Topic: Monetary Policy
The Money Matrix on the Grand Deception of Seigniorage (PART 5/15) "Do not give in to evil, but proceed ever more boldly against it." The Money Matrix explores Seigniorage as Legalized Silent Plunder with an introduction into medieval and modern banking. by Jake Towne, the Champion of the Constitution
(libertarian)
Sunday, August 24, 2008
Our next topic is that of seigniorage, which is a silent weapon used historically by governments repeatedly legally plunder the populace. Let’s start by defining it followed by several examples.
Seigniorage – Revenue or profit taken from the minting of coins, usually the difference between the value of the bullion used and the face value of the coin. In economics literature, the term is frequently used as a synonym for monetary expansion. Root of the word means a French feudal lord, and refers to the lord’s right to confiscate, or steal, money from the people.
The Lord’s Right to Steal – An Abbreviated History of Coin Clipping
As we saw earlier, governments often use ‘legal tender’ laws to force everyone to use their legal tender money, and only their legal tender money, as money. Note when I use the term "law" in this case, I mean law by decree, but it could also be common law. However, these laws were preceded by at least two very important steps.
The first was actually the government takeover of the minting industry, and in so doing start forcing the people to use the government’s currency. A worthwhile digression is Rothbard’s source from Part 1 where he writes of the era of private coinage, and makes a strong case why this should be free from the government. The crux of honest money is the understanding that it must also be commodity money, as was explained in Part 3.
The second step was ingenious. It was to give each currency its own special name to foster separation from the actual commodity – which was grams of metal. Hypothetically, let’s say the British sovereign was originally defined as 10 grams of gold, and the German mark was defined as 1 gram of gold. So, to convert currency between the nations was NOT really exchanging 10 marks for 1 sovereign. The conversions were simply exchanging 10 grams of gold for 10 grams of gold, although possibly there were small premiums attached to the gold price for the storage and shipment costs. However, the trick was to get people to start thinking in terms of 'sovereigns' and 'marks,' not grams of metal.
The third step to "coin clip" was easy enough for our feudal lord or King. One way was simple fraud, he added a base metal such as copper or brass to the gold or silver, debasing it short of metal, then returned the coin into circulation while keeping the metal removed as his own. Another way was to gather and smelt all the coins in circulation. New coins are made at a lighter weight, but given the same value – ‘one dollar’ or ‘one pound.’ The removed weight was kept by the minter, the government, as its seigniorage, and the new coins had to be used, often under pain of death.
Now you may think, well all this talk about seigniorage, gold coins, feudal rights to the purchasing power of the money has no place in our wonderful modern American society. You would be dead wrong. America has followed pretty much the same feudal pattern. Our government in the 1800s gave us coins that were made of base metals such as nickel and copper to handle smaller fractions, though these were still redeemable in gold and silver at the time. Although unconstitutional without an amendment, at least this made economic sense. Now, the oldest remaining coin in circulation from this time period, the modern-day nickel made completely of base metals is now worth more than its face value!
However, the founding of America’s modern-day monetary system was its first legal tender laws (this time common law!) declaring gold and silver to be legal tender. There was little protest at the time, and to the casual observer it might have simply seemed redundant as we saw in Part 4 that the Constitution states only gold and silver coins are to be money. However, it was just the start of a slippery slope. These laws led the government to substitute at first paper certificates for the gold and silver. Then came the day when the paper was not able to be converted to its worth in physical gold. President Roosevelt on March 9, 1933 declared that the government would confiscate all gold and silver from private citizens, including the sealing of all safety deposit boxes. The Coinage Act of 1965 halted the production of silver coinage. Honest money’s final death came in the form of today’s paper or electronic Federal Reserve Notes, which are intrinsically worthless. So, in a way, an American in 2008 is worse off than a peasant from the Dark Ages. At least the peasant’s debased coins still had intrinsic value, where we bow to our government’s decision to use paper, electronic blips, and faith in lieu of money.
Secret Seigniorage – The Modern Global Banking System
A second type of seigniorage no less insidious is the modern day fractional reserve banking system. For those who are unaware, modern banks expand the monetary supply since they are allowed to loan out far more money than they have on reserve. In the United States, the government stipulates a reserve requirement, which is the fraction of deposits-to-loans. For every $100 on deposit, banks may loan out around $900. I am aware of no bank that can cover all of its deposits, if for some reason all of the depositors (that is, us!) showed up one day. In our country we use the idea that the money is insured by the FDIC and hence "safe." However if you look into the details from the FDIC and just the size of the FDIC reserves remaining ($40-odd billion) and compare to the total size of US banking reserves (trillions) I think you are basically crazy if you keep the bulk of your savings in a bank. You might then also look at a few major banks’ skyscrapers and wonder for a moment just why they are so tall. The Detweiller source from Part 1 on pages 3-6 is a great further read on this topic.
However, banking was not always this insane.
The first banks were money warehouses. This meant, like any other warehouse, they stored the gold and silver money for you in return for a storage fee. You had the relief of not having all of your money at home or on your person at all times where it could be stolen or was inconvenient to carry, and the bank spent its storage fee revenue protecting your money and yes, making a profit. However, the bank’s owners noticed over time that the total amount of gold and silver they have to return to depositors in a week or month never came close to emptying their warehouse. So, they (mostly secretly) started loaning out their depositor’s metal to third parties with interest of course! and were able to increase their profits.
