Banking System

January 8, 1912: Report of the National Monetary Commission

On January 8, 1912 the National Monetary Commission established by the Aldrich-Vreeland Act issued its final report. The Aldrich-Vreeland Act had been passed in 1908 in response to the Panic of 1907. The act established a monetary commission that studied the banking systems of England, France, Germany, Switzerland, Canada, and other countries, and issued a series of documents during its existence. The Commission’s final report contained suggestions for a National Reserve Association to further nationalize the banking system, centralize reserves, and respond to combat financial panics. The ideas and language in that final report formed the basis for the eventual creation of the Federal Reserve System. Some advocates of sound money have advocated the creation of a new monetary commission, the Centennial Monetary Commission, which would examine the Federal Reserve’s performance over the past century and put forth proposals for a potential overhaul of the American financial system.

Anniversary of Murray Rothbard’s Death

Today is the anniversary of the death of Austrian School economist Murray Rothbard in 1995. Along with Ludwig von Mises and others, Rothbard was one of the men most responsible for popularizing the Austrian School of Economics in the United States. Following in the vein of Carl Menger, the founder of the Austrian School, Rothbard made important contributions to economics as well as economic and monetary history, and gave penetrating insights into the public policy impacts of monetary policy. For those wishing to begin reading Rothbard’s work on money and banking, his short book “What Has Government Done to Our Money?” and the longer “The Mystery of Banking” are great introductions to and explanations of the workings of the American banking and monetary system.

Top Five Monetary Policy Issues To Watch In 2017

With a new year come new opportunities as well as new issues to take into consideration. Here are the five most important issues to keep an eye on in 2017.

1. Trump Presidency

The most important issue facing monetary policy, at least in the United States, will be the incoming Trump Administration. The Federal Reserve Board of Governors is currently operating with two vacancies and has been for quite a while. With majorities in both the House and Senate, it is highly likely that President Trump will be able to successfully nominate two candidates to the Board. Depending on who he picks, that could put additional pressure on Chairman Janet Yellen to continue to raise the federal funds target rate throughout 2017.

2. Ongoing Weakness in Europe

The PIIGS are returning. The Greek debt crisis is still unresolved, the Italian banking sector is weakening with Monte dei Paschi likely facing a bailout this year, and Portugal is showing signs of a weakening banking sector. Add to that the difficulties continuing to face Deutsche Bank and 2017 could be a perfect storm facing the Eurozone banking sector. The big question then would be to what extent bank failures and bailouts in Europe would cause spillover effects in the United States and worldwide.

3. China Is Still a Wild Card

While the yuan continues its march towards becoming a global reserve currency, the Chinese economy faces continued difficulty and slowing growth. Private sector debt loads are high, the insurance and banking sectors are built on matchsticks, and the government is beginning to sell off some of its foreign exchange reserves to defend the yuan. 2017 could be a very interesting year for China, and for the rest of us if a Chinese collapse spills over to the West.

4. The Relentless War on Cash

As India’s demonetization demonstrated, the war on cash is ramping up around the world. While there likely won’t be major moves towards eliminating high-denomination bills in the United States or Europe, there will be continued actions that chip away at the use of cash and the financial privacy that cash affords. Expect more legislative and regulatory action against cash transactions under the guise of fighting against money laundering, terrorist financing, and tax havens as governments continue to try to squeeze as much money as possible from taxpayers.

5. A Coming Financial Crisis

The most important thing to watch for in 2017 is the possibility of another financial crisis. With the trillions of dollars of new money pushed into the financial system over the past several years by central banks around the world, financial bubbles growing, popping, and leading to financial crises are inevitable. Contrary to the thinking of Ben Bernanke and others of his mindset, it doesn’t take a central bank actively removing liquidity from the financial system to pop bubbles or create financial crises. All that is required is for the central bank to stop or slow its monetary easing and the effects of the newly created money will soon be evident.

