“Truth persists and illuminates, even if there is no one to utter it.“

Government is not the solution; rather, it is causing the problems.  The below slides (view at Scribd) highlight the economic situation, updated from August and May presentation.  I’ve written about the solutions to the unemployment problem, the deficit, Social Security, and the high costs of health care which are linked below.  Thanks to Lee Trembley for providing some of the research and slides.

A giant land mine is about to go off in the United States, and those responsible walk the halls of our nation’s highest political offices and the Federal Reserve.  I know how to cushion the people from most of the damage.  I have the courage to explain reality to the Republocrats, that is why I am running for Congress.  And it is certainly not all gloom and doom – there is a very bright future for America if we just return to what made our country great – individual liberties, sound money, accountability and the rule of law.

I humbly ask for your vote on November 2nd to stop the endless debt and perpetual wars.

For Liberty and the Constitution,

Jake Towne

Will the real national debt please stand up? The national debt published in the papers and online – which is closely tied to the USTreasury market is now over $13.6 trillion.  Current government plans include massive deficit spending through 2013, and the government’s optimistic projections of a return to “normalcy” after 2013 are not anchored in reality.  Source of budget data.

However, the true national debt is hidden by the cash-based accounting method government uses.  The true national debt is over $120 trillion when GAAP (Generally Acceptable Accounting Principles) are used to identify future taxation sources and future debts such as Social Security and Medicare.  That’s around $400,000 for every man, woman, and child in the country.  Massive reductions in spending and taxation are necessary if America is to regain its financial sovereignty, my proposals are outlined here and in “Guns or Health Care?“

As seen in the official USTreasury report on page 178/254, the total unfunded liabilities for Medicare and Social Security is a jaw-dropping $107 trillion over the future of these programs.  While I predict the Democrats may bear the brunt of the blame for the collapse of Medicare, one must not forget that it was the Republican’s massive expansion of Part D’s prescription drug plan under Bush that severely worsened Medicare’s fiscal situation.  While the situation in Medicare will continue to worsen under the new healthcare legislation – some of my proposals to maintain Social Security are outlined in “Social Security or Insecurity?“

“He has erected a multitude of New Offices, and sent hither swarms of Officers to harass our People, and eat out their substance.” – Declaration of Independence, 1776

The quote above from the Declaration is far more true in 2010 than it was in 1776.   Not counting the millions of government contractors, the government’s Republocrat-controlled work force is currently 22.1 million bureaucrats.  This is America’s largest single job sector, and remember, the taxpayer bears the full cost to keep these bureaucrats employed.  Like something out of an Orwell novel, the Washington Post estimates 854,000 bureaucrats are employed to spy on and keep tabs on the rest of us and the world.  Lisa Benson’s cartoon says it all.

Keep in mind bureaucrats make nearly twice the average wage of the private sector, and have better benefits.  My solutions?  First, lead by example.  I will refuse the elite congressional pension and healthcare plans when elected, and keep just the median income for a salary and donate the rest of the $116,000 to local non-profit hospitals.  Second, I favor either a temporary income tax holiday, or simply halting the income tax on the median income, which will abolish the income tax for about 50% of the population and only result in a 3% drop in the taxes collected by the income tax.

Next, notice about 1 in 7 Americans is on food stamps, or 41.8 million people.  USDA link here.  Note the strong rise in number of SNAP food stamp recipients during the past year.  One would expect to see this number dropping or even flat-lining – along with employment rising – if a recovery were underway.  The annual projected cost is now $67 billion, paid for by the ever-diminishing work force.

No jobs, no recovery. BLS link here.  Note that while the “newspaper” unemployment rate is still 9-10%, the U-6 figure – which more accurately describes total unemployment is 16% – a depression statistic.  An estimated 1.6 million will file for bankruptcy this year.   I’ve described the common sense solutions to end the rampant unemployment created by the government almost overnight in the campaign’s Jobs plank.

Since the BLS drops off workers from its U-6 figure, the real unemployment rate is likely greater than 17%.  Shadowstats estimates the rate at about 22%.

The number of new housing starts has reached a 5-decade low, while about 25% of all residential mortgages are underwater.  Note that in prior recession cycles, a quick rebound occurred while this depression looks more like a dead cat bounce.  This is because….

The Federal Reserve bailed out the bankers and Freddie Mac and Fannie Mae.  The above is built from the Federal Reserve H.4.1 data here.  The black line is the total (reported) balance sheet of the FED, which has more than doubled since the time of the Banker Bailout.  While the original TARP bailout (not shown) accounted for much of the initial sharp increase, most of the debt has been replaced by $1.12 trillion of mortgage-backed securities (the yellow line).

This graph shows the nationalization and propping of America’s entire residential housing industry. The yellow and green lines show the cumulative totals of USTreasury and USAgency debt held by the FED.  While the Federal Reserve has admitted it will take losses on the MBS debt, the question remains as to how much and when.

The purchasing power of the dollar has lost well over 94% since FDR took America off the classical gold standard in 1933 through monetary inflation.  The monetary inflation is caused by the Federal Reserve.  They debase the dollar by creating more and more irredeemable paper dollars, which is of increasing concern since China has stopped buying Treasury debt.  A major reason why healthcare now appears so expensive is this money-printing, as I highlighted in my article “Health Care Solutions.”  Graph provided by Bloomberg Financial, 2009.

The relentless rise in the paper gold price from 2000-2010 is not due to any special circumstance with gold – nor is it a bubble yet – it is solely due to the money-printing and credit expansions of the world’s central banks.  Gold is insurance against the failure of unbacked paper currencies, and this is why all central banks – and more and more individuals worldwide – hold gold reserves.  I’ve written extensively on the Federal Reserve and how sound money effects jobs here.

Now, where do the government and bankers spend a good portion of this currency they created from thin air?  In a word, WAR.  The United States spends more on military expenditures than the rest of the world combined, and the military-industrial-congressional complex that Eisenhower warned about now serves as the world’s largest arms dealers.  Check out this movie clip from “The International” on debt and control. (Graph source and data here)  There are far better solutions to capturing the criminals who attacked America on 9/11 which I write about in my Afghanistan War plank.

To cap off the situation with the dollar, the latest quarterly banking profile from the FDIC state the deposit insurance fund (DIF) is bankrupt.  While consumers at failed banks still receive “insured” funds, the losses are presumably filled in with dollars from the FED, as reported last here.  The current FDIC “watch list” rose to 775 banks, or almost 10% of all FDIC-insured banks in the US per p. 3/26.

CAUTION: LAND MINES

In summary, do not expect a recovery until the Republocrat ruling elite are removed from power or are forced to address the problems the rest of society faces.  As the extravagant $5 million Bill Clinton wedding under heavy security – possibly paid for by the taxpayer – and $7 million John Kerry yacht (and avoidance of >$500,000 in taxes) demonstrate, the elite are not exactly suffering.

The “Great Recession” still has a firm grip on the economy, and the situation continues to deteriorate, now matter what cherry-picked news is shared in the mainstream media.  Sadly, the truth is the situation in America will not improve until the government removes its jackboots from the throat of the economy.  Ceasing all special privileges to special groups would help as well.

That Freedom Shall Not Perish,

TOWNE FOR CONGRESS

Article Archives

As those who have been following the campaign are aware, my independent candidacy was recently endorsed by a major local newspaper, the Express Times, and I destroyed my opponents in the debates, the last one you can watch here or 8 pm this evening on Channel 69 WFMZ-TV.  Momentum is all on the campaign’s side, and anyone in the area is encouraged to spread this issues flyer.

I’d like to conclude with a quote on youth by Randolph Bourne, which explains why the younger generation has to step forward to converse with the older generations.

“Youth is the incarnation of reason pitted against the rigidity of tradition; youth puts the remorseless questions to everything that is old and established – Why? What is this thing good for? And when it gets the mumbled, evasive answers of…… the defenders it applies its own fresh, clean spirit of reason to institutions, customs and ideas and finding them stupid, inane or poisonous, turns instinctively to overthrow them and build in their place the things with which its visions teem. . . .

