Depressions and Their Solution

This is a simple outline of what depressions are and how they are solved. The problem and its solution are simple and should be understood by every voter. It may take a little effort, but the answers are available to us all.

(1) The market, if left free of government intervention and other forms of fraud and misappropriation, is immune to serious economic downturns (Say’s Law). There will always be individual business failures, but the misfortune of one person in the free market is another person’s opportunity. The same amount of material wealth in the economy remains the same; there is just a change of ownership. Because of this balancing of fortunes and the fact that the total wealth of the economy remains the same, there should never be epidemics of business failures.

(2) Business failures reach epidemic proportions because there is a change in the money supply. A reduction in the money supply, referred to as deflation, means that there are insufficient funds to maintain the demand for goods and services at existing prices. This change in demand reduces trading and creates employment. This is the essence of a depression. There is the same amount of wealth in terms of real goods and services but there is not enough money to purchase them.

(3) All that needs to be done to prevent depressions is provide a money supply that cannot be reduced. If the money supply were stable, there will still be goods on the market that are overpriced, causing business failures, but the money of the economy would be directed to cheaper alternatives. These cheaper alternatives would provide new business opportunities to offset the losses, preventing business failures from reaching the epidemic proportions that are characteristic of depressions.

(4) Durable commodities, such as gold, do not disappear and therefore can serve as a money supply that would prevent depressions from happening. In turn, government issued money can be made stable and can also serve an economy that is depression-free. Even if a government caused inflation through deficit spending, it would not necessarily lead to a depression, since the government’s money would still not disappear and thereby lead to the reduction of money that would cause a depression. This inflation would cause a misallocation of the economy’s resources and reduce its overall productivity but it would not lead to the unemployment that is caused by a reduction in the money supply.

(5) However, the US government, along with the other governments of the industrial world, cannot provide us with a money supply that is invulnerable to depression-causing deflation. Why? Because governments have no control over the creation of most of the money in their own economies – banks do. To see how this is done, please read the previous post to this blog “Our Money is Not Real” below. Through fractional-reserve banking, banks are allowed to multiply the government issued money up to six times through issuing credit on money that they do not really possess. This money exists on paper only and can disappear with the application of more paperwork. When our banks contract their credit (reduce the loans outstanding), the money supply of the nation is reduced and a depression results.

(6) The fractional-reserve banking is solely responsible for our recessions and depressions and it is nothing more than a form of fraud that our governments allow bankers to perform upon the rest of the economy. It is supported legally through transparent legal fictions that actually contradict each other and make no sense. The primary fiction is that bank deposits are not really deposits, but rather, are loans. But if this is the case, then the depositor commits fraud every time he writes a check on money that he has already loaned to his banker. An accessory to the depositor’s fraud is the banker who honors the check even though he has already borrowed the money and loaned it to another customer.

(7) Depressions can be brought to an end if the lawyers and judges of our country consistently apply the laws of fraud to the bankers who duplicate and triplicate our money during boom times and then reduce that money to vapor when they contract that credit.

Our Money is Not Real

Economic depressions are all the result of one single phenomenon – government sponsored fraud. If we eliminate the monetary fraud that empowers our politicians, we will have a stable economy that provides growth and full employment without the need for manipulative political institutions like the Federal Reserve. How the government, through its enabling of monetary fraud, causes economic downturns can be explained simply in the following few short paragraphs.

The marketplace, when it is not disturbed by government intervention, is an adaptive system that is self-correcting, eliminating the possibility of long-term downturns. Supply always changes to meet demand as producers change their prices and offerings to meet consumer needs. Massive unemployment is avoided because workers, like other producers, must occasionally change their services and their rates to meet the true sovereign of the market – the consumer.

Large adjustments in consumer demands that are pervasive across the economy are the result of an unstable monetary policy that causes surpluses and shortages of money. These monetary surpluses (known as inflation) and their corresponding shortages (known as deflation) cannot occur if the economy’s money is real. If money is real, its existence remains relatively constant through time without inflation or deflation. On the other hand, if it grows with our “irrational exuberance” and shrinks as our consumer confidence shrinks, it is not real and its volatility is caused by its fraudulent foundation.

