Ron Paul, the Federal Reserve
and the United Nations
Wednesday, March 7, 2012
by Aaron Ruhl
Aaron Ruhl writes:
I first must say that I do appreciate the website you have put together at TheGreenPapers.com. It is an invaluable resource when trying to gain an understanding of our fairly complicated political process.
I also appreciate your commentaries (the few I have read thus far, anyway). I am learning quite a bit about our country's founding through reading your essays on why libertarianism isn't conservatism (I already knew this to be true [my understanding is libertarianism is the remnant of the classic "liberal" or "radical" that fought for individual freedoms, while both major political parties are both classically "conservative" as they want to see power centralized and to remove personal freedom (at least in their actions, if not their rhetoric)] but still find your writing interesting and educational).
While waiting for the next installment, I have been going back through some of your recent commentaries on the Republican nomination. I have been impressed by your level of analysis, much better than I see in traditional media. However, I came to your essay published this past Dec. 29th that discusses the Republican candidates and could not resist replying to you about your analysis of Ron Paul. Although you demonstrate an extraordinary degree of knowledge about the history and politics of this country, I'm afraid you are mistaken about some economic issues.
First, I have a problem with your analysis of Ron Paul's position on the Federal Reserve. You suggest removing the power of a central bank would lead to inflation. Please point me to one instance of hyperinflation that did not involve meddling in the supply of money by a central authority. I'm afraid you won't find one because inflation is only caused by the creation of money (often facilitated by a central bank [hyperinflation can only be caused by a central bank]).
I also have an issue with you suggesting that Ron Paul supporters don't care about the implications of their ideas and don't bother to understand the economic impacts of the policies they support. I would be willing to wager that if you took a sampling of Ron Paul supporters and a sampling of American voters, and compared their abilities to discuss economics, especially regarding the Fed, you would find that a much larger portion of Paul supporters would be able to do so than the sampling of random voters. I'm not at all suggesting that this is true for all Paul supporters, but most people that support Ron Paul do so because they actually understand the issues he talks about (otherwise they would still be supporting one of the other candidate ;-)).
I also find it interesting that you compare the suggestion that the UN might attempt to take over the American money supply to the suggestion that space aliens visit earth. Now I am not personally ready to subscribe to such a theory as I have not personally sought out evidence for it. However, I'm curious as to whether you are aware that 17 countries in Europe relatively recently ceded control over their money supply to a supranational organization. I do not think it is unreasonable to suggest that such centralization of control (or at least desire for it) could be extended to include the United States.
I would be very interested in any response you have on these topics. I will continue to visit your website regardless of your (incorrect imho ;-)) opinions of Ron Paul and Austrian Economics.
Mr. Berg-Andersson responds:
First of all, thank you- Mr. Ruhl- very much for your kind words about this website in and of itself (whatever you might then think of me and my Commentaries [;-)]).
And I don't at all mind being seen as having been incorrect (that is all up to the reader of that I might write)... but as to the content of that I might write, in either Commentaries or responses to 'vox Populi' such as this: it is ever what I honestly perceive as being the truth as best as I can so perceive it based upon knowledge, experience and observation-- nothing more, nor certainly nothing less.
(By the way, I recently received an e-mail from someone who accused me of "[being] misleading" as regarded something I had written for this website and I reminded that person, in reply, of the dictionary definition of "to mislead" [the transitive form of the verb, as opposed to the intransitive] which is 'to purposely deceive' and 'to knowingly lead astray'...
I may, at times, be wrong-- yes-- but I never mislead! [;-)])
Let me start with the whole issue surrounding the argument (which Congressman Paul himself makes) that the United Nations might find it desirable to take over the money supply- and, by extension, the currency- of the United States of America:
Mr. Ruhl makes note of the fact that 17 countries in Europe relatively recently ceded control over their money supply to a supranational organization and then immediately links it to an opinion of his that he do[es] not think it is unreasonable to suggest that such centralization of control (or at least desire for it) could be extended to include the United States.
This is the quintessential "mixing of apples and oranges", as a (hypothetical) takeover (or even the mere desire for such takeover)- by the United Nations- of a nation's (or more than one nations') money supply/currency is not the same as that which most Member-States of the European Union have themselves recently done.
