The History of the Federal Reserve

Michael J. Ross writes "Money plays a key role in modern life; in fact, for some people, nothing is more important than acquiring more of it. Yet most people do not know what money really is, how it is created, how its supply is expanded and contracted, and who benefits from those changes. In the United States, the central figure in this ongoing drama, is our central bank, the Federal Reserve, whose history, power, and effects are explored in G. Edward Griffin's fascinating book The Creature from Jekyll Island: A Second Look at the Federal Reserve." Read on for the rest of Michael's review. The Creature from Jekyll Island author G. Edward Griffin pages 624 publisher American Media rating 9 reviewer Michael J. Ross ISBN 0912986212 summary A compelling history and indictment of the Federal Reserve system For the citizens of the United States and several Latin American countries, the "coin of the realm" is the US dollar, which is, in simple terms, created by the Federal Reserve, a.k.a., the Fed. But who created the Federal Reserve, and why? The subjects of banking in general, and the Federal Reserve in particular, would be considered by most Americans to be dry, boring, and of little importance to their day-to-day life. But those same people are endlessly fascinated by how to make more money (with minimal effort, such as the lottery), how to spend as little of it as possible (coupons never go out of style), and how to maximize one's investment returns. Why this disconnect? Why do Americans care so little about the origins of that which they spend a third of their time pursuing, and seemingly another third spending?

Some of these "salary slaves" may understand that their money serves as a store of wealth and a medium of commercial exchange, which makes possible their daily financial transactions without the need for bartering. But, for the most part, they do not understand the critical importance of what is backing that money, if anything; how that money comes into existence, and what debt offsets it; what entities control the supply and distribution of that money; and how those changes can be used to legally steal purchasing power from victims who may not be entirely unsuspecting, but do not truly comprehend how they are getting ripped off.

The typical American, if he or she has given any thought to the matter, would consider the following statements to be true: The Federal Reserve is federal, i.e., a part of the US government. The Federal Reserve is a reserve, i.e., it has monetary savings of real value. The Federal Reserve serves the public, and is not a cartel of private banks serving itself. The US dollar has real value, i.e., it represents tangible wealth, such as gold securely stored at Fort Knox. Inflation is an increase in prices. Inflation is caused by greedy companies, not the US government or the Federal Reserve.

As G. Edward Griffin makes clear in his book, none of these beliefs are true — regardless of how well entrenched they are in our conventional "wisdom." He also explains why the US government and the Federal Reserve have their own reasons for being in no hurry to eliminate this ignorance. Yet these topics are just a small portion of what is covered in his far-ranging discussion of the theory and history of money and banking, particularly within the United States.

Spanning 624 pages, the material is organized into 26 chapters, which are grouped into six sections: "What Creature Is This?" (the Federal Reserve's shameful birth, and the shenanigans of the Fed, S&Ls, the IMF, and the World Bank), "A Crash Course on Money" (money, gold, debasement, fiat money, fractional-reserve banking, and money creation), "The New Alchemy" (the Rothschilds, J.P. Morgan, and banker financing of wars and revolutions), "A Tale of Three Banks" (America's failed experiments with central banking, and the American Civil War), "The Harvest" (the unconstitutional creation of the Federal Reserve, and its dreadful effects, including the Crash of 1929), "Time Travel into the Future" (current crises caused by central banking, how they can be reversed, future scenarios, and what the individual can do regardless). Every one of the six sections begins with a brief summary, as does every chapter, with every chapter wrapped up with a more extensive summary.

The section summaries also appear in the table of contents, which precedes a preface and the author's acknowledgments. These are followed by a delightful introduction — a piece from the British humor magazine Punch, comprising a rather telling exchange between an unusually honest banker and a soon-to-be-disillusioned bank customer. The book contains three appendices: a summary of the structure and function of the Federal Reserve system; natural laws of human behavior in economics; and whether the M-1 measure of money is subtractive or accumulative. The author also provides an index, as well as an impressive bibliography, reflecting his extensive research on the topics. In addition, the author invites readers to join Freedom Force, an organization dedicated to increasing liberty in the United States, curbing federal totalitarianism, and abolishing the Federal Reserve — all through peaceful participation in government, and the shaping of public policy starting at the grassroots level.

The Creature from Jekyll Island is published by American Media, under the ISBNs 0912986212 and 978-0912986210. It first came out in July 1994, and is now in its fourth edition, and its 19th printing. It also has Japanese and German editions, published in February 2005 and August 2006, respectively. On the book's Web page, visitors will find testimonials and comments from readers, updates to the book, a review of the book by Jane H. Ingraham of The New American, and G. Edward Griffin's response to a critique of his book by Edward Flaherty, who holds a Ph.D. in Economics. On that Web page, interested readers can order audio cassettes or CDs of the author's lecture, based upon this book, and produced in 1998.

My only criticisms of the book concern not the material itself, but its production — more specifically, the printing and layout, presumably chosen and thus fixable in the future by the publisher. The generous font size used throughout the volume, makes it easy to read; but the bold text, such as the subheads found in every chapter, is a bit rough-edged — on some pages worse than others. The subheads, already bolded, do not need to be in all uppercase; the publisher should choose one or the other. In addition, the inside margin length is a bit too small, forcing the reader to crack open the book more than should be needed, in order to comfortably read the text closest to the binding. In future editions, some of the space in the outer margin could be used to solve the problem, without any change to the words on each page, and thus the length of the book.

But aside from these minor flaws, this book is to be highly recommended. The Creature from Jekyll Island is a remarkably thorough, detailed, and challenging critique of central banking and America's latest incarnation of it, the Federal Reserve. G. Edward Griffin's precision of language, and his interweaving of the major players and their motives, makes for a most compelling historical study.

Michael J. Ross is a Web developer, freelance writer, and the editor of PristinePlanet.com's free newsletter.

You can purchase The Creature from Jekyll Island from amazon.com. Slashdot welcomes readers' book reviews -- to see your own review here, read the book review guidelines, then visit the submission page.

Comments

Another good read...

[dada21]

...and a free e-book download is What has Government done to our money? by the esteemed Murray N. Rothbard.

I've read dozens of books (over 30, for sure) on central banking theory, and none of them have given a completely clear and transparent picture of what the Fed really is, what is does, and what it is supposed to do. In the end, all central banks have one customer: member banks (the banks you and I go to), and the central banks have one policy: save their buddies in the member banks against any malinvestment or market change.

The Fed isn't here to protect the value of OUR money (in fact, since the Fed's creation in 1913, the US dollar is about 95-96% devalued), and it isn't here to protect our investments or savings.

Re:Another good read...

[RealGrouchy]

For those who prefer audio/video, I suggest the video "Money As Debt", which can be viewed on Google Video.

The animation is cheap, but the meat of it is in the audio, which puts in pretty clear terms where money comes from.

- RG>

Re:Another good read...

[Anonymous Coward]

Part of the job of the Fed is to increase the money supply at an appropriate rate, since mild inflation tends to be good for the economy and deflation tends to be disastrous.

Add up mild inflation over the course of a century, and yes, you will find that the dollar has lost 95% of its value - but you'll also find the largest, most impressive economic expansion in the history of the world.

Re:Another good read...

[Kadin2048]

That's an interesting video, and not a bad introduction to how the banking system actually works (as opposed to the oversimplified "they lend out your deposits..." view that most people get as youngsters and never really question). However, I'm not sure that its attempt to spin 'money as debt' as a bad thing is really true.

If we were stuck on a gold or silver standard, we'd be in real trouble: there just isn't that much gold or silver around to make a a very good currency. We need a currency that can grow as the amount of real assets in circulation grows -- as we as a society and civilization create more valuable stuff, we need a way to pay for it. The debt money system uses all those real assets as the basis for its value, rather than an arbitrarily chosen precious metal.

In effect, the debt money system, though complicated, is a lot more 'real' than a gold standard. Gold is only valuable because it's shiny and pleasant to look at and you can beat it into useful shapes and it's been used as money for a long time. You can't eat it, you can't live in it, you can't plow a field with it -- aside from some applications in the jewelry and electronics industries, you can't do much of anything with it. But a house, that has real value. A factory has value. A John Deere tractor has value. When people borrow money to pay for these things, the money is created and the newly-created money is backed by the pledged asset. So when I buy a house for $250k, two hundred and fifty thousand new dollars are created, but those dollars are backed by my house; they are, in one sense, actually my house, floating around out there. And then I work, and pay the loan principle back, and basically suck those 'house-dollars' back out of the market and put them back into my house.

Once you get around the mental shock of realizing that the system doesn't work the way you thought it did, there's a certain elegance to the system. Money is created and destroyed as it's needed to pay for things, rather than there being some fixed amount of it floating around. When we need a lot of capital, it appears; when we don't (and pay off our loans), it goes away. With a fixed amount of gold, you'd have massive inflation/deflation cycles as prices changed in response to the amount of available currency.