“Youth is the leaven that keeps all these questioning, testing attitudes fermenting in the world. If it were not for this troublesome activity of youth, with its hatred of sophisms and glosses, its insistence on things as they are, society would die from sheer decay. It is the policy of the older generation as it gets adjusted to the world to hide away the unpleasant things where it can, or preserve a conspiracy of silence and an elaborate pretense that they do not exist. But meanwhile the sores go on festering just the same. Youth is the drastic antiseptic. . . . It drags skeletons from closets and insists that they be explained. No wonder the older generation fears and distrusts the younger. Youth is the avenging Nemesis on its trail. . . .

“Our elders are always optimistic in their views of the present, pessimistic in their views of the future; youth is pessimistic toward the present and gloriously hopeful for the future. And it is this hope which is the lever of progress – one might say, the only lever of progress. . . .

“The secret of life is then that this fine youthful spirit shall never be lost. Out of the turbulence of youth should come this fine precipitate – a sane, strong, aggressive spirit of daring and doing. It must be a flexible, growing spirit, with a hospitality to new ideas and a keen insight into experience. To keep one’s reactions warm and true is to have found the secret of perpetual youth, and perpetual youth is salvation.”

Lastly, a grassroots supporter sent this in to commemorate the campaign’s upcoming victory on November 2nd.  I have a dream as well, thanks to Arianne Elinich for the use of her song.

Jake Towne for US Congress PA-15 – Economy in Pictures (OCT 2010)

Upcoming Events

• Rally to Restore Sanity, 12 PM- 4 PM on Saturday, October 30 at Porter’s Pub, 700 Northampton St., Easton, PA 18036.  MAP.  The Comedy Central march in DC will be televised from 12-3 pm and Jake will be taking questions from 3-4 pm.  This is not a campaign sponsored event.
• Slatington-Walnutport Halloween Parade: 5:30 p.m. Oct. 30. Help hand out flyers before the parade begins!!  Contact the campaign at 610-392-8156 or towneforcongress@gmail.com for meetup details.
• Replay of “Debate at the State”, 8 PM on Saturday, October 30 on WFMZ Channel 69.

• Easton-Phillipsburg Halloween Parade: 12:30 p.m. Oct. 31. Help hand out flyers before the parade begins!!  Contact the campaign at 610-392-8156 or towneforcongress@gmail.com for meetup details.
• Allentown Halloween Parade: 1 p.m. Oct. 31. Help hand out flyers before the parade begins!!  Contact the campaign at 610-392-8156 or towneforcongress@gmail.com for meetup details.
• Bethlehem Halloween Parade: 1 p.m. Oct. 31. Help hand out flyers before the parade begins!!  Contact the campaign at 610-392-8156 or towneforcongress@gmail.com for meetup details.

• NOVEMBER 2nd ELECTION DAY!! Volunteers are needed to hand out literature outside of local polling stations, please volunteer here and share your name, phone #, city, and if you live in the district, your current polling location.
  • Post-Election Victory Party for all volunteers and supporters at 8 PM on Election Day at Pies On Pizzeria at Front and Pine Streets, Catasauqua!!!!

“Your parties have betrayed you.  Your parties have failed you.  Your parties have let you down.  Your parties aren’t even here!!” – from my closing statement last night

Yesterday I was kindly hosted by the local chapter of Delta Kappa Gamma, a group of women educators, at Cedar Crest College in a crowded room.  As Mr. Callahan first accepted, then canceled last-minute, and Mr. Dent refused their invitation, I immediately declared myself the winner by TKO and the debate instead became an informal forum like the campaign’s “Towne halls” offered to the public over the past year.

While both Mr. Callahan and Mr. Dent may publicly laud debate and democratic elections, the truth is that they wish to escape to November 2nd with as little scrutiny from the people as possible.   Mr. Dent had the first debate cut from 2 hours to 1 hour.  These Republocrat career politicians are living on taxpayer money, without new ideas of their own, and are dished out political welfare simply due to the ‘D’ or ‘R’ next to their names.

Citizens should question Republocrat career politicians who do not deign to explain themselves to those they wish to serve.   There is no higher responsibility of a candidate than to listen to the public and explain themselves.  I challenge both men to set aside an entire weekend afternoon in October and answer questions from the public in a neutral forum.

Ironically, only my campaign has been excluded from a major debate sponsored by the Morning Call, PBS-39, and the Chamber of Commerce.   After reading the Morning Call’s explanation that TV time was limited, this week I requested the opportunity to answer the questions to the audience after cameras clicked off, and this request was denied as “disruptive.”  While I respect an organization’s ability to invite or not invite candidates to their events, political expression should be preserved by the media, not denied, especially in times of political economic suppression.

Supporters are encouraged to write – or resend – a letter to the editor to the Morning Call or Express-Times or share their opinion with the Morning Call debate organizers below, and inform them I was the only candidate to show up at the last debate.  I am the only candidate who has pledged to balance the budget, stop the endless wars and endless debt, plus has the ideas that will work to solve the unemployment problem.  If you would like a yard sign, please leave your name, address, and phone number here.

PBS Channel 39 Viewer Response Line: 610-867-4677 ext. 111
Peter Leffler   MCall Content Editor/State   610-820-6567
Kathy Reinhard  MCall Content Editor/Suburban    610-770-3751

I extend an open invitation to groups in the community to allow me to speak and listen to your group.  Footage from the event is below, and the remaining debate schedule is here – next event is October 4th.

Introduction and Open Office Idea (Plank)

On Personal Liberties – for a more in-depth explanation, see “Philosophy of Liberty“

On Public Education.

On Health Care, part 1 and part 2.  See also my articles “Healthcare Solutions” and “Healthcare Plank“  After reviewing the footage, I found I failed to adequately define a cartel, so “CARTEL – n. a combination of independent commercial or industrial enterprises designed to limit competition or fix prices (per Merriam-Webster’s Dictionary)”

On the dollar.  Sound Money and Jobs Plank, Federal Reserve Plank

On the debt.

On my future plans and campaign donations.

Last week I appeared on the Gunther Show, where we had a spirited discussion on the War on Terror.  (Iraq War plank) (Afghanistan War plank)

Today is the anniversary of the September 17, 1787 ratification of the Constitution of the United States.   While the federal government no longer even pretends to follow the Constitution, I would like to write for a moment on the second-most important safeguard the founders tried to leave us.  (The most important safeguard being sound money, which by itself greatly inhibits rash war-making, as beautifully illustrated in this clip.)

“The Congress shall have Power… to declare War.” – The Constitution of the United States, 1787-present. Article I, Section 8, Clause 11.

The founders feared more than anything a strong executive branch, a President that would loom as powerful and as tyrannical as a King George.  While the Constitution bound the sovereign States closer together for the purposes of national defense, Congress was given this grave responsibility for a reason:  as the House of Representatives was directly elected by the people, it was viewed as the safest place to entrust a declaration of war, and people unhappy with Representatives could remove them fairly quickly – within two years.

Two Americans who long foresaw the day when America would ring the world with military bases – over 750 bases in 150 of the world’s 194 countries – were General Smedley Butler, WWI hero with two congressional Medals of Honor, the highest decorated Marine in US history and Garet Garret, who wrote the long-lost text of “The People’s Pottage” in 1953.

These men both understood the clip above – the consequences of the federal government’s actions is the ceding of America’s sovereignty to those who control the debt that endless wars and the military-industrial complex create. The greatest threat to our national security is the national debt, not malevolent boogeymen living in caves in Pakistan. Osama Bin Laden and his ilk will never destroy America – it will be the Congress who first destroy the country financially by looting our blood and treasure.  This is the true threat to our way of life.

Smedley Butler in 1933 wrote “War is a Racket,” which neatly summarizes the true definition of war.  I’ll leave it to the reader to read Butler’s powerful essay.  However, I’d like to partially paraphrase Garret and due to time constraints just weave in some of my own thoughts in what Garret listed way back in 1953 as the five heights that need to be regained in the coming years to restore America and the rule of law, to restore the Constitution:

The first height is a state of mind. To recover the habit of decision the people must learn again to think for themselves; and this requires a kind of self-awakening. This is so because thinking has been laid under a spell. The hypnotic powers are entrenched, combative and dangerous. But once the self-liberated mind had regained that first height, it would see not only that there is an alternative course but that above the noxious emanations of fear and the fog of propaganda the view is fairly clear as to the next steps.

The second height to be regained is intelligent, public debate of foreign policy.  No longer can the President  blindly frog-march the American people to war without a constitutional declaration of war from Congress.  Let foreign policy be debated once more by those who may have to die for it, and let the wind be cold and merciless. Let those  responsible be nakedly exposed to the horrors of war, who so misunderstand the nature of what they have done that they can find no respite, no solace in the abdication of their human responsibilities.

