of U.S. Treasury bonds from its member banks. This artificially increases the demand and lowers the supply of U.S. Treasuries. It also artificially increases the supply of money available to be lent in the market. With more money available to be lent, banks offer loans at lower rates than they would if money were in shorter supply. With lower rates, more businesses take out loans with which to expand or start new ventures. At the end of this chain of events, more average Americans supposedly get hired in order to support the new business activity that has been “stimulated” by the Fed’s monetary expansion.

Taking the Fed at its word, there is still a rub to this story. The magic described above and in the Fed’s press releases does not come without a cost. The money and credit infused into the economy during this process does not come from any “reserve” that is held by the public or by the privately-owned Federal Reserve. It is created out of thin air by the Fed, which enjoys this privilege as a result of legal tender laws and the Federal Reserve Act. By increasing the overall supply of dollars in the economy, this monetary inflation drives up the price of consumer goods.

It also causes capital to be misallocated, meaning that working people are hired for projects that are not ultimately going to succeed. This inevitably happens much more frequently when banks are able to loan “free money.” When they must convince depositors to invest their own money in loans the bank wishes to make, they are forced to make much wiser choices with that capital than when the money is simply created out of thin air and handed to them, with more fiat money forthcoming if they should make a mistake. In fact, a true understanding of the economics behind monetary inflation reveals that misallocation – economic booms and busts – are inevitable when monetary inflation is allowed to take place.

Progressives should automatically be suspicious of this whole charade simply because Wall Street loves it. Whenever the Fed makes an announcement that it will attempt to lower interest rates, the stock market immediately goes up. Of course it does. Cheap money hitting the market allows investors to get in on ground floor companies and pump up their stock value with newly-created money, subsequently bailing out long before the bust occurs. When the reality hits the market that half of these new companies had no viable business plan, the stock prices collapse and the ventures go out of business and lay off their employees. This is a recession. Average Americans are unemployed while the sharks who gobbled up the cheap money to pump and dump the stocks are sitting on a beach, enjoying the fruits of their heist.

Furthermore, while monetary inflation causes prices of consumer goods to rise for everyone, it is really average Americans and the poor who are most affected by it. When the price of gasoline rises to seven dollars per gallon, the Wall Street elite have lost purchasing power in terms of the dollars they hold, but they more than make up for it during the economic booms. Millionaires become billionaires, negating the effects of a further devalued money supply, while average Americans living paycheck-to-paycheck start looking for second jobs just to pay their rent and fill up their gas tanks to get to work.

However, the most compelling reason for progressives to oppose the Federal Reserve System is because of what it openly admits it represents. Taking the Fed and its supporters at their word, the Fed is nothing more than a subtler, more devious version of “trickle-down economics,” whereby large corporations receive huge sums of money in the hopes that they will then create jobs for the little guys. There is absolutely no difference between this argument and the “Reaganomics” of the 1980’s. Any self-respecting progressive who opposed Reaganomics must oppose the Federal Reserve System. If they are not strictly opposed to government redistribution of wealth, they certainly are opposed to redistributing from the middle class and poor to Wall Street. That was the whole principle upon which the movement was founded.

There is no reason that the left should concede the Tea Party movement to conservatives. It is not fundamentally a Republican phenomenon. It is just that the Republicans are the only party that has been able to adapt their rhetoric to what the Tea Party demands to hear. The Tea Party is rediscovering America’s founding principles. However, their perceptions are being skewed toward the conservative founding philosophy that advocated corporate welfare, a large military establishment, and a central bank to provide the necessary capital – plundered from average Americans. They quote Jefferson but are deceived into supporting policies consistent with his political arch-enemy, Hamilton. They need to hear from the left on what they are missing, instead of being vilified by the left as kooks.

The true American philosophy of free enterprise as expressed by the liberal Jefferson was completely opposed to the central bank of the time, recognizing it as incompatible with the free market and wholly a vehicle for big business to plunder the people. These ideas have been dead and buried for an entire century while the Fed has been allowed to wreak its havoc with impunity. They are ripe for rebirth within the Tea Party, which would embrace Jefferson’s ideas about the dangers of central banking as readily as they do his warnings about big government. There is a strong populist undercurrent in the Tea Party. Progressives are ignoring it at their peril.

Never in its existence has the Fed been under such scrutiny in the media as it is now, nor the subject of so much public opposition. It is a grassroots fire smoldering beneath the surface, waiting for someone to strike a match. To liberals and progressives everywhere, don’t let the conservatives snatch this opportunity out from under your noses. Take up your fight against the real robber barons – the Federal Reserve System and all of its beneficiaries.

