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The Real "Deficit" is the Money Supply

"Growth of business requires a corresponding growth in the quantity of money, just exactly as a tree, that grows vigorously ...

Saturday, March 8, 2014

Praise for Patrick J Buchanan's "The Great Betrayal"

"Nothing can be purchased cheap of foreigners, that must be purchased at the cost of leaving our own labor unemployed and our own good raw materials unused."  Peter Cooper 1883.

The Great Betrayal, by Patrick Buchanan is one of the finest defenses in print of what Buchanan calls "economic nationalism" - putting the best interests of your country first.  

Buchanan demonstrates the fallacies of free trade - eviscerating the arguments advanced by its adherents.  In the Great Betrayal the economic principles necessary to revitalize our manufacturing base and create millions of jobs here in the United States are established - an economic blueprint that would essentially reverse the trend of "deindustrialization" that has been decimating the jobs and wages of the middle class for the last 40 years.  

This book, published in 1998, is more timely now than ever. 
Moreover, it is a great book for conservatives to read and study because it teaches the true history of conservatism.  Historically and traditionally the Republican Party has always embraced the tariff system.  In American history it became known as the American System as advocated by Alexander Hamilton and Henry Clay.  The tariff was a superior way to raise revenue and protect U.S. business from foreign companies who operate under conditions that would be illegal in the United States. Behind a tariff wall the United States became the economic superpower of the world.

I want to conclude this post with the following book review that was written by the late Rev. R. J. Rushdoony in March 1999. Rushdoony is known as one of the founders of the modern day homeschooling movement, and was a prolific writer and theologian.  

This book review is noteworthy for several reasons.  

First, Rushdoony reviews Buchanan's book not only from the viewpoint of economics, but also from a Christian theological perspective.  

Secondly, Rushdoony, though he was greatly influenced by Austrian economic theory (free traders like Murray Rothbard and Ludwig Von Mises) he nevertheless had the intellectual honesty to depart from their teachings when confronted with the truth.  Unfortunately, this cannot be said of men like Gary North (Rushdoony's son in law) who continues to promulgate the myths of free trade to the detriment of our nation.

Here is Rushdoony's review in full:

The Great Betrayal (Boston: Little, Brown, 1998) is a work of major importance by one of the finest minds on the current scene.  What it has to say is of very great importance, both economically and politically.  My purpose in this review is not to describe Buchanan's superb analysis but to point to its theological importance, one of major importance in our time.

It has become commonplace in this century to see free trade as basic to American and world economic advancement.  Nothing could be further from the truth.  Free trade is an economic concept with theological roots.  Because God is the Creator of heaven and earth and all things therein, it follows therefore that basic to all meaning is the theological interpretation.  Now the essential meaning of free trade is the essential goodness of men and nations, so that all things work naturally together for good, not by God's ordination, but by man's.  Now it is true that economic protectionism is plainly affected by original sin, but it can have other objectives as well.  Buchanan rightly points out that "global free trade" is at odds with early American thinking and is rooted in a secularism which is "a first cousin to Marxism" (174 f.).  It is associated with a deep animosity towards our historic American views of church and state.  Free trade represents a shift in man's worldviews "from a God-centered universe to a man-centered one" (201).  Free trade also shifts the burden of taxes from trade to the citizen.

Clearly ideas do have consequences, and free trade represents a world view alien to a Biblical one.

For men of the last century, like Richard Cobben, "free trade was the way, the truth, and the life (189).  Buchanan represents a Biblical perspective.

It is understandable why Buchanan's study is so important.  It represents a return to Christian premises in the economic and political spheres, and to neglect Buchanan is to neglect our future.  This is a book to read and circulate.

Friday, May 25, 2012

The Real "Deficit" is the Money Supply

"Growth of business requires a corresponding growth in the quantity of money, just exactly as a tree, that grows vigorously one year by the nourishment of the earth and air, received through the sap, requires a greater quantity of that sap the next year to continue the growth and health of the tree... Precisely so it is with nations.  Prosperity, if we have any, is attended with growth, and a necessity for an increase of money.  Withhold the increase of money and you will dwarf the nation, or kill it, and murder the inhabitants."
-- Peter Cooper 1883

Several months ago I was listening to the Bloomberg Surveillance radio program on my ride to work.  That morning Tom Kean was interviewing economist Bruce Barlett and an interesting point was brought out.