Where you run into serious problems are when banks start making loans to people who don't have enough real assets behind them to cover the amount of money that's being created. IMO, this should be illegal, or at the very least the banks should be held directly responsible for ensuring that the loans they're making are backed by something (real property, or an income stream). If they don't, then they're magicking money into existence that has nothing behind it, and letting it out into the market. That's dangerous business, and the source of our current credit problems.

Re:Another good read...

[Citizen of Earth]

Part of the job of the Fed is to increase the money supply at an appropriate rate, since mild inflation tends to be good for the economy and deflation tends to be disastrous.

The _real_ economy also tends to increase by a few percent each year, so the money supply needs to be increased a few percent each year to compensate for this (or else there would be deflationary pressure because of real growth).

Re:Another good read...

[dada21]

If we were stuck on a gold or silver standard, we'd be in real trouble: there just isn't that much gold or silver around to make a a very good currency. We need a currency that can grow as the amount of real assets in circulation grows -- as we as a society and civilization create more valuable stuff, we need a way to pay for it. The debt money system uses all those real assets as the basis for its value, rather than an arbitrarily chosen precious metal.

We don't need something that can grow with the economic growth of the country. If we fixed to a gold standard, prices (in gold ounces or grains) would fall softly over time -- soft price declines. This encourages people to save rather than overspend, and only spend on things they need or are sure they want. Soft price declines are GOOD and happened for thousands of years when people used gold as a medium of exchange. This also allows for proper investment as people are not pushed to invest and can watch their savings grow in value even if they hoard their gold in the mattress.

Instead, we have fiat currency inflation (which just means more money is created than destroyed) which caused soft price increases -- this gives people incentive to spend and not save, even if they don't need or are sure they want something. It also creates malinvestment as people invest "just to protect their savings."

But a house, that has real value.

No it doesn't. Buy a home and ignore it for 5 years. The yard gets destroyed, pests and mold destroy the inside, roofs fall apart, windows need replacing, carpet goes stale, dust collects. A house has declining value.

A factory has value.

I'm sure all those horse-shoe manufacturing factories in 1889 are still valuable today. I'd say they weren't valuable within 30 years.

A John Deere tractor has value.

For about 7 years, at which point it is more costly to buy used than new in terms of lost productivity.

When people borrow money to pay for these things, the money is created and the newly-created money is backed by the pledged asset. So when I buy a house for $250k, two hundred and fifty thousand new dollars are created, but those dollars are backed by my house; they are, in one sense, actually my house, floating around out there. And then I work, and pay the loan principle back, and basically suck those 'house-dollars' back out of the market and put them back into my house.

Not quite, because when you have an inflationary fiat economy, people malinvest -- they take the easy new money as quickly as it comes, and that causes prices to rise extravagently. Your $250,000 house bought in 2005 may only be worth $175,000 today -- and if it is in Southern Florda, it may be worth only $125,000. Add to that your property taxes, maintenance, utility cost, and general upkeep, and the house is a terrible investment.

With a fixed amount of gold, you'd have massive inflation/deflation cycles as prices changed in response to the amount of available currency.

Inflation just means an increase in the money supply, deflation means a decrease in the money supply. You mean price rise/price decrease. This is _good_, actually, because it benefits the non-hoarders to pick up newly repriced assets that have dropped in value when they need them most, and it benefits hoarders in watching their money become more valuable even without investing.

Where you run into serious problems are when banks start making loans to people who don't have enough real assets behind them to cover the amount of money that's being created. IMO, this should be illegal, or at the very least the banks should be held directly responsible for ensuring that the loans they're making are backed by something (real property, or an income stream). If they don't, then they're magicking money into existence that has nothing behind it, and letting it out into the market

Re:Another good read...

[natedubbya]

The Fed isn't here to protect the value of OUR money

And if that gets your interest piqued, search for the Council on Foreign Relations and their role in the Fed. Then ask yourself why the head of the Secretary of State has been a CFR member for the past several decades. And why presidential candidates (both rep and dem) are *almost* always members of the CFR. Ahh it's a whole new world of elitism nobody seems to know about.

Re:Another good read...

[Kadin2048]

I agree with you on some of the dangers of inflation; however, I disagree about the nature of "value" in an asset.

Something can have substantial value, even if it's not the sort of thing you can leave sitting around idle and come back to later.

A tractor has substantial value not in the same way a pile of gold bricks does, but because it performs a function. It represents a potential income stream to a farmer, which is why a farmer might want to own one. Thus the farmer goes to a bank and takes out a loan against the tractor, in order to purchase it. For the bank to make this loan, they want to ensure that the farmer isn't an idiot, and that he'll pay back the value of the tractor either faster than it depreciates (or he has some other assets that won't depreciate as quickly, in order to secure the loan). If they think this is the case, they can then go and create a pile of 'tractor-dollars', dollars that are backed by that tractor. Those dollars only stay in the system until the farmer pays off the loan, and assuming the loan was intelligently made, there should never be more tractor-dollars sloshing around than the tractor is actually worth (either in literal terms or as an income stream).

The same holds true for a factory, or anything else that helps create an income stream. Just because it's not a stable asset doesn't mean it's valueless; as long as you can predict the depreciation, you can still use it as collateral, and if you can use it as collateral, you can use it as the basis for new money. (As long as you trust the government to enforce the lien and let the bank repossess it, of course -- the real basis for debt banking is the threat of force by people with guns.)

I also agree that banks have been supremely irresponsible with their lending practices, but I don't think that full-reserve banking is really the best solution. There are rules that need substantial tightening, but there's nothing inherently wrong with letting a bank use mortgaged assets as part of its reserves, as long as the value of those assets over time is computed, the loans made accordingly, and there's a iron-hard willingness by the government to liquidate those assets in the event of a default by the borrower.

Re:Another good read...

[dada21]

I agree with you on some of the dangers of inflation; however, I disagree about the nature of "value" in an asset.

Oh, I definitely agree that some of the assets you listed have value to SOME individuals, but there is generally NO asset that is valuable to all individuals -- except for gold, which I can not believe that another individual would not covet or desire if offered in trade for a profitable outcome (for both parties). Tools, to me, are not positive-income assets for all. Houses can be tools (for landlords), tractors can be tools (for farmers), but they're not universal.

A tractor has substantial value not in the same way a pile of gold bricks does, but because it performs a function.

As does gold -- as a unique, and historically safe, store of wealth. I am not sure that you can pick any one generation (from beginning to end, lets say 40 years) and see gold as dropping in value from the beginning to the end of that generation. I also believe you could pick any half generation and get the same solidity, and this is over 6000 years, including multiple gold rushes.

It represents a potential income stream to a farmer, which is why a farmer might want to own one. Thus the farmer goes to a bank and takes out a loan against the tractor, in order to purchase it. For the bank to make this loan, they want to ensure that the farmer isn't an idiot, and that he'll pay back the value of the tractor either faster than it depreciates (or he has some other assets that won't depreciate as quickly, in order to secure the loan). If they think this is the case, they can then go and create a pile of 'tractor-dollars', dollars that are backed by that tractor. Those dollars only stay in the system until the farmer pays off the loan, and assuming the loan was intelligently made, there should never be more tractor-dollars sloshing around than the tractor is actually worth (either in literal terms or as an income stream).

So they loan these tractor-dollars out to the farmer, who buys said tractor from a manufacturer. Who does the manufacturer redeem said tractor-dollars to? Or are we just saying they're dollars that say "secured by a tractor" on them versus fiat?

The same holds true for a factory, or anything else that helps create an income stream. Just because it's not a stable asset doesn't mean it's valueless; as long as you can predict the depreciation, you can still use it as collateral, and if you can use it as collateral, you can use it as the basis for new money. (As long as you trust the government to enforce the lien and let the bank repossess it, of course -- the real basis for debt banking is the threat of force by people with guns.)

Sure, this is why you need to have skin in the game -- something of your own that you also put in, and not just future labor. To loan against future labor with no consequence to previous labor makes little sense if you want your investment protected.

I also agree that banks have been supremely irresponsible with their lending practices, but I don't think that full-reserve banking is really the best solution. There are rules that need substantial tightening, but there's nothing inherently wrong with letting a bank use mortgaged assets as part of its reserves, as long as the value of those assets over time is computed, the loans made accordingly, and there's a iron-hard willingness by the government to liquidate those assets in the event of a default by the borrower.

So we need MORE regulation, which will make the banking monopoly even more exclusive? I definitely don't agree.

