by Gary North
Back in 1969, a Disney cartoonist sat down at his story board and produced a booklet that the Disney organization never saw: The Official Counterfeiter. It was a presentation of fractional reserve banking and the role of the Federal Reserve System.
His name was Vic Lockman. As far as I know, he was the first cartoonist ever to do a booklet based on the Austrian theory of the business cycle. He revised the booklet in 1974. It is now back online.
It is a shame that he did not do a version of this booklet for one of the Scrooge McDuck comic books. He wrote stories for Uncle Scrooge. Of course, the Disney organization would not have released it. Too controversial.
In 1974, let alone 1969, Lockman’s version of how the banking system works was confined to the fringe: Austrian economics. Because he was a gold coin standard advocate, the Greenbackers did not respond favorably to his booklet. They are committed to fiat money.
In 1969, Ben Bernanke was 15 years old.
It was a different world in 1969. Nixon had just taken office. A stock market crash began in 1969, and a recession followed. There was a small surplus in the federal budget in fiscal 1969 – the last time for three decades. Nixon then ran back-to-back deficits in the $23 billion range – unheard of at the time.
The Federal Reserve inflated. Gold began to be redeemed by foreign central banks at the fixed price (ever since 1934) of $35 per ounce. Nixon unilaterally closed the gold window on August 15, 1971. That ended the last traces of the gold standard.
Ron Paul was elected to Congress in the spring of 1976. This was a special election. I went to work on his staff. He lost in November by about 268 votes out of 180,000. I went off his staff.
Bernanke was 22 years old in November 1976.
Paul was re-elected in 1978. It took him from then until 2008 to get a hearing for his explanation of the Federal Reserve System. It took the crash of 2008 to get him this hearing, months after he had called off his run for the Republican nomination for President.
It has taken a long time – almost a century – from the founding of the Federal Reserve to the beginning of public awareness about the way that the FED works and the enormous harm that it causes.
Bernanke is now 58. He is the world’s premier counterfeiter.
Counterfeiting is universally defined as a crime against the state. That is because states want to defend their turf. When you have a monopoly, you want to keep competitors out.
The Federal Reserve System was granted a monopoly over paper money creation. There used to be a legal competitor issued by the U.S. Treasury. We read on Wikipedia:
A United States Note, also known as a Legal Tender Note, is a type of paper money that was issued from 1862 to 1971 in the U.S. Having been current for over 100 years, they were issued for longer than any other form of U.S. paper money. They were known popularly as “greenbacks” in their heyday, a name inherited from the Demand Notes that they replaced in 1862. Often called Legal Tender Notes, they were called United States Notes by the First Legal Tender Act, which authorized them as a form of fiat currency. On the back, they give notice that:
This Note is Legal Tender for All Debts Public and Private Except Duties On Imports And Interest On The Public Debt; And Is Redeemable In Payment Of All Loans Made To The United States.
They were taken out of circulation in 1971, the year that Nixon took the country off the gold exchange standard. Today, we still see these words on Federal Reserve Notes: “This note is legal tender for all debts, public and private.” This is the power of legal tender. It applies only to paper notes. It does not apply to digital money.
So, the Federal Reserve is not breaking the law. The Board of Governors of the Federal Reserve System is a government agency, unlike the 12 Federal Reserve Banks.
The Federal Reserve’s Notes looked very much like the Treasury’s greenbacks until the U.S. Notes were taken out of circulation. The government did not sue the FED for trademark violation. That was because the Federal Reserve Act of 1913 authorized the FED as a central bank that would act with the authority of the U.S. government.
The traditional counterfeiter before 1914 printed bills that looked like Treasury notes. He spent them into circulation. Then, after 1913, when Federal Reserve Notes also looked like United States Notes, counterfeiters had a choice: imitate Federal Reserve Notes or imitate U.S. Notes. The preference was for Federal Reserve Notes, which steadily replaced U.S. Notes.
The Secret Service enforces the laws against counterfeiting. It has always gone after counterfeiters of Federal Reserve Notes.
Why should private counterfeiting be illegal? Because the government recognizes that pieces of paper with ink do not create value. They merely enable the counterfeiters to persuade sellers of valuable goods and services to transfer ownership of these assets to people who have printed up pieces of green paper with politicians’ pictures on them. Privately printed paper bills constitute a drain of those assets away from the government and its beneficiaries and its clients. This leaves fewer assets for the clients of the official counterfeiter to purchase. The government shouts: “Unfair!”
The government recognizes that, with open entry into the counterfeiting market, paper money would be reduced to the market price of pieces of paper within a few years. This would bring the government into disrepute. Politicians fear this. If the public were ever to recognize that the power to inflate is the power to transfer valuable assets to people who have merely printed up pieces of paper, the voters might demand a return to a gold standard, where counterfeiting is more difficult to pursue without getting caught.
The politicians are involved in a form of word magic. They pretend that the ownership of a printing press by the U.S. government endows this press with magical properties. The press creates great wealth out of inexpensive paper and ink. We might call this the Rumpelstiltskin effect, except that old Rump actually had to work from dawn to dusk to spin all that gold.
With a modern printing press, plus some special paper purchased from a company that retains the longest-running monopoly in America, plus some special ink, Congresspersons think the government can create wealth. This is the heart of Keynesianism. It is also the heart of monetarism, supply-sidism, and all of the other schools of opinion except the Austrians.
