Monday, April 27, 2009

History in the Making: HR 1207

Since the day the likes of John Adams and Thomas Jefferson sat to forge our founding documents, ours has been a country built on the Capitalist ideal that every man is free to work at whatever he may so choose, to keep what he has earned, and to make of himself whatever he can. This has been bolstered by the value of Liberty, wherein every man is free from the shackles of government interference in his affairs, so long as he abides by the Rule of Law.

The beauty of Capitalism, when practiced by honorable people, within the Rule of Law, is that it rewards all parties involved equally. Two parties enter into an agreement to exchange goods or services for other goods or services, or more commonly, money. Both parties are driven into a relationship of mutual respect via the necessity to receive equal value for the value they have provided.

Things may not seem so much different to many people these days. We are still able to go to work, to pursue the work that suits our desires, and to make of ourselves what we can. We still believe that the money we receive in return for the services we provide, represents an equal value to those services. However, for nearly the past 100 years, our country has slowly been abandoning that one value, Capitalism, that allowed it to become the world's foremost superpower, and we now find ourselves standing at the precipice of a potential turning point in our history.

I refer, of course, to the practice of central banking, and the Federal Reserve System (the Fed). Established in 1913, the Fed is largely a conglomeration of private banking institutions, overseen by a Board of Governors, headed by the Chairman of the Federal Reserve, currently Ben Bernanke. The Board of Governors is a seven-member panel appointed by the President of the United States.

It is principally important to recognize that when the Fed was established in 1913, the United States Dollar was strictly tied to gold. One troy ounce of gold at the time was worth approximately $20.67. This is important because the intent of the Federal Reserve Act of 1913 was to ensure that banks would retain enough reserves on hand to stem the tide of an economic downturn. This was not entirely a bad idea. The last thing an economy needs in a downturn is the sources of the money itself being unable to supply that money to the people who need it. In that the money itself was tied to real, physical gold reserves, the money always held a true value. Dollars could be exchanged as currency, as could physical gold coins.

In 1933, Franklin Delano Roosevelt and the Federal Reserve set in motion the process of untying the Dollar from a physical asset. Roosevelt confiscated the country's gold currency, and arbitrarily reset the value of a troy ounce of gold to $35. This had the real effect of immediately devaluing the dollar by 75%. Though this took place, the Dollar remained tied to gold, and was soon also tied to silver, in a bimetallic currency. One was able to exchange paper notes for physical gold or silver. This lasted until 1971, when Richard Nixon dropped the hammer that Roosevelt had initially raised, and terminated this convertibility, cancelling US participation in the Bretton Woods System, an international agreement where all countries involved were required to keep their currencies tied to gold. Since this happened, the US Dollar has, unconstitutionally, been a fiat currency. Its value is essentially arbitrary, based only on a combination of manipulation of interest rates by the Fed, and what it the Dollar is commonly viewed to be worth around the world.

When Nixon severed the Dollar's ties to tangible assets, it was essentially a panic reaction to the fact that the US was overleveraged as a country, against multiple foreign countries calling in our debts. Moving to a fiat currency was the only way out of the continuing devaluation of the dollar against other foreign currencies at the time, whether or not it was a good long term plan.

And given where we sit today, in the midst of the worst recession since the Great Depression, with the Fed trapped between the rock of its own inflationary monetary policy, and the hard place of an irresponsibly overspending federal government, it has not been a good long term plan. This is outlined beautifully in a piece by Gary North:

The FED has increased the monetary base to such an extent that there is now way to turn back without risking not merely a recession, which we are in, but a depression, which the FED has inflated to avoid.

This is clear to anyone who understands the Austrian theory of the business cycle. The FED has moved into panic mode. Yet it has been unsuccessful so far in stemming the tide of recession.

The Federal deficit is now out of control. When Congress consents to a $1.8 trillion deficit, it no longer exercises the power of the purse.

The FED will have to fund whatever the private markets will not fund, which now appears to be whatever foreign investors refuse to fund. They sold a quarter of a trillion dollars in Treasury debt in February and March. These debt certificates constituted an increase in supply on the capital markets. These unexpected sales would have raised Treasury interest rates had the FED not intervened to buy more Treasury debt.

The question of questions now is this. When banks at last decide that this economy is safe enough to lend into, the excess reserves that they hold at the FED will flow into the economy. This will put the FED's balance sheet into play. The fractional reserve banking process will take over. M1 will increase by 100%. It will not be offset by a decline in the M1 money multiplier.

The fun will begin.

Bernanke understands this.

He knows what will happen to the money supply unless the FED increases reserve requirements to offset the increase in the monetary base. The FED can do this, of course. But then it is back to square 1: the recession that its increased spending will have overcome will return.

In short, the federal government and the Fed have overspent and inflated us into what appears to be a potentially permanent cycle of recession. North points out that Bernanke and the Fed have discussed some mythical "tools" with which they will be able to rescue the United States from this recession. But North sees through the smokescreen, providing us with the important translations of Bernanke's high level financial non-speak (emphasis mine):

Translation: "The money we have created to bail out the financial system will return to the FED and be mopped up. It will not be lent out again." The word "many" means "we aren't saying how much, and we will not tell you if you ask."

Translation: "The FED can adopt a policy of monetary deflation for as long as it takes to revert back to the monetary base that prevailed in . . . we aren't saying." The FED will deflate. We will enter the Twilight Zone.

Translation: "The Treasury, which will run a $1.8 trillion deficit in 2010, will somehow come up with enough money -- not from the FED -- to buy back these loans. I am not at liberty to say how the Treasury will accomplish this. Trust me."

So let us go back to the beginning. The Fed, a conglomeration of private banks, is controlled by a seven-member Board of Governors, appointed by the President. It operates with no other oversight, and no obligation to disclose its activities to the public. We now find ourselves in a state of complete economic calamity, due to a combination of the Dollar having no tangible physical value, and a federal government that has spent more recklessly than even the most egregiously overleveraged private citizen, and that continues to overspend. Ben Bernanke says the Fed knows how to get us out of this. But he won't say how.

Enter HR 1207, the Federal Reserve Transparency Act.

The bill has been introduced by Ron Paul, and calls for the full audit of the Federal Reserve by the end of 2010. It seeks to bring transparency to what has been the most cloak-and-dagger setup around for nearly 100 years. It seeks to make the people manipulating our currency, and ultimately our very daily lives and our liberty, accountable again to the people.

HR 1207 has been referred to the House Committee on Financial Services, chaired by everybody's favorite, Barney Frank. As of Friday, April 24th, the bill has gathered wide bipartisan support, and enjoys 91 co-sponsors. There is a massive grassroots effort underway to push the bill through committee and onto the floor, of which I am proud to be a part. I would ask that anyone who has taken the time to read this, would please visit this site, and take but a few minutes to contact your representatives urging them to support and cosponsor this bill.

The Federal Reserve, it's mere seven member Board, and the President of the United States have, for 100 years, enjoyed the power to manipulate the economy as they so choose. The situation has become so dire as to recognize the complete collapse of the Dollar itself as an inherent possibility, something recognized even abroad, with multiple countries calling for a new, universal currency at the recent G20 conference. The basic tenents of our society: Capitalism, Liberty, and ultimately our Freedom depend on our ability to show each other a mutual respect through our transactions. As the Fed continues to manipulate our money, it continues to call into question the true value of our money. When we can no longer properly understand the value of a Dollar, we can no longer determine in what way we should trade with each other, in what way we should respect each other.

The time has come to bring the Fed out of the shadows and into the light. The time has come to bring the true free market back to the forefront of our economy. The time has come that We the People begin again to forge a new history.

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