Loaning massive funds in a full reserve banking system is quite simple, and safe, and malinvestment resistant. For example, if you wanted to buy a $150,000 house with a 30 year loan, in a full reserve banking system, not many banks would be interested in giving you money for 30 years -- this is why fractional reserve banking with the MBS/CDO investment market is so culpable in the housing bubble.

Instead, i

Re:Another good read...

[The One and Only]

The depositors at Northern Rock were, sorry to say, idiots. I would _never_ put my money into a fractional reserve bank. ... Fractional reserve banking is fraudulent, it is theft, and it should be criminal. The idea is criminal for anyone to perform except for banks licensed by the State or Federal governments.

People who die from surgical errors are, sorry to say, idiots. I would _never_ undergo surgery. Surgery is physical assault, it is mutilation, and it should be criminal. The idea is criminal for anyone to perform except for physicians licensed by the state or federal governments. Did you see the fallacy? There's two: first, you severely mischaracterize why and how fractional reserve banking is legally controlled. If you act as a bank (in some strictly-defined ways) without being licensed, you're guilty of banking without a license, just as I would be guilty of performing medicine without a license if I tried giving people open-heart surgery. It doesn't mean that fractional-reserve banking (or surgery for that matter) are inherently bad things, just that they are high-risk endeavors that are considered deserving of licensing and control.

Your second fallacy is your apparent belief that, since fractional-reserve banking involves a degree of risk, it shouldn't be done at all. That's absurd. Risks can be controlled and mitigated, and in the decades of experience we have with fractional-reserve banking, the risks in question have been mitigated. The biggest failure in fractional-reserve banking was the monetary contraction towards the beginning of the Depression, which was caused by a combination of poor banking regulation and poor monetary policy (including what remained of the Gold Standard at the time).

All banks are bankrupt -- if each person that visits Slashdot this week was to withdraw all their savings, checking accounts, money markets and CDs (even at a penalty), many banks in the U.S. would be insolvent.

No, the bank would not be insolvent. Uncollected debts that are owed to you are still assets, and insolvency only occurs when your liabilities exceed your assets--not when your short-term liabilities exceed your cash on hand. (That's a cashflow problem. And yes, they borrow funds from the Fed to cover that cashflow problem, but once they collect their debts they pay the Fed back with interest--part of the cost of doing business.) And yes, the percentage of uncollected debt that never ends up being collected due to deadbeats is already accounted for--that's one of the purposes of interest, to mitigate risk. In any case, I enjoy living in a society where I can collect interest and borrow money without too much difficulty, and where the risk is spread out sufficiently. If you want to bury gold in your backyard instead, that's up to you.

Re:Another good read...

[saider]

land prices ought to stay more or less the same, since the ammount of land almost never changes

But the demand for land does increase as the population increases, pushing up the price.

Supply and Demand. Not just one or the other.

Re:Another good read...

[pugugly]

More precisely, inflation means the money supply is increasing more quickly than the actual goods and services available in the economy, and vice versa - You can increase the money supply as much as you want as long as the underlying economy is (in reality) expanding at the same rate.

Any kind of hard standard however means that the money supply is disconnected from the actual underlying economy - it's linked to the actual reserve - a quickly expanding economy means, perforce, deflation and vice versa, which in turn causes an economy to fluctuate between deflationary and inflationary cycles far more quickly and dangerously - deflation being worse because there are no built in economic safeguards to preventing it once started - holding your money instead of spending it means it's *more* valuable tomorrow than today, which cause further deflation. rinse, repeat.

Moreover, since the access to the reserves influences the local money supply, the economy doesn't achieve equilibrium automatically over different areas (even with the same currency)) creating arbitrary opportunities for arbitrage, which, by definition, means that some economic energy is being drained off as people make money off the inefficiency (Albeit, while correcting it).

Lastly, you can, in theory, corner the market on *any* commodity (It was nearly done during the Grant administration). I always find it interesting that the very libertarian influences that tend to like the concept of a gold standard are the people philosophically opposed to the very regulations that would make it difficult to corner the gold market once implemented.

Pug (Again, my layman's views)

in 4, 3, 2, 1...

[niloroth]

Waiting for some idiot to post a link to the Zeitgeist movie's section on the federal reserve. Seriously hoping it doesn't happen, but i have a strange feeling that at least one person on here has fallen victim to the allure of spooky music mixed with insane and unfounded assertions.

A Better Reference is

[rnicey]

http://www.amazon.com/Making-Money-Discworld-Novels-Pratchett/dp/0061161640/ref=pd_bbs_sr_1/105-1901449-4836442?ie=UTF8&s=books&qid=1190836803&sr=8-1

and you won't fall asleep reading it.

Bah! Who needs history when there's ADVENTURE!

[ScentCone]

No nerdly discussion about the history of money would be complete without a slavish recommendation to read Neal Stephenson's Baroque Cycle. Which, indeed, one should. ADHD raised-on-MTV types needn't bother, but it's pure gold. (+5 self-referental humor!)

You want the negatives on this book?

[brundlefly]

There are plenty. Many people do not consider this book to be a balanced discussion of the subject matter at hand. This type of controversy should be mentioned in any prominent book review.

Re:You want the negatives on this book?

[cheezedawg]

The author isn't saying there shouldn't be monetary policy. The entire point of the book is that the Fed has NOT managed the monetary system properly, best evidenced by the fact the value of the US dollar has declined by 98% since the Fed was created.

That is not evidence of mismanagment, especially considering that the policy of the Fed for much of its existance has been to keep inflation low, predictible, and most importantly, above zero. This 98% statistic that you think proves mismanagement is actually evidence that the Fed is achieving its goals.

Some inflation is desireable, and the reasons why are simple: sustained economic growth when the currency is deflating is next to impossible. Nobody wants to borrow money today that they are going to pay back with more expensive dollars in the future. As a result, productivity and capital investments drop, and the economy stagnates. The opposite is true when the currency inflates. The key is to keep inflation predictable so people can plan for it.

This is actually false. The money supply is increased by ONE WAY and ONE WAY ONLY! When a bank issues a loan, the loan itself is money "created" with the debt ultimately reported to the Fed.

No, thats not the only way that the money supply is increased. The US treasury dept increases the money supply when it auctions securities to the public. The FOMC can also increase the money supply through its open market operations.

Again, this is another poster who apparently doesn't even understand what they are saying. Banks issue loans by stealing part of the value of your money, then they collect interest on it.

Your loaded terminology is betraying you. Implicit in our system is the assumption that loans and investments drive future economy growth. If the money supply grows by $y, and the resulting activity increases our economy by $y, then nothing has been "stolen".

Sorry, there are no credible bad reviews on Amazon. Just a bunch of folks who don't understand fractional reserve lending and how the money supply is directly tied to the issuance of debt. The rest are communists who hate the John Birch society and defame the author and discredit his work entirely on his involvement with that organization.

I guess its a lot easier to argue an opinion if you just blithely dismiss anybody that disagrees with you as being ignorant.

Re:You want the negatives on this book?

[cheezedawg]

Apparently you are unfamiliar with the 19th century. In 100 years, the United States was transformed from near total wilderness to the world's largest industrial power filled with hundreds of cities and a vast railroad system.

The United States did not become the world's largest economy until after WWII. The economy in the 19th century was wild, with massive swings in employment, GDP growth, and inflation. It was not uncommon for the economy would grow by 20+% one year, only to contract by 15% 2 years later (1813 and 1815, for example). The average nominal GDP growth for that century was only around 4.5% compared that to almost 7% since then (and that includes the Great Depression!).

This was all done during a period of moderate - and at times severe - deflation. Deflation is the natural order of things in an industrial society.

This is incorrect. Between 1790-1913, the annualized inflation rate was around .1%, which is very low, but still positive. With only one exception, every deflationary period during the 19th century time corresponded directly with an economic contraction. The exception to this is the years 1866-1878, where there were 12 years of sustained deflation (the longest deflationary period on record) but GDP growth remained positive. This period is an outlier in our economic history, and not a basic rule like you claim.

Don't kid yourself. A bond is a loan.

Of course a bond is a loan, but the mechanism which public debt increases the money supply is different from private debt. When the government holds an auction to sell securities, it transfers $X from the public to the government (in exchange for $X worth of interest bearing assets). This alone would actually decrease the money supply if it weren't for the fact that the government does not maintain a cash account, so it turns around and spends the $X, putting the money back in the private sector (although to different people that it borrowed the money from). The end result is that the private sector still has $X and they have $X worth of interest bearing assets in the form of treasury securities.

Watch this video.

I have seen that video before, and I do not like it. It is classic conspiratorial propaganda- just enough fact so you can't accuse them of outright lying, but dressed up with the most inflammatory language possible and reaching conclusions not supported by the facts. I found it to be an appeal to emotion rather than to reason, and I don't like that.