If they can justify themselves to the free and disenthralled intelligence of the people, so that the people knowingly choose to go on with them, then there will be nothing more to say, or to do, but to perform the death rattle of the Republic. Until this is settled it will be useless to discuss domestic policies because what is at stake is the fate of the republican form of constitutional government.

On the next height lies control of the public purse and the national debt.  Until the people have recovered the public purse, they cannot tame Executive Government. Passing laws to control or restrain it is of no avail whatever. The only way to reason with it is to cut it off at the pockets.  When it came to setting up the American government, the Constitution said that control of the purse should be in the hands of the House of Representatives because that was the popular side of Congress. While the people have not always managed the purse well, there is a difference; no matter how badly Congress may manage the public purse, it cannot control the people, whereas in the hands of the government control of the purse becomes the single most powerful instrument of executive policy touching the lives of the people.

The next foe is one of insatiable evil, located right inside the public purse.  It is the fourth branch of the government known as the Federal Reserve.  This monstrous evil’s chief weapon is inflation by the printing press. Its weapon of defense is an invisible vapor, the effect of which is to cause people to become economic alcoholics, afflicted with the delusion that they can get rich by destroying the value of money.

It is no good to think of cutting off the head of this serpent. It has millions of heads, all in the likeness of human heads, and as fast as they are chopped off others appear in place of them. Moreover, at this point, even in the ranks of the dragon hunters, dissensions will break forth, people saying: “Don’t kill him. If he dies  chaos and deflation will come, and this is worse. Only chain him down.” At that every one of the heads begins to grin in a most sardonic manner. The serpent knows its life is safe and wiggling out of its chains is a light morning exercise. (Photo courtesy KamaInv, license)

There is only one thing to do with this monster. It can be sickened and starved, not to death, because the life in it is immortal, but to a harmless shadow. Its food is irredeemable paper money. Sound money is its poison. Victory here will never be complete.  A guardian will need to be left, then a watchman to guard the guardian, and then the people must keep going back to ensure the serpent always remains bound and starved.

These heights in the lost terrain that have been named are vital. To save the constitutional republic they must all be stormed and captured. Others are important, but if these are taken the others can wait; but there is still one more, the last and highest of all, and as you approach it you may understand the serpent’s sardonic grin. The slopes are steep and barren. No enemy is visible. The enemy is within yourself. For, you see, the only way to conquer this peak is with your own fortitude.

The cost of saving the country will be extremely high. It could be as high as the cost of setting it up in the first place, 223 years ago, when the love of political liberty was a mighty passion, and people were willing to die for it.

When the economy has for a long time been moving by jet propulsion, the higher the faster, on the rocket fuel of perpetual war, endless debt, and planned inflation, a time comes when you have to choose whether to go on and on and dissolve your very being in the stratosphere, or decelerate.

However,  deceleration will cause a terrific shock.  Who is willing to face the grim and dangerous realities of the economic depression, of wars without end, that have already begun?

For the good of our children, the answer must be yourself.  No doubt the people know they can have their constitutional republic and democratic elections back if they want it enough to fight for it and to pay the price.  The only problem is that not enough leaders have yet stepped up to the plate with the courage to ask you to choose liberty instead of tyranny.

Choose liberty.

For the Constitution,

Jake Towne

“Is there no danger to our liberty and independence in a bank that in its nature has so little to bind it to our country?… [Is there not] cause to tremble for the purity of our elections in peace and for the independence of our country in war?… Controlling our currency, receiving our public monies, and holding thousands of our citizens in dependence, it would be more formidable and dangerous than a naval and military power of the enemy.”

- President Andrew Jackson, a sound money Democrat president, on central banking.  His 1832 re-election campaign was primarily focused on one issue – his successful abolition of the nation’s central bank.

One of the key reasons I resigned my engineering job abroad and returned home to begin this campaign is my belief that the Republocrats – left unchecked – will create a dollar collapse brought on by the endless debt and reckless deficit spending by the federal government.

Beyond the tide of resentment created most significantly by the TARP Banker Bailout in 2008, the media has failed to warn the people of simple truths:

• The dollar is an unbacked piece of paper debt, an I.O.U.
• The dollar was loosely linked to gold up until 1971.
• Over the past century, the dollar has been devalued against gold by 98-99%.
• The dollar has depreciated against gold for the past 9 years at a steady 16% annual rate.
• The price of gold has more than quadrupled this decade, setting an all-time monthly close on August 31.
• China stopped purchasing US Treasuries well over a year ago.
• $107 trillion in unfunded liabilities from the Social Security and Medicare programs is unsustainable.
• Gold is a major financial market, trading well over $20 billion per day on the London exchange alone.

“Printing dollars out of thin air” is an accurate – though over-simplification – of what the government has done to our money.  The reality is the system has two tiers – a worthless printed or electronic fiat dollar currency and a worthless fiat government bond that “secures” the dollar.  (Fiat means “by decree” or installed by the force of government.)

The below reviews the differences, pros, and cons of single-tier (or straight currency-printing), two-tier “Republicae” gave me permission to share his in-depth article below, check out his articles here.  The highlights and bolded areas are mine to save the reader time and capture the most important points.  From one comment received, my use of “imminent” is not tomorrow or next week, but the relative short-term future in the coming years.

Fiat Money: Dual and Single Tier Systems

by Republicae
Saturday, September 4, 2010

Despite all the efforts of governments to substitute irredeemable paper, they have failed to demonetize gold and even though it is not used as legal tender, it still is recognized as money. That is a strange fact considering the immense pressure that has been placed on society by governments to erase the monetary value from gold. In the most widest consideration, given the sum of history, neither men nor governments for that matter, will actually trust anything other than gold as a hedge against economic collapse. That is evident, even today, as we see more and more people purchasing gold, the same is true with many governments and their central banks.

Unlike Fiat Money – notes issued by government – gold needs no endorsements or coercion to be used as money and valued in exchange. Fiat money of any kind always must be forced upon the population, introduced by stealth into circulation by governments who desire to manipulate the power of monetary economics and eventually siphon off the wealth of the productive population. Unlike Fiat Dollars, gold money does not even have to have a government stamp upon it, it does not require legal tender laws or to lay taxation to enforce its use. Gold money does not require the full faith and credit of a government to make it money or to influence the use of it in an economy, there is therefore no compulsion required when gold money is in circulation, it is a desired commodity, whether it is in the form of money or any other form.

Unlike gold money, fiat money is accepted as money as long as there is faith in the government of issue and in the stability of the purchase value of the fiat money itself, the problem, of course, is that eventually the depreciation becomes evident through price inflation, people see their hard labors wasted on a form of money that no longer holds the same value as it did just a few years prior. Additionally, fiat money must rest upon the expectation that the promises made by the government of issue will be kept, once that expectation dwindles through the various foibles of a government that abuses the power of fiat monetary creation, such as the massive deficit spending that usually accompanies all fiat currency regimes, then the currency suffers and people search out other forms of value, particularly gold. History has proven this fact time and time again since at least 20 B.C.; fiat monetary economies always end the same way, collapse. There is evidence however, that fiat currencies were used as far back as the time of the Pharaohs, with equally disastrous results. In a historical context, the Book of Genesis 47: 15 states a very interesting event: “So when the money failed in the land of Egypt and in the land of Canaan, all the Egyptians came to Joseph and said, “Give us bread, for why should we die in your presence? For the money has failed.”

It is indeed a very strange psychological occurrence among peoples and governments who are subjected to established fiat regimes, it tends to make them unwilling to view their irredeemable fiat paper money as anything other than what that fiat paper money really is, nothing more than promissory notes that can never actually be redeemed because the promises of the issuing government always become far too extended for such a redemption. It is strange that people seem to think that government authority and laws can create something out of nothing and call it money, it is this undeserved faith, this belief system that allows fiat money to sustain a degree of value as money, but that too ends when the inflated supply of the fiat regime depreciates the purchase value of the currency and such faith is destroyed.