How has our government enabled a form of money that is essentially fraudulent, causing depressions and credit meltdowns? To answer this question, we need to first recognize the vaporous quality of our money. The vast majority of our money has no physical existence at all. It is not backed by gold, green paper, or anything else. We can claim to have a thousand dollars in the bank simply because the bank says we can. Our money, known among economists as “fiat” money, is just a recorded number that our bank is required to keep accurate track of. Fiat money exists for no other reason than the right authorities say it does and this nebulous nature of our money is, as we will see, the reason why it can mysteriously come and go from our economy.

To understand fiat money we have to understand that fiat money is produced by our banks; not by the treasury department, the mint, or some other government organization. It is produced as if it was counterfeit currency, by private companies that actually increase their profits by making more of it through a practice that is essentially fraudulent. Banks become profitable businesses by producing as much fiat money as they can. To see how this is done, let us take three simple examples of a bank issuing credit:

1. The owner of the bank loans out $1,000 of his own money. In this case, the borrower has $1,000 more to spend, but the banker has $1,000 less, so the total effect of the transaction does not inflate or deflate the economy. This was the original form of credit but it is now almost nonexistent.

2.The owner of the bank loans out $1,000 that he has borrowed from his customers. He has given the loaning customer a $1,000 CD and he has given the borrower $1,000 as a loan. The total effect on the economy is again innocent. The borrower has $1,000 more to spend for the period of the loan, let us say two years, but the CD holder, who cannot claim his money for the two year period of his CD, has $1,000 less to spend. Again, there is no inflation or deflation. This form of credit, however, is minor and not important for the subject of this post.

3. The owner of the bank accepts $1,000 from a depositor into a checking account. He promises, with the government’s help, to keep the money safe, however, in truth, he actually loans the $1,000 out to a borrower (the government actually requires him to keep a small token of the checking out in a "fractional reserve," but the amount is insignificant and is ignored here for simplicity sake). There are now two people who are walking around claiming to have the original $1,000, the depositor, with his check book, and the borrower. The original $1,000 has turned into $2,000 in the economy’s money supply. This is called inflation.

The vaporous quality of our money is caused by the loaning out of our deposited money. Loaning out money that the depositor has a right to immediately demand is the source of the fiat currency that represents most of the money in our economy. When there are lots of borrowers with “irrational exuberance,” our economy inflates and when there are foreclosures and fewer borrowers we have deflation and rising unemployment as employers run out of the cash needed to make payrolls. Our government’s endorsement of the duplicating of depositors’ money through “fractional reserve” banking is the source of all monetary instability.

But fractional reserve banking is not only the source of our vaporous and unstable money supply, it is essentially fraudulent. If the banker is promising to keep the depositor’s money in safekeeping while loaning it to borrowers, his promise is made under false pretenses. On the other hand, if the depositor is making the claim that he actually has the money in a safe place while it has gone to a borrower, he is, perhaps unwittingly, making a false claim – his claimed money is really unavailable to him.

Once the government begins to enable this fraudulent money juggling, it either has to have the courage and integrity to fix the problem or it has to hide the problem through a series of techniques that protect the local banks from getting caught appropriating their depositors’ money. This is precisely the reason why politicians created the Federal Reserve System in 1913. Through a central bank, any local bank that ran short of money could be protected by the central bank. This plan, of course, failed in the Great Depression when the number of local banks with shortfalls became too great. Now the government had to take another step to cover its mistake, creating the FDIC which insured depositors even in periods of massive shortfalls. The FDIC, of course, only works because now the bank failures are covered directly by the taxpayer (the ultimate but involuntary insurers). Once the government begins to correct its distortions of the marketplace it needs to cover its ineptitude with even greater market distortions.

The only regulation that is needed to protect bank deposits is the enforcement of the law against fraud. If a bank promises to keep your money in a safe place and then is caught using it for another purpose, the officers of the bank are guilty of fraud and should go to jail. Enforcing this simple regulation would eliminate the need for the Federal Reserve System and the FDIC and would allow our economy to be based upon money that is real.

Seinfeld, Kramer, and the Federal Reserve

Every American taxpayer should know how his country’s banking system works. While how it operates may appear obscure and even intimidating, it is really so simple that all you have to do is watch one particular episode of the Seinfeld sitcom reruns to master its dark secrets.