I'm sorry, I didn't know some people on slashdot still support ad hominem attacks.

I have no idea who you are referring to here (who has supported ad hominem attacks in this thread?), but the idea that slashdot of all places (the cesspool of online discourse) is somehow too dignified for ad hominem attacks made me chuckle.

As for the comment on fractional reserve lending, even you don't seem to grasp the consequences. Anyway, watch the video - maybe it will become clear.

You just did it again. It is possible to understand the macroeconomic impacts of fractional reserve lending, and disagree with benzapp at the same time. You have to stop assuming that anybody that disagrees with you is just ignorant.

No one is buying US treasuries anymore because of the pathetic interest rate the fed set last week, and the debt load of the American consumer is far too great.

No one is buying our treasuries? Today's Treasury auction for 5 year notes attracted over $37 billion worth of competitive bids. This was about $2 billion more than last month's auction (before the Fed announced the cut in the target rate), and about the same as the auction held in September 2006. Oh, and the interest rate from today's auction was 4.25%, which is only 1/8% higher than last month, and a full .

Re:You want the negatives on this book?

[cheezedawg]

Do you just pull facts out of your ass and hope no one will notice?

Nope. The data I got was from these two sources:
http://eh.net/hmit/gdp/
http://measuringworth.com/calculators/uscompare/

Lot's of people don't hold much faith in the GDP measurements. In terms of actual industrial and agricultural output, those numbers are bullshit.

Perfect. You have constructed another argument where the facts don't matter. How about instead of blindly labeling any contrarian data as "bullshit", suggest some alternate means of measuring the economy, or better yet, explain exactly what aspect of the GDP measurements you find inaccurate.

Also, there was virtually no unemployment in the United States in the 19th century. More bullshit.

Where on earth did you get that idea? Even that propaganda video that you are pimping every chance you get talks about some periods of heavy unemployment in the 1800s that led to civil unrest. You know- when those evil illuminati were executing their nefarious plans for world domination.

And this of course, is the most comical piece of bullshit in your post. You can find the exact opposite information regarding the value of money in the government's own publications! Read Historical Statistics of the United States, Colonial Times to 1970. Washington, DC: Bureau of the Census; U.S. G.P.O., 1975. I even found a nice online calculator for you to show how prices declined by 50% during the 19th century.

You are right. I had plugged the numbers in from 1790-1913 (when the Federal Reserve was created) to get that statistic. It looks like the extra years on both ends did skew the results, and the period from 1800-1899 was net deflationary.

That said, take a look at this graph comparing GDP growth and inflation rates from 1790-1913. The correlation between deflation and economic contractions is almost perfect. To claim that the economy thrived when the currency deflated is misleading, to say the least.

I'd love to know what "conclusion" was reached that is not supported by fact.

Its been a while since I watched the video. I remember such sound arguments as:

• The Rothschilds were the richest and most powerful family in the world during the 19th century, and we have "no evidence" that this has changed, so they are still the richest and most powerful family in the world.
  
• The evil bankers did not like President Lincoln's plans for the national currency, so John Wilkes Booth was obviously a mercenary hired by them to assassinate the President.

Its classic conspiracy theory- impossible to disprove, but don't mistake that for proof that it is true.

Re:You want the negatives on this book?

[cheezedawg]

You used the nominal GDP rate and not the real GDP rate - that is bad economic analysis.

Yup- I had started out analyzing the GDP vs inflation rates, where the nominal GDP is the proper number to use, to generate that graph. I should have used real GDP numbers for the direct comparison. I need to stop posting after my brain has already turn off from a long day of work. My bad.

But look at the per capita GDP growth rates. From 1790-1913, real per capita GDP grew by an average of 1.45% per year. From 1913-2006, real per capita GDP grew by 2.10%, and remember that this period includes the Great Depression.

I'm an aesthete at heart and don't believe it is possible nor desirable to measure the success or failure of civilization in the materialistic terms of an bean counter.

Well, I think there is a lot more to the success or failure of an entire civilization than just it's economy, but I guess that is a different discussion.

Nobody claims that the GDP is a perfect measure of an economy, but it is the best broad measurement that we have, so I don't think that any honest discussion can just dismiss the number.

If the GDP decreases by 25% but the prices of goods drops 50%, a rational person would call that a period of prosperity.

I disagree. The only way you can prosper with the GDP decreasing is if your population and resource requirements are also decreasing- otherwise people start starving.

Yeah, we're definitely talking about a different video.

Yikes- sorry about that. More evidence that I shouldn't post past my bedtime :). I was referring to the 3 1/2 hour documentary from the mid 1990s called The Money Masters. Somebody else posted a google video link to that in this discussion, and I somehow got it confused with your post.
Here is a link to that video, btw.

I have also seen that Money as Debt cartoon before, and it isn't quite as conspiratorial. I still didn't like how they treat the subject like a big secret that nobody talks about when I learned about it in my freshmen econ class years ago.

real value?

[Lord Ender]

...The US dollar has real value, i.e., it represents tangible wealth, such as gold securely stored at Fort Knox.

Gold has almost no real value. You can do very little with it other than make jewelry. Yet, like fiat currency, people have become collectively convinced that it is valuable. Because of this, we spend countless resources digging it up from the ground, then burying it back underground. If we actually started USING the 95% of the worlds gold that wastes away in vaults, the value of gold would be almost nothing due to inflation (19x increase in supply).

Real value is power--the ability to control other people (aka labor). Whether the medium is gold coins or paper money or tootsie pops, what you are trading when you exchange money is labor.

Inflation does not tax the poor: They have no cash savings.
Inflation does not tax the middle class: They keep their assets in real-estate and mutual funds.
Inflation forces everyone else to invest in something, because hoarding money isn't good for the economy.

I'm sick of all the "money is a scam" articles on the internet recently.

Re:real value?

[dada21]

Gold has almost no real value. You can do very little with it other than make jewelry. Yet, like fiat currency, people have become collectively convinced that it is valuable. Because of this, we spend countless resources digging it up from the ground, then burying it back underground. If we actually started USING the 95% of the worlds gold that wastes away in vaults, the value of gold would be almost nothing due to inflation (19x increase in supply).

Gold is one of the only elements that does not deteriorate (ever), is not destroyed by any acid or chemical process, nor susceptible to environmental changes (rusting, corrosion, etc). Because of this, gold DOES have massive value as one thing: a store of value.

It is hard to come by (rare) -- industry uses up about as much gold as is mined per year.

It is useful in MANY modern and ancient processes, from electronics (computers, etc) to medical uses (fillings, etc) to consumer uses (jewelry, etc). It has significant value beyond just as a store of money.

Real value is power--the ability to control other people (aka labor). Whether the medium is gold coins or paper money or tootsie pops, what you are trading when you exchange money is labor.

No, you're not. What you're exchanging is an item of value. Labor is important in the initial creation of a product but it is not the only significant "cost" of a product. Rarity, longevity, storage requirements, transportation requirements and usefulness are all valuable towards the price of a product. Labor, while important, doesn't account for value alone. Paper money can be printed at will, tootsie pops can be manufactured by the billions. Only gold has the rare aspects of its composition and rarity that make it valuable as a store of value.

Inflation does not tax the poor: They have no cash savings.

Bull. The poor have no savings because they have no incentive to save -- their savings is destroyed by inflation.

Inflation does not tax the middle class: They keep their assets in real-estate and mutual funds.

And those assets are often-times in asset bubbles because of inflation's drive to create malinvestments. See the current housing market, see the stock market in 2015.

Inflation forces everyone else to invest in something, because hoarding money isn't good for the economy.

Hoarding money IS good for the economy -- when money is "hoarded," it creates a demand for money, and a demand for money brings prices DOWN for those who are not hoarding. Inflation makes prices go up, and not everyone should invest in something. I only invest in myself.

I'm sick of all the "money is a scam" articles on the internet recently.

Paper money is a scam.

Re:real value?

[CodeBuster]

Gold has almost no real value. You can do very little with it other than make jewelry.

The difference is that fiat currency can be arbitrarily increased by politicians with ease whereas increasing the available gold supply requires more time and effort and thus tempers the ability of politicians to pull the inflation ripcord whenever it is politically expedient to do so. The essential qualities of a commodity that serves as a store of value are rarity, durability, easy divisibility, and the general ease of identification and gold meets all of these requirements. Are other forms of commodity backed money possible? Yes, but gold is eminently practical for this purpose and that is why it has historically been used as a primary store of value.