The degree and depth of faith necessary in government issued fiat money is comparable to the faith necessary in religion, for what else could account for the fact that when people see a piece of paper with the numerals $100 printed on it, that they view it as more valuable as the same piece of paper that simply has $1 printed on it?  The ruse is complete, the deception is extensive and the faith that has been built around the fiat monetary system must be of the utmost dedication. The Fiat God commands total faith and allegiance! Talk about idolatry, gold makes no such commands of faith, it is its own promise of payment, and it requires no government seal of approval or legal tender laws to enforce or coerce its usage as money.

The constant hunger of government issues its fiat currency that ultimately devours itself, eating up its own purchasing power. There is no doubt that history teaches from an extensive experience concerning money; perhaps one of the greatest lessons is that government is the premier counterfeiter and can no more be trusted with the power to control money than a thief with the keys to a bank. One must wonder why so few believe the fact that governments and money don’t mix. There is a history however, one of sound money, one which is either completely ignored or partially ignored by most in government and in the population in general. Perhaps the strangest fact is that so many are fooled by the absolute folly of fiat money, even stranger still is the fact that this folly is recurring time and time again without the actual lesson being learned.

Except for a period in the 1860s and 1870s, [the federal] government relatively kept its hands off money for nearly a century, except for the barest minimum Constitutional requirements of establishing a standard of weights and measures. The laws necessary for various liabilities and for banking were kept to a minimum; the market took care of the rest by awarding the prudent and penalizing the less prudent. It was a century that saw the most incredible increase in widespread prosperity that the world had ever seen before. The reach of government was restricted, its presence in monetary and economic matters was limited and the result of that policy was the unleashing of market enterprise, voluntary and free. Government was not in the money business, it did not create it nor did it control it or the supply, nor did it intrude in the affairs of business except in the case of fraud.

The attempts at fiat money in the early experiences of our country were lessons not soon forgotten, but given the greed of government for both power and spending power it did not take long for those lessons to be laid aside in an attempt to grasp and then unleash the power of monetary creation and control. The first major push toward a government-controlled money came during the Lincoln Administration, the problem of course is that government fiat money cannot compete against gold; the attempt was a complete and utter failure. By the time the Lincoln’s illegal War of Conquest was over the Greenback was valued at 35 cents gold. It represented nothing of value and as a result the market created a two-tier pricing structure, one in fiat money, the other in gold money that continued through the 1870s. Coined money disappeared from the United States, gold was exported for goods while the Greenback swayed with instability and through the process the credit of the government was considered questionable, especially by foreign trading partners.

The search was on and government sought a method to use that would allow it to spend far more than the revenue collected and to do it in a way that would be relatively concealed from the population. Through its search, government also sought to control credit, as the ancillary power of money, for just to control the creation and supply of fiat money would not provide the government with the instrument it really needed and that was a market for its debt. Thus the bond market became the ultimate reality of a managed money supply that would produce a managed economic market to allow the control of the ebb and flow of the economy as needed or in more cases than not, as was politically expedient.

The government, not the market was to become the heart of the economy, with credit money being transformed into the fluidity of economic life-blood. Thus, taking the power of money away from private enterprise and placing its control in the grasp of government as a “proper function of government”. It was government that would determine what the proper supply of money would be, the rise and fall of interest rates and in the process; it would determine the actual beneficiaries of its own managed economy.

The problem, of course, is the ability to trust a government, which sees itself without limitations. To aid government in its unlimited vision, a monetary system was necessary and that system was one that provided few restrictions on the supply of money government could “raise”, the best way around that problem of revenue was a two-tier system of fiat currency since all single-tier fiat systems tend to collapse rapidly from government abuses.

Part of the problem government has always had with gold money is the restrictive character of the money that demands budgetary restraint. Another part of the problem, at least on the part of government, is that a sound money economy punishes abuse, both by government and by businesses. Under a gold monetary system combined with the free-market, there are few places to hide fiscal imprudence. These facts however, while viewed by government and those who are politically connected as problems, are actually beneficial in ways that are really beyond calculation. A sound money free-market economy will always indicate problems of excess and malinvestment, it is essentially the nervous system of a free-market economy and will, when necessary demand a remedy to match the abuses.

While there have always been critics of bankers, there is a huge difference between free-market banking and the type of banking that we are now subjected to under government authority. In the free-market a banker must abide by the necessity of good business practices otherwise the bank and banker will face insolvency. The government, on the other hand, has an unlimited supply of fiat money or at least the power to product an unlimited supply; additionally, the government is not bound by free-market restrictions, nor, as it appears, are the banks chartered by government.

In the free-market, bankers are required to maintain the trust of their depositors, as well as their stock-holders, with the responsibility to keep the bank solvent, the same is not true with government or its banking partners. Under a sound monetary system there is the demand that the banker holds his depositors money in trust, not simply to use it as he pleases under a fraudulent fractional reserve system of divided and unsustainable titles. While it is true that a banker under a sound monetary 100% reserve system can issue credit beyond the deposited funds, he does so at his own risk, for to extend credit beyond the funds held on deposit can ruin his bank and his life, particularly in the cases of outright fraud.

Unlike the current fiat fractional reserve system, under a sound monetary system, integrally linked to the free-market, the banker is limited by the amount of real money he has in deposit, lending at the behest of only those customers who give the banker permission to lend their deposits. If, by either chance or deliberate risk, the banker lends out more than his customers have deposited me must immediately stop lending, but additionally he must call in the outstanding loans. This is one of the benefits of sound money under a free-market banking system, it requires absolute adherence to the highest level of responsibility to the customers of the bank. While such measures are not pleasant, it is a necessary medicine under a sound money free market system of banking.

Unlike free-market money and banking, government is not bound by such limitations, nor is it at much risk since it will rarely, if ever, force a contraction of the fiat money supply, thereby tightening its budgetary belt. Government hates the political consequences of bursting economic bubbles and will always attempt to inflate or re-inflate a bubble. Its ability to create money at will helps the government in its attempt to side-step the painful aspects of a collapsing economic bubble. The control of money in the hands of government is the control of society, it is absolutely necessary if government is to retain control and expand its ability to rule without limitation.

Given these facts, it is extremely odd that there are those who laud the Lincoln Greenback or any other single-tier fiat system, for to do so it to laud the government in its unlimited ability to create money for both peace, but especially wartime expenditures. Since wartime expenditures tend to be exorbitant, the ability to wage war under a sound monetary system is limited only to those [wars] which are purely defensive in nature. So too, are internal improvement projects and projects of unlimited entitlement programs, the sound monetary system will simply not allow the novelties of popular political expediency.

Unlike the dual-tier fiat system, sound gold money places limitations on government since the government must abide by the law of the free-market. Sound money prevents the unlimited accumulation of debt always associated with fiat money, additionally, sound money cannot easily be manipulated in terms of supply, nor are interest rates easily manipulated by government for political and social gain, the market determines the rate of interest. Of special note, it should be recognized that under free market sound money system the rate of natural interest is relatively stable compared to the manipulated system of fiat interest rates.

The ability to control government by controlling the money available to government makes perfect sense, it restricts government to revenues raised and since the population is sensitive to taxation, the limitation mechanism is ultimately sound. It also effectively controls the ability of government to accumulate debt, since it must abide by the sound practices of borrowing only that which it is certain of repayment within a reasonable amount of time, the money is, after all, the People’s money, not the governments.

In the early years of the 20th Century, a new innovation was created, the monetization of public debt, this technique unleashed the economic, military and social powers of government in ways never seen before. While it is true that prior to this period the government issued bonds, it did so with the restrictions placed upon it by the limitation that sound money placed on revenues and on its ability to repay those bonds under the sound monetary revenue system. The problem, however, was that the government was also limited by the amount of the bond issue the public was willing to purchase. That was another limitation of sound money that government saw as a limitation on its ability to powers, especially when it came to any imperial inclinations of a ruling class of politicians. The solution was to create a dual-tier fiat monetary system that would function through the government’s ability to issue unlimited amounts of marketable monetized securities.

Here is the key to the entire system; the dual-tier fiat monetary system had major advantages to the single-tier system. In a single-tier system the government simply issues fiat money, but that system is extremely unstable and usually collapses within a matter of years. The government required a system that could be sustained for decades and one that would provide it with a virtual unlimited supply of funding and therefore, an unlimited resource of power. In the single-tier system, the government can issue its fiat currency, a piece of paper with all the official seals that promise some sort of redemption, but since such fiat notes represent nothing of marketable value, history has shown that such single-tier systems are usually repudiated as the system deteriorates through rapid inflationary depreciation.