As the reality sets in that massive amounts of resources have been malinvested in unproductive sectors of the economy, the bubbles that were blown will inevitably burst. While monetary policies around the world remain historically loose, the Federal Reserve’s raising of its federal funds rate target has been accompanied by talk in other countries about raising interest rates. Given the anemic recovery in the aftermath of the 2008 financial crisis and continued low interest rates, central banks don’t have much room to maneuver when the next crisis hits. It’s always tricky trying to predict when a crisis will occur, but given economic data in various sectors that show similarities to the last crisis, it’s not out of the realm of possibility for 2017 to be the year of the next crisis.

Fed Holds Rates Steady: Setting Up for December Hike?

In an unsurprising decision, the Federal Open Market Committee (FOMC) decided today once again to keep its target federal funds rate steady at 0.25-0.50%. It was widely speculated that the FOMC would hold rates steady at today’s meeting due to concerns about influencing next week’s Presidential election. Expectations now are that the Fed, if it decides to raise rates, will do so at next month’s FOMC meeting.

There were no significant changes in the language of the statement from September’s meeting. Household spending was described as “rising moderately” rather than growing strongly, price inflation and measures of inflation expectations have risen but still remain lower than what the Fed would like to see, and the case for raising rates has continued to strengthen. Voting against today’s action were Esther George from Kansas City and Loretta Mester from Cleveland, both of whom wanted to raise the target federal funds rate to 0.50-0.75%. Eric Rosengren, who voted against September’s FOMC action, switched this month to supporting the most recent FOMC action.

It remains to be seen when the Fed might raise rates, as it seems that central banks are waiting to see what the other central banks are going to do before they make their own decision. The Fed, the Bank of Japan, the European Central Bank, and others are playing a game of chicken. They are like cars heading full-speed towards a volcanic crater, soon to plunge into the chasm and assured of destruction. Yet none of them want to be the first to hike rates. That would be tantamount to admitting error, or at least admitting defeat, and would be a tremendous blow to their pride. And so meeting after meeting we see central bank after central bank holding steady.

Some of them like to talk a good game, jawboning markets into thinking that more easing might be on the way (BOJ, ECB) or that rate hikes are just around the corner (Federal Reserve), but they never back up their tough talk with action. Watching central banks nowadays is like watching a game of poker in which each player has a horrible hand, tries to bluff, and is unwilling to show his hand. And so it goes again today. Even if the Fed were to raise rates next month, it would likely only be to 0.50-0.75%, still an abnormally low figure. Given that the Fed spent all year talking about raising rates and not doing anything, it would be safe to say that rates won’t even approach 1% until December of 2017. Don’t expect full “normalization” to be reached until 2020 at the earliest, assuming the economy doesn’t go down the toilet before then, which is very likely given the huge asset bubbles that easy money policies have inflated all across the world.

The Symbiotic Relationship Between Central Banking and Total War

The following is the prepared version of a speech delivered at the Ron Paul Institute Conference in Sterling, VA.

I am here today to talk about one of the most important, but also most overlooked, issues of our day: the relationship between central banking and total war. When you focus on central banking and the problems that result from it, it’s very easy to see how central banks enable larger, more centralized, and more pervasive governments. But it isn’t always easy for those who oppose war to see how central banks enable war. So I’ll go ahead and give you kind of the 10,000 foot view of the symbiotic relationship between central banking and war.

One of the primary activities that states engage in is fighting wars. But wars cost money. Armies march on their stomachs, and someone has to buy the necessary food and transport it. Weapons and armament cost money too, all of which has to be paid for. So where have kings and governments historically gotten that money from, particularly when their own treasuries ran out? As Willie Sutton could have told them – banks.

Banks developed initially as a means for merchants to store their funds safely and securely. But eventually those banks took in so much money that they got the idea to loan out some of those funds, hoping that they could juggle loans and receive enough payment on outstanding loans to satisfy demands for redemption by depositors. Thus was born fractional reserve banking and the recourse to banks as lenders of money. Sure, kings could expropriate money from banks, but that only went so far. If you continued to rob banks outright, they would eventually either hide their money or disappear from the kingdom and the king was left with no money to fight his wars. So what developed was a relationship that has developed over time and become ever closer and more symbiotic over the course of time between banks and governments.

Ron Paul: Wells Fargo or the Federal Reserve – Who’s the Bigger Fraud?

