By: Thomas Lee Abshier, ND2/20/2011
From: John H.
To: Thomas Lee Abshier, ND
Sent: Saturday, February 19, 2011 5:57 PM
Subject: 2-hour video: “The Secret of Oz” – best documentary of 2010
How history (since Rome) has been manipulated by central bankers.
How “The Wizard of Oz” novel was really a spoof on the central banking problem.
2 hours long, and worth it! This one is well done!
The author’s conclusion:
Legal tender should be controlled by government, not by a private banking monopoly (Fed Reserve, etc.).
If you hold an Austro-libertarian perspective, you would want to go further than this author’s solution (you would want competing private currencies and individual choice to treat anything as a medium of exchange). This author doesn’t go that far (he stops at “legal tender” decreed by government and printed by government), but what he proposes is an improvement over what we have today and would solve a problem that goes back over 2000 years.
Summary of the Secret of Oz:
The quantity of money in circulation (monetary policy) has been controlled by either government or by central banking policy throughout history. This method of controlling money supply has produced a series of inappropriate expansions and contractions of the money supply, with the resultant unnecessary boom and bust cycles, and associated human misery. Some attribute this mismanagement to incompetence or poor judgment to these “mistakes” of monetary policy. Others suspect intentional, sinister, and selfish motivations for the economy-wide disasters wrecked by the Central Bankers. (The “Secret of Oz” posits a banker cabal associated with gold and power.)
The solution to this problem is to change our concept of money creation. We should not depend upon the Central Banks to issue money for circulation and exchange within the economy. Rather, we should recognize that money is merely a measure of wealth, and that money should not be issued unless there is a contract to create wealth.
The banks, the local institutions with people who have names and faces, should be the points of accountability for the generation of new money. When a man commits/contracts to creating wealth, if he is competent, and there is a market, then money should be generated.
(Note: the concept of creating new money by loaning it is not a new concept. Currently, the banks create new money by Fractional Reserve Banking – loaning out 10-30 dollars for every dollar they have in deposit. Thus, the proposal to recognize that new money is being created by “contract to produce value” is only one of concept, not procedure. When we rightly understand what money is, we can properly act.
The subsequent use of money received in circulation for consumption becomes the right to consume after having created value. Money would no longer be seen as wealth, rather money would properly be seen as a measure of having created wealth, and hence representing the right to consume commensurate wealth.
As a refinement and extension of the concept, the money we possess (for work, gift, or luck) gives us a right to consume wealth. Thus, theft of money would likewise give the owner the right to consume, but such exercise is illegitimate since the owner did not obtain the money through rightful labor or willful transfer of contract.
Savings would reflect the measure of wealth created but delayed in consumption. — Interest would be seen as the premium paid to those who had delayed consumption of the wealth they created. Delayed consumption allows labor, materials, and organization to be dedicated to expanding the mechanisms of production (i.e. increasing productivity). This allows for a multiplication of the wealth available for consumption.
Commentary: The Secret of Oz; the History of Money, Gold, and Central Banking; Creation of Fiat Money; The Crash of 2008 and Government’s Culpability; The Culpability of Government in Preventing Recovery; The Solution – Seeing Money Creation as a “Contract for Creation of Wealth”
In summary of “The Secret of Oz” video, William Still is trying to prove by historical example that government should not borrow money from bankers who have just created it out of thin air and then lent it to the government at interest. Instead, government should be the agent who prints money in the same manner, by fiat, without valuable asset underlying the money supply. The supply of money should be properly and well-regulated to meet the needs of a gradually expanding economy to prevent inflation or deflation. In this way government, and the taxpayers, would have to pay no premium in interest to Central Bankers to create money. Nor, would the economy be subject to the intentional or foolish expansions and contractions of credit/money, which result in unnecessary and painful recessions and bubbles.
I would like to start my essay/commentary by agreeing it has never made any sense to me to put a private bank in charge of creating money. I have no reservation about that particular change of banking and governmental policy. As I understand it, the Fed was created under very suspicious circumstances that probably had little to do with benefiting the general welfare.
But, I don’t think that central banking, the gold standard, or the limitation of the money supply by the central bankers caused the problems that we saw start in 2008. Likewise, it does not explain the failure of the Fed and Administration’s monetary and fiscal policy in reviving the national and world economy.
