| Misinformation, Disinformation, Mistakes, and Material Omissions Relating to the Money Issue in the Major Media | ||||
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There is so much misinformation,
disinformation, mistakes, and material omissions relating to the money issue in
the major media, it’s like swimming up a waterfall. Nevertheless, one has to
start somewhere. The quotations below and comments that follow were culled at
random from various publications. If those publications believe that their
information is correct and that our criticisms are unwarranted, FAME will be
delighted to print (short) rejoinders. The Economist, “Schools
Brief: The business of banking” - October 30th, 1999 Page 89 In this article, The
Economist purports to explain “why banks evolved, how they function, what
they do, and the challenges they face.” The Economist: “First,
they [banks] are vital to economic activity, because they reallocate money, or
credit, from savers, who have a temporary surplus of it, to borrowers, who can
make better use of it.” The Economist: “Banks
take in money as deposits, on which they sometimes pay interest, and then lend
it to borrowers, who use it to finance investment or consumption. They also
borrow money in other ways, generally from other banks in what is called the
interbank market. They make profits on the difference, called the margin or the
spread, between interest paid and received. As this spread has been driven down
by better information and the increasing sophistication of capital markets,
banks have tried to boost their profits with fee businesses, such as selling
mutual funds. Such income now accounts for 40% of bank profits in America.” FACT: The above statements include a material omission. Banks do not just “take in money.” Banks create money. In 1950, the money supply in the U.S. was about $150 billion. Today, it is about $6.2 trillion. Of the additional $6 trillion, the Federal Reserve created roughly $500 billion. The remaining $5.5 trillion was created out of thin air by banks—and without any work. How do banks create money? In essence, they merely press some keys on a computer keyboard. To quote John Kenneth Galbraith: “The process by which banks create money is so simple that the mind is repelled.” [Emphasis added.] The Economist:
“Governments try to minimize the risk of such [systemic] failure in several
ways. One is to impose harsher regulation on banks than on other sorts of
companies; often the regulator is the central bank.” FACT: The Economist’s claim is
demonstrably false. Banks have much more lenient— even derelict—reporting requirements
than other companies. For example, banks alone are exempt from the Securities
and Exchange Commission regulations that require publicly held companies to
mark their balance sheets to market. Banks alone have been given the privilege
of valuing their “investments” at historic cost rather than at market value.
This means that banks, and banks alone, are able to hide the deterioration of
their balance sheets from public scrutiny. Since the public guarantees the
banking systems’ aggregate balance sheet—by virtue of the so-called lender of
last resort facility at the Federal Reserve and so-called Federal Deposit
Insurance—, why isn’t the true market valuation of that balance sheet public
information? FACT: Representatives of some of the largest banks have been empowered by law, which created a body called the Federal Advisory Council, to meet regularly—and in secret, with no oversight—with the Board of Governors of the Federal Reserve in order to give advice to the Board and to air their concerns. No other regulated industry has the privilege of meeting with their putative regulators in this manner. The Economist: “Another
tack is to try to prevent runs on banks in the first place. Following the
collapse of a third of all American banks in 1930-1933, the government set up
an insurance scheme under which it guaranteed to repay depositors, up to a
certain limit, in the event of bank failure.” FACT: So-called Federal Deposit
Insurance was not set up to prevent further runs on banks. After the banking
debacle of the 1930’s people were generally distrustful of banks, as they
should have been. The so-called insurance plan was put into place to entice
people to put their money into banks. That the “insurance” scheme would prevent
further runs was an added bonus. In effect, the so-called insurance plan is a
subsidy—none other than Alan Greenspan, the current Chairman of the Federal
Reserve confirms this—to the banking system. It was implemented so that people
would again trust the banks with their money. FACT: So-called Federal Deposit
“Insurance” is not insurance. It is an indemnification. As the late Professor
Murray Rothbard has written, insurance as a concept arises only when there is a
large population of actuarially identifiable risks. Risks taken by banks are judgment
calls and do not fit this model. Further, since the banking systems’ entire
balance sheet is subsidized and protected by taxpayer subsidy, there is the
added issue of moral hazard—that the one taking the risk gets the reward if the
risk works out, but that someone else (the ordinary taxpayer) is left holding
the bag if the risk fails. To use the term “insurance” to describe this subsidy
is misinformation. The Economist, “Killing
Glass-Steagall,” - October 30th, 1999, Page 18 In this article, The Economist
purports to explain: “Not before time, America’s Congress has decided to repeal
this bad law. A pity it has not updated the country’s financial supervision.” The Economist: “House and
Senate have agreed to dismantle a law that was badly conceived and kept alive
out of sheer prejudice. … Such a draconian restriction, you might think, must
have had the soundest of motives. Indeed it did. In the four years following
the Wall Street Crash in 1929, some 11,000 of America’s banks, a third of the
total, collapsed. Everyone concluded that they must have been speculating on
the stockmarket and politicians made sure that banks would never be allowed to
do so again. Actually, these fears had no basis in fact. Banks had not, as it
turns out, poured depositors’ money into the stockmarket. Nor was there any
evidence for a second worry: that banks had foisted on a naďve public shares in
dodgy companies which owed them money.” FACT: The Economist has set up a straw man argument, i.e., an argument that is
false, and then attacked that argument. While there were hearings in the
Congress about the malfeasance of some bank officials, “everyone” most
certainly did not conclude that banks had been speculating in the stockmarket,
as The Economist suggests, and such speculating was not the driving
motivation for the Glass-Steagall Act. Perhaps
one of the most astute and plugged-in personalities of the time was Mr. James
Warburg, the son of Paul Warburg (who was the intellectual driving force behind
the Federal Reserve legislation in 1913). Mr. James Warburg, who testified
before the Congress on the money issue several times, and who represented the
U.S. at the aborted London Economic Conference, was also a close confidant of
President Roosevelt. Mr.