The Wells Fargo bank account scandal took center stage in the news last week and in all likelihood will continue to make headlines for many weeks to come. What Wells Fargo employees did in opening bank accounts without customers’ authorization was obviously wrong, but in true Washington fashion the scandal is being used to deflect attention away from larger, more enduring, and more important scandals.

What Wells Fargo employees who opened these accounts engaged in was nothing more than fraud and theft, and they should be punished accordingly. But how much larger is the fraud perpetrated by the Federal Reserve System and why does the Fed continue to go unpunished? For over 100 years the Federal Reserve System has been devaluing the dollar, siphoning money from the wallets of savers into the pockets of debtors. Where is the outrage? Where are the hearings? Why isn’t Congress up in arms about the Fed’s malfeasance? It reminds me of the story of the pirate confronting Alexander the Great. When accused by Alexander of piracy, he replies “Because I do it with a small boat, I am called a pirate and a thief. You, with a great navy, molest the world and are called an emperor.”

Over two thousand years later, not much has changed. Wells Fargo will face more scrutiny and perhaps more punishment. There will undoubtedly be more calls for stricter regulation, notwithstanding the fact that regulators failed to detect this fraud, just as they have failed to detect every fraud and financial crisis in history. And who will suffer? Why, the average account-holder of course.

Today in History: President Nixon Closes the Gold Window

45 years ago today, on August 15, 1971, President Richard Nixon officially closed the gold window. While US citizens had been forbidden from owning gold or from redeeming their gold certificates for gold coins since the early 1930s, foreign governments still had the privilege of redeeming their dollars for gold. Due to the Federal Reserve’s inflationary monetary policy during the 1960s, foreign governments began to redeem more and more dollars for gold. Attempts to encourage other governments (especially France) not to redeem their dollar holdings were unsuccessful, and there was a very real threat that US gold holdings might eventually be exhausted. So President Nixon decided to close the gold window, thus severing the final link between the US dollar and gold. The removal of the restraint of gold redemption freed the Federal Reserve to engage in more inflationary monetary policy than ever. The effects of that on money supply and official price inflation figures are readily apparent.

Consumer Price Index

Consumer Price Index

M2 Money Supply

M2 Money Supply

The demonetization of silver in the Coinage Act of 1873 was widely assailed by its critics as the “Crime of ’73.” Isn’t it about time that Nixon’s closing of the gold window be known as the Crime of ’71?

Die deutsche Antwort auf Negativzinsen: Bankschließfächer

Für unsere deutschen Leser stellen wir unseren ersten Artikel auf deutsch vor. Übersetzt und ergänzt von einem früheren veröffentlichten Artikel.

Die japanische Antwort auf Negativzinsen: Anschaffung von häuslichen Geldschränken. Andererseits die deutsche Haltung: Abhebung von Bankkonten und Verstauung in Bankschließfächern. Beide Methoden sind als Reaktion gegen eine Zinzahlung für Bankkonten verständlich. Der deutsche Fall ist besonders merkwürdig, weil die Bundesbank vor ein paar Jahren erklärte, die durchschnittliche Effektivrendite sei seit 40 Jahren negativ gelaufen. Das führt zur Frage, warum sind diese Kontoabhebungen nicht früher passiert? Nur jetzt, da nominale Zinsraten auch negativ sind, ist die Fassade von Bankkonten als sicherer Geldversteck endlich für Otto Normalbürger weggerissen.

Bitcoin Once Again Facing Scrutiny

Despite never having been linked to a single incident of terrorism, Bitcoin is once facing increased scrutiny from European politicians. The European Commission is set to update its anti-money laundering rules next month, which would force Bitcoin exchanges to comply with the same AML and Know Your Customer rules with which other financial institutions must comply. That likely won’t be the last time that Bitcoin faces scrutiny, as European governments are increasingly cracking down on Bitcoin, cash, and other payment methods that allow anonymity when making purchases. Every new terrorist attack in Europe is another opportunity for governments to crack down on Bitcoin and cash, sweeping more and more transactions within the financial system where they can be tracked and, most importantly, taxed. Talk of money laundering and terrorism is just cover for what ultimately are moves towards increasing revenue and enhancing control over people’s finances.