Topic: Debate
Rebuttals in the Federal Reserve Debate

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My opponent in this debate has been busy publishing broadsides, while I've been tied up with making a living. That changes now.

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by Walt Thiessen
(libertarian)
Tuesday, October 7, 2008

While I've been dealing with other business concerns the past few days, Master C has been very busy putting out his own view of the Fed. I'm overdue to rebut his claims and move forward with my own case against the Fed, so I beg the forgiveness of my readers for my tardiness. Let's get started; there's a lot to discuss!

Trains, Planes, and Automobiles

In his introductory remarks in our debate, The Federal Reserve: a Primer, Master C claims that fiat money is responsible for everything from Henry Ford's cars to railroads to TVs to cigarettes. He says that without fiat money, none of these things would have come to pass. His evidence? He gives us none except for the fact that railroads, cars, TVs etc. exist. We're supposed accept his argument as an axiom. We do not. Money (both fiat and gold-based) never creates any goods or services. Only people can do that. This blindingly obvious fact obliterates his argument.

[Correction 10/09/2008: I got his articles confused. His reference to these forms of manufacture were from his second article, A Fiat Money System Is Necessary for Growth and Investment, not his first. I plead guilty to trying to reply to too many articles at once.]

Money As A Commodity

Master C also displays a very sloppy use of his concepts when he claims, "Money is a commodity as surely as a frying pan or an ice cream cone." This is in a paragraph where he is laying his foundation for the understanding of money. The problem with this part of his foundation is that fiat money is not a commodity! Hard money (gold and silver) are commodity-based moneys, because gold and silver themselves are commodities. They can play a role in an economy independent of their monetary aspects due to their intrinsic value. Fiat money is made of paper, which has no similarly significant  intrinsic value. The only value fiat money ever has is due to the fact that the government has declared that it must be accepted as money...the so-called "legal tender" requirement. There is no way for fiat money (paper money) to be a commodity. That's why the government has to declare that it has value  as money despite it's lack of intrinsic value before anyone will even consider using it as money.

Thanks for teeing that one up for me, professor!

Gold and Silver Can't Keep Up?

However, these are just side points on the way to his main point in his article, A Fiat Money System Is Necessary for Growth and Investment, which is: that hard money can't perform as well as fiat money because the supply of hard money is fixed. Again, he does not supply evidence to back his claim that hard money cannot keep up. He assumes that the point is self-evident, but he's wrong. There is nothing axiomatic about it. Master C falls into an age-old trap. He believes that money can't function adequately as money unless  more of it is being produced all the time. This is not true.

Gold and silver functioned quite well as money over the course of hundreds of years. In fact, gold was the basis for the money supply when the railroads were being built, a point that Master C conveniently overlooks when adding railroads to his laundry list in favor of fiat money. So also were the original automobiles, telephones, and airplanes being built when gold was the basis for our money, items that were also on his fiat money list. The only reason that cigarettes and TVs weren't produced when gold was the basis of our money is that gold had been outlawed before they were invented.

Master C is trying to imply that the rate of growth of the economy after the introduction of fiat money could not be matched by hard money, and he's trying to make us believe this is true because the spectacular growth of the economy happened when fiat money was in operation. In fact, that growth happened in spite of fiat money, not because of it. The economy was actually inundated with a series of economic booms and busts that undercut the rate at which the economy could have grown had hard money been in play. A money supply is supposed to keep things moving, not slow them down. Yet "slow them down" is exactly what fiat money keeps doing. With the agriculture depression of 1920-21, the Florida land collapse of 1926, the great Crash of 1929, the entire Great Depression of the 1930s, recessions in 1953-54 and 1957-58, the gold crisis in 1971, the 1973-75 oil crisis, and the recessions of the early 1980s and early 1990s,  (not to mention the recession we're currently experiencing) our economy under fiat money has been one long series of crises and economic slowdowns preceded by "bubbles" that were created by fiat money.

Claiming that fiat money drives an economy better and faster than hard money is like claiming that driving a car by flooring the accelerator, then slamming on the brakes, then flooring the accelerator again, repeating the same pattern over and over while constantly leaving "patches" on the road is better than simply shifting into gear, accelerating smoothly, and then driving at a steady pace, slowing or stopping gently to avoid hitting pedestrians or running traffic lights. The fiat money driver doesn't care much about traffic lights or pedestrians. He only cares about speed, and he displays a disturbing ignorance of the risk of crashing.

There is absolutely no need for the money supply to constantly increase in order for the economy to grow. Professor Murray Rothbard cuts to the chase on this point in his book, The Case Against The Fed:

"But once a money has been established in the market, no increases in its supply are needed, and they perform no genuine social function. As we know from general economic theory, the invariable result of an increase in the supply of a good is to lower its price. For all products except money, such an increase is socially beneficial, since it means that production and living standards have increased in response to consumer demand. If steel or bread or houses are more plentiful and cheaper than before, everyone's standard of living benefits. But an increase in the supply of money cannot relieve the natural scarcity of consumer or capital goods; all it does is to make the dollar or the franc cheaper, that is, lower its purchasing power in terms of all other goods and services."

