Little Green Lies

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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.


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.

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!

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!

Answer the Question:

Is the
Federal Reserve Too Independent?

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

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:

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.

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

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:

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.

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

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?

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

Neither does

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.


Let’s examine
this statement:

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
." 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
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.

7, 2004

North [send him mail]
is the author of Mises
on Money
. Visit
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