The problem with inflation is that, generally speaking, inflation causes expectation of further inflation in a self fulfilling prophecy that, if left unchecked and allowed to accelerate, will ultimately destroy the monetary system and force all back into barter and other more inefficient forms of exchange. If you don't believe that inflation hurts the poor or the middle class then why not ask the people of Argentina or Zimbabwe or Bolivia if they have been hurt by inflation? In fact inflation is among the most regressive of all taxes since it can effectively limit social mobility and reinforce existing disparities while not allowing for a reasonable chance of promotion beyond one's present economic circumstances.

Re:real value?

[Lord Ender]

Looking at your website, it seems you publish some sort of gold newsletter. Surprise, surprise.

First, your physics is completely wrong. Radioactive elements are the only ones that decay.

Second, your assertion that all new gold is used in industry is highly questionable. Most gold is hoarded underground and not used for ANYTHING--a senseless waste of resources.

You are correct that my one-sentence definition of "value" is an oversimplification. But your assertion that ANY physical object has some sort of inherent value is wrong. Nothing has value unless people want it and are willing to sacrifice for it--including gold.

Your claim that the poor choose not to save because they understand and fear inflation is laughable. Anybody with a checking account can use scottrade, etrade, or whatever and transfer their assets from currency to revenue-generating businesses, REITs, or even gold ETFs if they are so inclined. Inflation isn't stopping the poor from saving. Living hand-to-mouth is.

Your don't seem to have made a point when you stated that real-estate and securities can fluctuate in value ("bubble" in your terms). Averaged out, these things grow in value faster than inflation, and much faster than gold. The minor corrections in these assets are just static. Gold goes up and down in value over the short term, too. On top of that, it doesn't generate any new value, as a business (stock investment) does. What is your point again?

I'm not an economist, so I can't compare the value of hoarding to investing with great accuracy, but I can say that countries which adopted banking (aka lots of investment, hardly any hoarding) did FAR better off economically than countries that didn't.

Finally: If paper money is a scam, then please explain why the countries with fiat currency have dramatically better standards of living than barter societies. My understanding is that paper money benefits everyone, but it benefits some disproportionately. It doesn't bother me. I direct deposit into an investment brokerage.

And you are right that you do desperately need a web designer; but you probably will have to pay him in "scam" money. Not many web designers are willing to take metals and kooky newsletters as payment, because they don't value those things as much as they value fiat currency.

Re:real value?

[808140]

The Fed is not a part of the government in the sense you seem to think it is. History has shown that when politicians are allowed to print money, they do, and in large quantities. Which is why modern central banks like the Fed and the ECB are not beholden to the interests of democratically elected politicians. Hell, if that had been the case, Paul Volker would have been in pretty deep shit. Thankfully, the prevailing attitudes of the day had no bearing on what he knew needed to be done and the result was that the stagflation from the Carter era did not persist, despite Reagan lampooning the Fed in Congress.

I'm also not sure why everyone is going on about inflation. Inflation is at a low, targeted rate and has been for some time. There was a period when inflation went out of control -- but that's because economists had a very skewed idea about what sane monetary policy was and the result was 1970 to about 1982. Since then, the Fed has tried to keep inflation at a low, positive, and predictable rate (roughly 3%).

Deflation (the opposite of inflation) is detrimental to the economy because it encourages people to hoard cash -- why spend it, when its value is going up? Hoarding cash is not the same as saving -- you can save your money in a bank, for example, which typically provides you with an interest rate which is slightly greater than the rate of inflation. Hoarding cash is putting it in your mattress and keeping it out of circulation. Look at interest rates in Japan in the 1990s for an example of what that sort of thing can do to an economy. Are you old enough to remember how afraid everyone in the US was of Japan in the 1980s? Now they're just a random Asian country known for hi-tech toys and weird game shows. But there was a time that Americans were worried they were going to buy us.

A low, positive inflation rate does the opposite: it provides incentive to spend cash, and to keep it in circulation. This increases the liquidity of money markets and makes loans easier to obtain, which in turn stimulates wealth generation -- jobs, capital investment, etc.

Most people who start companies aren't independently wealthy -- they look for investors and they take out loans to finance their start-ups. In order to get the money they need, there has to be money around and available. It isn't around and available if it's hidden in your mattress. These people build products, employ workers, and generally keep the economy going.

Did you know that in inflation adjusted dollars, the yearly GDP of the US is greater than the worth of the world's entire gold supply? How exactly do you expect to reconcile that fact with a gold standard? How exactly can you have a currency based on gold when in a very real sense there simply isn't enough gold? Economics is not a zero-sum game, and the pie keeps on growing. The money supply needs to too, and having a supply-capped money supply may seem like a smart idea if you haven't thought much about it, but in reality it would effectively cap economic growth.

for the cliff notes, go here...

[ed1park]

http://en.wikipedia.org/wiki/Federal_reserve ;)

Gold Standard == Bad

[brunes69]

The only people who argue for reinstatement of the gold standard are those who do not have a fundamental grasp of macroeconomics. Reinstating gold-backed currency would do several bad things, because it artificially constrains the value of gold as a commodity metal.

Because the value of gold is implicitly tied to the value of a currency, gold can no longer be traded as a commodity in any real sense. As in - if your currency is backed by gold, what happens if the value of gold should go down due to a glut in the production market? Answer is nothing, because it *can't*. If money is backed by gold then you can't logically trade gold separately from money. This means that gold is artificially valued, and the prices of things that use gold would increase for no sound economic reason.

Re:Gold Standard == Bad

[metlin]

The promise by the government that they will accept it as payment for taxes. ...in exchange for services, infrastructure and governance.

There, fixed that for you.

(Disclaimer - your definition of what government should do may vary.)

Re:Gold Standard == Bad

[jcr]

The only people who argue for reinstatement of the gold standard are those who do not have a fundamental grasp of macroeconomics.

Oh, please. You do not support your position by proclaiming that your opponents are ignorant.

-jcr

Re:Gold Standard == Bad

[UbuntuDupe]

This is what I don't like about arguments against the gold standard.

The entire disadvantage you just listed as stemming from a gold standard is: "Things requiring gold would be unjustifiably expensive."

That advantage is so bad that no one can support a gold standard unless they "fundamentally misunderstand macroeconomics"?

It's things like this that for so long kept me from understanding the hate for the gold standard. The best arguments against it seemed to be pretty trivial, and yes, that includes the extensive list on Wikipedia.

Think how confusing that must sound: Those who support a gold standard are idiots because they are too dismissive of high prices for items containing gold. Huh?

After a while of wringing out sources for a serious argument, I finally found something more convincing, which is this:

1) Under a gold standard, the (very high) volatility of gold is imposed on the general price level, making it that much harder to plan economic activity, and magnifying negative events.
2) Significant amounts of gold must be held out of production, just for use as money, with signficant opportunity cost.
3) Increasingly huge portions of the economy are diverted to gold production during times of economic growth because that, rather than e.g. cancer cures, have the highest return.

Re:Gold Standard == Bad

[ShatteredArm]

I think you're wrong. Clearly he does support his position by proclaiming that his opponents are ignorant.

Now whether it is a valid argument is an entirely different story...

Re:Gold Standard == Bad

[dch24]

Will somebody please mod the parent +1 insightful? Or post his bullet points at the top of wikipedia?

As a counter-argument (I have to play devil's advocate here):
1) The volatility of gold is only tied to the supply and demand of it. If the supply of gold increases, does it really reduce the value of currencies? Or does it create new wealth? If it creates new wealth (in the hands of the mining companies) then it hasn't reduced the value of gold holdings, as long as demand increases proportionate with supply. This is why gold is usually put forth as a standard: the demand for it increases almost exactly 1:1 with the increase of the supply. Or, in other words, there is infinite demand, but the price sensitivity is linear.

2) The opportunity cost of not being able to manufacture electronics with gold in it (or jewelry, or whatever you're going to do with the gold) is balanced by the opportunity cost of running out of gold. Gold is rare. It's not as rare as some other minerals, but by putting significant amounts in reserve, any government can then guarantee the value of its currency. Hyperinflation is a significant opportunity cost just so that manufacturers (and jewelers) have an unlimited supply of gold.

3) This may be the hardest one to counter. The environmental cost of mining for gold will probably never be properly taxed or regulated. I think the best counterargument is to compare a gold standard with our current environmental crisis, fueled by the U.S. Government's insistence that all oil be sold for U.S. Dollars (source). If we assume (pretty naively) that oil will continue to be pegged to the U.S. Dollar, then we effectively have Oil as our currency backing right now. The result is that in times of economic growth, (now I'm quoting you) "Increasingly huge portions of the economy are diverted to [oil] production ... because that, rather than e.g. cancer cures, have the highest return."

The environmental impact of mining is arguably more controllable (it stays on the ground) than that of burning oil (it causes GLOBAL pollution).

OK, so please respond to me and let's debate the pros and cons of a gold standard.