In the episode entitled “The Wigmaster,” the mechanics of our Federal Reserve banking system are perfectly modeled through the mischief of an unscrupulous parking lot manager. Think of the parking lot as your local bank, watch the show carefully, and walk away with the equivalent of a graduate degree in money and banking.

Two Seinfeld buddies, George and Kramer, have decided to “deposit” their cars in Jiffy Park’s long-term parking lot (Kramer actually gets a free t-shirt for making his initial deposit). The manager of Jiffy Park, like your local bank president, agrees to take care of the deposited property, including providing the necessary storage and protection.

Our two heroes walk away satisfied that their properties are safe, apparently unaware of the deceptive use that will be made of their vehicles. The manager of Jiffy Park, like the president of our local bank, is not really in the business of storing and safekeeping people’s property – instead of depositing the deposits, he loans the deposits out to others for his own gain. In the case of Jiffy Park, the cars are borrowed by prostitutes to perform “tricks,” while in the case of our local bank, the deposits are borrowed by business people, homeowners, and other people performing transactions of a more legal nature.

That our bank deposits are loaned to borrowers is not really a secret to most of us, but the more sinister aspects of the banking system become apparent when we realize that, if our deposits have been loaned out to borrowers, they should not be available to be returned to us upon our demand. This, like the case of Jiffy Park, reveals the dark side of loaning out for profit what really belongs to other people.

Kramer chooses to withdraw his deposit (his car), when it is currently being used by a prostitute plying her trade. This is invariably what will happen when people make withdrawals from their bank accounts. In Kramer’s case, Jiffy Park tells him that his property is currently unavailable, but he can have a Mary Kay Cadillac instead. In the case of our bank withdrawals, our money might be on loan, but we can have someone else’s deposited money instead.

Like Kramer, we can go about our business using someone else’s deposits. In Kramer’s case, the excitement of a pink Cadillac is enough to make him forget that his own deposit is unsafe. In the case of our bank deposits, the money of another bank customer is just as good as our own. Everything is fine until Kramer and the owner of the Mary Kay Cadillac want there vehicles at the same time or until there are a large number of simultaneous withdrawals from our bank.

For Jiffy Park, there are other vehicles to tantalize the gullible customer but in the case of our local bank, fooling the customers requires the help of the Federal Reserve. As the “lender of last resort” the Federal Reserve is in the business of providing an endless supply of Mary Kay Cadillac’s to our local bank. If too many customers want there deposits back when they are on loan to others, the Federal Reserve will always produce more deposits that look just like our deposits, keeping the bank from the embarrassment of having to admit that your deposits are not really deposited – they are being used by the bank to make its own profit.

So, as long as the Federal Reserve keeps coming up with pink Cadillacs, what is the harm? The harm is called inflation by credit expansion. Jiffy Park has taken, for example, ten cars and made them look like twenty. Ten drivers deposited ten cars and think they are the sole possessors of the ten cars, but ten prostitutes also think they are the rightful possessors of ten cars. Twenty people think that they have exclusive use of a vehicle, but there really was only ten cars deposited in the lot. Jiffy Park has counterfeited ten additional cars.

In the case of our bank, the amount of money originally deposited is believed to be owned by the depositors, but the borrowers actually believe that they own the money also (there is a “fractional reserve” of the deposited money that the bank cannot loan out but that amount is small and disregarded here for simplicity’s sake). Due to the bank’s ability to loan out deposits, the economy has far more money in it while having the same number of goods to buy with the money – the bank is the source of inflation. In the same way that Jiffy Park inflated the number of cars possessed through its deceptive practices, the banks are allowed, legally, to inflate the economy by loaning out money that they are pretending to keep “on deposit.” Your local bank counterfeits “legal tender.” In boom periods, banks inflate the economy; in periods of pessimism, they reduce the loans and thereby deflate the already inflated economy, causing unemployment.

The Seinfeld episode ends with an innocent Kramer in a police lineup after he and a prostitute made simultaneous claims to a Mary Kay Cadillac. This is where the analogy to our bank ends; unlike Jiffy Park, there can never be a shortage of Mary Kay Cadillacs for our banks, the Federal Reserve can produce an endless number of them. The Ponzi scheme of banks counterfeiting money by undepositing deposits can continue until the American taxpayers learn about their banking system and find out that they are the ones buying all the Mary Kay Cadillacs.