We are all dependent on each other to some degree. The free market
is a gigantic system of interdependence. There are degrees of dependence,
of course. But every buyer and every seller has some influence on
a particular price. So do our perceptions of what each other might
do under slightly different circumstances — say, a price hike or
reduction of 10%.
What we personally know about any one tool in our lives is minuscule.
Compared to what some primitive hunter knows about his spear or
his traps, we know almost nothing about the things that keep us
alive. We flip a switch, and a light goes on. We press a button
on the channel-flipper, and the McLoughlin Group goes off. What
do we really know about how all this works? Practically nothing.
Last November, I got sick. I rarely get sick. But, starting around
noon, my stomach started to hurt. By 11 p.m., I was in constant
pain. I was vomiting green bile. By 2 a.m., I did what I do not
recall ever having done: I had my wife drive me to the emergency
hospital. They put me on some sort of sedative. By 10 a.m. the next
morning, a physician I had only just met removed my gall bladder.
Think about this. I allowed a stranger to administer a mind-altering
drug. The other stranger inserted a small TV camera inside me. Then
he made incisions in my stomach and took out my gall bladder.
What is a gall bladder? What does it do? Now that mine is gone,
what am I missing? I haven’t a clue. When I had a gall bladder,
I didn’t even know it was there. Now that it’s gone, I don’t care.
He later told me that on the same day that he removed my gall bladder,
he did five of these operations. His partner did several more. Given
what I paid for mine, nobody will have to hold a fund-raiser for
his widow. I don’t live in a large city. Here is one man and his
partner who run an assembly line for removing gall bladders. These
men are specialists in the surgical removal of something the rest
of us barely know exists until the pain hits. It’s amazing. These
people make a good living by doing things that the rest of us are
unaware of most for of our lives — all of our lives, if things
The free market brings together buyers and sellers of specialized
procedures so obscure that the buyers are completely in the dark.
Nevertheless, despite my ignorance, I got well. I spent some money,
and I got well. In 90 minutes, the pain ended. Prior to anesthetics
(1844), I probably would have died an excruciating death. The alternative
would have been an excruciating operation. There were no assembly
lines for surgery in 1843. Think of the scene in “Gone With the
Wind” at the hospital-in-a-church. They didn’t call doctors “sawbones”
THE MYSTERY OF CENTRAL BANKING
Now think about central banking. How many people understand fractional-reserve
banking? Not many, including most of those who took a money & banking
course in college. I have read only one textbook on money and banking
that does a good job in explaining the system, Murray Rothbard’s
Mystery of Banking. Today, I’m happy to say, you
can download a copy for free.
Nation by nation, the public is dependent on the wisdom of a group
of highly paid experts called central bankers. These people work
for private organizations that have been granted sovereign power
by their national governments. No other group of profit-seeking
private entrepreneurs in the world enjoys an equal measure of autonomy
— autonomy (self-law) from both the government that granted them
their monopoly over the money supply and also from consumers in
the free market. They impose sanctions, both positive and negative.
No sanctions are imposed on them by the likes of us.
The public has been taught by the media, including all accredited
colleges, that this profit-seeking monopoly is run for the benefit
of the people. Public-spirited monopolists over the money supply
really have the nation’s interests at heart. Because these men,
unlike all other monopolists, are simultaneously self-sacrificing
yet self-serving, politicians have granted them independence from
the government. They also possess independence from the free market’s
negative sanction: bankruptcy. In fact, the central bank is charged
with the task of forestalling widespread bankruptcies, beginning
with the institutions that legally own the central banks, private
A central bank, unlike any other organization, is praised because
no one in civil government controls it. Textbook writers in economics,
as well as financial columnists for the major newspapers, praise
the central bank for its anti-democratic legal status. The nation’s
professional opinion-makers assure the literate public that the
great benefit of a central bank is that it is independent from politics.