A far better analogy to what the EU has done as regards its own "EuroZone" is to found, in History, back when representatives of 12 independent- or, at least, autonomous (the distinction is unclear because the shortness of the period of time covering the actual sequence of events precludes the appropriate status from being so readily discerned [in other words: historians ever argue over this!])- republics, once upon a time, met and agreed to such centralization of control over the money supply/currency...
these republics were themselves called 'States' and were, at least ostensibly, 12 of 13 Member-States of a "Confederacy" "stiled [sic]" "the United States of America" (per the Articles under which this Confederacy- however clumsily, in retrospect- operated).
On 16 August 1787- in the midst of the General Convention in Philadelphia which had been called "to revise the Articles" governing their "Confederacy"- these representatives agreed nem. con. (short for Latin nemine contradicente: "no one contradicting"- in other words: without dissent) that Congress shall have power... [t]o coin money, regulate the value thereof, and of foreign coin..., the first portion of the 5th clause of Article I, Section 8 of the very document this Convention was then putting together- the Constitution of the United States of America, of course.
Once that particular decision was taken, these republics cum States of a potentially "more perfect Union" were presented with the prospect of a currency that would, here on out, be multi-State in jurisdiction and regulated by a central authority reposing in the new Federal Government these representatives then meeting in Philadelphia were proposing, no less than what the euro is today to at least most of the constituents of the EU.
Obviously, the Constitution of the United States was sent to the States for ratification by the People of the several States meeting, debating and- ultimately- voting in Conventions set up for that specific purpose and- once 9 of these 13 republics cum States (including the one- Rhode Island- which did not even deign to send representatives to Philadelphia in 1787) had so ratified, the document was in position to become the apex of a triangular 'Supreme Law of the Land' in force throughout the United States of America and which included a single currency/money supply within any and all States that agreed to join this "more perfect Union".
Simply put: the institution of a single currency, along with its concomitant centrally-regulated money supply, in the United States of America back in the late 1780s was a byproduct of the very processes of Republican Democracy (at least as such was understood on this side of the Atlantic at the time): I sincerely doubt anyone can well argue with that!
It is no less with what has recently happened in Europe!
The Member-States of the European Union are all Republican Democracies-- albethey, perhaps, not such in the vision of many of those beholding that concept from here in the United States of America: after all, ours is not a Parliamentary system of governance and we generally much prefer our own "first past the post" electoral system to systems of Proportional Representation with such apparently odd names attached thereto as 'Droop quotas' or 'Hare quotas' or the strange concepts (to we Americans, at least) of the Single Transferable Vote or Alternative Voting--- therefore, whatever agreements their respective Governments might have entered- and may yet enter- into as regards the regulation and governance of the euro is, ultimately, subject to the popular approval of their own voting-age citizens...
if the electorate in the relevant EU Member-States don't like what is being done in this regard, they have the constitutional means through which to "throw the bums out" no less than we here in the United States ourselves do. Thus, the ceding of control over their money supply to a supranational organization is not being forced upon them against their will (or, if it is, there is a democratic means [though it may not so precisely match our democratic means] to which the proverbial Will of the People can- eventually- have its say)!
In this regard, the very suggestion that the United Nations (or any other international body) might- of its own accord (or so is the implication)- take over the American dollar is, at the very least, quite irresponsible and, at worst, most reprehensible Fearmongering. For there is no way such a thing can even be done without the approval, in some form or fashion, of the American People themselves...
if Congressman Paul- or those supporting his candidacy for the Presidency- are rather afraid that the American People might, in fact, do just that-- well-- so be it! To, again, quote former Senator Warren Rudman (R-New Hampshire) "the American People have the constitutional Right to be wrong"; in addition, the very language of Article I, Section 8, clause 5 of the Federal Constitution- granting Congress that very power to regulate the value of its own currency and foreign coin relative to that currency clearly implies a power to, however theoretically, peg the very value of the dollar to a given foreign currency... one can argue against this, to be sure-- that's Politics!-- but it is not inherently unconstitutional: yet this would not be done with the ultimate approval of the American electorate (either that, or the politicians who might exercise just such an option would do so at much peril to their own subsequent re-election or election to other office-- either way, 'We the People' would have our say!)