Governments found that they simply can’t issue paper money on a single-tier system, it cannot be sustained nor does it provide government with a relatively stable monetary system on which it can build its empire. It is odd indeed, that there are those who continue to advocate that the government simply replace the current dual-tier fiat system with one where the government simply issues fiat money directly, without the use of debt monetization. The fact is that such a system has been tried throughout history without any success whatsoever.

Thus we come upon the distinct differences between the two types of fiat monetary systems. The dual-tier system provides a degree of stability, but the manner in which it is achieved is ultimately very costly and dangerous. Under the two-tier fiat monetary system public debt is monetized using what amounts to essential two pieces of fiat paper, one being the fiat bond issued by government and the other being the fiat currency note issued by government. The bond is issued and provides a surety of repayment, the problem, of course is that the repayment of the bonds is promised with the very fiat notes the issuance and sell of bonds create. So, the government promises to pay its bonds by the very paper fiat notes created by those bonds. Neither the fiat bonds nor the fiat notes represent anything of actual value in terms of purchasable goods, there is no real asset value to either the underlying bond or the repayment of those bonds with the fiat currency created through the salable issue of those bonds.

Essentially the government states that it will repay its bond issues, but repay it with what? Certainly not anything holding any more value than the bond issue itself. It promises to repay its bond obligations with nothing more than the very Federal Reserve Notes created from the security of those bonds. Thus, in the simplest sense, one piece of worthless paper is serving as security for another piece of worthless paper. The Government Treasuries secures the fiat money and the fiat money secures the Government Treasuries.  Have you recognized the folly yet? Thus, the fiat bonds secure the fiat money and the fiat money secures the fiat bonds. Who is the greater fool, the debtor or the creditor? They are equally foolish in their conceit of the system.

The government has no worries as long as the ruse continues to deceive the buyer of its bonds, but it can only last so long before the over-issuance of bonds, combined with massive deficit spending rips the veil from the fiscal Ponzi scheme.

In order to complete this dual-tier fiat monetary system it was absolutely necessary to attempt to demonetize gold. It was essential for Gresham’s axiom to be circumvented; otherwise the new dual-tier fiat monetary system would not work. As long as money and credit were related and thus restricted by gold money, the government would not be free to pursue unlimited power; it could not manipulate the sound money supply to an extent that would satisfy its insatiable appetite for domination over the economic and social arenas. The government, if it were to be successful in its powerful desires, would have to eliminate gold money from the economy. History proves that governments hate the restriction of gold money and have, through the centuries, attempted to contain the power of gold money, without much success. You see, there was no way for the system to function while gold was considered and used as money; not only that, but to implement this dual-tier fiat monetary system it was absolutely necessary for the government to outlaw gold altogether until the fiat monetary system was firmly established.

To accomplish this there had to be a stratified repudiation of all debt payable in gold. The first step began, of course, during the Administration of FDR when the domestic public debt was repudiated and private ownership of gold declared illegal in this country. The second step came when Nixon repudiated all foreign debt of this country when he declared that no U.S. Government debt obligations would be paid in gold, at which point private ownership of gold no longer posed a real threat to the pure dual-tier fiat monetary system.

This was the crucial moment in time when there was an almost complete seizure of the entire financial economic system of money, banking and credit. With such a seizure, the ability to control and thus manipulate the social policies needed to create a welfare/warfare state was achieved. No longer would the restrictions of gold or the flaws of a single-tier fiat monetary system limit the powers of government. Public debt could be monetized and the repayment of that debt could be achieved through a slight-of-hand structure that paid debt through the very same instrument used to create it in the first place.

The dual-tier fiat monetary system avoided all the pitfalls of a single-tier system, such as the Greenback system, or all the other single-tier systems throughout history that failed within a short period of time. This government fiat money, like all before it, had to be the only legal money allowed in the country, there could be no competition, especially from the most powerful and liberating money in the hands of the People, which is gold money. Governments are limited and thus controlled, when its ability to spend is restricted. Such a restriction came from gold money, its quantity could not be easily increased, nor could it be easily manipulated once in circulation and it became titled money when in the hands of a private individual.

There is such a delusion created by the entire system that government must continually promote the impossible, and that is a perpetual boom through its inflationary fiat monetary policies. While it appears that cheap money and credit offer some sort of immunity from the laws of economics, the truth is that eventually the system is consumed from government excess. It is evident that the last thing our government ever wants to experience is the pain of economic realities created by the system it uses to stay in power and it will use the fiat monetary system to the extreme, if necessary, to maintain its power even if it means such policies will ultimately cause the entire foundation of the economy to crumble.

All the proper functions of money have been suspended, and economic law delayed, by the government’s dual-tier fiat monetary mechanism. It can continue for a while, but eventually all the principles of economic law will bear down upon the fraudulent system. As those principles press against the system, its structure will be exposed, its flaws manifested in economic pain and ultimately economic disaster.

At this point in our fiat history the government is attempting to postpone the inevitable and the system itself is exposing the helplessness of the government and, in all its folly, its own insolvency and corruption. The government, with its debased currency, is facing its final repudiation of debt and, in the process, an actual repudiation of the fiat monetary system. The government’s seal, its promises, beautifully engraved on all its fiat obligations cannot prevent the catastrophe that faces this country, and indeed the world. There is no trust in the promises of this government, no matter how the words are engraved on its fiat paper money, no matter how its engraved bonds are promoted as a safe-haven from economic distress.

END

While I am not for a government-controlled gold standard myself – read here for my thoughts on transitioning from the current situation, you can also check out my planks on Sound Money and Jobs and the Federal Reserve.  Another interesting read for those still skeptical that government would do such a thing should read about the London Gold Pool, which is documented in the Federal Reserve’s own meeting minutes.

We need to stop the endless debt before it destroys our nation.

If one owes a bank a thousand dollars, he has a problem. But if one owes a bank a billion dollars, then the bank has the problem. From the four years I spent in China, I assure you this truism is not lost on the Chinese, though one must never forget the banks’ nifty little ability to create their own money.

While America tends to act rather brashly on the world stage – think Bush proclaiming “Mission Accomplished” in a jumpsuit in 2003, or Obama graciously accepting a Nobel Peace Prize while simultaneously expanding the ridiculous Afghanistan War – the Chinese government acts in a far more subtle manner.

The below chart shows the total US Treasuries owned by China which includes both Hong Kong and the mainland. In July 2009, the total was $1.051 trillion. In April 2010, the total is $1.052 trillion, and the trend is a flat plateau. The Chinese have wisely chosen to contain their US debt exposure by halting the purchase of dollars.

In February 2009, Luo Ping, director-general at the China Banking Regulatory Commission, said:

“Except for US Treasuries, what can you hold? Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.”

Of course, Ping was lying on two counts. First that US Treasuries were a safe haven – if Ping believed his own drivel, Chinese holdings would surely have increased during the past year to help pay for the Obama stimulus plan. Instead, Ping wanted other foreigners and his creditor, the USA, to continue to believe his feint.

Ping’s second lie was that US Treasuries were the only option. In May 2009, as I explained in “The Gold War – China and the US Treasury Market,” gold is a form of insurance to protect against sovereign defaults and money-printing by the Bernanke gang at the FED. Sure enough, shortly after Ping’s speech, China reported a near-doubling of its gold holdings.

This week Dagong Global Credit Rating downgraded its rating of US Treasury debt from AAA to AA with a negative outlook, and now rates Chinese sovereign debt slightly better than America’s. The Financial Times immediately downplayed the announcement by inferring the privately-owned Dagong is a creature of the Chinese government. While this may be true to a large degree, it does nothing to change the message: China has downgraded our debt and has ceased increasing its Treasury holdings.

The FT concludes: “Despite the discredit the financial crisis has brought to the big three global ratings agencies [Standard and Poor's, Moody's, and Fitch], investors are still more likely to trust their ratings…” Lemmings off a cliff, but for each loser there is sometimes a winner.  Who will the winners be? TO BE CONTINUED…

Feel free to ask any questions below, I’ll do my best to answer, further suggested reading is my “Bailouts and Corporatism” and “Federal Reserve” planks.  You can help my campaign take on the Republocrats by making a donation of any amount below.