Check out Tom Mullen’s new book, A Return to Common Sense: Reawakening Liberty in the Inhabitants of America. Right Here!


© Thomas Mullen 2010

>The Fed Audit Goes the Way of the Tea Party

>”Once you admit that the individual is merely a means to serve the ends of the higher entity called society or the nation, most of those features of totalitarianism which horrify us follow of necessity.

– F.A. Hayek, The Road to Serfdom (1944)

When Congressman Ron Paul proposed his bill to subject the Federal Reserve System to regular audits, it was no secret what his ultimate objective was. If there was any doubt, his subsequent book, End the Fed, eliminated it. Congressman Paul hoped to educate the public about just what the Federal Reserve does – transfer wealth. With regularly scheduled audits, average Americans would see that new money and credit created by the Fed in the form of loans makes its way quickly and consistently to Wall Street, defense contractors, and government agencies.

Meanwhile, people would slowly begin to catch on that this apparent act of magic was not without a cost; that in fact, they were bearing the cost themselves through the loss of their purchasing power due to inflation of the money supply. This could plausibly start a popular movement to do exactly what Paul has been calling for throughout his political career. The key to the strategy was to educate Americans on the principle at issue with the Federal Reserve.

The principle is each individual’s right to keep his own property, which the Fed is completely antagonistic to. The Federal Reserve System is an instrument of theft. Even if managed flawlessly (which it never has been) by its government-appointed central planners, the Fed would still accomplish every one of its goals by taking property from some people and giving it to others. It is no less a wealth redistribution scheme than Medicaid, food stamps, or Social Security. The only difference is a cosmetic one. Instead of clumsily removing dollars from Person A’s bank account and depositing them into Person B’s, as Congress does through taxation and appropriation, the Fed operates with a more graceful subtlety. It allows Person A to keep his dollars while merely creating new ones for Person B.  However, Person B’s new purchasing power has not been created.  It has been stolen from Person A, whose dollars are now worth something less than they were before the new dollars were printed.

It is no mistake that a state-controlled central bank with an exclusive monopoly was one of Karl Marx’s ten planks of the Communist Manifesto. A system in which people are forced to use a state-sponsored currency, manipulated by a central bank to transfer wealth in support of the goals of the state at the expense of the individual is a completely communist, collectivist idea. No matter which monetary policy is pursued, the existence of monetary policy is anti-capitalist and anti-freedom.

Sadly, that central point has been largely obscured due to the varied ideologies of the people that make up the coalition that Congressman Paul has put together.  Instead of an indictment of the ongoing theft that central bank monetary policy represents, the focus has shifted exclusively to the money and credit created during and after the financial crisis of 2008.  The newly proposed one-time audit will show that the funds were directed towards Wall Street banking giants and foreign central banks.  Both then and now, the cries of “but what about average Americans?” can be heard from populists of every political persuasion.  It  is no longer a question of whether or not we should steal, but rather how we should split up the loot.

It is important to remember that even if 100% of the money and credit in question was instead directed to average Americans in danger of mortgage foreclosure, it would still be stealing.  The purchasing power in question would still have been taken from Person A in order to be redistributed to the troubled borrowers.  Moreover, it would be just as economically destructive, as all wealth redistribution by government ultimately is.  The only distinction would be that a different special interest group would be benefitting at the expense of the rights of those victimized to underwrite them.

This dearth of principle is pervasive in political protest movements in America today.  There are no end of demagogues calling up the ghosts of early American heroes of liberty; some even wearing three-cornered hats for effect.  The Tea Party is one example.  Certainly it is laudable that its members oppose “Obamacare,” but how many would show up for Tea Party rallies if opposition to Medicare was also part of the platform?  In reality, the lion’s share of support for the so-called Tea Party comes from Medicare beneficiaries who object not to government-provided health care, but to the program that they benefit from being cut to fund a program for other people.  They also largely support the forced redistribution of wealth from individuals to military contractors and the government in support of the United States’ worldwide military establishment, which they extol as if it weren’t also a massive government program.

It is a sobering reality that any real understanding of liberty has been completely eradicated in the minds of most Americans today.  Instead, we have become a collection of special interest groups, all competing with each other politically for other people’s money.  Our “progressive” education system has rendered most Americans completely incapable of conceiving that there is an alternative to a government-directed economy.  When confronted with the bank bailouts of 2008, the universal, conditioned response was one of outrage that wealthy bankers were getting public funds and average American homeowners were not.  The idea that it was a violation of the rights of those from whom the money was taken never entered into their minds. 