To quote the late Congresswoman Barbara Jordan of Texas, "My faith in the Constitution is whole- it is complete- it is total"... AMEN, Ms. Jordan!
In that same statement, uttered as the House Judiciary Committee was debating Articles of Impeachment against then-President Richard Nixon during a Summer of 1974 rendered much more heated by the political and constitutional crisis of that time we throw under the rubric 'Watergate' (the same Summer during which I myself cast my very first-ever vote as a citizen of My Country in my State's Primary Elections, by the way), Ms. Jordan also noted the words stated, in favor of Ratification of the Federal Constitution, during the North Carolina Ratification Convention in 1788: "No one need be afraid that officers who commit oppression will pass with immunity"... while her words specifically addressed the subject of Impeachment itself, the phrase can also be well taken to be a general statement of the sentiment of the American People themselves.
To suggest otherwise is to be treating the general American citizenry as mere children (something I also decried in relation to at least some of Congressman Paul's rhetoric in my 29 December 2011 piece).
Now, let us move on to such centralized regulation of currency (and, thereby, money supply) here in the United States of America itself:
On all the American bills of various denominations in my wallet right now are printed the following words "THIS NOTE IS LEGAL TENDER FOR ALL DEBTS, PUBLIC AND PRIVATE"-- I'll come back to what these words themselves portend after the following historical note:
To be fair, many- if not most- of the delegates to that same Constitutional Convention of 1787 in Philadelphia were not exactly fans of paper money-- there is, after all, a reason for the phrase "not worth a Continental" and it was all the result of bad experience with paper money during, and after, the American Revolution. On the same day that the Convention authorized the granting of power to Congress to "coin money" and "regulate the value thereof"- that is, again, 16 August 1787- there was something of a political "bruhaha" over another (albeit related) provision of the proposed Constitution.
The Committee on Detail had reported out- among its listing of the proposed powers of Congress- a provision that would grant Congress the power to borrow money, and emit bills on the credit of the United States. A motion was made by Gouvernour Morris to reduce the clause to merely the words "to borrow money" (his argument was that- if the United States had credit- such bills would be "unnecessary" and- if not- the 'emission' of such bills would be "unjust and useless" [all in all, his argument included the notion that a power to borrow itself implied concomitant credit to begin with]).
Soon, however, the Convention was considering, instead, simply removing the words "and emit bills" and the debate on this divided on pro-paper money and anti-paper money lines. Some of the delegates were hard-core anti-paper money (such as George Read- who would become one of Delaware's first two United States Senators)- who went so far as to opine that, were these very words not struck out, it "would be as alarming as the Mark of the Beast in Revelation") but, in fact, the anti-paper money men were split over whether or not to have an express prohibition (George Mason, for instance, was "unwilling to tie the hands of" Congress: to a point by Pierce Butler that, at the time, "paper was legal tender in no country in Europe", Mason retorted that "if there was no example in Europe, as just remarked, it might be observed on the other side, that there was none in which the Government was restrained on this head")...
in the end, the three words "and emit bills" were struck out by a vote (by States) of 9 to 2 (only Maryland and New Jersey voted 'no'-- New York was, at the time, unrepresented in the Convention [and, again, Rhode Island did not even attend the Convention]) so that the provision in question- now the 2d clause of Article I, Section 8 of the Federal Constitution- would read that Congress shall have power... [t]o borrow money on the credit of the United States.
In the end, there was to be no express provision for paper money... but neither was there express prohibition!
The battle in America over "hard" money (that is coinage) versus paper money dominated the first half or so of the 19th Century (President Andrew Jackson was, by his own telling, himself a "hard money man"-- how ironic, then, that his portrait adorns a modern $20 bill but appears on no American coin!)
Then, in order to fund the Union cause in the American Civil War, Congress passed the Legal Tender Act of 1862 (12 Stat. 345 [signed into Law by President Abraham Lincoln on 25 February 1862]) which specifically permitted Federally-authorized paper money- such bills known as "greenbacks" (due to their prevailing color)- to be used to pay off private debts (which, hitherto, had to be paid off in gold or silver [or its equivalent, such as a bank note backed up by gold or silver in said bank]).