Congress cannot tell it what to do. Neither can the President. This
is presented as an enormous advantage to the public. The academic
economists’ theory of monopoly pricing is suspended in this one
instance. So is the academic political scientists’ discussion of
anti-democratic associations. In only one other area of officially
democratic policy-making is anything equally schizophrenic: tax-funded
education. Here, too, the voters are assured by expert opinion-makers
that democracy is a liability, that those who pay the piper are
not qualified to call the tune.
In these two areas, therefore, we find a theory of what used to
be called priestly status. Central banking and public education
are both run by employees of a government-granted monopoly. Both
institutions are said to be immune — rightfully immune —
from the wrath of voters and the pressures of free market competition.
There are now faint signs of waning faith in both of these priesthoods.
Home schools are springing up. So is the price of gold.
There is no monopoly more profitable or with more power to ignore
the government than a central bank. It has power over the only common
link among all participants in the economy: the money supply. The
world’s national governments have self-consciously transferred power
over the central economic institution — money — to a group of
unelected, profit-seeking, self-screened representatives of the
commercial banking system, a system based on fraud.
Commercial banks promise to pay depositors interest on money that
can be withdrawn by the depositors at any time, yet the banks lend
this money long-term to borrowers, who do not have to repay it until
a specific date. The system is “borrowed short” and “lent long.”
Bankers earn a good living, and a few get rich, from contracts that
are based on a lie. This promise is believable most of the time
because only a handful of depositors can actually withdraw their
money at the same time. Whenever a lot of them — maybe 10% of them
— try to withdraw currency at the same time, we call these events
panics or bank runs.
These events used to produce bankruptcy (bank + rupture). But then
central banks came along, beginning in 1694 in England. They are
invested by the State with what has traditionally been explained
as the state’s sovereign authority: the authority to create money.
This ability to create money reduces the threat of bank runs, but
it also guarantees the creation of depreciating money.
Today, German banks are starting to go bankrupt. It’s not a nation-wide
panic yet, but it could become one.
German central bank, the Bundesbank, will of course intervene at
some point to prevent a widespread panic. It will tell depositors
not to worry. But deposit insurance is low in Germany, less than
20% of what it is in the United States. Depositors are at much greater
risk there. So, this panic could get out of hand. It may take emergency
action by the government. There is no doubt what that action will
be: to grant more power to the central bank, and to use government
money to bail out the system.
Japanese depositors are in a similar condition. Their banks are
in much worse shape than German banks.
Every national currency is depreciating. Compared to the price of
goods that the currency would buy 30 years ago — especially real
estate — consumers around the world are suffering from currencies
of declining value. This makes them seekers of long-term debt, especially
for real estate. This quest for money to borrow increases demand
for the asset leased by banks: money. In other words, the central
banks’ slow destruction of money creates public demand for the services
of commercial banks. This is a classic vicious circle. It is the
product of a government-granted monopoly. Banking is not a free
Today, an American commercial bank can borrow money in the federal
funds overnight money market at 1.75%. The Federal Reserve System
has driven short-term rates this low — an unprecedented reduction.
The commercial bank can then lend this borrowed money to credit
card users for up to 24%. Let’s see: for every $175 paid out, a
bank pulls in $2,400. Not too shabby a deal! Last week, I had three
offers in one day for new credit cards in the mail. I suspect that
there is a relationship between these two rates of interest and
the number of credit card solicitations in the mail. Of course,
these cards were “low rate” cards. I was asked to pay about 9.9%.
I failed to take advantage of this.
A GALLON IN ME, ALAN!”
I trusted the physician who cut me open. I was highly motivated.
It hurt when I laughed. It hurt when I didn’t laugh. “Cut me open,
Doc! I’ll pay!”
Today, 270 million Americans and a whole lot of foreign holders
of dollar-denominated assets have basically told Alan Greenspan
to put them on the operating table, do whatever is necessary to
make the pain go away, and take whatever he wants out of our bank
accounts. He tells them: “This may require blood.” Everyone tells
him to go ahead and cut. What they don’t understand is that when
he says, “This may require blood,” he doesn’t mean blood poured
in; he means blood taken out. He means more debt: more obligations
to repay bankers and other lenders. He means another contract that
surrenders an additional percentage of our future productivity.