Why would it?  That principle had never been taught to them in school.  It was not voiced in the media.  No politician, conservative, liberal, or otherwise, articulated it at all.  The closest thing to it was the “moral hazard” argument, that rewarding the people who caused the problem would only lead to further problems.  However, this is a sound economic argument made from a collectivist perspective, based upon what might acheive the best aggregate results, rather than one based upon freedom or individual rights.  That the economic analysis happens to be true in the case of the “moral hazard” argument only further obscures the fundamental principle that makes it true.  One might conclude from this argument that central planning and wealth redistribution would be beneficial if the planning and redistribution were done more wisely.  The moral hazard argument correctly points to a negative effect but distracts us from the underlying cause – the violation of individual rights.  It is this underlying cause that is at the root of every societal problem facing America today.

All resistance to government wealth redistribution is a good thing, regardless of whether the motives of every protestor are completely “pure” as defined by political theorists.  The one-time audit of the Fed will be helpful, even if it is motivated in large part by the politics of jealousy rather than principle.  However, it is the job of everyone who believes in and yearns for freedom to point out early, often, and loudly that the central objection to the Fed should be that it steals in the first place, not to how it divides up the take.  Once that distinction is clear in the minds of average Americans, it is a cure for virtually all of our afflictions of government.

Check out Tom Mullen’s new book, A Return to Common Sense: Reawakening Liberty in the Inhabitants of America. Right Here!


© Thomas Mullen 2010

>Central Banking Doesn’t Work – Just Ask the Fed!

>It is still a tiny minority who understand that central banking is a collectivist institution that is completely hostile to liberty. It is, by definition, an instrument of theft that purports to stabilize economic conditions for the collective by controlling the supply of money and credit. The fact that its only means to do so is to steal from savers to finance well-connected borrowers is a seldom-mentioned detail. That people only use the central bank’s currency because they are forced to do so by legal tender laws is spoken of even less. In this late stage of the Age of Government, the rights to liberty and property are expendable as our rulers “get the work of the American people done.”

Hopefully, the question of whether there should be a Federal Reserve will be on the table soon. However, once one concedes the existence of the Fed, there is a further question to ask: Can it do what it purports to do?

According to the Federal Reserve’s website, its mission is as follows:

Today, the Federal Reserve’s duties fall into four general areas:

• conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employment, stable prices, and moderate long-term interest rates

• supervising and regulating banking institutions to ensure the safety and soundness of the nation’s banking and financial system and to protect the credit rights of consumers

• maintaining the stability of the financial system and containing systemic risk that may arise in financial markets

• providing financial services to depository institutions, the U.S. government, and foreign official institutions, including playing a major role in operating the nation’s payments system[1]

Of these four stated goals, the first is the most expansive in its scope. Let us leave it until last. The second, to ensure the soundness of the banking system, seems to have been answered by history. Since the Fed’s launch in 1914, the nation has suffered banking crises in every generation that have dwarfed the Panic of 1907 or any of its predecessors. In addressing the Great Depression, the Savings and Loan Crisis, and the 2008 Meltdown, the Federal Reserve’s only answer has been, “Without the Fed, it would have been much worse.” History is not on the Fed’s side. Only a general ignorance of the facts allows the Fed to keep fooling most of the people most of the time.

Refuting the third stated goal is so easy it’s almost embarrassing. For those not trying to regain their seats after falling on the floor laughing, I need only to point out 30-1 leveraging, $60 trillion (or more?) in derivatives [2], or the subprime mortgage disaster. I believe that to go any farther would be, to borrow a football analogy, “piling on.”

In fact, Alan Greesnpan’s now famous (or infamous) mea culpa on the “flaw” in his beliefs about the self-regulating nature of financial markets effectively amounts to the Fed admitting that it has failed in goals two and three. If the “Maestro” himself doesn’t speak for the Federal Reserve, then who does?

Regarding that fourth goal, one is tempted to give this one to the Fed. The important objection would be of the “should they” rather than of the “can they” variety. The fact that the Fed provides these services with an exclusive monopoly and claims only that it will play a “major role,” rather than a positive one, makes this the least significant of the four.

That leaves the first goal, which is stable prices, full employment, and moderate long term interest rates. There can be no doubt that the promises of stable prices and full employment in particular are now the principle justifications for the existence of the Federal Reserve. Almost exclusively, when the subject of the Fed comes up, these two goals are discussed. Even the Fed chairmen themselves, when testifying before Congress, often state these two goals exclusively in describing the Fed’s overall mission.

It should not be forgotten that until the late 1970’s, full employment was not part of the Fed’s mandate. Even using the logic of central banking proponents, these two goals are mutually exclusive of one another. Since the only means the Fed has at its disposal to try to achieve full employment is expansion of the supply of money and credit, which puts upward pressure on prices, the Fed must balance these two goals to try to find the optimum level of money and credit where everyone is employed but prices remain stable.