After the Civil War (by which time more and more people found the use of such "folding money" far more convenient in their everyday financial transactions-- problem was: the bills themselves fluctuated in absolute value [that is: in relation to a given amount of precious metal]- meaning that it was possible to pay off a debt [even with interest] with less real money after a time, something that did not make creditors at all happy), the issue of whether or not Congress actually had the power to issue such paper money made its way to the United States Supreme Court.
The cases which dealt with this issue have come to be known, collectively, as the Legal Tender Cases.
The first such Legal Tender case was that of Hepburn v. Griswold [8 Wallace (75 U.S.) 603 (1870)], the result of a citizen of Kentucky named Griswold, the creditor in this dispute, having sued- in his State's courts- a debtor to him named Hepburn for payment in gold instead of the paper currency Hepburn was offering instead. At issue was the fact that, while payment had become due after the effective date of the Legal Tender Act of 1862, the debt itself had been incurred before that date and the Kentucky Court of Appeals (as the court of Last Resort in the Bluegrass State was still called at the time) had ruled in favor of Griswold: Hepburn brought the case before the Federal court of Last Resort on Writ of Error (that is, a claim that a State court had misapplied either a Federal law or the Constitution of the United States itself, if not both).
The Hepburn case was decided on 1 February 1870 (interestingly, on the very day that the United States Senate was actually debating a Currency Bill intended to authorize the expansion of the money supply [by about 15%] while, at the same time [this due to amendments to the bill adopted by the Senate that same day], re-circulating notes from banks with a surplus of same to those with a deficit in other parts of the country [roughly 1/4 of the notes then in circulation would be so transferred]): 7 Justices had voted on the issue (an 8th Justice [the High Court only had 8 Justices at that time (please see the section within our site's Explanation of certain items in the Justices of the Supreme Court" Table re: RECONSTRUCTION for the reasons for this)]- Robert Grier- had resigned from the Court only the day before the decision in Hepburn was handed down) and the vote was 4-3 in favor of ruling that the authorization- by Congress- of payment, in paper money, of private debts incurred prior to the effective date of the Legal Tender Act of 1862 was unconstitutional.
Chief Justice Salmon Chase (who, interestingly, had been Secretary of the Treasury at the time the Legal Tender Act of 1862 had first been implemented) wrote the Opinion of the Court, with Justices Clifford, Field and Nelson concurring; Justices Davis, Miller and Swayne dissented. (As was the practice at the time, the Court convened to publicly read its opinions after [in this case, nearly a week after] the case had already been decided [nowadays, on the other hand, the date of a decision is considered to be that on which the Court publicly offers its Opinion(s) in the case]).
But President Ulysses S. Grant had two Supreme Court vacancies to fill at the time: not only the one caused by Justice Grier's resignation but also the seat vacated upon the death of Justice James Wayne back in 1867 and which Congress had prevented then-President Andrew Johnson from filling through manipulating the size of the Court by statute. Congress had, in fact, already passed (and President Grant himself had signed) legislation specifically setting the size of the Supreme Court at nine Justices (which it has maintained ever since, by the way).
To replace Justice Grier, Grant chose William Strong and, to fill the longstanding Wayne vacancy, he chose Joseph Bradley (both nominations were- coincidentally- announced by the White House on 7 February 1870, the same day the Court and dissenting Opinions in Hepburn were publicly read and both nominations were fairly quickly confirmed by the U.S. Senate [Strong's viva voce on 18 February and Bradley by vote of 46-9 on 21 March]).
Then, on 1 May 1871, the second set of Legal Tender cases (Knox v. Lee and Parker v. Davis [12 Wallace (79 U.S.) 457 (1871)]) were decided by the U.S. Supreme Court, this time by vote of 5-4: the two newest Justices siding with the dissenters in Hepburn to form a majority of the Court now voting to reverse that earlier decision (Chief Justice Chase and Justices Clifford, Field and Nelson- the majority in Hepburn- were now dissenters in Knox and Parker).
