My Lesson on How Big Government Creates Income Inequality

I teach classes in managerial skills and human resource management.  Both are linked to issues surrounding success, career progression, and wages.  My managerial skills teaching focuses on trying to get students from inner city backgrounds to think about how to modulate cognitive and interpersonal skills in order to achieve career success and how to manage themselves to become sufficiently wealthy to be financially independent. With respect to cognitive skills, I emphasize writing, which is one of several weaknesses of  the New York City schools. I cannot, unfortunately, remedy other weaknesses, such as mathematical and statistical skills. I cannot do everything, nor can I do more than show my students the way to learn to write competently.  In a sense I do what John Dewey claimed to be doing: giving them the tools to learn on their own.   

Understanding the Fed, its economic subsidization of asset owners, and its manipulation of wage earners is important to understanding how to invest and how to balance career effort with investing effort.

Another of the critical issues related to both skills building and human resource management is the effect central banking has had in generating income inequality and malinvestment.  Part of this involves overinvestment in financial and real estate markets and part involves overinvestment in technology and labor-saving and cost-reducing strategies like plant relocations. When capital costs are near zero, it costs little to invest in machinery to save labor costs. In the long run, big-government economics, whether it be monetarist or Keynesian, results in capital substitution for labor.  

I just sent an email to my two real time classes summarizing the class discussion, which of course is not covered in the textbooks.

Take a look at this chart, courtesy of the St. Louis Federal Reserve Bank, of the stock of M2 money supply (the broad definition of money) over time:  https://fred.stlouisfed.org/series/M2

 Also, take a look at this chart of the gross federal debt since 1940, also courtesy of the St Louis Fed: 


https://fred.stlouisfed.org/series/FYGFD

Also, take a look at the chart on this blog. The chart is of real (inflation-adjusted) hourly wages since 1964: 

https://www.pewresearch.org/fact-tank/2018/08/07/for-most-us-workers-real-wages-have-barely-budged-for-decades/

Also, take a look at this chart, which illustrates the rise of the valuation of the S&P 500: 

https://www.macrotrends.net/2324/sp-500-historical-chart-data

Notice that real wages began stagnating around 1971, which is around when the money supply began increasing at an increasing rate. President Nixon ended the gold standard that year.

Part of the increase in money supply may be offset by the aging of the baby boomers.  An aging population is deflationary because older people spend less. More importantly, the dollar has served as the chief reserve currency since World War II, so the demand for dollars from foreign central banks and businesses absorbs about one-half of the money supply. 

At the same time, the creation of debt and the creation of money are directly in synch because the money-creation process is part of the debt-creation process.  Notice, though, that the debt-and-money-creation pattern parallels wage stagnation.  Asset values escalate, but wage bargains lag. Keynes calls that money illusion.  Income inequality increases as asset owners, who are wealthy in the first place, become more wealthy.  Keynesian monetary stimulation, based on monetary creation, becomes counterproductive as low interest rates encourage substitution of capital and technology for labor.  Plant relocations and overinvestment in labor-saving equipment follows from sustained low interest rates, further encouraging low wages and income inequality.

Moreover, the widespread dollar reserve holdings are under threat from China, Iran, and Russia, which do not want to do business in dollars.  All modern monetary regimes have collapsed.  The first paper money inflation occurred in China after the invention of paper money during the Song dynasty in the 11 and 12th centuries. The Yuan dynasty, headed by Kublai Khan, adopted the paper money not long after and soon created hyperinflation.

The first US hyperinflation occurred during and after the Revolutionary War, and the first US currency, the continental, became worthless by the end of the Revolutionary War.  There was also hyperinflation during the Civil War, when the US Treasury and the Confederate Treasury both printed money and experienced double-digit inflation rates. Again, this occurred after the establishment of the Federal Reserve Bank in 1913 and World War I, after which there was a hyperinflation followed by the 1920-21 depression.