Re:Gold Standard == Bad

[wowbagger]

It's one thing to have $1000 exchangeable on demand for x grams of gold (or of silver), but it would get a bit daft if the central bank had to pay out 10g of gold, 0.1 bushels of wheat, three lean hogs and half a tonne of copper.

No, they give you a booklet containing coupons worth 10gAu, 0.1 bushel of wheat, etc.

You then go to the local granary, hand them the coupon for the wheat, and they give you a bag of wheat. They punch the coupon to indicate it had been redeemed and put it in the bag to send back to the government to indicate that share of the government's reserve in wheat has been paid out (for which the government has previously paid them).

You go to the local meat market, hand them the coupon for the hogs, and they give you the meat.

You sell the coupon for the copper on the open market to a business which needs it.

etc.

The "reserve" for the various items in the "basket" is just bookkeeping in the various entities which produce the goods - much as it is now. The government maintains a reserve of gasoline, food, etc. - most of which is nothing but a ledger entry at some refinery/food producer/etc.

Re:Gold Standard == Bad

[Hatta]

Read it again.

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts;

This only restricts the states from coining money that is not gold or silver. The federal government can make anything they want legal tender. Once it's legal tender, the states can use it.

Re:Gold Standard == Bad

[MSTCrow5429]

No State shall...make any Thing but gold and silver Coin a Tender in Payment of Debts;

That pretty strongly says to me that they can't accept anything as legal tender other than gold or silver, as this would be tantamount to making it legal tender, which is prohibited. The Federal Government can not legally coerce the States to accept fiat currency as legal tender.

Re:Gold Standard == Bad

[Grishnakh]

I disagree. I don't know whether this is really a good thing to do in this particular discussion thread, but there's other threads where the opponents' position is utterly stupid, and it's simply a waste of time to do much besides proclaim that they're ignorant. Otherwise, we'd all be wasting lots of time every time some moron made some utterly ridiculous claim.

If we're discussing an article about China's proposed manned mission to the moon, for instance, and some fool writes a comment that seriously claims the moon is made of green cheese, do you really think we should waste time debunking that claim? No, I'd just call him an idiot. Similarly, if we're discussing paleontology, and some fool writes a comment that the earth is 6000 years old, is there any reason to debunk that idiotic claim? Of course not, because anyone with a basic grasp of science knows that's utterly ridiculous. So that's a perfectly reasonable time to call that person a moron. (Unfortunately, there's a LOT of such morons out there.)

I think the person who made this claim about proponents of the gold standard may be a little extreme with his standard, however, because I don't think it's quite as obvious to the audience here on /. (if indeed his claim is even true: I Am Not An Economist).

Re:Gold Standard == Bad

[i kan reed]

No, he supported his arguments with the things following that. Being indignant is no way to prove him wrong either.

Re:Gold Standard == Bad

[Hatta]

No state can make something legal tender, but if someone else (say the federal government) made it legal tender they are free to accept it.

No, the federal government can't coerce the states into accepting dollars, but why would the states need to be coerced?

Re:Gold Standard == Bad

[MSTCrow5429]

I don't think so. If I'm a State, and I accept Federal Reserve Notes as payment of taxes, this de facto renders Federal Reserve Notes to be legal tender. The Federal Government can coerce the several States to accept the debt-backed fiat currency of the Federal Reserve as legal tender, but I'm not sure this was ever necessary. If the States had decided to operate on Constitutional principles, then yes, that would be a point of contention. Most people have no clue how fiat currency and fractional reserve banking function, and I'm certain you could include many politicians.

Re:Gold Standard == Bad

[Original Replica]

but why would the states need to be coerced?

Because right now the value of the TexasDollar (oil and military) would be skyrocketing as compared to the value of MichiganDollar (US Automotive Industry) and Detroit would be even more screwed than it already is. Add to this having to exchange money when you crossed state lines and well basically the States can't print there own currency (Federal currency is standard) for the same reasons the the EU adopted he Euro.

Re:Gold Standard == Bad

[Hatta]

We already established that the states can't issue money. That has no bearing on whether they have to accept the federal governments money. The states could go back to gold and silver as we saw in the constitution. But that would be dumb. That's why I said "why would the states need to be coerced[... to accept federal currency]"

Re:Gold Standard == Bad

[Yunzil]

However, why would the Constitution in Article 1, Section 10, prohibit the States from making anything but gold and silver legal tender, if Article I, Section 8 allows the Federal government to not only coin currency, but print currency?

Probably because they wanted to keep the States from being able to declare any old thing as currency. You don't want Virginia using tobacco leaves as money, or Florida to declare it will accept foreign banknotes, etc.

Re:Gold Standard == Bad

[markov_chain]

1) Under a gold standard, the (very high) volatility of gold is imposed on the general price level, making it that much harder to plan economic activity, and magnifying negative events.

Dude what are you talking about, gold is not volatile--it's a metal, and highly inert one, at that.

Re:Gold Standard == Bad

[UbuntuDupe]

Okay, I'll respond, but I don't really have a the hatred of the gold standard that a lot of people do. Also, the WP article seeme to have significantly shortened by the time I posted my original comment.

1) Yes, gold follows supply and demand, but the problem is that these S/D curves result in significant daily volatility. It does not steadily increase like you seem to think. The problem with the volatility is that it exposes people to sharp, unpredictable price changes. (Yeah, yeah, "price changes are good, because they reflect..." I know. But that doesn't mean you have to tie all of your exchanges to a good that has "too much" volatility) The magnitude of these volatility cost is reflected in option prices on gold. If you think of it this way: all people must, in effect, buy a hedge against gold shifting in price.

It's true that you have to do this with government currency too; however, historically, it has been less volatile, so the risk is limited to the so-called "systematic risk" -- it requires a truly drastic crisis to have a major shift.

2) When you have to store gold to back the currency, you *are* that much closer to "running out of gold" because it's forever out of production. (If people actually start redeeming the notes and using the gold, the money supply contracts significantly, which can precipitate a crisis.) Storing it doesn't delay this event, but hastens it.

3) The analogy to oil seems valid, except that if more resources are diverted to extracting oil (or more generally, energy), that energy is put directly into production, instead of simply adding more backing to the currency.

Re:My review

[eln]

The gold standard was not all that some people make it out to be either. Bankers have been profiting like crazy ever since they gained the ability to create money, meaning to lend money backed by nothing more than the borrower's promise to pay it back. This has been going on since well before the gold standard.

Bankers are able to create money to lend far in excess of what is actually backed by real assets, meaning money from depositors, gold, silver, goats, or whatever. They have been doing this for a long, long time though. They were doing it during the gold standard as well. These days, the vast majority of money in circulation is backed only by a debtor's promise to pay it back to the bank.

This is a video that attempts to explain this in plain terms. It is long (around 45 minutes) but informative.

Re:What the...?

[UbuntuDupe]

Yeah, normally, you have to wait for a thread to tangent about money to have one of these discussions. A book about the Federal Reserve just doesn't seem appropriate for /.

Nevertheless, I'm going to comment:

The review claims that a number of statements are false. I mostly disagree:

The Federal Reserve is federal, i.e., a part of the US government.

It's a semantics game to claim otherwise. The Fed chairman is appointed by "the government", charterd by the government, and designated to achieve US domestic policy goals, and subject to being shut down if it acts too crazily. It is given significant autonomy by congress. Does that make it "not part of the government"? Okay, then I guess the federal courts aren't either.

The Federal Reserve is a reserve, i.e., it has monetary savings of real value.

The federal reserve has cash holdings. Cash has real value. Don't believe me? Go offer it in an exchange.

The Federal Reserve serves the public, and is not a cartel of private banks serving itself.

Kind of. Given its autonomy, it could achieve nefarious goals. However, members are required to basically give up any financial holdsing that could lead to a conflict of interest.

The US dollar has real value, i.e., it represents tangible wealth, such as gold securely stored at Fort Knox.

It is true that money is only a *claim* on real wealth; that, in other words, money flows in the opposite direction as wealth. However, you can in fact trade your money for real wealth; in that sense, it has real value.

Inflation is an increase in prices.

Usage determines meaning, and this is exactly how most people use the term "inflation" (in the economics sense).

Inflation is caused by greedy companies, not the US government or the Federal Reserve.

Under the definition the author wants to use, yes, the US gov. and Fed cause inflation. They're not the only cause of general price increases. There are also supply shocks.

The Invisibility of Money

[klenwell]

I was a lit major in school but often found myself led stangely enough to the subject of money, currency in particular, as it's a subject that seems to have had much more relevance in people's everyday life in that past than it does now. I find the Federal Reserve, especially the institution of FDIC after the Great Depression, one of the greatest innovations of the 20th century. As Milton Friedman points out, it effectively ended the terrible plague of bank runs that wracked economies in the past.