Those opposed to the ever-growing use of "greenbacks" in ordinary economic transactions were rather livid at this reversal and many of these openly accused President Grant of "packing" the Court in order to get a constitutional determination more to the liking of those who were pro-paper money (it also didn't help that Chief Justice Chase's Opinion of the Court in Hepburn had itself wandered into the realm of discussing whether or not Congress even had the power to make paper money legal tender to begin with [though this issue was not germane to the case at bar, which only dealt with whether or not a debt incurred prior to the Legal Tender Act of 1862 could be so payed off in "greenbacks"]).
The third, and final, Legal Tender case was to be Juilliard v. Greenman [110 U.S. 421 (1884)] in which a creditor was suing a debtor for repayment of most of a debt but had already refused to accept payment of the balance in "greenbacks". Here the question was, indeed, whether or not the statutory provision- by then codified in the 'Revised Statutes of the United States' as Section 3588 of same- to wit: United States notes shall be lawful money and a legal tender in payment of all debts, public and private, within the United States, except for duties on imports and interest on the public debt (it is from this provision- now codified [in since modified form] as Title 31, section 5103 of the United States Code [thus, 31 USC 5103]- that the words cited above as printed on American currency are derived) . By this time: only Justices Bradley, Field and Miller were left from the Court from the Knox and Parker era and only Field and Miller (who had been on opposite sides) were left from the Court that had decided Hepburn.
The vote on the case was 8-1 (as might be expected, Justice Field was the lone dissenter) and Justice Horace Gray wrote the Opinion of the Court upholding the constitutionality of Section 3588 and, once and for all, allowing for American dollar bills to, indeed, be- henceforth- "legal tender for all debts, public and private" (as the paper money in my wallet so tells me it is!).
Justice Gray's Opinion in Juilliard was primarily based on the power of Congress "[t]o borrow money on the credit of the United States" (as noted above: U.S. Constitution-- Art. I, Sec. 8, clause 2)-- how?-- because money itself is the very stuff of borrowing!
For what money really is is but a means of exchange... exchanging what?... exchanging already extended credit for payment of debts incurred!
If you are able to hold an American dollar bill- legitimately received by you into your own possession- in your own hands, you are, in reality, a creditor of the Federal Reserve Bank of the United States of America (I'll get back to the ever-hammered upon "Fed" shortly) in the amount of $1US. Because you are a creditor, you can transfer the $1 credit due (the dollar bill being legal proof of such credit) to someone else in payment of a debt...
thus, I can walk down to the local convenience store in town and pick up a copy of today's edition of the newspaper with the largest circulation in my State of New Jersey (which happens to have a newsstand price of $1, by the way), walk up to the cash register and hand over- to the cashier- this "proof of credit" as payment for the (admittedly, very short-term) debt incurred as a result of what is- in actuality- a legal contract between myself and the storekeeper (as pointed out in my piece for this website on Corporate Personhood, when one purchases something from a store: there is, indeed an Offer [what is on the store's shelves being presented to the buyer], an Acceptance [the buyer picks the desired item off the shelf] and an Exchange [of something of value, literally "sealing the deal" legally: the buyer pays for the item]-- all Anglo-American Contract Law 101!): I discharge the debt immediately by transferring my proof of credit in the form of a dollar bill to the store, after which I can then take the paper out of the store without having to be at all worried about being charged with the crime of Petty Larceny!
The very reason that a dollar bill is called- in America- a bill is because what, nowadays, are 'Federal Reserve Note's are lineal descendants of Bills of Exchange going back to Renaissance Italy: where (to here use modern terminology) retailer A owed wholesaler B an amount that could not immediately be paid in cash (because retailer A was still waiting for Singora Lapido to pay off her tab with said retailer), B could do up a bill- drawn against that which A owed B- which B could then transfer to supplier C as at least part of a payment for, say, a consignment of goods... all *I* did whilst spending my dollar bill to buy the morning paper in town today was pretty much the very same thing: I'm in the position of B- the United States of America is A (for the "Fed" ever owes me a buck for as long as I keep that dollar bill)- and I have merely transferred what A owes B (myself) to C (the store from which I purchased the newspaper)... in other words: I have transferred my credit to offset a debt via which I have exchanged my credit for a newspaper!
What makes this possible? A series of Congressional statutes going back to-- yes-- that aforementioned Legal Tender Act of 1862.