Some people become wealthy during monetary disorder; typically, they are debtors who own assets like real estate and hard assets. The precious metals, art, and similar kinds of assets retain value. Stocks may as well, depending on the particular stock and various circumstances.  Bitcoin and other cryptocurrencies may be additions to the list of hard assets.

Moderation as Vacuity

Americans sometimes claim to be moderate in their views.  "I don't believe in abolishing the Fed, for I am a moderate," is an example.  Moderation means limiting change to a moderate distance from present policy. But what if present policy is extreme?  Franklin Roosevelt might have said: "I don't believe in ending concentration camps for Japanese Americans. I believe in a more moderate course." Andrew Jackson might have said: "I don't believe in ending my policy of banishing all Native Americans east of the Mississippi. I believe in the moderate course of extending the Indian Removal Act to just one more tribe."

Is moderation as a mere increment meaningful in the context of policies whose effects are devastating or reprehensible?

There are other possible meanings, though. Perhaps moderation underlies a claim that state action is not a moral but a pragmatic question. "Only extremists hold that theft is wrong under all circumstances. We moderates hold that taxing some to redistribute to others is a pragmatic course."  Here, however, the claim is contradictory. If  morality that prohibits theft is extreme, why is the morality that motivates redistribution of wealth not an extreme? If it is wrong to say that theft is wrong, why is right to say that income inequality is wrong?

Since all government action involves violence, and since the elimination of violence is a prerequisite to the foundation of civilization, all government action involves moral choice.  Choice about violence,murder, or theft is inherently moral, and all government action involves violence, murder, or theft. Therefore, all government action is extreme if  extreme  is to be defined as making state decisions on the basis of morality.

A third possible meaning of moderation is that it accords with the majority.  The majority in America believe the claims made on television and in newspapers.  The writers in these sources are not well educated, and they have demonstrated a repeated capacity for advocating erroneous courses of action. One example was the Vietnam War.  Another was, in New York City, the urban renewal policies of Robert Moses.  A third was the Iraqi War and the strategy behind it. A fourth is America's monetary policy.  Ancient Athens lost the Peloponnesian War because it chose to invade Sicily, a decision that was politically popular. America's disastrous invasion of Iraq was similarly popular, and I was among the mistaken supporters.

In other words, defining moderation as incremental decision making, pragmatism, or accordance with majority rule potentially leads to policies that are extreme.  A fourth definition is mathematically certain, but it is also self-contradictory and equally vacuous.  The ancient Greeks defined sophrosyne (σωφροσύνη)  as temperance or moderation in the sense of  being well balanced.  Aristotle spoke of a range of virtues such as prudence, justice, and courage as well as sophrosyne. Moderation, in Aristotle's view, is the mean between two extremes.  Courage is the mean between rashness and cowardice, for instance.

Perhaps moderation in state action can mean the mean between two extreme courses of action.  In this sense, though, current American policies are not moderate.  An economy in which public debt is in excess of $55,000 per man, woman, and child, forty-four percent of whom have no savings, is hardly a mean between two extremes. It is an extreme. The same may be said of monetary policy. The tripling of the money supply in 2008 and 2009 can hardly be called a mean between two extremes: Historically, monetary expansion of that magnitude has led to economic collapse. Nor can we say that a nation that subsidizes one industry, banking, to the extent that the US government has is taking actions that are the midpoint between two extremes.

Moderation can be defined as a small increment over current policy, pragmatism, majority rule, or the mean between two extremes, but none of these meanings is inconsistent with policies that are genocidal, horrific, radically redistributive,  or economically destructive.  Americans' claim that their choices are moderate, like their claim that they are free or their claim that they are prosperous, is a chimera.

Which Is Better: Strong or Weak Dollar?

My old childhood friend from Queens, Barry (actually, it goes further back because our mothers were friends in the Bronx in the 1930s and 40s), just sent me this message about the dollar on Facebook and I respond.