If private counterfeiters enter the market, they are implicitly making a statement: “There is no magic here. There is just illusion.” The more counterfeiters who practice their trade, the more price inflation there will be. This would reduce the number of voters who believe in word magic. It would force governments to tax directly (income taxes) and indirectly (VAT taxes) through tax collectors. This creates political resistance. It is so much easier to print money.
No one saw this more clearly than Beardsley Ruml, the Rockefeller agent who was the head of the New York Federal Reserve Bank during World War II. He had started out as the head of the Laura Spelman Rockefeller fund. He invented withholding taxation, which was imposed in 1943. In 1945, he gave a speech to the American Bar Association. He told the assembled lawyers this.
If we look at the financial history of recent years it is apparent that nations have been able to pay their bills even though their tax revenues fell short of expenses. These countries whose expenses were greater than their receipts from taxes paid their bills by borrowing the necessary money. The borrowing of money, therefore, is an alternative which governments use to supplement the revenues from taxation in order to obtain the necessary means for the payment of their bills.
A government which depends on loans and on the refunding of its loans to get the money it requires for its operations is necessarily dependent on the sources from which the money can be obtained. In the past, if a government persisted in borrowing heavily to cover its expenditures, interest rates would get higher and higher, and greater and greater inducements would have to be offered by the government to the lenders. These governments finally found that the only way they could maintain both their sovereign independence and their solvency was to tax heavily enough to meet a substantial part of their financial needs, and to be prepared – if placed under undue pressure – to tax to meet them all.
In other words, the government becomes dependent on private, profit-seeking lenders. This is bad from the government’s point of view.
Then he made this statement: “The necessity for a government to tax in order to maintain both its independence and its solvency is true for state and local governments, but it is not true for a national government.” Why isn’t it true of a national government?
Final freedom from the domestic money market exists for every sovereign national state where there exists an institution which functions in the manner of a modern central bank, and whose currency is not convertible into gold or into some other commodity.
The United States is a national state which has a central banking system, the Federal Reserve System, and whose currency, for domestic purposes, is not convertible into any commodity. It follows that our Federal Government has final freedom from the money market in meeting its financial requirements.
Or, paraphrasing another important social commentator, “Free at last! Free at last! Thank Ben Almighty, we’re free at last!”
If you picture Bernanke as a bald troll seated in front of a spinning wheel, with a pile of straw next to him and a pile of gold in front of the spinning wheel, you would have the correct image of real magic. Instead, picture him seated in front of a printing press with paper and ink on one site and Federal Reserve Notes pouring out of the press. This is the correct image of word magic.
If Bernanke could do real magic, he would not be a salaried employee of the federal government. He would not be a tenured professor at Princeton, either. He would be laboring as an independent contractor in luxurious obscurity, working with a team of ex-CIA agents, who would have him under house arrest – a very nice house. He would be working out of Panama, maybe, or perhaps the Bahamas. Next to him on his desk would be a large pile of copies of a children’s book: The Goose That Laid the Golden Eggs. He would greet every visitor by giving him a copy of the book. “You really should read this.”
He is not in the Bahamas. He is in Washington, D.C. This is because he can do only word magic. Examples:
Your hometowns may be struggling with foreclosures. You may have had difficulty getting a loan to buy a car or a house. You may have family members who have had trouble finding employment in a tough job market. You may be worried about your own job prospects when the time comes for you to leave the military. So this morning I thought I’d first say a few words about what the Federal Reserve is doing to help strengthen our economy and increase economic opportunity.
At the Federal Reserve, we are working hard – both as central bankers and as financial regulators – to help restore our nation’s prosperity.
The Federal Reserve will certainly do its part to help restore high rates of growth and employment in a context of price stability.
This is the central banker’s equivalent of the time-honored promise, “Let mommy kiss it, and the pain will go away.” Then after mommy kisses it, she gets out the alcohol, and says, “This is going to sting.”
Bernanke is in “let mommy kiss it” mode. He knows he will soon move to “this is going to sting.” He will blame Congress when that time comes.
It is a lot easier for critics of the Federal Reserve today than it was in 1969, when Vic Lockman printed up the first edition of The Official Counterfeiter. We have had Nixon’s two recessions, Ford’s recession and price inflation, Carter’s price inflation and recession, Reagan’s recession, Bush I’s recession, Bush II’s recessions, and a 6-to-one increase in consumer prices. Gold is up by a factor of 49 to one. But we still have the Federal Reserve in charge. We still have not had an independent audit of the FED, especially of the gold in the vault of the Federal Reserve Bank of New York.
In short, word magic still is the ace-in-the-hole of the U.S. government and most of the world’s governments.
The official counterfeiters still run the world. So, when the debt-based monetary system finally goes belly-up – as word magic systems always do – they will get all the blame they deserve.
You may not think the system will go belly-up. Most people don’t. That is why the official counterfeiters are still in charge. But if the secret of perpetual wealth is pieces of paper with dead politicians’ pictures on them, consider this: the last politician to make it onto a coin was Dwight Eisenhower, and we never see the coins (dollars). On paper, the last one to make it was McKinley: the $500 bill. Have you ever seen a $500 bill?
If you believe in word magic, think of a $100,000 bill with a picture of George W. Bush on it, in front of a sign that says: “Mission Accomplished.”