Master C tried to claim that if people save hard money (presumably all of it that is in existence), then none will be available to use as capital toward funding new ventures. The absurdity of this notion is almost beyond belief. Before the age of endless debt, savings is exactly where funding for new ventures used to come from!

In no society in recorded history have people removed all hard money from circulation except when someone was trying to foist fiat money on them. That exception is encapsulated in Gresham's Law, which states that bad money (fiat money) will drive out good money (gold and silver based money). Gresham's Law depends upon a situation where fiat money is permitted by law or (worse) is made legal tender. If fiat money is outlawed, then Gresham's Law has no application (except when considering other forms of counterfeit money).

Return On Investment?

So the solution to Master C's conundrum is simple: ban fiat money. Unfortunately, Master C is far from done with his argument. He continues, "When you restrict monetary growth, you also restrict the RETURN ON INVESTMENT (ROI) that is so important to the creation of factories, airports, and new products." But that's not true. If it were true, then no one could have made sufficient profits to help the country move forward by investing when gold was the basis for money, and more importantly the investments could not have grown in value. All of gold money history disproves Master C's point. Growth does happen under a gold-based economy. It just doesn't happen as fast as an irresponsible teenage boy driving a sports car would define "fast." Economies don't need to grow at break-neck pace.

Again, his point is made rather sloppily, but what Master C is trying to say is that you can't collect windfall profits that exceed the value of the investment by many magnitudes of order without fiat money. Even this claim is misleading. First, why are windfall profits necessary to a healthy economy? But even if we put this question aside, the critical point with fiat money profits is who gets to use the money first? That determines who really benefits the most from it. And who gets harmed? The ones who get the money last (the poor, the working classes, the middle class) because by the time they get it, the price inflation has already taken place! Thus, their cost of living has already been pushed upward, and their newest dollars buy them less than what their old dollars used to buy!

The Fed and Freedom?

Moving on to his next article, The Federal Reserve Gives Us Freedom, I had to laugh at his title. Surely he can't mean that! Sadly, apparently he does, and he's wrong again.

I should not have to point out the obvious, but freedom came to this country in the form of a bunch of American colonists who refused to give in to England's Stamp Act and eventually rallied to mount a revolution against the British tyranny. Freedom comes from freedom of action, from the protection and defense of basic human rights (life, liberty, property, pursuit of happieness, etc.) not financier leverage. So what on earth is the ol' professor talking about? Curiously enough, he doesn't use the word "freedom" anywhere else in his article. Instead, the article is a meandering random walk about how the Federal Reserve System is run by no one and that the banks keep us all from going too deeply into debt.

I won't even bother to debunk this article, because an article should make sense before someone has to debunk it. Instead, I'll just point out a couple of obvious facts that the good professor overlooks.

Who Runs The Fed?

First, he makes a great deal of noise with his opening two sentences. He writes:

"In looking at the Federal Reserve, it is important to note that this is a money SYSTEM not just a group of men (although one member is a woman) sitting in a conference room controlling everything having to do with the US dollar. The Fed is a system just like the government of the US is a system."

There's just one teensie little detail he left out. The  overwhelming majority of men and women who sit on the Federal Reserve Board and the boards of each of the 12 regional banks of the Fed are professional bankers! They make their living from banking, working for and (usually) heading the very banks whose behavior they're supposed to be "controlling." Heck, in most cases, they've each made a fortune from banking, and they have extensive ties to the banking community. If we want to be really generous here, we could state that the Fed's voting members have a conflict of interest, but that would be really generous. Oh sure, there are a few non-bankers on these boards who have made their fortunes outside of the banking industry, but they're very, very much in the minority. Don't even bother looking for representatives of the poor, the working class, or the middle class on these boards. You'll be lucky if you find one..

The members of the Fed boards don't just have a conflict of interest. They have a complete confluence of interest. They are the banking cartel personified. The only real, remaining question is whether they truly act on their own judgment and accord, or whether they take their cues from behind the scenes from the David Rockefellers of the world. There is strong evidence of the latter possibility, but we don't need to go that far to prove our point. We don't even need to engage in conspiracy theories to know that the bankers run the Fed. Regardless of whether the Rockefellers and the old Morgan interests are really pullling the strings behind the scenes, there is absolutely no doubt that the Fed is run of the bankers, by the bankers, and for the bankers. Heck, even the U.S. Treasury Secretary, Hank Paulson, came from (drum roll please) the investment bank Goldman Sachs. By the way, Master C, did you notice how well Goldman Sachs is doing? That was a nice little $5 billion cushion Warren Buffet gave them a week or so ago, wasn't it!

Stimuluses

One of my favorite [hint: I'm being sarcastic here] sentences in his article is, "When the economy is sluggish or struggling, the Fed can often help conditions by giving it a boost." That's like saying that a drug addict can get a boost from cocaine when he's feeling down. It conveniently overlooks the fact that the drug addict was most likely down in the first place because he was recovering from his latest binge. Most times that the economy is sluggish, it's trying to shake off the after effects of the most recent "bust" in the "boom bust" cycle that fiat money creates.