Barry:

>Is the "problem" with the dollar that it is too high or too low in comparison with other currencies? If the dollar falls, all of our export industries become more competitive, but we end up with a dose of inflation because our imports become more expensive. If the dollar strengthens, we keep cheap imports but have an increasingly hard time competing abroad. Which is better?

My response:

>That's one of those paradoxes, much like wages. Should an employee be paid more or less? If less, he cannot afford to pay his bills. If more, his employer may go under. Which is better? The answer is that practical human reason cannot answer that question. Rather, market forces can deliberate for us. Allowing the market to do so has the effect of allowing resources to be used most productively. If we set wages too high, there will be a reduction in demand for labor and a surfeit of supply. If we set them too low, there will be a labor shortage and the best people will start their own businesses. Rather, let us allow the market to tell us how high wages ought to be, and firms produce efficiently and fairly.

Being fair to both sides allows supply and demand, including supply and demand for labor, dollars, shoes and anything else, to fall into equilibrium. With respect to dollars, that would be done by letting them float. Firms might lose some predictability with respect to their overseas plants, but why should the public subsidize the risk aversion of big companies? Let them stay home if they wish to avoid currency risk.

In the post war period there was a peg to the dollar. But President Nixon printed too many dollars and so the peg was not sustainable. There was a run on the gold in Fort Knox as foreigners (Americans were not permitted to do this by law) cashed in their dollar bills for gold. So Nixon (a) abolished the transferability of Euro dollars into gold (that had been done for American dollars by Roosevelt in 1932) and (b) floated the dollar. Floating exchange rates, which I believe were suggested by Milton Friedman, work great in theory, but firms required long term stability to make plant decisions. To accomplish this stability, the central banks, the Chinese, Japanese, Saudis, Europeans and others have been holding onto large sums of dollar denominated bonds, informally duplicating the pegging system of the post war period. But the US has been printing more and more dollars. This makes us richer at the other countries' expense. You can cheat others once or twice, but over many decades they began to grow weary of it.

You are right that there are distributional effects of monetary policies. Under the current system the global demand for dollars is exaggerated (also exaggerated because the legal tender law increases domestic demand for dollars--we are not allowed to refuse dollars as payment for goods or services). As a result, the dollar made strong by foreign holdings makes our exports less competitive. More generally, the stability of the artificially propped up dollar has encouraged firms to move overseas. A propped up dollar benefits US manufacturing firms that have moved overseas, and so this policy has contributed to de-industrialization. Also, the Federal Reserve Bank's interest rate and monetary expansion policies have facilitated many firms' moving overseas.

The US government has thus encouraged de-industrialization, driving out manufacturers and sending them to China. China also has low labor costs, and it is difficult to say exactly how much of the move is due to the artificially high dollar and how much is due to low labor costs in China. My guess, which is completely intuitive and not rational, is 20% is due to money. So that 20% of manufacturing might come back here if the dollar were allowed to float.

The up side (besides the huge benefits to manufacturing firms and Wall Street) is that consumer goods have been cheaper.

The down side is that the system is unfair and so unstable. Winding down the dollar subsidies by the international central banks will hurt the vast majority of Americans. The dollar's purchasing power will diminish so that people will become poorer. The real cost (inflation adjusted) of all goods will go up, also guessing, 20%. Maybe a lot more, but no one knows.

So imagine a situation where there's a 20% increase in factory jobs and a 20% reduction in standards of living. Will most Americans appreciate the trade? I think there may be widespread dissatisfaction, and maybe rioting in the streets. But that extra margin (maybe 10% maybe 100%) of benefit to consumers will be lost to us.