Concomitant with this particular piece of Federal legislation were two others: the National Currency Act of 1863 [12 Stat. 665 (signed into law by President Abraham Lincoln on 25 February 1863, exactly a year to the day after he had signed the earlier Legal Tender Act)] and the National Banking Act of 1864 [13 Stat. 99 (signed into law by Lincoln on 3 June 1864)]-- these laws are often grouped together as the National Banking System Acts (of 1863 and 1864, respectively):
The 1863 law created the office of the Comptroller of the Currency within the U.S. Treasury Department and also mandated a national currency by requiring banks (all chartered by their respective States of the Union, by the way) that wished to be considered "national banks" to invest a certain set percentage of United States securities (in essence, a proportion of a national bank's capital was deposited with the Comptroller of the Currency)- such banks could thereafter issue notes backed by the Federal Treasury, but printed by the Federal Government itself, up to the amount of the banks' capital so deposited, which would make up the "legal tender" as defined by the earlier Legal Tender Act; meanwhile, the second (1864) law provided for the chartering of said national banks by the Federal Government (it is from this that one hears of financial institutions such as the 'First National Bank' or 'Second National Bank' of such-and-such a place, by the way).
But such national banks- no less than any other bank- were still prone to failure during severe economic downturns during the remainder of the 19th Century and on into the early 20th (most notably, the "Panics" of 1873 and 1893 and, finally, one in 1907)- with obvious detrimental effects as regarded the overall stability of American currency- and it was, at least in part, to address this concern that the Federal Reserve Act of 1913 [aka the Owen-Glass Act: 38 Stat. 251 (signed into law by President Woodrow Wilson on 23 December 1913)] was adopted:
Owen-Glass was actually pretty much a "federalization" of an earlier Republican-backed concept known as the "Aldrich Plan" (named for Senator Nelson Aldrich of Rhode Island [his grandson- a Governor of New York and, later, Vice-President of the United States- was named for him: Nelson Aldrich Rockefeller; Aldrich's great-grandson currently sits in the United States Senate: 'Jay' Rockefeller (D- West Virginia)]): the Aldrich Plan would have created a public-private partnership 'National Reserve Association' made up of regional branches stocked with directors culled from the banking profession itself-- its principal purpose would be to loan money, from out of reserves to which member banks would contribute, to national currency-issuing banks that might otherwise default during a financial "panic".
But the Democrats were in control of both houses of Congress and the Presidency after the 1912 Elections!... thus, the Federal Reserve Act.
Owen-Glass set up regional Reserve Banks overseen by a Federal Reserve Board (that which "Fed chairman"- as he is colloquially called- Ben Bernanke chairs today): while, yes, the primary purpose of the "Fed" was to do that which the Aldrich Plan had also sought to do (tide national banks [which were now required to contribute to the reserve fund being thus created (under 'Aldrich', membership was to be optional)] over during economic crisis), Owen-Glass also created the modern 'Federal Reserve Note's- those very dollar bills of various and sundry denominations currently filling my own wallet: 'bills of exchange'/'proofs of credit' that were now to be an obligation of the United States Treasury itself, rather than private "national banks" per se.
But what the Federal Reserve Bank system did- perhaps more than anything else- was to facilitate the flow of credit, as well as stabilize the currency: the reason for this is shown by one of the simplest exercises in Monetary Theory:
The "Fed" pays person A X dollars (this might be, say, for some service rendered to the Government-- let's make A an active-duty soldier home on leave and X is his military pay)... A deposits his entire pay into bank B, a national bank also- by law- a member bank of the Federal Reserve system... B has to deposit a stated portion of X (per its "reserve rule": we'll call this f [for "fed"]) with the "Fed" and is allowed to then loan- should it wish to do so- the remainder (which we'll call Y: Y=X-f) to, say, a client C who, instead of immediately using Y for his own purposes, deposits it in bank D (also a bank legally required to then send a stated portion as a "reserve" to the "Fed" [we'll call this r (for "reserve")], leaving bank D with Z (which is, of course, equal to Y-r).