To get a sense how invisible money as an instrument is to most people in modern stable economies, you can look at the plays of Shakespeare and all the reference to coinage and especially "debased" currency during the period. One of the most insightful history books I've read is E.C. Challis's The Tudor Coinage. It really gives you a sense of how much we take a stable currency, as the bedrock for a stable economic system, for granted.

Anyway, if you have any curiosity about that subject at all, you can check out this article:

http://links.jstor.org/sici?sici=0013-0117(196712)2%3A20%3A3%3C441%3ATDOTC1%3E2.0.CO%3B2-H

I've been looking for a good stimulating non-fiction read. I think I'll pick up G. Edward Griffin's book. Thanks for the review.

Redaction

[klenwell]

Just noticed this section in the review:

The author also provides an index, as well as an impressive bibliography, reflecting his extensive research on the topics. In addition, the author invites readers to join Freedom Force, an organization dedicated to increasing liberty in the United States, curbing federal totalitarianism, and abolishing the Federal Reserve -- all through peaceful participation in government, and the shaping of public policy starting at the grassroots level.

On second thought, maybe not the impartial history of the role of currency in American society, nor the impartial review of a new book, that I was looking for.

In any event, thanks for pointing out the author's agenda in the review.

Other sources of information on the Fed

[BunkAsInBed]

A good video on the subject is From Freedom to Fascism (http://www.freedomtofascism.com/) You can purchase the DVD for a $1. The movie cites the book and includes some video commentary from the Author of Creature from Jekyll Island. If you are alarmed about what you learn you may want to consider throwing some support behind Congressmen Ron Paul, who is running for president. He entered politics because of his concerns about monetary policy and the Federal Reserve. He is currently the ranking chair of the house finance committee and there is some great YouTube videos on his exchanges with the Fed during committee meetings.

Re:i am very surprised to see this on /.

[jeevesbond]

Quite right, here's a good quote:

Bankers own the earth; take it away from them but leave them the power to create credit & with a flick of a pen they will create enough to buy it all back again. Take this power away from them & all great fortunes like mine will disappear, & they ought to disappear for this would be a happier & better world. But if you want to be slaves of bankers & pay the cost of your own slavery, continue to let bankers control money and credit.

- Lord Stamp, former Director of the Bank of England, 1940

Here's a link for 'The Moneymasters', it's an interesting watch--if a little 80's/90's

This is an area where there are some interesting conspiracy theories, however central banks and currency are complicated subjects so it's worth keeping a cool head and trying to remain objective.

This is a subject not many understand, myself included, so I remain very skeptical that the information put forth by books like The Creature from Jekyll Island: A Second Look at the Federal Reserve and films like The Money Masters is correct. What we can all take from these are some interesting questions to ask bankers and economists, it would be interesting to find out how the banking systems of the world actually work, unfortunately--judging by the Amazon reviews someone else posted--it looks like this book is not a good place to find this out.

The FED is..

[prxp]

Where does money come from? It depends on your currency. In the case of Dollar, it comes from the FED, the one and olnly source for dollar bills. How does money get distributed among the nation? Through the Baning infrastructure which lends money to people and companies and gets interest in return. How banks get money? From the FED! And not the magic happens: Summing up: 1) FED prints money (the paper itself is legal tender, no need for gold to back it up) 2) FED lends this paper to the Banks 3) FED gets the interest from the paper loan from the Banks How do the Banks pay the interests to the FED? Getting new loans! From who? From the FED! So, the FED prints worthless money that is turned into debt that is only payable through new debt! And the thing goes on and on! Basically, THE FED is MAGICAL MONEY MACHINE! Awesome!

Cheaper gold would actually be quite useful

[vlad_petric]

... to electronics at least. Gold has high conductivity, malleability, ductility, resistance to oxidation and is also not toxic to humans.

Re:This guy is a conspiracy theorist

[Skorgu]

It never fails to amaze me how smart, educated people can completely lose their rational thinking skills when money comes into the discussion. Think of how silly tinfoil hats sound to an engineer, that's how silly people like this sound to economists.

Re:My review

[Kadin2048]

Bankers are able to create money to lend far in excess of what is actually backed by real assets, meaning money from depositors, gold, silver, goats, or whatever. When a bank lends money that's backed by someone's mortgage, it's backed by a very "real asset": the mortgaged property.

It's not an asset that the bank can keep in its vault (how would you fit it in there, exactly?), but it's a bank asset nonetheless. If the borrower fails to repay the loan, the bank gets the house.

As long as the government is around and is willing to enforce liens, those are all very real assets, and I don't see a problem in using them as a basis for a currency.

The only reason you need a precious-metal currency is when you don't have a functional government that enforces contracts. If you have doubts in the government's ability or willingness to enforce the lien and throw a defaulting borrower out so that the bank can take their house, then you have a problem, and the bank ought not to consider that loan as an asset anymore. (But without a functional government you have some other fairly serious problems, to the point where I'd suggest that the best currency is probably 5.56mm rifle rounds, not silver certificates.)

Re:My review

[king-manic]

When a bank lends money that's backed by someone's mortgage, it's backed by a very "real asset": the mortgaged property.

IANAE, The corollary is that the mortgage must be for an amount that is very close to the value of that asset. If you have massive over estimates of property values due to something like a real estate bubble, once the bubble burst the revaluation throws the system out of whack. Banks says they have X dollars but due to over valuation they actually only have Y% of X dollars where Y is 100. If there is a crash like that and a simultaneous extreme cash call from the banks actual creditors (their customers) then the whole system collapses.

Gold backed currencies aren't subject to this rare circumstance but Gold standards have a lot of draw backs. Thus even with the known failure conditions of the current system it's still better then the gold standard.

As one who knows...

[Anonymous Coward]

I've been an employee at one of the twelve Federal Reserve Banks for eight years. During employee orientation, they asked us noobs what we knew about the Fed. I was the only one in the room with more than a rudimentary knowledge. They educate the new hires, AND they educate the public. We employees are almost always explaining what the Fed is (or myth-busting assumptions about the Fed).

• The Federal Reserve System is the collective title for the Federal Reserve Board of Governors and the twelve member banks.
  
• The Board of Governors IS a government agency; the district Federal Reserve Banks are not.
  
• The Federal Reserve Banks are owned by member banks in each Federal Reserve District.
  
• Federal Reserve District boundaries were established based on population and economic centers at the time of the Federal Reserve Act (that's why they seem weighted toward the east coast).
  
• The Federal Reserve Board has been given responsibility by Congress to oversee and manage monetary policy, distribute currency, and to ensure depository institution compliance with various regulations.
  
• The Federal Reserve Banks act under delegated authority (from the Board of Governors) to ensure that member banks in their districts comply with regulatory standards and other sound banking practices. This is the function that sends bank examiners (auditors) out to supervised institutions to review bank lending practices, risk portfolios, and overall management. If not for these guys, we never would have had "It's a Wonderful Life" (which features bank examiners as the pseudo-villans).
  
• Each Federal Reserve Bank has its own board, made up of representatives from the banking and business communities within the district. This board, aided by research conducted by the Reserve Banks or within the market, works to understand the local/regional economy. Reserve Banks then bring their views and concerns to the Federal Open Market Committee.
  
• The Federal Open Market Committee (FOMC) is a twelve member board that includes seven members of the Federal Reserve System's Board of Governors, the president of the Federal Reserve Bank of New York, and four presidents from the remaining eleven Reserve Banks (who serve one-year, rotating terms).
  
• Federal Reserve Banks serve as banks to banks, making available overnight loans to cover transfers between institutions, and holding required reserve funds for member banks (reserve funds are cash reserves each member bank must maintain--they were designed to prevent liquidity in the event of a bank-run event like that which occurred in the 1930s).
  
• Federal Reserve Banks conduct community outreach and educational activities, both for bankers and community groups, to educate them regarding pertinent topics, especially the Consumer Reinvestment Act, minority issues and banking, reaching underserved populations.
  
• Federal Reserve Bank employees are not Federal employees.

There's much more I could say, but that's an example of the type of information I pass on to friends and neighbors all the time when they hear that I work "at the Fed."
 
[I'm posting anonymously just in case my employer might think this post violates some policy or other. I don't think it does, because this is public information, but I rather like working here, so I'll play it safe.]

Isn't this a setup for a conversation of Ron Paul?

