Taxation Without Representation, Part 2

The economy sucks; big corporations are taking advantage of the little guy; the free market has failed us; if only the government had stepped in and regulated industry more heavily then we could have avoided this; lets pass laws that restrict big banks and big businesses from taking big risks. Sound familiar? This has been a narrative in the United States and Europe for the last two years (much ,much longer in some circles) due to our current economic quagmire. While this is a well meaning and seemingly well reasoned line of thought, it is hopelessly and dangerously off target. We have little hope of ever trudging out of this recession let alone our history of the boom and bust cycle if we don't get seriously thoughtful and address the foundational cause of all of our economic heartache.

The next obvious question is, if these things aren't the cause of our current predicament then what is? The answer is multi-faceted, but really the root of it is access to extremely cheap and easy credit. The mid-2000's relatively speaking were good economic times for America and it seemed like the growth wouldn't end. The average Joe was taking part in a huge economic boom that was being led by record home building and home value appreciation. I remember thinking that it was absolutely amazing how much my home had appreciated and how wonderful it was for my family to be able to build wealth so quickly. It was a time of "irrational exuberance" as former Federal Reserve chairman Alan Greenspan put it. Participating in it myself, I was led down the path happily like a cow to the slaughter. While I haven't been hit as hard as some by this financial crisis I am carrying the yoke of a home that is worth less than what I bought it for.

Cheap and easy isn't a phrase you hear commonly in the current economic debate, in fact you're more likely to hear it on an episode of Jersey Shore or Real American Housewives than you are on CSPAN or PBS, but this is exactly what we should be talking about. This story about the "Cheap and Easy" can really be traced back all the way to the American Revolution, but for the purposes of this post we will only go back to the earlier 20th century. Few Americans understand the roots or function of the Federal Reserve and its impact on their lives so I will give a brief history of our present federal reserve system.

The story starts on Jekyll Island, a small island off the coast of Georgia. It was purchased as a hunting club/retreat for some of the worlds richest men in 1886 and its members at the time represented 1/6th of the world's wealth. Privacy and discretion being the utmost concern for people of such high stature it was also very exclusive. The fact that this is also the birthplace of our Federal Reserve seems odd for constitutional republic and an open society like the United States of America. Alas, the basic outline of the Federal Reserve Act of 1913 was formed in a super-secret meeting on this exclusive island by some of the worlds richest most powerful men. Senator Nelson Aldrich, John D. Rockefeller and Paul Warburg were all in attendance among others at this meeting where last names weren't allowed to be used as not to alert the press. None of employees on the train out to the island or at the meeting itself were told who the men were. These men brought shotguns along with them to disguise their rendezvous as a hunting trip in order to conceal the real reason for their visit. So why the secrecy? It seems that if this was truly beneficial to the people of the United States that it could be presented in a well reasoned manner and the public could be swayed to get behind it, but the problem was the people didn't want a central bank and had a history of rejecting them. The last central bank the United States had was allowed to expire under Andrew Jackson in 1836. The name, "Federal Reserve" was concocted by the Jekyll Island troupe in order to give it the appearance of a government entity while obscuring the fact that it was a central bank. You're probably thinking to yourself, "Wow, the process so far makes the Nixon Administration look transparent!" And you're exactly right, but what was their motivation? Why would these men, already among the most rich and powerful in the world force an idea on the American people that they were clearly against? Were they do-gooders with the public's interest in mind? Certainly not, and if you are someone who can tie your own shoe you already know that stories like this very rarely end with a public win. Actually its a group of men and a story that is so cartoonishly evil that it wouldn't even make believable fiction!

So what were their goals and what did they stand to gain by forming a central bank? Their goals were to squeeze out emerging private capital that was being created by an expanding industrial base, reduce competition from smaller regional or local banks which were on the rise in the south and the west by keeping the financial power center in New York, and transfer financial losses and risk to the taxpayer. This was all easily accomplished with the Federal Reserve Act because by controlling the flow and cost of money they were able to make money so cheap that no one else could compete and their monopoly was secured. So what happens when a bank becomes too big to fail? This answer has been played out over the last couple of years and that answer is we all pay for it, not only in the erosion of our dollar, but also when taxpayer dollars are used to pick up the losses of these banks. More regulation will not change our boom and bust cycle! Only a drastic yet gradual revision of our monetary policy back toward a true gold standard can change our current cycle.

Why a gold standard? The answer is that gold is a finite and tangible resource that can't go to zero and can't be manipulated as easily. It is something that has proven to be more stable than our current paper system and actually encourages saving due to its history of appreciation rather than our current system which heavily favors borrowing. Often times people can't understand why they can never seem to get ahead financially and the reason is the relative value of their dollar is constantly declining due to massive deficit spending in Washington and the cheap and easy flow of credit to the consumer. Also, the boom bust cycle is created by the expansion and contraction of credit which are essentially federal reserve responses to political pressures to stimulate what feels like economic growth or to market forces like increasing inflation. The market does work if its allowed to work, but what we presently have is a monetary system that is controlled by a private cartel of banks and not the free market. They can't possibly have our interests in mind!

This is a short and crude synopsis of our present predicament so it is essential that you educate yourself on the subject. In my view this is the single most important issue facing us today; in a sense it is the root of all evil in our nation and contributes to so many of our social ills. I recommend two books on the subject: "The Creature from Jekyll Island" by G. Edward Griffin and "End the Fed" by Ron Paul. I would love to vet these ideas further with some discussion. Let me know what you think!