X is- in Monetary Theory- M0, that is: base money- the total liabilities of the "Fed" (its assets, in cash, plus the required reserves of member banks on deposit with it) from which X had to be paid out in the first place; the total of X+Y+Z, on the other hand, is M1, aka narrow money- money in circulation (which includes so-called "demand deposit" accounts, such as a checking account on which one [say, C in our example (let's pretend- just for sake of this argument- A, for some reason, has only a savings account) can do up a draft entitling the bearer of same to "demand" payment in the amount of the check [yet another way, in the modern world, to transfer credit in order to satisfy a debt and, thereby, exchange said credit- in the form of money- for goods and services], hence the very term "demand deposit"):
say the soldier's pay is $500 and say both banks B and D are required to deposit 15% in reserves with the "Fed": M0 was $500 but M1 is $1286.25 (X+(X-f)+([X-f]-r where X=500 or, put another way, X+(X-[.15X])+([X-.15X]-.15[X-.15X])... it is easy to see (here assuming a closed system that does not really exist) how such "fractional reserve banking" facilitates the flow of credit through such concomitant increases in "money supply" (though it is also equally easy to see how- were such a closed system to actually exist- that same money supply would contract rather suddenly once soldier A begins to draw down the $500 he originally deposited: in order to pay soldier A, bank B would have to then call in the loan to C which would, in turn, require bank D to pay C!)
Actually, such a "closed system" does exist... it is just that it is far larger than the four entities (soldier A, bank B, borrower C and bank D) in the admittedly simplistic illustration above... and this closed system happens to be called "the Global Economy".
My admittedly flippant reference to Mr. Ruhl's "space aliens visit[ing] earth" in my Commentary of 29 December last was intended to convey the idea that the notion that the United Nations might itself want to take over the American money supply/currency is itself largely based on a mere, albeit strong, belief that the UN (whatever that means! [for just which entities, institutions or persons within the UN seemingly desire such a thing?-- and, more to the point, where such desire might even exist, on what basis would this even be practicable (putting aside likely American resistance to this, as already opined earlier in this response [even with the fact that Americans ever have the constitutional right to not so resist]?) even wants to do so in the first place- a belief, in essence, that is not inherently different than that of my long-ago protagonist in college to the effect that "space aliens" want so badly to come to (even, perhaps, take over) this planet!
But I could have used the concept of "space aliens" in another manner relative to this discussion-- in defense of the following maxim:
No one on Earth trades with anyone other than other persons!... that is: nobody is doing business with space aliens!
The flow of money- which, again, is merely a flow of credit in payment after payment after payment after payment (etc. etc. ad infinitum ad nauseam) of debt after debt incurred- is itself, then, a closed system. Money, even where exchanged for other currencies and then re-exchanged and re-exchanged until it is back in the form of American dollars, never leaves this here third planet from the Sun!
I owe money to my friend Joe who owes money to his friend Jim who, in turn, owes money to a friend of mine, Bob, who owes me money (or, at least, very likely will)...
I buy a newspaper from a storekeeper who takes my $1 and uses it as part of a payment for rent of his retail space: his landlord takes what was- so recently- my $1 'credit' and uses it to pay his quarterly property tax bill from which my municipality (utilizing such property taxes in the form of local revenue) pays the Public Works guys who are re-paving my street so that I don't have to then "work out the Road Tax" through exchanging my labor (me and my neighbors paving the street ourselves) for a smooth street surface on which to drive my car out of my neighborhood so I can go about my daily business!...
the United States of America owes money to the People's Republic of China which owes money to the European Union which owes money to... my goodness!... the United States of America!
("Here's some money-- pass it on!")
Money may not, in fact, make the world go round... but it sure as hell goes around the world!...
and there is no other reason to even have money (although it be true that a few do hoard money for sole sake of so hoarding it and there are those who collect coins and currency that might well fetch a hefty sum were they to be sold on the open market, yet these coins and currency are not being sold at the moment)!
Money is only useful when it is actually being used: sure, one can save it for the proverbial "rainy day" but, eventually, it will rain!