[GI Jones]

When I saw the review of this book posted, I puzzled to myself how such a review would find its way into Slashdot 13 years after a book was published. My curiosity was peaked because I personally just read this book, sparked by the documentary already mentioned in other posts. While I am not a conspiracy theorist, I found myself thoroughly spooked by the nature of the Federal Reserve and the fact that our country pays the Reserve billions of dollars in interest each year; "for what?" you may ask... simply because the Fed printed a bunch of money so that our government could pay for things like the war in Iraq and other unchecked spending. During WWI and WWII the dollar was backed by gold and the government couldn't simply print money to pay bills, because they had to have gold in the reserves to back the dollar that was printed. For this reason, the government had to sell War Bonds to raise money to pay for the war. Today, they simply ask the Fed to print more money for them to borrow. Paying interest on this borrowed money is one of the single largest expenses of our federal tax dollars.

I said all of that to say this: when I saw this review go up, I thought for sure it was an attempt to discuss Ron Paul simply because I am willing to bet that the one of the main reasons someone on Slashdot might read this book is because it is one of the issues behind the candidacy of Ron Paul. If you are asking the question, "who the hell is Ron Paul?" you are not alone. Among Paul's goals is the elimination of the Federal Reserve and the return to the gold standard, the elimination of the IRS, Federal Taxes and the Department of Education, the return to a constitutional government and the removal of our country's nose from the rest of the world's business. I know that sounds crazy, but when you scratch the surface and see what is behind all of this stuff, your interest might be peaked as mine was.

While I am not stumping for Ron Paul, I find it strange that his name hasn't come up in this conversation.

Just my $0.02,

Dollars are not a store of wealth

[snowwrestler]

You're right--if you put dollars in your mattress in 1913, they would be 95% devalued today. (Although actually, they would be 100% devalued today because that physical design is no longer accepted.)

On the other hand if you'd put your money into Ford stock in 1913, today that stock would be far more valuable than it was during that time. The truth is that the only true stores of wealth are assets. Dollars are not assets--they are currency. They are handy for exchanges, but are not wealth themselves.

You don't have to put your money in banks. You can instead put your money in IBM stock. Or you can put your money in bonds if you'd prefer to invest in governments. Or you could buy property if you'd prefer to put your money in real estate.

If you do this, and pick your assets well, you will accumulate wealth. If you focus on the value of a dollar bill I think you're shooting yourself in the foot.

Re:US Dollar and Oil?

[Colin Smith]

Until 15th August 1971, the US dollar was backed by gold. The US was fighting the Vietnam war and spent all the gold paying for the war. Nixon broke the link between the dollar and gold because they couldn't pay the bills in gold any more, they didn't have any.

http://en.wikipedia.org/wiki/Nixon_Shock

The dollar was then simply being printed, unbacked by anything. This increases the supply of dollars and the value falls massively. Huge inflation.

1972-3 Nixon or someone went to the Saudis and "persuaded" them somehow to remain only US dollars in return for oil. No idea what they promised, but it was big. From that point, the US dollar is pretty much backed by OPEC oil. It was denominated in dollars before, but the dollar had been backed by gold, so basically the oil price was based on gold. Not so after 1971.

So. All oil all over the world has to be bought in US dollars... The demand for US dollars (not gold) rockets, all the central banks across the world have to keep reserves on hand so the countries can buy oil. Billions of them. Trillions in total.

Do you see what this does? It does 2 things.

1: America gets paid first for any oil which other countries want to buy. They have to get the requisite number of dollars. And they get paid simply for running a printing press.

2: It allows the USA to print and spend as many dollars as they want to. The demand from outside the country means that inflation can't take off. The entire world is subsidising the US economy.

Now... 35 years later, there are trillions of US dollars out there sitting in central banks waiting to be spent on mostly oil. If oil were to be available in Euros, the dollars would be useless. They would come back to the USA.

Ask yourself what a million dollars would be worth if everyone had a million. ok, imagine what a trillion dollars or so would do coming back into the country. The value of the dollar would fall and as the value of the currency falls, the price of everything else increases.

As to the size of the effect... who knows.

http://www.ccc.nps.navy.mil/si/nov03/middleEast.asp

Re:US Dollar and Oil?

[Strider-BG]

Currently, the only way to buy oil from an OPEC nation is with "Petrodollars" which are actually US dollars. What this means for the American economy is that oil importing countries (which is pretty much all of them) have to hold lots and lots of US dollars in their treasuries in order to pay OPEC for their oil (and then they have to "buy" more dollars to buy more oil). So if OPEC were to one day decide that they wanted to accept Euros for their oil instead of dollars, then mountains of US dollars would hit the world currency markets to be exchanged for Euros. This would crush the value of the US dollar and leave us in a very bad situation.

It's been said that one of the reasons we went into Iraq was because Saddam was accepting Euros for his oil.

Re:US Dollar and Oil?

[bmajik]

You are absolutely spot on. Want to know something else?

What do Iran, Iraq, and Venezuela have in common? (besides being the subject of US animosity, chest-thumping, invasion, and a coup-attempt?)

They threatened to sell oil in Euros.

The reason Ron Paul is always talking about the Fed like he's some kind of nutcase is NOT because he's some kind of nutcase. It's because the Fed is the bouncer at "I want to run the planet" club. Want to go running all over the world invading countries? No problem when you can just print all the money you want with no accountability.

Once the dollar jumped off of the gold standard, the only thing propping up the dollar was the threat of military action by the US. That's very uncomfortable, so some folks wisely decided to use the world oil market as an intermediary. The dollar is supported by oil; oil is supported by military might. Any crack in US control of world oil is a crack in the dollar, and thus, the US economy.

The entire history of state-managed currency shows a steady trend of the ruling entity devaluing the currency to persue wars or other ambitions not generally related to the well being of society, with the obvious result that the citizenry become measurably worse off.

Anatomy of the Great Oil Swindle

[nido]

1972-3 Nixon or someone went to the Saudis and "persuaded" them somehow to remain only US dollars in return for oil. No idea what they promised, but it was big.

According to John Perkins' Confessions of An Economic Hitman, it was a variety of things:

• Modernization of the country: all Saudis were too good to be garbage collectors, so goats eating garbage was common. Western companies got large contracts to 'westernize' the place. Garbage collectors were imported from Asia. Desalinization plants were built, etc.
• Military support for the Saudi Royal Family: "We'll keep you in power, all you gotta do is accept our 'dollar' and only our 'dollar' for your oil"
• A certain Saudi prince had a thing for blonds. So Mr. Perkins got him a blond escort.
• etc.

Perkins covers the many reasons why common people in non-westernized nations tend to hate the U.S. Feral Government - the things 'our' government has done/supported aren't especially nice. From the link above:

"Economic hit men," John Perkins writes, "are highly paid professionals who cheat countries around the globe out of trillions of dollars. Their tools include fraudulent financial reports, rigged elections, payoffs, extortion, sex, and murder."

John Perkins should know--he was an economic hit man. His job was to convince countries that are strategically important to the U.S.--from Indonesia to Panama--to accept enormous loans for infrastructure development, and to make sure that the lucrative projects were contracted to U. S. corporations. Saddled with huge debts, these countries came under the control of the United States government, World Bank and other U.S.-dominated aid agencies that acted like loan sharks--dictating repayment terms and bullying foreign governments into submission.

Now... 35 years later, there are trillions of US dollars out there sitting in central banks waiting to be spent on mostly oil. If oil were to be available in Euros, the dollars would be useless. They would come back to the USA.

The dollar will be worthless in the near future - 6 months? 12 Months? Hard to predict exactly when, but if the 'Neoconvicts' do eventually wage another illegal war of aggression against Iran, China and Russia will likely repudiate the dollar immediately thereafter. If I had much cash, I'd be buying Euros...

The government does not borrow money from the FED

[mosb1000]

"Today, they simply ask the Fed to print more money for them to borrow."

The FED only lends money to banks, who lend it out for loans to private industry. Believe it or not, the majority of the domestic national debt it owed to . . . the U.S. government. Social security has been collecting a surplus of money since its inception, and the government has been spending that, and issuing bonds to repay what they took from the program at a later date (presumably they will pay for it by raising the federal income tax). The rest of the national debt is owed to private investors who purchased bonds from the government at a fixed rate of return, much of this money is owed to foreign entities. To finance a deficit, the government issues more bonds, which it must repay later with interest.

The FED isn't some huge conspiracy, a bunch of banks got together and tried to find a way to end the volatility that the money market was continually facing. The primary goal of the FED is controlling inflation. People always say that inflation is out of control, I don't know what country they live in. We have very low, but always positive inflation. Most economists agree that this is the best situation. Anything else you can think of (including a commodity standard) would be much worse. It would be more volatile, and it would be hard to control inflation.

Re:RIAA vs. the Fed

[BitGeek]

Actually the herd does not panic when it sees deflatin-- the period when the US was really growing, while on the gold standard and when we went from being a backwards nation to a world leader-- was a period of deflation.

Why would people get mad when their wealth gets more valuable?

No, all the anti-deflation propaganda comes from those who profit by printing money, which is literally a form of theft.