On the one hand, the deal has been sweet for US consumers. But on the other, like all subsidies, for instance a rich heir who does not have to work, the windfall has made Americans used to an artificially high standard of living. Note that the standard of living we should be enjoying today is probably not that much higher than it was in 1971. Real (inflation adjusted) hourly wages from 1800 to 1970 increased around 2% per year. Since the abolition of the gold standard in 1971 real hourly wages have increased a total of 2% in almost 40 years. More people work two jobs now and much more families are two income, so it's not going to affect most people to the degree that they will have to give up all the consumer gains. But our standard of living, for the first time in history, probably needs to be adjusted downward by a sizable chunk. The retailing jobs that we will lose because of lower consumer demand will be replaced by manufacturing jobs.

Elastic or Inelastic Money Supply?

Constance writes:

>Prof Langbert,

I have just started to “self-educate” on economics and have found your blog very useful. I am currently reading a book by Jesus Huerta de Soto called “Money, Bank Credit, and Economic Cycles’. He is of the Austrian school and supports sound money backed by precious metals and a 100% reserve requirement for demand deposits. In his book he argues that a gold-backed money would be inelastic and would prevent serious deflations as experienced during the Great Depression. I have always heard that one of the advantages of our present economic system (fractional reserves and a central bank) was that the Fed could “manage the money supply” which I take to mean expand or contract the supply of money.

If you had the time and inclination, it would be great if you could write a blog post on the advantages/disadvantages of an elastic versus inelastic money supply.

My reply (edited for the blog):

There is no need for an elastic money supply. I will put de Soto on my list, but I do not believe that deflation is as important a problem as he says.

I'll be glad to answer but let me give you a little background about myself. I'm not really an economist. I studied labor issues in graduate school and teach business and human resource management. I finished my Ph.D. in 1991 and have taught management ever since. In the 1970s I had gotten involved in the libertarian movement in New York City right after Murray Rothbard dropped out of what was then called the Free Libertarian Party. There I met Howard S. Katz who has written a great deal about the money issue on his blog http://www.thegoldbugnet.blogspot.com..

Since 2004 I renewed my interest in this subject because of current events. What seemed bad in '04 has turned into a worst case scenario over the past year. I decided to pursue a new research topic concerning decentralization. I decided to make the monetary issue a part of that topic, so I have begun to familiarize myself with it. Perhaps we can form a study group!

I recommend these books to begin your pursuit of understanding money:

Hans Sennholz, Money and Freedom, available through the von Mises Institute (www.vonmises.org)
Murray Rothbard, The Mystery of Banking and What Has Government Done to Our Money?
Howard S. Katz, The Paper Aristocracy

I read William Greider's book Secrets of the Temple last fall. Greider is a Keynesian and the book is full of inconsistencies (such as that the Federal Reserve system helps the poor but the banks lend hundreds of billions to big business boondoggles; inflation is good for the middle class, etc.).

Business and banking interests have always said that flexibility in money, an elastic money supply, is desirable. However, the history of the nineteenth century was that when money was tightest, from 1879 to 1900, progress was most rapid in technology and innovation. The three central banks that existed before the Fed, The Bank of North America, The First Bank of the United States and The Second Bank of the United States, were all associated with corruption, high inflation and economic dislocation.

Business interests favor central banks because the banks create money out of thin air and then lend it to favored business interests. The business interests can make investments at pre-inflation levels, and as the money filters through the economy and the banking system multiplies it, prices go up as do asset values. The businesses repay their loans in depreciated dollars and enjoy increased asset values and diminished loan values (because the loan is for a fixed dollar amount but the asset goes up with inflation). The gain in real wealth that the business interests enjoy has to come from somewhere. It generally comes from those who own the least assets, average workers whose wages lag the inflation.