I think a good case could be made that it is not the debt or money supply that is crippling the recovery. The problem is that loans are not being made by the banks to the people who are willing to borrow. The resultant depriving of capital to industry has prevented the entrepreneur from producing value he is totally willing to produce. Men willing to work, risk, and hire have been prevented from engaging their skill and producing wealth. In turn, there have been none of the normal resultant economic multipliers associated with increased production, hiring, and consumption. (Borrowing/loans is/are contracting to produce wealth, paying interest to those who have delayed consumption, creating new money for those who have committed to creating new wealth.) Enabling those who have a commitment to produce a multiplication of value by giving them loans is the first step in the process of expanding the economic cycle of production and consumption.
Money is not wealth. Money is only a symbol that represents that wealth (goods and services) have been created. Money loaned to a willing and skilled worker enables the creation of goods and services. The bank serves as a point of accountability, but the bank is only a tangible face representing the borrower’s accountability to society. By loaning money, the society is giving the recipient the right to consume goods and services from the pool of created wealth, expecting that the trust extended will be repaid by goods and services multiplied above the quantity consumed.
Loaning money into the economic system to men who are committed to producing wealth in repayment is truly the proper way to inject new money into the system. As the borrower makes good on his contract, the goods and services produced are made available to the general economy. Those products become part of the pool of wealth that others consume with the money they are paid. The value produced by the entire chain of workers involved in the production, marketing, and support effort corresponds to the multiplied dollars that are put into circulation by the loans.
The reason for the poor economic recovery after the crash of 2008, lies with the government and their policies, rules, and legislation. The restrictions of government have directed the behavior of banks, which have in turn not loaned the money needed for production, hiring, and consumption. In turn, we have had the contraction of circulation and negative multiplication of production and consumption of goods and services.
The Libertarian, hands-off approach to governing, is appropriate and workable as long as the people are self-governed by an internal standard of Right morality. Government should not be involved in commerce except for possibly the most minor regulation to prevent conflicting policies regarding foreign export. Otherwise, government should be the agent to handle only those few items which would most benefit group activity and are otherwise poorly provided by private enterprise. Defense being the most notable area where government may be properly used as provider of a group service.
Specifically, the problem with the poor economic recovery lies with the regulation by government of banks and their allowed market value to loan ratio. (I think the offending legislation is in the Sarbanes-Oxley Act of 2002 (enacted after the Enron failure) and involves the Mark to Market rules.) The legislation requires that banks “fail” because their asset and loan ratios fall below a prescribed level.
This legislation, which requires banks to self destruct, has made banks unwilling to loan money. The resultant reluctance to loan money, and thereby avoid any but the most minor risk has been the reduction of potential viable productive efforts. The result has been the reduction in goods and services, employment, and money available for consumption and further hiring and expansion.
In our current post-crisis strategy for recovery, there is no problem with the amount of money made available for circulation by the central bankers. The problem is with the local bankers. There has been a huge expansion of the money supply due to the quantitative easing policy of the Fed, but that money has simply gone into the stock market and inflated the price of stocks, and commodity futures.
We cannot blame an insufficient money supply for the failure of the economy to rebound. The Federal Reserve has made great efforts to expand the money supply with its zero percent loans to banks.
As you know, the collapse of the economy in 2008 was government-induced. The seeds of it were sown with the passage of the Community Reinvestment Act (CRA) of 1979. It was given regulatory force in the Clinton years when its implementation required banks to make the “subprime loans” to people in poor neighborhoods to buy houses. The law provided the forceful consequence of prohibiting banks who did not participate in the subprime loans from merger and expansion if they did not make these undesirable loans.
Once the banks had been coerced into taking toxic, low-value, high risk, assets into their portfolio, they did everything they could to pass those loans off as assets that could produce a return and mitigate their potential failure. The subprime mortgages were bundled into new financial instruments called MBS’s (the Mortgage Backed Securities) and CDO’s (Collateralized Debt Obligations).
Thus, these misvalued assets were bundled and sold around the world (by very good salesmen (Goldman Saks, etc), who were highly incentivized to make the sale with huge salaries and commissions) into other economies as high yielding, secure, assets.
