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Posted by on Apr 14, 2011 in Economy, Politics, Society | 0 comments

“First Do No Harm”: Part 2 (Inflation Costs You Half As Much as Income Tax)

If you want to continue to be slaves of the banks and pay the cost of your own slavery, then let bankers continue to create money and control credit.

Sir Josiah Stamp, Director of Bank of England 1928 – 1941

Last weekend, I posted here an unusually well received article, entitled, “First, Do No Harm”: The Constitution and Conservative Liberals.

The gist of the piece is captured by the following part.

This creation of money by bankers, including central bankers is inflation. The steady erosion of the value of money transfers wealth to those that create it, impoverishing those who do not hold significant assets. Those asset-poor people are the lower 90% of our nation. Over time, the rich get richer, and the poor get poorer, and those in the middle tend to join the latter group. The skilled American householder today earns less than he earned in 1973. And whereas it used to take one income to raise a family, it now takes two.

To keep the system running without riots in the street, the same government officials who license the banks to print money pass welfare laws, which keep the disenfranchised at the bottom, but off the streets.

Therefore, there is no welfarism, beloved of the old Left, without crony capitalism (which pays for it). And there is no crony capitalism, beloved of the old Right, without welfarism (which maintains the political stability that protects it).

Many of the responses to the article are worthy of intelligent reflection, but I’m moved here to write a follow-up piece by the following question that was asked by one reader:

Is the middle class really so helpless in all of this? As a member of that group, I feel we can extricate ourselves from the left-right power games, and we can pursue our lives in a way that makes the power-mongers far less relevant. This article focused on the state and the banks’ manipulation of money–but do we have to play that game? If we refuse to go into debt, if we live within our means–then doesn’t that undermine the power of the banks?

This sentiment certainly reflects the way I seek to live my own life. I eschew credit for any consumer item and live by the simple maxim, “If I don’t have the money, then I can’t afford it”. However, this does more to help me sleep at night than it does to reduce the relevance of the power-mongers, and it’s important to understand why.

It turns out that the fundamental basis on which the “power-mongers” (to use the questioner’s term) retain power is the nature of our money. The fact that this previously esoteric topic is now becoming a mainstream concern of people and the media is, by the way, proof-positive of the optimistic half of the thesis in my original article – that the old Left-Right axis may be crumbling.

As any supporter of Ron Paul will be quick to tell you, the very existence of Federal Reserve Notes (a.k.a. dollars) in their current form is UnConstitutional, because they represent nothing of value. Before Nixon took the USA off the gold standard in 1971, a dollar bill represented a receipt for a chunk of silver for which it could be redeemed from the Treasury by anyone who could be bothered to do so. In other words, a dollar had actual value as an entitlement to receive a certain amount of some physical asset.

Nowadays, the federal reserve note has no intrinsic value whatsoever. Its only practical value is that the government decrees that it shall be used to settle all debts, public and private. In other words, if you refuse to take it in an economic transaction, you can be put in prison. That is the meaning of fiat currency.

The government that decrees the use of this fake money as if it were real licenses banks to create it. The mechanism by which money is created is probably the single most important unknown fact that governs American life. On it rests the ability of government to spend what it does not receive through taxation and the systematic transfer of wealth from productive participants in a free market (workers and entrepreneurs) to financiers.

The famous economist John Kenneth Galbraith provided the best introduction to this topic when he said,

The process by which banks create money is so simple that the mind is repelled.

It works like this.

A man walks into a bank. He asks to borrow money. Let’s call the amount requested P (for principal.) The bank creates the money by typing some numbers into a computer to add the funds to the bank account. The money has now been created out of nothing. At the same time, however, a legal obligation is created: the man must pay the bank back an amount P plus some interest. We’ll call that amount I. So P dollars have been created by the bank and P plus I dollars are owed to it.

The interest, I, will of course be profit to the bank. For this profit, the bank had to produce nothing. The borrower, though, will have to work to earn the amount P plus I to pay the bank back. In other words, the wage earned by the borrower as he works to create some tangible product or service of value will be transferred to the bank that has produced nothing.

