Federal Reserve Interventionism
Cliff DrokeThe bedrock of the U.S. economic system for nearly the past century has been the policy of interventionism. Specifically, intervention in the financial markets by way of central bank money lending operations and easing (or tightening) of interest rates.
The past 10-15 years alone have witnessed more large-scale interventions in the money markets (the stock market in particular) than perhaps any other time in the 90-year history of the Federal Reserve. But how deep do the tentacles of U.S. central banking extend into the country's economic system? And just how powerful an influence does the Fed exert on the financial system? To see in graphic terms just how extensive and powerful this interventionism is, let's examine the graph below.
The above chart shows the relationship between the Dow Jones Average of 30 industrial stocks and the Federal Reserve's daily securities lending operations. This clear-cut example of monetary intervention is taken from just this year alone. Note how Fed interventionism at specific times and price levels of the stock market has a direct and almost immediate effect on the future course of stock prices. In this manner the entire U.S. equities market is kept afloat at times deemed critical by the central planners. Of course, interventionism of this type goes much further than just the stock market. It also extends to the currency, interest rate, and real estate markets, and to many other areas of economic importance.
Take for instance the currency markets. Although not as much a topic of focus in the financial press as the stock market, a nation's currency is the foundation of its economy and it therefore follows that to enjoy a strong economy a country must have a strong currency. The prevailing policy governing the U.S. currency in recent years has been the famed "strong dollar" policy of the Alan Greenspan era, especially during the Bill Clinton presidency. Larry Bates, editor of the Monetary & Economic Review, has pointed out that since 1971, every economic problem, crisis or crash has been currency-based. In the face of the weakening dollar and apparent abandonment of the strong dollar policy, can a currency crisis be on the immediate horizon for America?
British economist John Maynard Keynes, considered to be the principle architect of our current economic system, wrote in his book "The Economic Consequences of The Peace," "by a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of its citizens." Keynes went on to say, "There is no surer, no more subtle way to overturn the existing basis of society than to debauch the currency. It engages all the processes of economic law that come down on the side of destruction and does so in a manner that not one person in a million can recognize it." (Source: Monetary & Economic Review, Spring 2003)
Bates commented, "This coming dollar crisis, as Keynes says, will "overturn the existing basis of society,' which in plain language means that today you have money that has value and purchasing power, and tomorrow you don't." He added," Money is the wealth transfer agent of all times and fiat paper money is totally dependent on confidence...in the political and economic
stability of the country whose currency you are holding."
Commenting on this startling change of currency policy, R.E. McMaster wrote in a recent issue of The Reaper newsletter, "Now, for most of our lifetimes, the U.S. has enjoyed a monopoly in the global fiat/deb creation racket, as the U.S. dollar was the world's reserve/preferred/premier currency. But that has been called into question of late, and is being challenged by the euro now, and soon by the gold-backed Islamic dinar, and ultimately by the Chinese gold-backed renminbi. But currently, it has been the bear market in U.S. stocks since 1998, the U.S. economic slowdown, low U.S. real interest rates, the panic explosion in U.S. money supply growth, terrorism on U.S. soil, the world- and Islamic-alienating U.S. conquering of Iraq, the flagrant effort by both the U.S. Federal Reserve and the Bush administration to devalue the U.S. dollar, supposedly to help U.S. exports, and simply too many debt-based U.S. dollars circulating globally that have resulted in the progressive disintermediation/flow out of U.S. dollars."
Here is another factor to consider as the economic crisis looms closer: When government spends money for social programs, economic stimulus programs, or to fight wars, it must either tax, borrow, or print the money. As Bates says, "Raising taxes and expanding the size and scope of government only stymies economic growth....Borrowing by government to fund a deficit competes with the private sector for available capital." As I pointed out a week ago in a Gold-Eagle editorial entitled "The ticking time bomb of federal debt," a recent economic study presented before Congress has put the actual federal deficit at $43.5 trillion. Many proponents of federal interventionism have for years sneered at the ballooning federal debt and scoffed at such notions as a coming "day of atonement" for debt will ever hit the United States. "We've experienced good economic times with a huge deficit for years so why should it be any different this time?" they ask. Here's why: at this point along the debt curve, the interest on the debt becomes exponential beyond comprehension. Every week now billions are added to the national debt, and with the War on Terrorism now being waged and other factors mentioned earlier, even if the Fed decides to inflate the currency to deal with these issues it won't bail us out. This is because the total national debt (on both the consumer, corporate, and federal levels) has become so all-consuming that no amount of money can be printed to service it. It's now only a matter of time before the sum of debts collapses the economic system due to its sheer volume alone.