Barlett has been in talks with  U.S. Treasury officials and they have told him privately that it was imperative that the nation's money supply be increased by $2 trillion in order to restore growth to the weak U.S. economy.

You read right - $2 trillion!

Is this figure right?  Based on the chart below it seems to be accurate - for if the financial meltdown of 2008 had not occurred and the banking system had continued to expand their loans (money supply) at the same rate as when the economy was healthy --  the money supply today would be over $11 trillion, or $2 trillion greater than today's current supply.


Consider the following chart from the Federal Reserve.  The thick red and blue lines on the chart below are mine.  I did my best to trace the approximate angle of the growth in Bank Credit from 2002 to the beginning of 2008 -- before the trajectory of the chart begins to roll over as the banking system began to tighten credit.

The point where the red and blue lines meet (at the top of the chart) gives us a rough estimate of where the money supply needs to be before we can once again see good economic growth.  The thick blue line represents the deficit in the money supply.


This money shortage is the real deficit -- the deficit that is most damaging to the economy.  This deficit represents the difference between a sufficient money supply, one where the economy is operating at full employment and goods and services are being facilitated between buyers and sellers, and an insufficient money supply were millions of people are either unemployed or underemployed, not because there is no work to be done, but because there is a shortage of money to pay for that work.

A growing economy always needs a corresponding increase in the money supply to facilitate a growing universe of transactions.

A scarcity of money creates economic recession.  This illustration taken from the book The Deficit Lie by Rick Boettger demonstrates the problems caused by too many goods and services chasing too few dollars.  The circle at the top right represents all the wealth that could have been created but never was because of the recession.


Let's take a closer look at the raw bank credit data.  These numbers represent the actual annual changes (in billions of dollars) in bank credit at commercial banks beginning in 2004 and leading up to the financial crash in 2008 and then on to the present (2012).

Year Bank Credit (Billions)
2004 +548.1
2005 +704.4
2006 +800.7
2007 +805.5
2008 +354.2
2009 -269.8
2010 +229.8
2011 +245.4
2012 +118.9

From 2004 to 2007 the banking system was growing the money supply by 500 to 800 billion dollars per year as bank credit expanded.  Then came a sharp drop off in 2008 (a 56% decline from previous year) and then an absolute decline in 2009 (-269.8).  The money supply bounced back a little in 2010 (+229.8) and 2011 (+245.4) helping to stabilize the U.S. economy -- but has yet to recover fully to the growth rate of the 2002 to 2008 era.

In truth, this debilitating shortage of money (about $2 Trillion) is the primary cause of our nation's economic woes.  Nevertheless, when the banking system finally reopens the monetary spigot of bank credit -- the paralyzed conditions of trade and commerce we are now experiencing in the U.S. will come to an end.

That's the good news.

The bad news is that under our current monetary system the only way to increase the money supply is to borrow from private banks.  So when the banks do begin to loan again, the money supply will surely increase -- but so will our indebtedness.

Monday, April 30, 2012

Thomas Edison answers the "Money Question"

The chart above shows how much of our Federal Debt is owed to the private commercial banks ( $1.6 Trillion ).   Savings And Loans Institutions own an additional $1.6 Trillion.  When you add to this how much debt is held by the Federal Reserve ( $2.7 Trillion ) the sum is $5.9 Trillion dollars.   Where did the Federal Reserve and these U.S. Financial Institutions get the money to purchase these U.S. Government Securities?  They didn't "get" the money, they created it.

The following are quotes from an interview with Thomas A. Edison.   They appeared in the December 8, 1921 edition of the New York Times.   In this interview Thomas Edison endorses Henry Ford’s plan to pay for the completion of the Muscle Shoals dam by issuing new money directly from the National Treasury    -without incurring any debt or interest costs.