Ironically, the best source of information on the Fed’s performance in terms of its principle goal for the first sixty years of its existence (price stability) is the Fed itself. Among the collections of historical data on the Federal Reserve of Minneapolis website, there can be found a table documenting price inflation rates for every year since 1800 (Appendix A of this article). There, one can see for oneself whether or not the Fed provided price stability during any period in its existence.

The first fact that jumps off of the page is the stark difference in the trends before and after the creation of the Fed. For the period from 1800-1913, the general price level (a statistic that Austrian economists object to) was cut almost in half. In other words, products that on average cost $100.00 in 1800 would only cost $58.10 in 1913 (Appendix A). While there were some years where prices rose, prices generally fell overall during the entire 19th century.

This would probably be a startling revelation to most modern Americans. There isn’t an American alive whose parents or grandparents haven’t remarked at current price levels and gone on to say, “When I was your age, I only paid a dime for that.” As unbelievable as it might seem, that conversation would have been exactly the opposite in 1890. Grandpa would instead be saying, “When I was your age, I had to pay a lot more for that.” Today, Americans resign themselves to constantly rising prices as a fact of life. However, that is a phenomenon that has only occurred since the creation of the Fed.

In contrast to the century preceding the Fed, the century following has seen exactly the opposite result. Those same products whose average price had fallen from $100.00 in 1800 to $58.10 in 1913 rose to $1,265.14 in 2008. That is an increase of over 2,000%!

Without addressing the subject of which result is “better for society,” inflation or deflation, the data speak directly to the question of “price stability.” From 1800-1913, the average annual fluctuation in price was 3.4%. From 1914-2008, the average annual fluctuation in price was 4.5%, a 33% increase over the previous period. In fact, the numbers for the Fed would be far worse if the same methods used to calculate the price inflation rate were used for the entire period from 1914-2008. In the 1990’s, several changes were made to the methodology used to calculate the Consumer Price Index. They all have the effect of lowering the price inflation rate given a particular set of price data.

Regarding the goal of “full employment,” the Fed’s results are also poor. Similar to that of the CPI, the methodology for calculating the unemployment rate was also changed in the 1990’s. These changes in methodology, which include no longer counting “discouraged workers,” lower the unemployment rate from what it would be for the same data if calculated using the old methodology. Despite this handicap, the Fed still fails to achieve positive results. The average annual unemployment rate in the U.S. between 1948 and 1978 was 5.1% (see Appendix B). Even without compensating for the changes in methodology during the 1990’s, the average annual unemployment rate in the U.S. between 1979 and 2009 was 6.1%. So, unemployment was almost 20% higher during the period that the Fed actively tried to manage it than it was during the prior 30 years.

Once you undo the methodological changes in calculating price inflation and unemployment that were put in place in the 1990’s, the Fed’s results on price stability and unemployment get much uglier. Nevertheless, even after the Fed fudges its own numbers it still comes out a failure. Everyone can remember the ne’er-do-well from school that cheated on tests and still couldn’t pass. Would we want that kid managing the entire economy?

The arguments that the Fed makes to justify its existence are fraught with false assumptions. One is that “stable prices” are a good thing. Remember, the industrial revolution occurred amidst steadily falling prices. It was this period of steady deflation (gasp!) that saw the common people become the prime market for society’s output – for the first time in human history. It was this period that saw the United States transform itself in a matter of decades from an indebted hodgepodge of former colonies to a world economic power. The natural result of economic progress and increased productivity is falling prices. That is what raises the standard of living for the great majority of society.

However, the most absurd assumption underlying the arguments for the Fed is one common to all collectivist arguments: that there is some strange entity called “society” whose needs outweigh the rights of every individual that comprises it. Every citizen surrenders his right to liberty to legal tender laws because being forced to use the Fed’s worthless notes as currency supposedly benefits “society.” He surrenders his right to property in letting the Fed steal his savings through inflation for the same reason. In the end, however, the Fed fails to achieve its “societal” goals of full employment and stable prices, so he gives up his rights for nothing. Isn’t time he took them back? There is a way: End the Fed.

Appendix A – Price Inflation Rates 1800-2008 (Federal Reserve Bank of Minneapolis)
Appendix B – Unemployment Rate (Monthly) 1948-2009 (Bureau of Labor Statistics)

[1] http://www.federalreserve.gov/aboutthefed/mission.htm

[2] http://www.newsweek.com/id/164591

Check out Tom Mullen’s new book, A Return to Common Sense: Reawakening Liberty in the Inhabitants of America. Right Here!


© Thomas Mullen 2010