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“The body of economic knowledge is an essential element in the structure of human civilization; it is the foundation upon which modern industrialism and all the moral, intellectual, technological, and therapeutical achievements of the last centuries have been built. It rests with men whether they will make the proper use of the rich treasure with which this knowledge provides them or whether they will leave it unused. But if they fail to take the best advantage of it and disregard its teachings and warnings, they will not annul economics; they will stamp out society and the human race.” – Ludwig von Mises, from Human Action

Henry Ford is alleged to have said that “it is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”

The spirit of his words encourages us to put forward questions about the banking and monetary system — especially in view of the international credit-market crisis. Is it a good thing that central banks have cut interest rates essentially to zero and have increased the base-money supply dramatically to support the financial sector? Will depression be prevented if governments underwrite banks’ balance sheets and run up huge deficits in an attempt to strengthen production and employment?

To answer these questions, a diagnosis of the root cause of the debacle is indispensible, and once the root cause has been identified, a proper remedy can be formulated.

The diagnosis provided by the Austrian School of economics can be distilled into one sentence: governments have caused the monetary and economic debacle by taking control of money production.

Money and Credit

To explain this one-sentence conclusion — which may of course be surprising or even irritating to many — it must be noted that the defining characteristic of today’s monetary systems is that state-controlled central banks hold the monopoly over the money supply. The US dollar, euro, Japanese yen, British pound, and the Swiss franc share the essential feature of being currencies produced by governments.

What is more, these monies are produced through circulation-credit expansion — credit that is not backed by real savings. One can even say that today’s monies are produced out of thin air. These monies are often called fiat money: they are established by government decree, not legally convertible to any other thing, and created by political expediency.

Fiat money regimes create economic disequilibria, and do so inevitably. This is because the rise in circulation credit lowers market interest rates below their natural levels — that is, the levels that would have otherwise prevailed, had the credit supply not been artificially increased.

The downward-manipulated interest rate induces additional investment and, at the same time, provokes a rise in consumption out of current income, at the expense of savings. Monetary demand outstrips the economy’s resource capacity. A rising money supply pushes up prices sooner or later, be it the prices for consumer goods or for assets.

What is more, the artificially suppressed interest rate shifts scarce resources increasingly into more time-consuming production processes for capital goods — at the expense of production processes for consumer goods, causing intertemporal distortions of the economy’s production structure.

A circulation-credit-driven boom is economically unsustainable and must be followed by bust. If the injection of additional credit and money out of thin air was a one-off affair, it presumably wouldn’t take long for the artificial boom to unwind. A recession would restore the economy back to equilibrium.

Unfortunately, however, the increase in credit and money out of thin air is not a one-off affair under today’s monetary systems. As soon as recession approaches public opinion calls for countermeasures, and central bankers increase the credit-and-money supply even further, thereby bringing interest rates to even-lower levels. In other words, monetary policy fights the correction of the debacle by taking recourse to the very action that has caused the debacle in the first place.

Such a strategy may work occasionally. But as soon as credit expansion comes to a halt — that is, when commercial banks refrain from lending altogether — the inevitable adjustment will unfold. Borrowers will default, and firms will liquidate unsound investments and cut down jobs.

The longer an artificial boom is kept going, the greater the malinvestments are that have to be corrected, and the higher will be output and employment losses.

Mises knew that pushing down interest rates to ever-lower levels would not solve the problem but would lead to an even-bigger disaster. He wrote,

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.[1]

Intervention and Reform

If one subscribes to the diagnosis provided by Austrian School of economics, two important observations must be made. First, more circulation credit and fiat money at lower interest rates will not, and cannot, prevent a disaster that has been caused by too much credit and money. Second — and this aspect may not attract peoples’ attention right away — governments’ ongoing attempts to fight the economic correction will destroy what little is left of the free market order.

In his book Interventionism, Mises explained that market interventions would not create a lasting system of economic organization. He wrote,

If governments do not give them up and return to the unhampered market economy, if they stubbornly persist in the attempt to compensate by further interventions for the shortcomings of earlier interventions, they will find eventually that they have adopted socialism.[2]

Interventionism in the field of monetary affairs — most notably by governments controlling money production — has caused damage on the grandest scale.

There are a number of economists who have identified the serious economic and ethical problems caused by fiat money. Among them are, most notably, Ludwig von Mises, F.A. Hayek, and Murray Rothbard. They basically recommend privatizing money production, which would pave the way to sound money — money that is compatible with the principles of a free-market society, money that does not cause boom-and-bust cycles.

Under privatized money production, people would freely decide on the kind of money they wanted to use. Such a money would presumably be anchored by gold, but it could possibly be anchored by other media (for example, silver or platinum). The government and its central bank would be closed down and lose control over money production. From then on, the interest rate would be determined by free-market forces rather than government action.

Conclusion

The global monetary fiasco is a reminder that it is high time to seek monetary reform along the lines of that which is recommended by the Austrian School of economics. It is the only way to protect and maintain peoples’ freedom and economic well-being.

Murray Rothbard wrote that “Mises, almost single-handedly, has offered us the correct paradigm for economic theory, for social science, and for the economy itself, and it is high time that this paradigm be embraced, in all of its parts.”[3] This holds true especially for Mises’s monetary theory.

So if one wishes to hold a positive view on the progress of civilization, it necessarily implies that the future monetary system will be a free-market-money system, as envisioned by the Austrian School of economics — and that the era of fiat money must come to an end.

[Thorsten Polleit is Honorary Professor at the Frankfurt School of Finance & Management.  This talk was first given at the SIX Swiss Exchange Bond Event, 2010.  The article's original post is here. Receive free copies of the Mises Institute's Free Market magazine to your mailbox here.]

Since the 1990s, the FED has change accounting rules so even the loose ~10% fractional reserve requirement could be thwarted. We live in an era of paper tickets.

In Part 1, Fractional Reserve Banking in Pictures, we saw how the banking system creates fraudulent money by creating new money on top of old. The reserve requirement limit used in the example, 10%, is the figure usually given, which means that from a $10 deposit the banking system could generate $90 of new money. Also, the FED uses Open Market Operations to create new money by writing a check upon itself.

This article will demonstrate that reserve requirements are effectively not in existence and easily avoided by accounting tricks in the U.S. banking system.  In other words, fractional reserve banking is dead.  In my view, the evidence is unrefutable as the sources are from the FED and documentation from Citigroup.

Although I have tried my best to keep the following simple and source my data, please feel free to comment or question and I will do my best to reply.  The below article was originally published August 12, 2009.  While some of the data is from July 2009, the current data was recently checked and does not change the conclusion.

This first chart is from the FED’s latest Purposes and Functions from 2005 on page 51 of 146.

As can be seen, “net transaction accounts” have a 10% reserve requirement when over $45 million at a depository institution. Net transaction accounts are checking accounts, demand deposit accounts, NOW (negotiable order of withdrawal) accounts, or credit union share draft accounts (p. 135/146)

“Nonpersonal time deposits” are defined (p 129/146) as a “time deposit held by a depositor other than an individual” such as certificates of deposits, or CDs. These have no reserve requirement.

Now what about savings accounts and certificates of deposits? These are termed “nontransaction accounts” by the FED since they do not meet the requirements of a transaction account (CFR 204.2). See our next chart, taken from page 21/21 in this 1993 article from the Federal Reserve Board’s Division of Monetary Affairs. Personal savings accounts, CDs, or money market accounts are NOT reservable liabilities since December 1990 as stated directly by the FED in 1993 and indirectly by their non-inclusion here. So, there are NO reserve requirements for personal savings accounts and CDs.

The above leave us only with checking/NOW (or “net transaction”) accounts. Here’s the text for the “two sub-accounts” trick done for “accounting purposes” by Citibank.

“For accounting purposes, all Citibank consumer checking accounts (Regular Checking, Citigold Interest Checking, Interest Checking and Basic Banking Account) consist of two sub-accounts; a transaction sub-account to which all financial transactions are posted; and a holding sub-account into which available balances above a pre-set level are transferred daily. Funds will be transferred to your transaction sub-account to meet your transactional needs. For Regular Checking and Basic Banking Account, both sub-accounts are non-interest bearing. For Citigold Interest Checking and Interest Checking, both sub-accounts pay the same interest rate. Transfers can occur on any business day. Transfers to the holding sub-account will be made whenever available balances in the transaction sub-account exceed a preset level. Transfers from the holding subaccount to the transaction sub-account will be made whenever transaction sub-account balances fall below a predetermined level. Because banking regulations limit the number of transfers between these types of subaccounts, all balances in the holding sub-account will be transferred to the transaction sub-account in the sixth transfer in any calendar month. Both sub-accounts are treated as a single account for purposes of the client’s deposits and withdrawals, access and information, tax reporting, fees, etc.” (Citibank Client Manual p. 19-20/33)

First, note that the account holders have no idea these sub-accounts exist unless they read this fine print. I encourage you to check your checking account’s fine print – all of the major banks I have checked use “two sub-accounts,” and several nearby local banks in my area have it too.