Thus, the real hourly wage (not family income--families have compensated for declining real wages by holding multiple jobs) has been in decline since the gold standard was abolished in 1971. However, the stock market has climbed steadily higher. This is because artificially low interest rates boost the stock market but the inflation caused by monetary expansion reduces workers' real (inflation-adjusted) wages. Thus, central banks allocate money from the average worker to hedge fund managers and stock holders. It is telling that one of the themes of William Greider's book is that inflation hurts asset owners. That would be true if asset owners held their assets in bank accounts, which hasn't been true in 100 years. Greider's book is testimony to my long standing belief that the left's aim is to support Wall Street and the wealthy at the expense of those whom it claims to represent, the poor. Thus, leftists are granted academic posts and are hired by capital to dominate the mass media and expatiate on why inflation is good for the poor.

Children like candy, and if you asked a nine year old whether they should have cake and ice cream for breakfast they would say "Yes, an elastic diet is good for me. You let me eat cake and ice cream when I choose." Naturally businesses like cheap credit. But if you look historically, the late nineteenth century was when most of the American innovation occurred, and it was a period of deflation. Competition is painful to business but it breeds productivity. No pain no gain. Today's business executive is a self-indulgent, other-directed narcissist who pays himself a high salary in order to move plants overseas and cannot come up with new ideas to save his or her life.

Also, there was proportionately more immigration into America the late nineteenth century despite the depressions of the 1870s, 1880s and 1890s. Yet real wages were rising. Yes they were. Despite cheap immigrant labor in the late nineteenth century, there was more innovation than at any other time in history and rising average real wages but deflation. Yet, most economists you hear on television tell you that deflation is the worst thing imaginable. If you can find it in a library, a great book on that topic is David Ames Wells' Recent Economic Changes published in 1889.

The pro-inflation position has been the mainstream view of the economics profession. Not coincidentally, the economics field enjoys benefits from the banking industry. For instance, many economists find work there, banking interests donate to universities and the like. The mass media only gives air time to the Keynesian viewpoint, there are almost never Austrian or monetarist economists on TV these days.

The ideas of John Maynard Keynes came out of the Populist movement in America. In the late nineteenth century there was deflation. The deflation hurt property owners. Farmers formed a mass movement to protest the gold standard. Earlier in American history there had been a bi-metallic standard. Historians who study this topic do not ask the right questions. They look at the income level of the farmers but not their asset holdings. They conclude that the Populists were low income farmers who needed loans to finance their crops. But it is likely that many of the Populist supporters were land holders who had obtained land via the land grant acts of the mid nineteenth century. Holding land might have represented hope for a good investment to many, but deflation made farming much less attractive. It is difficult to know the extent of that phenomenon. In general, falling food prices help workers but hurt farmers. Historians paint the picture that falling food prices were bad because the farmers didn't like them, but they ignore the effects on other kinds of workers. Also, it is not clear that real wages of agricultural labor were falling. There is a difference between farm profit and farm wages. Profits in general were falling in the late nineteenth century, and much of the protest about the gold standard was from business owners who resented deflation that caused falling profits. Perhaps farming was no different. As laborers, farmers may have been receiving increasing wages, but as real estate investors farmers may have been suffering even bigger losses.

There were two investment bankers who picked up on the Populist inflationist concept, I forget their names but the title of their book was something like "Road to Plenty". They argued that inflation could create wealth. The banker Mariner Eccles made similar arguments and FDR later appointed him head of the Fed. John Maynard Keynes wrote his General Theory after the Populists, the Road to Plenty guys and Eccles had written about inflation stimulating investment and social welfare. No one denies that Keynes derived his ideas from these movements.

The history of the Fed was that it was established Christmas week 1913 and it is likely that neither Wilson nor the Congressmen who voted it in totally understood it. They believed the "elastic" argument. Within two years World War I began and the Fed initiated its first inflation, leading to a contraction and depression of 1920. There was a mild inflation in the 1920s, and there was a second credit contraction in the late 1920s which led to the Great Depression. During the 1920s there was increased use of consumer credit in the form of car loans and margin buying on stocks, and neither of these had existed before.