Here are some further considerations on the subject of Federal Reserve interventionism. In the words of its own charter, the Federal Reserve's purpose is "to help counteract inflationary and deflationary movements, and to share in creating conditions favorable to sustain high employment, stable values, growth of the country, and a rising level of consumption." Note the
emphasis placed on consumerism as opposed to manufacturing and industry. And the words "growth of the country" is so nebulous that it would be well within the spirit of the Fed's past actions to interpret this to mean growth of government (as opposed to growth of the country's backbone, the middle class and its institutions). As many have already pointed out, this is
interventionism plain and simple, replete with all the usual assumptions of benevolent omniscience on the part of the central planners.
Economist Hans Sennholz wrote in his famous 1972 treatise on the Federal Reserve System that "The Federal Reserve System is the most important tool in the armory of economic interventionism." He goes on to write, "Its part in the colossal metamorphosis of our country is not limited to the maintenance of cheap money, in order to prolong or create a boom. It also
provides the government itself with the money the planners think they should have, beyond the amount they dare take directly in taxes."
Sennholz went on to show that the Federal Reserve System facilitates the government's own inflationary financing "in period of emergency." It accomplishes this through a system of inflationary financing of budget deficits and the inflationary refunding of government loans. It intervenes to stabilize the government bond market through inflationary methods and manipulates this market to the advantage of the government. "It does all of this," wrote Sennholz, "by wrecking the purchasing power of the dollar; by subtly stealing from the people of this country what it thus provides for the government, through a process similar to the coin-clipping of ancient kings but much more diabolical because [it is] so much less visible."
Sennholz concluded that despite the monetary transgressions of the past, we must anticipate an ever increasing role of the Federal Reserve System in the future with even greater examples of interventionism to come. He proceeds to examine the appalling attempt at total economic control over the U.S. by means of implementation of Emergency Banking Regulation No. 1.
This document is just one of a number of emergency measures that would impose government control over rents, prices, salaries and wages, and introduce rationing; in short, it would impose a strict war-time economy over the U.S. at the whim of the planners. Since we are living in perilous times when the possibility of total war (foreign and domestic) is a constantly looming threat, we must re-examine the provisions contained in this Emergency Banking Regulation (which could easily be implemented
by the President at any time).
The Regulation is based on The Trading with the Enemy Act of October 6, 1917, and covers all banking institutions, including every commercial bank, trust company, private bank, savings bank, mutual savings bank, savings and loan association, building and loan association, cooperative bank, homestead association, and credit union.
As Sennholz observed, Section 2 of Chapter V of the Regulation "is most shocking in its wanton denial of individual freedom and private property." To quote:
"(a) No depositor or share or savings account owner may transfer in any manner or by any device whatsoever any balance to his credit on the date on which this Regulation becomes effective, except for the payment of (I) expenses or reconstruction costs vital to the war effort, (ii) essential living costs, (iii) taxes, (iv) payrolls, or (v) obligations incurred before the date on which this Regulation becomes effective, to the end that the best interest of the war effort and the public will be served.
"(b) Banking institutions shall prohibit the transfer of credit in any case where there is reason to believe that such transfer is sought for any unauthorized purpose.
"(c) After this Regulation becomes effective, banking institutions shall retain until released by Federal authority the original or a photographic copy (face and reverse sides) of each check and other evidence of transfer of credit in the amount of $1,000 or more."
"In short," commented Sennholz, "your money in the bank is blocked unless you propose to spend it toward the war effort, i.e., buy U.S. Treasury obligations or finance expenditures deemed 'vital' by the government. You may withdraw your money for living expenses, but only sums deemed 'essential.' You may pay taxes and wages, and discharge old obligations. But any other use of your money is prohibited. Let us assume that you were saving for another car, new furniture, or a house, or for your children's college education. As such objectives can hardly be called "essential," neither for the war effort nor individual living, your money could be blocked."
Sennholz further observed, "The Emergency Regulation would permit business to pay taxes and wages, but deny all other expenses of doing business. After all, manufacturers need materials, tools, and equipment in order to produce goods and services. Merchants need ever new supplies of merchandise in order to stay in business. Even professional people, such as
doctors and dentists, have expenses other than taxes and wages. This is why the Regulation would halt all economic activity but that of government."
He concludes, "In fact, no enemy attack no matter how devastating to human life and property could conceivably have a more disruptive effect than the Emergency Banking Regulation." With the ongoing "War on Terrorism" and threats of further military action in the Middle East, we must certainly be concerned with the growing possibility (nay, probability) that the Emergency
Banking Regulation will at some point be deemed "necessary" by the Commander-in-Chief.
In the face of these unprecedented economic threats, isn't it high time we got our own financial houses in order? Do it now while the window of opportunity still exists!
June 16, 2003
Clif Droke is the editor of the Gold Strategies Review newsletter, a monthly forecast and analysis of gold and silver futures and precious metals stocks. He is also the author of numerous books on finance and investing, including most recently "Junior Mining Stock Yearbook 2003-2004." Visit his web site for free samples of his analysis at www.clifdroke.com
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