We sign on the dotted line.
Even when we don’t sign, our elected representatives do. Taxpayers
are facing another increase in the on-budget U.S. national debt
limit. Congress will sign on the dotted line on our behalf. The
last time that Congress resisted was in fiscal 1995. Clinton and
the voters put an end to the “Contract with America” at that time.
The real contract with America means more debt, more fiat money,
and dependence on the U.S. government and the central bank.
In every nation, users of money and banking services have told the
same thing to their respective central bankers. But Greenspan is
the world’s most important money doctor. If he and his associates
make a mistake, the pain will increase for a billion or more people.
We have preferred the drip, drip, drip of debt. This has been accompanied
by the drip, drip, drip of price inflation. I keep thinking of Dan
Ackroyd’s 1980 “Saturday Night Live” skit, “Inflation is our friend.”
“Didn’t you always want to wear $1,000 suits and live in a $200,000
home. I know I did. Well, now we can. All it takes is a little ink
and some paper.”
The public has trusted politicians and central bankers. Voters assume
that the promises and assurances of these experts are reliable.
They have accepted high-flying theories of why these power-seeking,
money-seeking, money-creating people are in fact self-sacrificing
servants of the public’s good. Voters have trusted their judgment.
We have allowed them to indebt our children and our grandchildren.
Then, when our children and grandchildren start to vote, they are
assured by the same experts that everything is just fine, and besides,
the debts will be paid by their children and grandchildren.
Every generation wants to defer the day of reckoning. Every generation
votes to pass on the old maid card: “account overdrawn.”
The sad thing is that the average person, in every industrial nation,
really believes that official promises are reliable, that a politician’s
promise regarding the economic future is as good as gold.
GOOD AS GOLD? NO, BETTER!
good as gold.” This phrase is not in common use any longer. Gold
is seen as a losing proposition. For 21 years, it was. But now the
tide seems to have turned. The dollar is falling, as well it should.
Gold’s price is rising. Why? Because a tiny handful of people are
catching on to the nature of the lies.
Promises that rest on lies eventually are broken. Everyone can’t
get his money out of the bank at the same time. Everyone who has
been promised a comfortable retirement by the government won’t enjoy
one. Every old person who gets sick won’t get well at government
expense. Some will. Some have. Most won’t.
A Ponzi scheme’s early investors can make money, although few of
them ever do. They stay in the program. They reinvest. Ponzi scheme
designers know this will happen. Greed is powerful. It overcomes
common sense. Early participants in a Ponzi scheme can make money
because most of the money invested by late-comers is handed over
to early investors as part of the scam’s strategy. The Social Security
System is a Ponzi scheme. This one is working, for there have been
hundreds of millions of new participants pouring in their money.
Also, it is illegal to pull out of the program. But the end is now
in sight. The retirees will begin to overwhelm the system’s revenues
no later than 2011. In Japan and Italy, this will take place within
two to three years if the recession continues.
Whom should you trust? Politicians who make promises that, statistically,
cannot be fulfilled? Commercial bankers who make promises — “withdraw
your money at any time” — that cannot be fulfilled without a digital
printing press to make the promises technically valid? Or should
you trust gold, which rises in price when political promises are
fulfilled with fiat money instead of tax revenues?
The public regards Alan Greenspan as part magician, part guru. This
faithful assembly of millions includes some very sophisticated investors.
But there is a major problem with investing anyone with guru status
and a monopoly over money: he is an old man. Greenspan, like Warren
Buffett, will not live forever.
The public always seeks out representatives to trust in. They do
not really put much trust in bureaucracies. They put their trust
in specific individuals. Voters invest these representatives with
the aura of infallibility whenever they do not understand what these
representatives actually do. This is rational. Voters need to hold
someone responsible. It is far easier to hold an individual responsible
than a committee. In good times, the recipients of the public’s
trust rejoice. In bad times, they point the finger of blame elsewhere.