There is great wisdom here from one of America’s greatest men.  More importantly, this wisdom is applicable to our present day as our nation is searching for answers to our trillion dollar debts and deficits.

Though Edison is famous primarily for his revolutionary inventions (the light bulb, phonograph, etc.), he was also an astute economist - one of the best ever in this writers opinion.   The world could benefit immensely from his observations on how a money system should work.

In the following interview Edison discusses the nature of money, paper money vs. gold, and the inherent inflationary qualities of interest bearing money.   

Most importantly, Edison demonstrates that money created directly by the National Treasury (without debt and without interest)  for the  building of our nation's infrastructure, is a far better monetary policy than the one we presently employ - borrowing private bank created money - and forever paying the banks interest.

The Constitution grants Congress the power to create money (Article 1, section 8, clause 5).  

No private banking institution should have this power - though unfortunately, about 90% of our nations money supply is currently created by private banks for their own profit through a process called fractional reserve deposit expansion.

Edison's mental sharpness is abundantly evident as he doesn't succumb to the fallacy that money must be gold or silver or some other commodity in order to be valuable.   

Edison also nails down the primary cause of price inflation - interest on borrowed money.  

Paying for things with borrowed money always causes the final cost to be greater than the original price.  Or as Edison put it, "under the present system of doing business we simply add 120 to 150 percent to the stated cost."  

And when one considers that under our current U.S. monetary system all money is loaned into existence - you can begin to fathom the state of our current predicament. 

I believe this New York Times article should be required reading for all who want a deeper understanding of our current money system - and how we can fix it.  

Quoting at length:

Mr. Edison - Gold is not money until the people of the United States and other nations put their stamp on it.  It is not the gold that makes the dollar.  It is the dollar that makes the gold.  Take the dollar out of the gold, and leave it merely yellow metal, and it sinks in value.  Gold is established by law, just as silver was, and gold could be disestablished, demonetized by law, just as silver was.  When silver was demonetized the former so-called dollar became worth about 50 cents.

Reporter - But would not Mr. Ford’s suggestion that Muscle Shoals be financed by a currency issue raise some objection?

Mr. Edison - Certainly.  There is a complete set of misleading slogans kept on hand for just such outbreaks of common sense among the people.  The people are so ignorant of what they think are the intricacies of the money system that they are easily impressed by big words.  There would be new shrieks of ‘fiat money,’ and ‘paper money’ and ‘greenbackism,’ and all the rest of it – the same old cries with which the people have been shouted down from the beginning.

But maybe we have passed beyond the time when the thoughtful 2 per cent. – you know, I gather from my questionnaire that only 2 per cent. of the people think.

Maybe they can’t shout down American thinkers any longer.  The only dynamite that works in this country is the dynamite of a sound idea.  I think we are getting a sound idea on the money question.  The people have an instinct which tells them that something is wrong, and that the wrong somehow centers in money.  They have an instinct, also, which tells them when a proposal is made in their interests or against them.


Now, as to paper money, so called, every one knows that paper money is the money of civilized people.  The higher you go in civilization the less actual money you see.  It is all bills and checks.  What are bills and checks?  Mere promises and orders.  What are they based on?  Principally on two sources – human energy and the productive earth.  Humanity and the soil – they are the only real basis of money.

Don’t allow them to confuse you with the cry of ‘paper money.’  The danger of paper money is precisely the danger of gold – if you get too much it is no good.  They say we have all the gold of the world now.  Well, what good does it do us?  When America gets all the chips in a game the game stops.  We would be better off if we had less gold.  Indeed, we are trying to get rid of our gold to start something going.  But the trade machine is at present jammed.  Too much paper money operates the same way.  There is just one rule for money, and that is, to have enough to carry all the legitimate trade that is waiting to move.  Too little or too much are both bad.  But enough to move trade, enough to prevent stagnation on the one hand and not enough to permit speculation on the other hand, is the proper ratio.
Reporter - Then you see no difference between currency and government bonds?
 Mr. Edison - Yes, there is a difference, but it is neither the likeness nor the difference that will determine the matter; the attack will be directed against thinking of bonds and currency together and comparing them.  If people ever get to thinking of bonds and bills at the same time, the game is up.