The simplistic placards reading 'END THE FED'- admittedly just about as prevalent at 'Occupy' rallies as at more than a few "tea party" functions and Ron Paul campaign whistlestops- are the very reason such as my conservative Republican retired bank loan officer Dad do not support the candidacy of Congressman Paul (or, for that matter, the 'Occupy Wall Street'ers coming from the other side of the American ideological divide), for so "ending the Fed" would be an altogether destabilizing force, not only on the American currency/money supply (and such scarcity of money would- per the laws of Supply and Demand re: Price Equilibrium- have an upward impact upon the very value of money itself but also on the flow of credit [which is, in and of itself, the very essence of what money actually is] in general, both here at home as well as abroad [hence my own reference to Hyperinflation: those that already have would, if only theoretically, be better off but money (in the form of credit [which, again, is money]) would be harder to come by for those who would, in fact, need it but not be so easily able to get it-- the very flow of credit would then be most adversely impacted: for what happened in early 1920s Germany when something that once cost 30 marks would cost thousands of marks (yet one still only had 30 marks from but a short time back when- as one might have then pined- "30 marks was still 30 marks")? If a car costs $16,000 but I only have $30 to my name-- well------ but it would be the same if I had but $16,000 and the same car cost over $8.5 million!] ...
by the way: do those supporting Congressman Paul even use money?
Reminds me of a joke that was making the rounds during Ron Paul's previous presidential campaign- four years ago now:
<<Three friends regularly go out to lunch together-- but one of them is a Ron Paul supporter who never picks up the tab because 1. he doesn't believe Federal Reserve Notes are constitutionally legal tender and 2. he never seems to ever carry his gold and silver nuggets around with him in any event">>
(Yes... I am being facetious here [if only to further my point]... for I well know Congressman Paul's supporters [some of whom are friends of mine-- yes, they do pick up their share of the bar tab ;-)] use money in its more ordinary form, too!)
The gold standard, for example, was abandoned precisely because it is so restrictive of trade (and money is valueless without trade, for there is no need for credit where one is not going to ever incur debt [even in the form of ordinary everyday spending]): because it was an attempt (of, yes, long-standing-- but an attempt nonetheless) to link currency (by extension, all currencies on the face of the Earth) to a single commodity (here in the form of precious metal[s]) which then forced a choice (ultimately, the proverbial "Hobson's" one) upon national economic and political leadership between movement of capital and an autonomous monetary policy.
Then again, maybe we don't even want movement of capital across our own international borders...
but we Americans, denizens of what is so often described as "the last remaining Superpower", tend to so often forget (or, at least, don't want to think)- in many different arenas and fields of endeavor (not just economics or geopolitics)- that, while- yes- we can always (as well as at any time) "pick up our ball and go home" (indeed, it is our constitutional right- under our own sovereign Constitution- to do so), others "out there" will be provided a new ball with which to continue to play the "game". And, yes, we Americans do have the ability, as well as the right, to thereafter "look out the window" while watching the others so play while ever repeating, to ourselves, the mantra that 'hey, we didn't really ever want to play anyway'...
perhaps- just perhaps- if we repeat this to ourselves more than enough times, we might even come around to actually believing it, too!
When I hear those who longingly pine for the return of the gold (or other similar) standard, I also see those who are fervently urging people to come together in order to catch a train that has already long left the station for its faraway destinations: for the direct link between money and precious metal has for so long already been broken (hell... I went to the gas station the other day, used my bank-issued debit card in payment for the gasoline and didn't even *see* any "money" [in quotes here because I am purposely using the word in its colloquial sense, as a synonym for "cash, in coin or bills" instead of the way I've been using it in most of this response]!)...
I also hear the echoes of the long-ago famous words of William Jennings Bryan before the 1896 Democratic National Convention (albeit, admittedly, for very different reasons [for Bryan, unlike myself herein, was arguing in favor of substituting (or at least making equivalent) a different precious metal- silver, in his case- for gold]):
If they dare to come out in the open field and defend the gold standard as a good thing, we shall fight them to the uttermost, having behind us the producing masses of the nation and the world; having behind us the commercial interests and the laboring interests and all the toiling masses, we shall answer their demands for a gold standard by saying to them: you shall not press down upon the brow of labor this crown of thorns; you shall not crucify mankind upon a cross of gold.
In the real world of- now- the early 21st Century, you also shall not crucify the trade (all that money really is at all good for in the first place) of mankind ("space aliens" need not apply! [;-)]) upon a cross of either gold or silver or any other precious metal, gem or stone... for the world itself has already moved along so far from these!