The Great Depression began with Roosevelt illegalizing ownership of gold and abolishing the gold standard. He re-inflated in 1933 and there was a 75% stock market rise in 1933. He appointed Eccles to be Fed chairman and the recovery was stopped in 1935 or 6 by another Fed contraction. The massive inflation of World War II ended the Depression. Since then, there has been consistent inflation. The result has been a considerable degree of economic miscalculation. Excessive real estate construction, one corporate boondoggle after the next, excessive financing of corporate waste. For instance, the Hunt Brothers' attempt to corner the silver market in 1980 was bank financed and could not have happened without the Fed. Likewise, the Latin American debt crisis in the 1980s, the tech bubble, Long Term Capital Management. Oh, and did I mention the stagflation of the 1970s? Who paid for all this waste? Not university professors, who live off fresh Fed money funneled through government grants. Not Wall Street bankers and business executives who were responsible for one incomprehensible business boondoggle after the next, but the average American, who has passively racked up big credit card bills while allowing the Fed and its academic boosters to run amok. This generation of Americans is a disgrace to the memory of Andrew Jackson.

If you're ambitious, the next book I plan to read is : Ludwig von Mises, Theory of Money and Credit.

Hope that helps!

How Federal Reserve Policy Has Reduced Wages

The economists who have been managing the money supply since the 1930s have generally followed a low interest rate policy in order to stimulate employment. When the Fed introduces extra money into circulation interest rates fall. This in turn stimulates economic activity because it is cheap to borrow. The additional economic activity results in hiring, and employment increases and unemployment decreases. This is the pattern that has motivated the Federal Reserve Bank's officially-induced inflation since the 1930s.

However, the long run effects of low interest rates may be opposite to the short run effects. There are strategic as well as stimulative effects of easy money.

The economic historian TS Ashton notices this in his little book The Industrial Revolution: 1760-1830.* Ashton notes that the course of innovation in 18th century Great Britain tended to respond to the availability of labor. Early innovation focused on harnessing the forces of nature. The success of this early innovation led to increasing population. But in the 1730s and '40s labor was still scarce and capital abundant, so:

"attention was centered on labour-saving mechanisms, such as those of Kay and Paul in the textile industries; and the search continued until in the 'sixties and 'seventies it culminated in the appliances of Hargreaves, Arkwright and Crompton. By this time the nature of the economic problem was changing: population was beginning to press on resources. The quickening of the pace of enclosure and the breaking in of the waste were the outcome of a growing demand for food; Watt's first engine and the Duke's canals were the answer to a problem set by a shortage of coal...Towards the end of the century and later, when rates of interest were moving up, some (though by no means all) of the inventors turned their minds to capital-saving ends. The newer types of engine of Bull and Trevithick and the newer ways of transmitting power, dispensed with much costly equipment...It would be dangerous, however, to press these generalizations far. There was often a lag of years between an invention and its application, and it was this last, rather than the discovery itself, that was influenced by such things as a growing shortage of materials or a change in the supply of labor or capital."

Taking Ashton at his word that the effects of policies are often approximate and long term, what would be the long as opposed to the short run effects of artificially stimulating the amount of available capital, i.e., the Federal Reserve Bank's artificially increasing the amount of money?

In the short run, in which the ratio of labor to capital is constant, demand for labor will naturally increase in proportion to the increased capital due to the Fed's monetary expansion. In the short run, the production function is constant, so the increased supply of capital increases labor demand.

In the long run, however, the production function is no longer constant. Production and innovation will focus on cost saving with respect to the relatively most expensive resources. Since capital has been made artificially cheap, the cost saving on which industry focuses becomes, because of Fed policy, finding new methods to save on labor costs. Capital investment focuses on saving labor through new machinery or alternative uses of capital such as plant relocation.