Thus, the world economy was then burdened with debts/assets that were unable to perform and thus had little value. In 2006-07 the economy began to contract due to the rise in oil prices to $140/barrel, and the associated $4.00/gallon gasoline. In the same general period, there was a rise in the prime interest rate. The contraction in the economy due to these factors led to the layoffs of a percentage of the workforce. The slowdown in the economy resulted in default of a percentage of the subprime mortgages. In turn, the MBS’s and CDO’s began to lose their value.
This cascade of depreciating asset valuation eventually led to the crisis point when the Lehman Brother’s commercial paper began to fail in its daily transaction. This event, the day the commercial paper failed, triggered a panic and the subsequent collapse of confidence in the financial system.
The TARP program of Bush passed in Oct 2008 may not have been the money the economy needed to prevent financial collapse, but its symbolism may have been the more powerful stabilizing factor. At that moment, confidence was needed for people to continue financial transactions. The move of the government to back the commercial paper market, etc, brought people back to the markets, willing to trade.
The subsequent policies of the government have failed to revive production and consumption. They have tried to stimulate production and consumption by providing money to banks at low interest and buying bonds to keep interest rates low, but this has not stimulated borrowing and production.
The failure as mentioned before is due to the government’s own policies which have made banks unwilling to loan. The low-interest rates are an inadequate incentive for banks to loans, which should in turn increase production. The banks who hold the keys to loaning will not loan because of the poor economic outlook, and their own unwillingness to loan for fear of being made to “fail” for not meeting asset-loan ratio requirements.
The solution to the economic crisis is the reversal of the government enforced banking rules that de-incentivize loans. There is only a limited period of time when people will hold hope without seeing results. If the business community loses hope, then the loans that could be made, that could revive production, will no longer be desired.
A malaise may settle in where there is little hope of a return on investment by those who are willing to produce because of the lack of a consumer class. This could result in the dreaded depression that had no consumer/producer force to bring it up. And, if the foreign community demands repayment of their debt, the government may institute crushing taxes that will further dampen hope in business and profit.
My personal campaign is to change the concept of the generation of money. The creation of fiat currency by the government is not the proper point of origin of money. Such a concept involved big government estimating the proper amount of money in circulation to conduct commerce, with not too much injected so as to create inflation, and too little to create recession/depression. Neither the government nor the Central Bankers can properly judge the needs of the economy for money supply.
Money should be generated by banks who make a contract with businesses who credibly promise to produce value in return for the commitment to produce valuable goods and services at a profit.
There is no inherent problem with fractional reserve banking. The problem is giving money to people for consumer loans who are not engaged in gainful employment. Such a policy will result in inflation, as there are too many dollars chasing too few goods and services. The government is involved in just such a program where they give money to people via the various entitlement programs (welfare, Medicare, pensions…). They then pretend to be fiscally responsible by heavily taxing the productive class to pay for benefits (vote buying) of the entitlement class (leisure/sick/elderly).
To finance the entitlement class, the government is borrowing from the Fed, but more pernicious a problem is the borrowing from other producing nations to fund the consumption of our entitlement class. The eventual lack of repayment of our debt, (with money, which actually corresponds to returning to them goods and services with interest to compensate them for their delayed consumption), will precipitate a cutting off of further loans. This will in effect cut off our ability to support our entitlement class, which may result in social unrest. The national and world economy will suffer as the contraction spirals downward.
Reiterating, money should only be created upon a credible contract to produce valuable goods and services. Such a policy and monetary philosophy is a sure prescription for generation of wealth without inflation. All men who can work skillfully should be given the opportunity to exercise against the resistance of nature to produce value. The Banks should be the gatekeepers of the money supply by being the point of accountability and judgment of business plans. In effect, the generation of fiat currency should be at the discretion of those who do banking, and their point of accountability should be their depositors who should likewise be compensated for the excellent risks that the wise and discriminating banking community takes. The success of this system rests on faith, community, skill, knowledge, wisdom, and hard work. In isolation, this program will not be successful. No one bank or community could implement such a program in isolation or alone. But, if the general policy of the national economy were to adopt such a spirit, then the prosperity of all local economies will rise together.