Now, here is Ford proposing to finance Muscle Shoals by an issue of currency.  Very well, let us suppose for a moment that Congress follows his proposal.  Personally, I don’t think Congress has imagination enough to do it, but let us suppose that it does.  The required sum is authorized – say $30,000,000.  The bills are issued directly by the Government, as all money ought to be.  When the workmen are paid off they receive these United States bills.  When the material is bought it is paid in these United States bills.  Except that perhaps the bills may have the engraving of a water dam, instead of a railroad train and a ship, as some of the Federal Reserve notes have.  They will be the same as any other currency put out by the Government; that is, they will be money.  They will be based on the public wealth already in Muscle Shoals, and their circulation will increase that public wealth, not only the public money but the public wealth – real wealth.

When these bills have answered the purpose of building and completing Muscle Shoals, they will be retired by the earnings of the power dam.  That is, the people of the United States will have all that they put into Muscle Shoals and all that they can take out for centuries – the endless wealth-making water power of the great Tennessee River – with no tax and no increase of the national debt.

Reporter - But suppose Congress does not see this, what then?

Mr. Edison - Well, Congress must fall back on the old way of doing business.  It must authorize an issue of bonds.  That is, it must go out to the money brokers and borrow enough of our own national currency to complete great national resources, and we then must pay interest to the money brokers for the use of our own money.
The bank bail out and the Fed's recent QE2 have greatly increased the Fed's holdings of Federal Debt.


That is to say, under the old way any time we wish to add to the national wealth we are compelled to add to the national debt.

Now, that is what Henry Ford wants to prevent.  He thinks it is stupid, and so do I, that for the loan of $30,000,000 of their own money the people of the United States should be compelled to pay $66,000,000 – that is what it amounts to, with interest. 

People who will not turn a shovelful of dirt nor contribute a pound of material will collect more money from the United States than will the people who supply the material and do the work.  That is the terrible thing about interest.  In all out great bond issues the interest is always greater than the principal.  All of the great public works cost more than twice the actual cost, on that account.  Under the present system of doing business we simply add 120 to 150 percent to the stated cost.

But here is the point:  If our nation can issue a dollar bond, it can issue a dollar bill.  The element that makes the bond good makes the bill good, also.  The difference between the bond and the bill is that the bond lets the money brokers collect twice the amount of the bond and an additional 20 percent, whereas the currency pays nobody but those who directly contribute to Muscle Shoals in some useful way.

If the Government issues bonds, it simply induces the money brokers to draw $30,000,000 out of the other channels of trade and turn it into Muscle Shoals; if the Government issues currency, it provides itself with enough money to increase the national wealth at Muscle Shoals without disturbing the business of the rest of the country.  And in doing this it increases its income without adding a penny to its debt.

It is absurd to say that our country can issue $30,000,000 in bonds and not $30,000,000 in currency.  Both are promises to pay; but one promise fattens the usurer, and the other helps the people.  If the currency issued by the Government were no good, then the bonds issued would be no good either.  It is a terrible situation when the Government, to increase the national wealth, must go into debt and submit to ruinous interest charges at the hands of men who control the fictitious values of gold.  

Look at it another way.  If the Government issues bonds, the brokers will sell them.  The bonds will be negotiable; they will be considered as gilt-edged paper.  Why?  Because the Government is behind them, but who is behind the Government?  The people.  Therefore it is the people who constitute the basis of Government credit.  Why then cannot the people have the benefit of their own gilt-edged credit by receiving non-interest bearing currency on Muscle Shoals, instead of the bankers receiving the benefit of the people’s credit in interest-bearing bonds?

Says People Must Pay Anyway.

The people must pay any way; why should they be compelled to pay twice, as the bond system compels them to pay?  The people of the United States always accept their Government’s currency.  If the United States Government will adopt this policy of increasing its national wealth without contributing to the interest collector – for the whole national debt is made up of interest charges – then you will see an era of progress and prosperity in this country such as could never have come otherwise.