This, rather than enhanced transportation and reduced trade impediment may explain the relocation of plants overseas. General Motors, for example, has moved the majority of its plants to Mexico yet still complains about labor costs with respect to the slim percentage of remaining US employees. It costs money to move plants overseas. The learning required to competently manage a foreign plant is significant. Errors with respect to cultural differences, misunderstanding of legal systems, political risk, transportation costs (themselves reflecting capital costs) all amount to non-labor costs that are financed through reductions in capital costs.

Thus, over the long run, the Federal Reserve Bank effectively increases firms' strategic focus on capital investment by reducing the cost of capital. This has the perverse effect of reducing labor demand while increasing firms' profitability. This in turn leads to a two-tier economy in which technological workers who benefit from employment in excessively capital intensive firms earn super-normal wages while a large number are excluded because excessive capital investment has made their services redundant.

Traditional macro-economic models do not assume change in technology due to monetary policy. But firms have moved plants overseas because Fed policy has reduced the cost of doing so because it has increased the advantage of utilizing capital over labor (because it reduces capital costs). Strategically planning firms shift their production functions to invest more in labor-replacing capital investment. This reduces wages over the long term even as it stimulates labor demand over the short term. The labor-stimulating effects of new money are reduced over the long term, and like a drug addiction, the amount of money needed to achieve full employment increases at an increasing rate.

Thus, Keynesian policy in the long run produces results that differ from those in the short run. If this is so, we would expect to see higher wages from Keynesian policies from the 1940s to the 1960s, and lower wages from the same policies thereafter. This is what has occurred. However, rather than question their own assumptions, Keynesian economists seek elaborate, often illogical excuses in areas like blaming trade, income and capital gains tax policy and free market processes for declining real wages. This in turn leads them to advocate further capital investment and injections of money that stimulate labor demand in the short run but add to further replacement of labor by capital investment in the long run. Perhaps this is what futurists refer to as a coming "singularity", the ultimate replacement of human agency with machinery because of super-acceleration of technological advance.

*T.S. Ashton, The Industrial Revolution 1760-1830. London: Oxford University Press, 1948, p. 91.

Banking Idiocracy

Almost 100 years ago the nation made a decision to permit bankers to control the nation's money supply. This did not have to be, and it does not have to be now. The principle of "easy money" had been publicly rejected in 1896, when William Jennings Bryan, who favored "free silver", lost to William McKinley, who continued the hard money policies of the late nineteenth century, the period of America's greatest economic growth and a period of deflation.

In 1913, Woodrow Wilson established the Federal Reserve Bank under the guidance of JP Morgan's associates (Morgan had died that year, and some argue that the Federal Reserve is just an institutional embodiment of JP Morgan himself). A number of leading bankers associated with Morgan had met in 1910 on Jekyll Island in Georgia and drafted a plan that served as the basis for the Federal Reserve Bank. These bankers included "Frank A. Vanderlip of National City (now Citibank), Henry P. Davison from the Morgan Bank and Paul Warburg of the Kuhn, Loeb investment house."*

Banks need not be granted authority over the creation of money. Instead, there could be a steady increase in the money supply created by general distribution to the public or to borrowers selected by the Treasury Department or private investors. Alternatively, for the nation's most productive years the gold standard was in place. Yet another alternative would be competitive money supplies which existed before the National Banking Act passed during the Civil War. There is no empirical evidence that any of these alternatives would work worse than the current system.

The current system is based on the premise that professional bankers are better equipped to assess investment risk than would be the alternatives, and that their wisdom is greater than the market-neutral approach of a gold standard or broad distribution of new money.

Recent events contradict this claim. From what I can see of the descriptions of what has gone on in the banking world, the banking world is dominated by nincompoops who are worse-equipped to allocate credit than would be a random sample of Americans taken from the Yahoo! phone directory.