Or they retire.
The day Greenspan dies or retires, you won’t want to be in the stock
Voters do not understand central banking. Most of them could not
identify the Federal Reserve System, even if you showed them “Diehard
3.” If you were to read the questions that Congressmen — Ron Paul
excepted — and Senators ask Greenspan, and his answers that they
accept as meaningful, you would begin to understand that they have
little idea what the Federal Reserve System can do or has done.
The public cannot be expected to understand the intricacies of economics.
That voters do not understand the Federal Reserve System is understandable.
Almost two decades ago, the mainstream book publisher, Praeger,
published a book with the provocative title, The
Federal Reserve System: An Intentional Mystery. The system
was designed in 1910 at a secret meeting of bankers and Senator
Nelson Aldrich — Nelson Aldrich Rockefeller’s grandfather —
on a first-names-only basis, just in case of courtroom or Congressional
testimony under oath later on. It was held on an island off the
coast of Georgia, an island owned by J. P. Morgan, William Rockefeller
(John D.’s banker brother), and their business associates. The FED
was designed to deceive politicians, which it did. Even the anti-gold,
anti-bank, anti-Establishment radical Democrat, William Jennings
Bryan, was conned into supporting the Federal Reserve Act of 1913,
when he was Secretary of State under Wilson. Wilson’s son-in-law,
Secretary of the Treasury McAdoo, fooled the Great Commoner into
thinking the FED was anti-New York banking!
All over the industrial world, people have trusted their futures
to central bankers and politicians who officially regulate central
banking, but who rarely do. People hope for the best. They trust
that the experts know what they are doing.
Hundreds of millions of people have placed their trust in self-interested
men who have received from national governments a grant of sovereignty,
not just an economic monopoly. These men are seen as being wiser
than the free market and more honorable in profiting from this unique
grant of sovereignty. An elite group of salaried academic economists
and monopoly-possessing businessmen, who cannot easily be fired
for poor performance, are regarded by the public and the politicians
as possessing greater insight into supply and demand than the combined
knowledge of the world’s capital markets, whose investors have their
own money at risk.
This is one more example of the truth that most people really don’t
understand the logic of the free market or how the free market works
in practice. This includes people who call themselves free market
When gold’s price rises, and when a currency unit falls in relation
to gold and other currency units, those who rely on that currency
unit for their very lives are tempted to shift their trust elsewhere.
This is bad news for politicians and central bankers.
In an economic crisis, politicians will not accept any responsibility
for failure. They never do. They will eventually blame the Federal
Reserve System. They will be correct to do so.
People have to decide whom to trust. I trusted that physician. I
had little choice. I trust the FED, too. I have no choice. It runs
the only game in town. I trust the FED’s tenured agents to seek
profits by not collapsing the economy. But I always place limits
on this trust. I do not believe that monopolists are as wise as
participants in the capital markets. So, I do not trust the FED
with everything I own. I also do not trust Social Security’s promises.
I do not intend to retire.
I believe that a crisis of public trust is brewing. Voters will
not know exactly what went wrong with the economy after a payments
crisis hits, but they will know that something surely went wrong.
They will demand wild, impossible political solutions. They will
insist that they get paid. No matter how little the dollar is worth,
they will insist on payment. They have bet everything on the flow
of funds. I mean everything.
If you entrust your economic future to self-interested monopolists
who promise prosperity based on statistical falsehoods, you will
find it difficult to think straight. Investors in gold today are
few and far between. But, as more people’s faith in the spinners
of statistically impossible dreams begins to wane, there will be
a search for other things to trust in, other promises to trust in.
Most investors will cling to false promises for too long. But a
few will put their money where their dreams are.
Put some of your dreams in places that do not rely on the continuing
wisdom of tenured bureaucrats with a monopoly over money.