Debt Is Good?

Master C writes:

"Many people, however, misunderstand this system and even see the creation of MORE DEBT as something BAD. They see debt like getting cancer or eating something that isn't good for you when debt is really just SPENDING MONEY YOU WILL RECEIVE IN THE FUTURE RIGHT NOW and paying it back over some agreed upon period of time.  This allows us to have things NOW that we otherwise would have to wait for, or might not even be able to have at all if we couldn't save up the money to buy them."

I suppose that's one particularly craven and inverted way of looking at it. Of course, another way to look at it is that debt-based money ultimately prevents the rest of us who aren't big-time financiers or self-made millionaires from being able to save enough to buy that big fancy plasma TV. The net effect of a shrinking standard of living is that money doesn't go far enough, so savings are reduced or eliminated because money that loses value undermines the perceived need to save. Gee, Master C, do you think that could be why people don't want to wait to buy the TV with their savings (if they have any) and end up going into debt instead? Could it be that they feel like they already did enough to work earn it (and they're right) but that somehow, through some mysterious process they don't understand, that all that money they thought they earned just doesn't go as far as they thought it would?

No, of course not, that couldn't be it. [insert hollow laugh here].

Ranting and Raving

In his next effort,  You Can Rant, But You Can't Hide, Master C takes on his critics who have been leaving comments under his articles. Apparently, all those nasty little ingrates want liberty and aren't shy about saying so. How dare they!

What's really interesting about this article is that it is an obvious attempt to justify exclusive economics. Those who are willing to play the wild, roller-coaster game of fiat money can win, win, win! Or as he puts it, "The fiat money system of the Federal Reserve is certainly slanted toward some rather obvious incentives. If you INVEST your money, you can make money with your money. If you don't, then you're going to see it whither away as fast as MA BELL gave way to SPRINT!"

The flaw in this theory, of course, is that making money in this context implies having a net profit afterward when you've also taken the inflation into account, and that net profit has to take into account the money he admits is lost in the inflationary spiral. That's a difficult trick, because it means that you can't just make a profit, but it has to be a profit that is greater than the true rate of inflation (as opposed to the understated "CPI" that got rigged in the 1990s to make it look like inflation is less than it really is). Given how fast the cost of gasoline, food, real estate, etc. has been rising in the new millenium (roughly 13%), it means you have to earn some decent gross profits on your investing just to break even! Wanna get ahead? You'd better be so good at investing that you can easily outperform the S&P500. I imagine that would apply to well less than 50% of the investors out there., not to mention all the people who are smart enough to know that they don't know how to invest, so they don't lose money trying to do it anyway. So, unless you're an investing wiz, you're screwed. As Master C says, "If you don't know HOW to play the Federal Reserve game, you're going to be LEFT BEHIND like an Amish hay wagon!"

You heard it from Master C first! What I don't understand is why he considers this to be an argument in favor of the Fed.

He concludes once again with his wild, teenage boy driver theory, "The modern world REQUIRES an active, constantly scrambling economy to provide enough for all the people who are in it." Does this really need to be debunked again? No, I didn't think so.

Getting Rich By Devaluing The Dollar

Last, but not least, Master C weighed in today with yet another wandering article, Devaluing the Dollar Is A Way To Get Rich. I say that it's "wandering" because I've been wondering when he was going to say something that makes sense, or at least makes an impressive argument. This article at least makes an attempt, because he's claiming that now that the dollar is devaluing, it means that your cash is worth more. Well, in a perverted sort of way, he's right. It's worth more than it was during the inflationary run-up. Sort of.

Again, there's just one teensie-weensie snake in the ointment. The dollar is worth more, but the economy is still priced higher than it was before the inflationary run-up! In other words, instead of being a purely losing venture, for a brief time it becomes a wash. The deceptive part is that you really never gain anything during the deflationary stage except a temporary reprieve before the next round of inflation hits. Now, if this meant that we were going to have a relatively unchanging money supply, that could work out okay in the long run. It would take awhile for people to right their busted rowboats and start floating again, but they could do it. Except that the Fed won't let them. One thing you can count on is that the Fed will start inflating again, because they share the professor's view that growth only happens when you increase the money supply.

So where's the reprieve, Master C? Well, he answers that in his second to last paragraph of the article:

"But, if you keep your retirement money in real estate, jewelry, paintings, collectibles, and INVESTMENT ACCOUNTS, you're going to have more money than you EVER DREAMED of having when you want it."

Interesting. So, once again, you have to be good at investing in order to survive. If you're not good at investing, you're screwed. Didn't we just address this point?

It's time to get onto the real issue in this debate. It's time to talk about how the whole mess really got started. That's what my first article in defense of the claims I raised in my introduction will address, and it's being published right after this one!

©2008 Walt Thiessen, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Tuesday, October 7, 2008
Last modified: Thursday, October 9, 2008

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