Warburg, in his book The Money Muddle, identified what was then seen as
the principal motivation for the Glass-Steagall Act. The idea was that banks,
which created what was then called “bank money,” should use that money only for
short-term liquidating loans, i.e., to finance what was then called “turnover,”
or goods that would soon reach the ultimate consumer. This was another way of
putting forth the so-called “Real Bills” concept of bank credit creation. It was
felt at the time, and it was true, that banks had badly mismatched their assets
and liabilities by financing investments—which were not just stock market
speculation, but were, for the most part, real estate and foreign loans—most of
which were, by their nature, long-term. It was believed that the mismatching of
assets and liabilities was the principal reason for most of the bank failures.
Here is what Mr. Warburg wrote in his The Money Muddle: Page
193: “We must see that demand deposits are loaned out to finance turnover, and
not capital transactions, so that ‘bank money’ may always be what it is
supposed to be—a medium of exchange.” Page
194: “We have seen how necessary it is that there should constantly be an
accumulation of savings out of income, in order that the machinery of
production may be supplied with the fixed assets it requires. We have seen also
that financing for such capital requirements must not come from ‘bank money,’
but should come from the ‘investment market.’ It is the function of the
‘investment banker’ to guide savings into wise and profitable employment and to
guide business enterprise in obtaining the capital to which it is properly
entitled, on favorable terms.” “When
the investment bankers lose their sense of proportion, as they did in selling
foreign loans after the War, or when the public is seized by a speculative
mania, as it was in 1927-29, the investment market ceases to fulfill its proper
function and becomes nothing more than a gambling hell. If, when this happens,
the commercial banks are one and the same as the investment bankers, the whole
‘bank money’ structure is affected, instead of just the capital market. That is
why segregation was necessary.” The
“segregation” that Mr. Warburg speaks of was accomplished by the Glass-Steagall
Act. The Wall Street Journal, “Change Agent: How Alan Greenspan Finally Came to Terms With the Stock Market” by Jacob M. Schlesinger, 5/8/2000 ppA1 In this article, the author says of Mr. Greenspan: “Both he and his institution have a deep-seated belief in the logic of free markets and in the Fed’s ability, given enough effort, to divine it.”
“Progenitor of the Paper Millionaires” In a prominent article on the front page of the B section of The Wall Street Journal July 19th, 2000 describing the career of John Law, the article concludes: “John Law’s experiment, like many experiments, was a failure, even a tragedy for some. But his ideas were like smoke from a bottle: Once out, they could not be put back. He had proved that the value of money is an agreement among people, not an objective standard measurable in nuggets or ingots, a distinction that fostered future stages of wealth creation.” FACT: This is a demonstrably false statement based on the article itself. The article, while describing how Law kept what was truly a fraud going, states: “. . . [John Law] published exaggerated accounts of Louisiana’s riches, mineral resources, and people. … The reality, of course, was quite different. Much of the Mississippi valley was unconquered wilderness. But in Paris, no one knew this. The only thing the French knew with certainty was that prices of the company’s shares would never stop climbing.” So, in other words, John Law misrepresented, which is the indicia of a fraud. It is not that he “proved that there was agreement among people that money was not an objective standard”, but he deceived them; he defrauded them. In the same way, our fiat-funny-money of today circulates because of material misrepresentation and non-disclosure of key information. This, also, is the indicia of a fraud. FACT: When The Wall Street Journal claims that the “distinction fostered future stages of wealth creation,” the Journal is completely misstating the situation. Rather than wealth being created when paper money is created, wealth is being transferred. It is not the same thing. The winners are those who create the paper money and move it around, in our case the banking system and the Wall Street community, and the losers are the people who create wealth in the first place through their work, mostly ordinary working people. The creation of money out of nothing by the banking system is theft, plain and simple.
The Wall Street Journal, “Steady Hand: A Steely Central Banker Lends New Credibility to Mexico’s Economy – Ortiz Beats Back Inflation With Blend of High Rates And Resistance to Pressure – Suddenly the Peso Isn't a Joke” by Peter Fritsch, 5/21/2001 ppA1
In this article, the author wrote “Aided by a vigorous follow of dollars into the Mexican economy, Mr. Ortiz has built a solid currency out of the rubble left behind by the peso’s white-knuckle collapse in 1994.”
FACT: This is complete nonsense. There is nothing “solid” about the Mexican Peso or any other fiat currency. The Peso, like all fiat currencies, is created out of nothing — out of thin air. It circulates because of coercion (legal tender laws) and a combination of misrepresentations and nondisclosure about the mechanism of money creation. For a respected newspaper like The Wall Street Journal to lend its credibility to this scam is an indicia of how uninformed people are about the nature and state of money.
The article goes on to say: “Meanwhile, Mexico’s war chest of hard-currency reserves has swelled to a record $40 billion.” FACT: There are no “hard currencies” today. They are all fiat. The financial elite has triumphed worldwide and has promulgated the notion that some fiat currencies, e.g., the “dollar,” the “euro” etc., are “hard.” They are not “hard.” They are all part of what some economists call the “money illusion.” The idea is that if everybody has “confidence” and believes that the currencies are “hard,” then that belief is enough to transform reality. When the “dollar” collapses, as all fiat currency eventually do, reality will reassert itself. There will be a lot of tears.
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