Second, note that the holding sub-accounts may fluctuate daily, and there are no rules whatsoever limiting how much of the currency can be diverted to this holding sub-account.

Obviously, the reason for the “two sub-accounts” accounting trick, more politely termed “Deposit Reclassification” by the banking industry (see page 9-10/31 of this agreement from Camden National Bank), is to have the holding sub-account deemed a nontransaction account and no longer subject to reserve requirements. In Eric deCarbonnel’s article “Deposit Reclassification Used To Eliminate All Reserve Requirements,” he refers to additional sources including this easy-to-follow piece from Romney & Associates where the author outlines the benefits and profits from deposit reclassification – by changing reserve requirements at their whims, banks can loan out even more – which is naïve insanity of course in the event of a bank run.

Speaking of bank runs, let’s take a look at the FED monetary base, reserves, and vault cash. Per the latest H3 report from the FED, we have the below data (in millions of USD). Note the massive swings in nonborrowed reserves and the monetary base which took place roughly a year ago.

In the next chart, I took the reported deposits of FDIC depository institutions – which is an approximation I have made of the U.S. banking system from June 30, 2008 (p. 16/21) and the latest March 31, 2009 (p. 18/27) report – and listed the July 2008 and July 2009 results from the H3 report. Provided my calculation of dividing the Total Reserves by the FDIC-reported Domestic Deposits is reasonable (I haven’t been able to find suitable FED numbers, hence my usage of FDIC data), the “Towne reserve ratio” was just a shocking 0.6% in July 2008. While the current “Towne reserve ratio” is 10.6% in July 2009, this is likely due to the monetary base change below.  This is, of course, just a rough estimate.

[Update 6/26/2010:  Please note that both the March 2010 H3 Table 2 total reserve number reported by the FED and the FDIC-reported March 2010 domestic deposit numbers (page 15/26) are still much higher, though perhaps using the total FDIC assets would be a better estimate.]

Note that in July 2008, the banking system’s vault cash EXCEEDED both required and total reserves. [Vault cash is the physical banknotes that banks keep on hand to meet withdrawals; the vast majority of dollars exists in the form of electrons, and only a tiny sliver is metal coinage.] Note that in July 2009 (and in July 2010) the required reserves and vault cash have been relatively unchanged.

Over the same period, the monetary base has almost doubled from $847 billion to $1,681 billion while reserves grew by about the same amount, from a scant $45 billion to $803 billion. Where did this money come from? It is likely just FED “liquidity” or newly created currency. We would need to audit the FED to be sure, but the timing and amount coincides with the Banker Bailout of October 2008. At any rate, the intention of this money is likely just to paper over the collapse of the banking system last year.

CONCLUSION

In plain english, the U.S. banking system is using a sneaky accounting trick listed the fine print of checking account agreements to escape the gravity pull of reserve requirements. The system likely already crashed last year, but the FED pumped in liquidity last year at the same time as the Banker Bailout to avoid the collapse of this Ponzi scheme.

This brings me to an interesting conclusion – at this point in history, our monetary system is really no more than paper ticket printing and excited electrons. [Although technically speaking, dollars are linen with mercury, arsenic, cyanide, titanium dioxide, formaldehyde, lithium, valium, zinc imbedded as I wrote here "The Federal Reserve - A Good Company to Work For?".]

Although our central bank, the FED, can technically NEVER go bankrupt since it has the power to create as many paper tickets as needed, risks over the long-term include psychological events like hyperinflation where the demand to store money goes to zero, and the purchasing power of the currency approaches zero as well.  However, the true responsibility lies with U.S. Congress, which “delegated” its control over the currency to the FED in 1913.

As F.A. Hayek wrote in The Road to Serfdom, delegated autonomy from the legislative body of a socialist state is usually done to escape blame and responsibility for the inevitable mistakes of central planning.  Understand that the next time you see your Congressman or -woman, they ARE responsible for quite literally stealing purchasing power from your pocket as I related in further detail here “Unlocking the Money Matrix – The Real Interest Rate (PART 12/15)“.

The solution? The money power must be returned to We the People. The FED must be abolished, by populating the U.S. House with representatives who will end the FED. I’ve outlined the steps I recommend here, but this certainly requires a national debate.

One last bit of math. The current $52 billion in vault cash divided by 307 million Americans works out to a whopping $169 per person. Maybe Bernanke over at the FED should fire up the printing presses!

Note: Thanks to Eric deCarbonnel whose article “US Banks Operating Without Reserve Requirements” clued me in to the above facts.

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Jake Towne is running for U.S. Congress in Pennsylvania’s 15th District in the 2010 election as a citizen unaffiliated with any political parties.

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We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.

As always, unlike the NFL, the author grants full permission to allow any accounts of, rebroadcasts, retransmissions, repostings of this article to your blog or anywhere else in order to promote the Restoration of our Republic.

Veritas numquam perit. Veritas odit moras. Veritas vincit. Truth never perishes. Truth hates delay. Truth conquers.

Tu ne cede malis sed contra audentior ito. Do not give in to evil but proceed ever more boldly against it.

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Other Articles on this subject by the Author

Federal Reserve Plank

R.I.P. – The London Gold Pool, 1961-1968

The Summers Gold Price Suppression Scheme

END THE FED…. Then What?  The Transition to Sound Money

Gold and the “Average Man”

Silver and Gold ARE Money (PART 1/2)

The Money Matrix – How the FED Works (PART 6/15)

The Money Matrix – Who Owns the FED (UPDATED PART 7/15)

The Federal Reserve – A Good Company to Work For?

Bernanke’s Great Lie – The “Gold Standard” and the Great Depression (PART 2/2)

Original article from 2009

http://towneforcongress.com/economy/yes-virginia-there-are-no-reserve-requirements-part-22-1

“The few who understand the system, will either be so interested in its profits, or so dependent on its favors, that there will be no opposition from that class. The great body of people, mentally incapable of comprehending the tremendous advantages, will bear its burden without complaint.”

- Lord Rothschild, European central banker

The below slides are meant to explain the form of modern banking known as “fractional reserve banking” as simply as possible using pictures.  The presentation itself can be found here, and a written description and documentation in “The Money Matrix – How the FED Works (PART 6/15)“.   This article was originally published August 6, 2009.

The below demonstration assumes a reserve requirement of 10%, which is the figure typically given by the banking industry and financial experts.  However, in Part 2 I will demonstrate there there is effectively NO set reserve requirement though the banking system obviously carry some level of cash reserves.  In other words, fractional reserve banking is dead.

Jake Towne – The Problem With the Dollar (July 2009)

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Jake Towne is running for U.S. Congress in Pennsylvania’s 15th District in the 2010 election as a citizen unaffiliated with any political parties.

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We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defence, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.

As always, unlike the NFL, the author grants full permission to allow any accounts of, rebroadcasts, retransmissions, repostings of this article to your blog or anywhere else in order to promote the Restoration of our Republic.

Veritas numquam perit. Veritas odit moras. Veritas vincit. Truth never perishes. Truth hates delay. Truth conquers.

Tu ne cede malis sed contra audentior ito. Do not give in to evil but proceed ever more boldly against it.

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Other Articles on this subject by the Author

Federal Reserve Plank

R.I.P. – The London Gold Pool, 1961-1968

The Summers Gold Price Suppression Scheme

END THE FED…. Then What?  The Transition to Sound Money

Gold and the “Average Man”

Silver and Gold ARE Money (PART 1/2)

The Money Matrix – How the FED Works (PART 6/15)

The Money Matrix – Who Owns the FED (UPDATED PART 7/15)

The Federal Reserve – A Good Company to Work For?