Bad enough, but here’s the catch: when the bank lends the money to the borrower, only money in the amount of the principal is created. The interest on that principal is not. Therefore, in aggregate, people owe banks more money than has yet been created!

It is only the time lag between the taking out of a loan and the interest payments that allows time for the money to cover the interest to be created by someone else’s taking out a loan with a bank somewhere else. In other words, the inflation is built into the system. If everyone stopped borrowing from banks, the creation of money would stop. If everyone then tried to paid back their bank-loans, all the money in the economy would go back to the banks but people would not be able to pay back their interest because the money would not yet exist to pay it. To put it another way, money is debt and the only thing that stops the economy from collapsing over night is people’s choosing to go into debt. The next time you look at a dollar bill, know that you’re holding in your hand a bit of your neighbor’s debt (or perhaps, you own). Put yet another way, all money belongs to the banks.

Of this situation, Robert Hemphill, former credit manager of the Federal Reserve Bank in Georgia, said simply,

When ones gets a complete grasp of the picture, the tragic absurdity of our hopeless situation is almost incredible, but there it is.

It is, indeed, there.

The banks are allowed to do this only because the government gives them a special license to do so. When you or I create money, we have committed a crime. When the banks do exactly the same thing, they have not committed a crime. Not only that: they get to make a profit off the money that they create. It is the ultimate risk-free business.

As money is created without the production of goods, prices rise, and so we can all buy less with the same number of dollars.

Why does the government maintain this situation? Because it enables the government also to borrow (or create through a Central Bank) as much money as it likes. The creators of dollars get to spend them at today’s prices. The government creates money and spends it with today’s spending power, but then, once it gets into the economy, prices go up and everyone else has to pay more for everything. In this way, the government gets to spend money without taxing us. In so doing, the government leaves the actual dollar bills in the accounts of the citizenry, but transfers away their buying power to itself. We don’t notice the effect until it’s too late, so we don’t riot.

This government-sponsored inflation makes poorer those at the bottom of the economic scale who have no assets. Not only do the poor not realize that their government is causing the problem by making their earnings worth less (on the one hand) and transferring wealth systematically to the creators of money (on the other), but worse than that, the beneficiaries of these transfers actually think the government is helping them through welfare programs etc. – and vote for the politicians who promise to maintain them. All the while, they don’t realize that the same politicians that are helping them in their poverty are causing the poverty by this system of debt-money and inflation.

For this reason, the fact that J P Morgan administers the food stamp program is the perfect metaphor for the entire American economy.

Lest this all seem too abstract, I ran some numbers – which led to the title of this article. (I invite anyone else who is mathematically inclined to check them.)

Consider a worker who started his career in 1971, when Nixon took us off the gold standard, and the inflationary regime described above was freed of any real constraints. That worker, earning $40,000 in today’s money, would has been paying an average of about 17% in taxes out of his paycheck (including income tax and social security etc.). If he is being conscientious, like the person imagined by the questioner who responded to my previous article rightly suggests we should all be, and if he therefore tries to minimize his participation in the money-debt system, say, by taking on no debt but saving 15% of his after-tax paycheck every month, then the loss of value of his savings over forty years due to government-sponsored inflation alone would be equivalent to an extra income tax of 9.1% – or more than half the tax he was paying on his income!

As I mentioned, the government that covertly expropriates this wealth on the one hand adds insult to injury by paying some of it back in entitlement programs on the other, converting the wealth removed into support for a nanny state – a nanny that removes our pocket money and then makes us behave like good boys and girls to earn it back again. And so, as I suggested in my original article, wealth is concentrated in the hands of the financiers and power is concentrated in the hands of their political sponsors. Welfarist politicians of the Left and crony capitalists of the Right unite!

The worst of it is the deceit on which it depends at every level.

Lest you think that this edifice is anything other than an insidious evil, hear the repentant words of the very President who was more responsible than any for setting up this system, Woodrow Wilson:

I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit.

But heed the words of a philosopher:

None are more hopelessly enslaved than those who falsely believe they are free.

Johann W. von Goethe

And that is why, America, the Founders gave us the Constitution.

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