[A tremendously wealthy European banking family, the Rothschilds, made its fortune in this manner, and later ushered in fractional reserve banking. If any of you readers think that the poor Rothschilds will be left shivering in the winter cold of their palaces after fiat money fails, I ask you to rethink. Why would the thieves not cash out their fiat on the world’s remaining gold and silver? Or that they do not already have huge reserves already compiled? It is happening right now in the United States, just try and buy any gold or silver. Just try! There is very little to be scrounged up by the Average Joe, but gold and silver bar traders (read: governments and bankers) still remain fairly liquid. The Rothbard source in Part 1 is a nice read on this topic.]
Let me put the absurdity of modern banking as a storage place for you in a different manner. Let’s say you want to go on an extended vacation for a few years. You store some of your belongings at a local warehouse - could be a boat, a car, or any other possession. You pay them a monthly fee for them to store it for you. However, let’s say you return back early and ask for your boat back, but the warehouse tells you it is on loan right now, please wait. Would you not be outraged? Has the warehouse not usurped your right to ownership and stolen your belongings?
Just because money is all uniform and can be surrendered by modern banks to its depositors up to a certain amount does not make the crime any less heinous. Modern banking is simply theft, whether a feudal lord did in 1200 AD or the banks and government do it to you in 2008.
In closing, I leave you a teaser quote. As you read it, can you guess when these words were spoken?
"On account of [the Federal Reserve], we ourselves are in the midst of the greatest depression we have ever known. From the Atlantic to the Pacific, our Country has been ravaged and laid waste by the evil practices of the Fed and the interests which control them. At no time in our history, has the general welfare of the people been at a lower level or the minds of the people so full of despair.
Recently in one of our States, 60,000 dwelling houses and farms were brought under the hammer in a single day. 71,000 houses and farms in Oakland County, Michigan, were sold and their erstwhile owners dispossessed. The people who have thus been driven out are the wastage of the Fed. They are the victims of the Fed. Their children are the new slaves of the auction blocks in the revival of the institution of human slavery."
No, this is not a quote from an August 2008 newspaper. It is from the 1934 Congressional record, from Pennsylvanian Congressman Louis T. McFadden. McFadden brought formal impeachment charges against the Federal Reserve Board of Governors, the Comptroller of the Currency and the Secretary of the Treasury charging them with theft, fraud and treason, among others. Congressman McFadden was almost certainly murdered by those he opposed, see the source in Part 1.
What is the cost of freedom? Did you think that freedom was free? That merely being born in the USA is enough to lay your claim to freedom? America was once a sanctuary for the poor, the hungry, the oppressed and downtrodden. However, our government has been slowly replacing the psychological shackles that some of our forefathers initially fled Europe and elsewhere to escape. Our government has been slowly replacing the iron shackles that some of our forefathers wore when they arrived from Africa. It is time for this farce to end. Freedom will come once again if the people recognize that yet again we are all oppressed, that we all wear a gigantic ball and chain that is our monetary system and government. If monetary policy must be the first shackle that draws noticeably amounts of blood before it is smashed, so be it.
The next article in this series will endeavor to succinctly summarize how the Federal Reserve works in step-by-step fashion.
The Money Matrix - Prelude (PART 1/15) Published: August 1, 2008 Prelude and Source List to a Series on Global Monetary Policy of Control and Explaining Big Government's Finances
The Money Matrix - What the Heck Are Derivatives? (PART 10/15) Published: December 9, 2008 This article seeks to define financial derivatives and why they are so important. Future and spot market basics are also examined so the Reader understands how the price of gold and silver is determined.
We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.
As always, unlike the NFL, the author grants full permission to allow any accounts of, rebroadcasts, retransmissions, repostings in part or full of this article to your blog or anywhere else in order to promote the Restoration of our Republic.
Veritas numquam perit. Veritas odit moras. Veritas vincit. Truth never perishes. Truth hates delay. Truth conquers.
Ron Paul and the Struggles of Attrition Published: August 17, 2008 My comment on Ron Paul's Campaign for Liberty after reading David Nolan's and Walt Thiessen's recent Bob Barr pieces.
A Salute to Malalai Joya - Afghanistan's Tom Paine Published: August 8, 2008 Malalai Joya, a brave lady and banned legislator from Afghanistan, fights for justice, human rights, and democracy. She battles both the Warlords in power, the Taliban... and the American Government, which is probably why you have never heard of her.
Police State Invades Mayor's Home & Kills His Dogs (UPDATED) Published: August 1, 2008 "It was inconceivable to me that my government would be coming through my door." - the Mayor of Berwyn Heights, Maryland, or a recent police raid on his residence
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What is the cost of freedom? Did you think that freedom was free? That merely being born in the USA is enough to lay your claim to freedom? America was once a sanctuary for the poor, the hungry, the oppressed and downtrodden. However, our government has been slowly replacing the psychological shackles that some of our forefathers initially fled Europe and elsewhere to escape. Our government has been slowly replacing the iron shackles that some of our forefathers wore when they arrived from Africa. It is time for this farce to end. Freedom will come once again if the people recognize that yet again we are all oppressed, that we all wear a gigantic ball and chain that is our monetary system and government. If monetary policy must be the first shackle that draws noticeably amounts of blood before it is smashed, so be it.