Bernanke’s Great Lie – The “Gold Standard” and the Great Depression (PART 2/2)

Original article from 2009

http://towneforcongress.com/economy/fractional-reserve-banking-in-pictures-part-12

John Callahan, the Democrat challenger in my race, recently targeted the incumbent Republican, Charlie Dent, for his vote to pass the TARP Banker Bailout in 2008.  Amusingly, Callahan – along with the rest of the Establishment’s career politicians at the time – stated he would have voted FOR the Banker Bailout himself per this article.  Apparently, the only difference is Dent voted for the bill after even more pork was added – for a partial list see here.

I have been emphatically against bailouts and corporatism not only since the start of my campaign last year but since they were passed in October 2008.  However, the government-sponsored corporatism is still ongoing.  The American people, Congress, and the President have never been told how the FED used over $2 trillion dollars during the Banker Bailout per the Bloomberg lawsuit.  What few seem to realize is that even for the troubled firms that “paid back” the money is they were able to leverage these funds and profit in the marketplace at the expense of everyone else.

Another daily “bailout” that the government grants all the banks is completely unaddressed by my opponents. While the Federal Reserve has the power to create money by simply writing a check on itself, the banks also have this power, as explained in “Fractional Reserve Banking in Pictures.”

Currently, the FED and the government protect the banking cartel by offering loans at near-zero interest rates. These banks can then “reinvest” in US Treasury bonds at >3% and leverage these assets for investment trading. It is no wonder that in Q1 2010, Goldman Sachs, Citigroup, Bank of America, and JP Morgan each reported trading profits on each and every trading day.

Whether it is the military-industrial complex, Big Oil, Big Pharm, Big Ag, or the financial firms who bankroll their Establishment politicians into power, the crony corporatism and revolving door between the Treasury Department, the FED and Wall Street must end. The government should not be issuing special favors to any corporation for any reason, as to do so the government must first steal from someone else.

The actions taken so far by the government have only worsened the economy. Government’s responsibilities should be limited to establishing a framework of laws to protect individuals and society from fraud, coercion, and aggression against the rights of individuals — life, liberty, and justly acquired property.

Don’t support Republocrat career politicians, who – in exchange for your vote – will empty your wallet with inflation and bailouts, steal from your livelihood with the income tax, and fritter away your freedoms. If you are tired of the usual suspects, vote for Jake Towne on November 2, 2010.

If you live in the area, help is needed at events gathering signatures for ballot access.

Article Archives

Below is the rough transcript of some remarks I made at the campaign’s successful fun-raiser at the American Sandwich Company in Coopersburg on June 6, the 66th anniversary of D-Day.  More details on the fundraiser in tomorrow’s post.  The event began with a moment of silence for veterans, especially the 5,490 soldiers who have died so far in Iraq and Afghanistan.

“Today we face a D-Day of a different sort, and while there is still war, the causes are economic. At the last Towne Hall, I presented “The Economy in Pictures” where I demonstrated that unemployment is >>17%, 1 in every 8 Americans is on food stamps, the FDIC that “insures” bank accounts is hopelessly insolvent, and the true national debt is really $120 Trillion – when the $13 trillion in US treasury debt is added to the unfunded liabilities of Social Security and Medicare -  a vast sum that is best put into personal terms as $400,000 for every man, woman, and child in the United States.  At this point, even if the government were to tax 100% of each citizen’s dollars and properties, there still would not be enough to theoretically pay off this debt.

The plan the country should follow is very similar to an engineer solving a problem, or a doctor treating a bleeding patient. First we must contain the problem, then determine root cause, then take corrective actions. The steps are easy and simple enough, though this doesn’t mean Congress will follow them. Let me recap.

To contain the problem, we must first stop all new taxation and all new spending. This means no healthcare tax, no cap and trade energy tax, and no inflation tax by the money-printing of the Federal Reserve.

Next we must stop all new spending – no “stimulus” plans or new federal spending of any kind. Our economic mess is due to the excessive spending and the doubling of the size of government over the past decade. We cannot cure the problems of excessive spending by yet more spending!! And again, we must remember these three words – GOVERNMENT HAS NOTHING. It is not possible for the government to give charity to someone without plundering it from someone else.

Lastly, we must cut both spending AND taxes. To cut taxes, the best tax to abolish is the federal income tax – it is not only IMMORAL that the government has the first claim on the labor of each individual American, but fiscally this tax is UNNECESSARY. There is no better stimulus to work than to remove the government interventions that keeps people from working and employers from hiring in the first place.

For instance 50% of the people who file contribute just 3% of the total tax. However, this does NOT mean they are not taxed heavily. If we slash government spending by the size of the federal income tax, the government would be the same size as it was in 2005. If we do this again, the government would be the same size as it was in 1998, which was still too big.

To cut spending, it really has been an educational experience to campaign door-to-door. Much of the time I feel as if people only grasp half of the whole picture. Some only understand the full impact of the welfare spending and can rattle off all types of statistics on social security or the Department of Education. Others don’t understand the true size of the welfare spending, but they can rattle off all the facts you ever needed to know about warfare spending on the wars in Iraq and Afghanistan.

However, a lot of people are open to the full picture once I make it clear I understand where they are coming from on the welfare or warfare spending. Pragmatically speaking, it is very obvious that – while additional welfare spending should be frozen – the first place to make all the cuts is to the $1+ trillion dollar military budget that does not even secure our borders.  The other key place is the hundreds of billions spent on redundant and useless federal departments.  [As outlined in this ppt.]  At least a small percentage of welfare dollars does make it to recipients, and most of this is contractual obligations.

My candidacy represents the only possible way to save both Social Security and Medicare by returning to a constitutionally-limited government on everything else. If this is not done ASAP, there will be a currency crisis with the dollar, of that there is no doubt.

I’d like to talk for a moment on interest rates, which are so important to understand in today’s crisis of debt. Many people don’t understand interest rates, which included myself not all that many years ago as well.

Interest rates represent the present time-value of money. Interest rates serve as a natural regulator between savings and investment in capital on one hand, and consumption on the other. Each individual or business is left to decide whether to increase cash holdings, to consume, or to build a business or building.

Interest rates serve as a check-valve between the deployment of capital (and the amount of mal-investments!) for economic growth and the savings deferred to the future to pay for the goods and services resulting from the growth.

When central banks increase the supply of dollars by money-printing, this suppresses the market’s interest rate in the present. This tends to trick entrepreneurs into spending dollars they otherwise would not have spent into business ventures that do not succeed just because consumers do not have any savings in the future. Meanwhile, consumers tend to consume all the goods and services they can in the present.  Why should they save dollars if the interest rates are so low?  Does this sound at all like 2001-2007?

The imbalances the government has created are only postponed AND worsened by additional suppression of the interest rate. This has played a critical role in not just today’s economic depression but also in Greece. Lessons from Greece can help us understand what can also happen to our country. Those who read my column realize I first warned about the collapse of Greece in late 2008, when the rioting first began.  Why was I able to predict this?

Well, unlike most of the 1800s globally and the early 20^th Century where the different FED regions varied interest rates to account for regional differences – like the agricultural Midwest or industrial East Coast – the modern FED constrains the economy to the same interest rate for the past 60 years or so.

This is similar to the EU’s central bank has done since the currency union was first formed in 1993; not only do they all use the Euro but — far more importantly — highly industrialized states like Germany now share the same interest rates as states with very different economies more based on tourism and agriculture like Greece or Spain.

What we may now see out of Europe is a domino effect as the weaker countries from the PIGS group (Portugal, Italy, Greece, and Spain) cannot sustain their levels of debt. In fact, ALL governments in Europe are in debt, it is just a question of how much as these two comedians – err, economists – below point out.

The alternative the EU has is to bind all its governments into one gigantic “bailout nation,” not unlike the current situation with America’s 50 states. This will weaken the EU’s stronger states like Germany with temporary gains for the weaker states.

However, choosing this alternative of centralization by bailout – as America has chosen with the FED – will only prolong and worsen the inevitable collapse of the paper currencies.

History teaches it is during such a currency collapse that the likelihood of additional warfare increases.

For additional reading on this campaign’s ideas on how to fix the economy:

• Freedom From Fascism
• Jobs and Social Insecurity Talks at Lafayette College
• Jake Towne Says John Callahan Clueless on Job Recovery
• Jobs Plank
• The Government’s “War” on Main Street
• Lecture – Why the Stimulus Plan Will Fail (and a Better Alternative)
• Lecture on the Financial Crisis
• Bailout and Corporatism Plank
• Income Tax Plank
• Escaping the Current Depression – Causes and Cures