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Sound Money Saves Lives

Yet more on the WW1 roots of today's money...
It is PROBABLY no coincidence that the 20th Century – the century of central banking – was also the century of two world wars and multiple genocides, writes Tim Price at Price Value Partners.
Yet the 'origin story' of the US Federal Reserve, still the most important of the world's central banks, is one with which many longstanding financial practitioners may still be unfamiliar. Edward Griffin, in his book 'The Creature from Jekyll Island', explains how the US Federal Reserve was conceived.
"On a cold November night in 1910, a handful of financiers boarded a private railway car in conditions of extreme secrecy in New Jersey. The passengers included the Republican whip in the Senate and a business associate of the banker J.P. Morgan; the Assistant Secretary of the US Treasury; the president of the National City Bank of New York, the most powerful bank of the time; a senior partner of the J.P. Morgan Company; the head of J.P. Morgan's Bankers Trust Company; and a representative of the Rothschild banking dynasty in England and France. In other words, of the six passengers, five of them were representatives of private banks.
"Those financiers would go on to meet in secret at a hideaway owned by J.P. Morgan and several of his business associates, where visitors would gather in the winter to hunt ducks. The name of this remote retreat: Jekyll Island."
This group met in order to tackle five pressing issues:
  • How to reverse the growing influence of small commercial banking rivals and concentrate financial power among themselves;
  • How to allow the money supply to expand so that they could retake control of the industrial loan market;
  • How to consolidate the modest reserves of the country's banks into one large reserve and standardise each bank's loan-to-deposit ratios, thus protecting themselves from the possibility of bank runs;
  • How to shift any ultimate losses incurred by the banks onto taxpayers;
  • How to convince the US government that the scheme was established to protect the public – as opposed to protecting the interests of a private banking cartel.
"Perhaps most cynically of all, to address this fifth problem, the group decided to adopt the structure of a central bank and, furthermore, ditch the use of the word bank altogether, in favour of a coinage that would evoke the image of the federal government instead. Three years later, after the passing of the resultant bill in Congress on 23 December 1913, the US Federal Reserve was born."
"The Federal Reserve System," it today proudly tells us, "is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded."
Few could deny the latter point. Rather than maintain a narrow focus on managing the money supply, the Fed is now figuratively all over the shop, its fingerprints evident everywhere across the economy. Jim Grant, interviewed on CNBC in February 2014:
"The Fed insists on saving us from 'everyday low prices' – they call it deflation. I submit that in a world of technological wonder, prices ought to be weakening: it costs less to buy things because it costs less to make them. This benign tendency the Fed resists at every turn. It wants the price level (as it defines it) to rise by two percent a year, plus or minus. In so doing, it creates redundant credit that finds its way into other things. These excess Dollars do mischief. On Wall Street we call this mischief a bull market and we're generally all in favour of it.
"The Fed, in substance if not in name, is [still] engaged in a massive experiment in price control. (They don't call it that.) But they fix the Fed Funds rate, they manipulate the yield curve...they talk up the stock market. They have their fingers and their thumbs on the scale of finance. To change the metaphor, we all live to a degree in a valuation 'hall of mirrors'. Who knows what value is when the Fed fixes the determining interest rate at zero? So I said 'experiment in price control' but there is no real suspense about how price control turns out. It turns out, invariably, badly."
The Fed is not alone in having a shady composition of which many market professionals are unaware. Iain Davis for UK Column makes the following observations of the Bank of England:
"Contrary to the stories we are told about the Bank of England (BoE), it is not 'owned' by the Government. The BoE is a private corporation managed by its Court of Directors by virtue of the authority invested in the Court by Royal Charter.
"The Government has no power to interfere in the BoE's 'business'. This can only be done through amendments to its Charter, and the BoE must consent to make the Charter 'anew'. BoE-related government legislation, such as the 1946 and 1998 Bank of England Acts, are legal constructs which the BoE permits.
"The BoE allows the Government to create legislation that enhances its status as a private corporation, one with the "public" authority to make monetary policy – thus affording the BoE immense financial and economic power."
Of the Bank's alleged purpose:
"The BoE declares: 'Our mission is to maintain monetary and financial stability for the good of the people of the United Kingdom. To do this, we provide safe, confidential and reliable banking and custodial services that underpin our responsibilities as banker to the UK Government.'
"The BoE provides services to the Government. It 'acts' as the Debt Management Office's 'agent' for settlement of its debt securities (government bonds). The BoE also 'acts' as the UK Treasury's 'agent', holding its gold and other assets.
"The current governor of the Bank of England, Andrew Bailey, has blamed British inflation on many and varied people. He blamed workers and their unions for calling for wage increases. More recently, he blamed businesses for increasing prices, as they try to absorb the rising costs that result from inflation.
"The BoE, like the Government, uses the Consumer Prices Index (CPI) to measure inflation. The CPI does not provide a true reflection of the real impact of inflation and only partially records the effect of inflation. Nor does the CPI tell us anything about the cause of inflation.