Tuesday, August 9, 2011

The Cause of the Great Recession

The chart above illustrates both the cause and severity of our current "Great Recession."   The banking system creates money when they extend credit.  The collapse of bank credit during the last  three years has led to the worst recession in the post World War II era.

"The function of money is not to make money but to move goods.  Money is only one part of our transportation system.  It moves goods from man to man.  A dollar bill is like a postage stamp:  it is no good unless it will move commodities between persons.  If a postage stamp will not carry a letter, or money will not move goods, it is just the same as an engine that will not run.  Some one will have get out and fix it.” Henry Ford, 1934.
 As can be gleaned from the chart above, during the last 3 years the banking system has substantially reduced the growth of new loans on their balance sheets..  This is the primary cause of the "Great Recession."


Because a vital ingredient for the success and growth of any economy is an adequate and sufficient money supply.  And the volume or amount of money in circulation is critical.

Money is a tool that we use in order to trade with each other. It moves goods and services "from man to man."  And when this "tool" is in short supply the economy begins to stagnate or contract as less transactions are possible.

A scarcity of money is like a shortage of stamps at the Post Office during Christmastime.  If the post office ever failed to provide enough stamps a lot of letters and cards would go unsent needlessly.

Similarly, a shortage of money can be likened to a shortage of tickets at the movie theater.  If a movie theater sits 100 people, but the managers of the theater only printed 90 tickets, 10 seats would go empty.  

Unfortunately, in our present day economy, we have millions of "empty seats" - people who are unemployed or underemployed because of a lack of "tickets" in the economy. 

Consequently, an economy cannot grow unless the money supply is growing with it - helping to facilitate a growing universe of transactions.   Money activates production and sets the wheels of commerce in motion.

This understanding is verified in the record of history.  During the Great Depression of the 1930's, the money supply contracted by 40% causing great misery throughout the land.  Monetary historian Sheldon Emry summed it up well:
"In 1930 America did not lack industrial capacity, fertile
farmland, skilled and willing workers or industrious farm
families. It had an extensive and highly efficient transportation
system in railroads, road networks, and inland and
ocean waterways. Communications between regions and
localities were the best in the world, utilizing telephone,
teletype, radio, and a well-operated government mail system.
No war had ravaged the cities or the countryside, no
pestilence weakened the population, nor had famine
stalked the land. The United States of America in 1930
lacked only one thing: an adequate supply of money to
carry on trade and commerce
." (emphasis added)
And the same can be said about our country today.  The United States does not  lack wealth - it lacks a medium of exchange to trade that wealth.  Truly, every recession, depression, panic, financial crisis, etc., has one underlying cause - a scarcity of money.

You may be asking, "But who is responsible for how much money is created?"  And why would there ever be a general shortage?

The Creation and "Decreation" of Money:

Banks create our nation's money supply whenever they extend credit by making loans.  Economists call the way banks create money "Fractional Reserve Banking."  When banks extend credit by loaning money to their customers they add to the nations money supply - creating new money that never existed before. But money creation is not a one way street.  The opposite is also true.  When loans are repaid to the banking system, the money is extinguished and subtracted from the money supply. 

This brings us to a critical point:

All money is borrowed into existence.  If banks create a sufficient amount of money we are prosperous, if not we experience economic calamity.  

That is, under our current monetary system if there is not a debt there can be no money.  Another way to think about it is to consider that if every bank loan in the nation was retired there would be no money left in circulation.

Therefore, in a very real sense, our country is trying to do the impossible - borrow its way out of debt!  So all this talk about paying off our nation's debts fails to consider the mechanics of how the money system actually works.

But why are the banks allowed to create money in the first place?  According to the U.S. Constitution only Congress has the power to create money.  Yet Congress has abdicated this authority to the Federal Reserve and the private banks.  And since the banking system has failed to provide our country with an adequate money system, Congress needs to reassert its Constitutional powers in monetary matters.  There is no reason why the American people should be held hostage by a ineffective banking system.

In conclusion, as the chart above indicates, the banking system has failed to provide enough money for the economy to grow at a healthy rate.  Until this changes, expect more dismal economic data in the coming days.

We will explore this issue in greater depths it future posts.