The story that I have heard is that first, bankers were willing to lend to non-credit-worthy borrowers because (a) real estate never goes down and/or (b) because the Democrats said they should. Now, I hear, despite a doubling of the money supply, the bankers are afraid to lend money to each other or to borrowers because they made the bad decisions a few years ago. This phenomenon is said to occur despite the ability and availability of loan money directly from the Federal Reserve Bank itself. In other words, the Fed has created a huge amount of new money, is willing to lend to the banks directly, and yet the banks are afraid to borrow. A few years ago, they were willing to lend $200,000 to hair dressers making $8 per hour. Stupidity on this scale exceeds even the market frenzy concerning the Internet stocks that the Federal Reserve and the banking system also created.

This is not a monetary system. This is a sacking of the monetary system by a federally enforced idiocracy.

Perhaps it is time to reconsider the odd claim that bankers are better equipped to decide on how to manage the nation's money supply than would be a neutral, market-based rule like a gold standard. As an institution, the Federal Reserve Bank has come to look like a barbaric relic, and its officers and owners among the commercial banks an idiocracy.

*William Greider, Secrets of the Temple, p. 276.

Gerald P. O'Driscoll, Jr. Advocates Gold Standard

Gerald P. O'Driscoll, Jr., previously of the Federal Reserve Bank of St. Louis and now of the Cato Institute, has an excellent article in today's Wall Street Journal. O'Driscoll writes:

"Mr. Obama needs to stop the next asset bubble from being inflated by imposing a commodity standard on the Fed. A commodity standard (such as a gold standard) imposes discipline on a central bank because it forces it to acquire commodity reserves in order to increase the money supply. Today the government can inflate asset bubbles without paying a cost for it because the currency isn't linked to the price of a commodity."

The Federal Reserve Bank has become a barbaric relic. It is time for Americans to think about adopting a civilized alternative to the Fed's barbarism: a gold standard.

Paying For Your Burger With A Wheelbarrow of Cash

I just received the following e-mail from Howard S. Katz, the "Goldbug".

Dear Mitchell,

Sorry to ruin your day, but I just checked out the Federal Reserve Report. They have been increasing Reserve Bank Credit (their portion of the money supply) at a massive rate. It is up 56% in the past 3 weeks. Since the Fed's portion of the money supply is 57%, this computes to a 32% increase in the nation's money supply in 3 weeks (with more to come later when the nation's banks start lending out all those reserves).

Inflation News

According to Moneynews.com on April 15:

"Inflation at the wholesale level soared in March at nearly triple the rate that had been expected as the costs of energy and food both climbed rapidly.

"The Labor Department reported Tuesday that wholesale prices rose by 1.1 percent last month, the second largest increase in the past 33 years, exceeded only by a 2.6 percent rise last November. Analysts had been expecting a much more moderate 0.4 percent rise in wholesale prices for the month."

At the same time, Money News reports that there are fewer new millionaires because of the "economic slump". The classic tactic (that goes back to the late nineteenth century) of arguing for inflation, which increases profits and stock market values but hurts people on fixed incomes and the productive poor (i.e., inflation redistributes money from the working poor and pensioners to the wealthy) is to argue that inflation will reduce unemployment. Of course, pro-inflation progressives never mention that besides reducing unemployment inflation gets elderly people to eat cat food and the working poor to give up necessities.

Increasingly, the news media don't bother to lie or color the story as they have in the past. In the 1970s, if you can recall, the media and academia argued that oil prices caused inflation and in the 1960s they argued that unions caused inflation. Today, MoneyNews.com more or less says that millionaires are hurt because there's not enough inflation:

"The continuing global economic turmoil is taking its toll on the wealthy — as fewer new millionaires are being minted....

Is this the end of the American dream? Or just a bit of a nightmare? Probably the latter, economists are telling MoneyNews, as the problems in the stock market are limiting the growth of the portfolios of professionals and executives and entrepreneurs for now. "

Where is Jim Cramer now that we really need him? I want to break into the seven figures myself. We need more old people on cat food and evicted from their homes because they can't afford the property taxes; and we need more families depriving their children of milk so people like me can become millionaires. Absolutely.