"Inflation is primarily caused by the monetary policy that is firmly under the control of the BoE. In 1951, the economist Ludwig von Mises said: 'Inflation, as this term was always used everywhere and especially in this country [the United States], means increasing the quantity of money and bank notes in circulation and the quantity of bank deposits subject to check. But people today use the term 'inflation' to refer to the phenomenon that is an inevitable consequence of inflation, that is the tendency of all prices and wage rates to rise.'
"Bailey is among the many modern 'financial experts' who conflate the effect of inflation – rising prices – with its cause, monetary expansion. In his most recent letter to the chancellor of the Exchequer, Andrew Bailey wrote: 'The increase in CPI inflation in the aftermath of the pandemic mainly reflected large increases in global energy prices and other tradable goods prices...Russia's invasion of Ukraine...greatly exacerbated the rise in energy prices as well as wholesale prices of many agricultural commodities...These external factors continue to add significantly to inflationary pressures in the United Kingdom.'
"According to Bailey, sterling inflation mainly reflects the impact of 'external factors'. The BoE's – and Bailey's – eagerness to blame anyone and anything for current inflation, except the BoE's own monetary policy, is utterly at odds with its own stated purpose.
"The BoE's Monetary Policy Committee (MPC) lays out its alleged responsibility:
"Monetary policy affects how much prices are rising – called the rate of inflation. We set monetary policy to achieve the Government's target of keeping inflation at 2%. Low and stable inflation is good for the UK's economy and it is our main monetary policy aim.
"Again, according to the BoE, it controls monetary policy and it is this – not so-called pandemics, wars or wage demands – that 'affects how much prices are rising'. Suggesting that it can control inflation, the BoE declares that managing inflation is in fact its 'main monetary policy aim'.
"While quick to take credit for on-target, stable inflation, the BoE points the finger at everyone else when the situation deteriorates. It both claims that it can control inflation and that inflation is beyond its control.
"Currently, the BoE is seemingly failing to 'maintain monetary and financial stability'. If it can't perform its primary function, what use is it? On the other hand, if it is capable, then perhaps we should entertain the possibility that it is deliberately trying to destabilise the economy. Either way, it hardly appears trustworthy."
Iain Davis concludes his exhaustive piece on the BoE as follows:
"The Government neither owns nor directs the BoE. The private Bank of England corporation is, and always has been, entirely and irrevocably beyond government control."
Years of easy money and an associated build-up of sovereign debt have brought us to what feels perilously close to the Anglo-Saxon bond market endgame. This year's US debt ceiling debates and political brinksmanship, for example, have been even more than usually fraught. Given recent monetary stimulus, the inevitable inflation, and even more recent interest rate policy, an objective observer could be forgiven for thinking that both the Fed and the BoE were deliberately trying to crash the financial system quite deliberately, in order – presumably – to drive through the compulsory introduction of Central Bank Digital Currency, a nastily fascistic solution (programmable currency) in search of a non-existent problem (in that nobody other than central bankers even wants it). On which note, the financial history Russell Napier, in an interview with fund managers Incrementum AG, makes an interesting observation:
"I must tell you a funny story. There is a CBDC in the Bahamas, and I was recently in the Bahamas, and everybody I met, I asked them if they're using the sand Dollar, which is the CBDC, and I couldn't find anybody. Believe me, I did ask young people, because obviously old people tend not to; and the reason they weren't using it is that it wasn't really adding any functionality.
"Then I was at dinner one evening, and I asked the gentleman beside me. He said, 'Oh yes, I use it all the time' and that surprised me because he was the first person I encountered that used it, but also he was probably about as old as I am. I said, 'That's really interesting'. He brought out his phone, showed me the app, and told me how he used it. I said, 'That's interesting; what do you do for a living?' He said, 'I'm the central bank governor'.
"Then the lady next to him chipped in, and she showed me how she was using it as well. I said: 'Well, let me guess. Are you the wife of the central bank governor?' She said yes. So, as a means of transaction, it doesn't really add any functionality. However, as a store of value, it could, particularly in a crisis, become a huge threat to just about everything."
'A huge threat to just about everything'. Sounds like something consistent with a central bank.
There are innumerable reasons to favour sound money over fundamentally unsound fiat. Probably the most compelling dates back to the outbreak of hostilities in July 1914. If the various combatants had been forced to pay their way honestly, the First World War would indeed have been over by Christmas, because the protagonists would all have gone bankrupt. Instead, they chose the politically expedient option to go off the gold standard, ushering in problems over debt and monetary corruption that linger to this day.
Sound money saves lives. Unsound money destroys them.
London-based director at Price Value Partners Ltd, Tim Price has over 25 years of experience in both private client and institutional investment management. He has been shortlisted for the Private Asset Managers Awards program five years running, and is a previous winner in the category of Defensive Investment Performance.
See the full archive of Tim Price articles.


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