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Freethought
Association of West Michigan
Meeting Minutes for July 24, 2002, #120
Jeff said
that the topic added to the schedule for November 13 will be a
stand-up comedy impersonation by Joel Welty of the Great Lakes
Humanist Society, Mt Pleasant, entitled “Mark Twain tries
(again) to become a Christian”.
At our next
meeting on August 14, (in three weeks) our member Herman Sullivan,
MD, will discuss “The Neurological Basis of Consciousness”.
At last Saturday’s
picnic two items were left behind: a large knife and a medium
sized bowl, which have not yet been claimed.
One of the
attendees announced that when the Promise Keepers meet on Friday,
August 2, there will be picketing activity at the Arena. Those
interested should assemble first at 4:45 p.m. in front of Fountain
Street Church. On Saturday at 7:30 a.m., at the same location,
a group will assemble to arrange for handing out flyers.
Our topic
for this meeting was The Federal Reserve Bank, presented by Freethought
member, Dennis Murphy.
Dennis stated
that the idea of the Federal Reserve System was enhanced because
conspiracy theories suggested that the elite or unscrupulous people
would control money and banks. What evolved was a unique combination
of private banking and public oversight that effectively controls
the money supply.
To provide
the group with a little history of our monetary system, Dennis
indicated that money serves three purposes: It is a medium of
exchange. It establishes value so that the cost of good and services
can be compared. It can be accumulated and saved.
In the very
beginning, commerce was conducted by the actual trading of goods,
called bartering. Then small items that had value in themselves
were used such as shells, gold, and coins. With the difficulty
of having to handle such commodities, especially for large purchases,
the next evolution resulted in the use of trading of paper; not
intrinsically valuable itself, but which could be redeemed in
actual commodities. This was labeled representative money. Three
eastern states even issued tobacco notes that could be converted
to a certain amount of tobacco, making it much easier than carrying
a large of amount of coins or tabacco leaves. In the late 1800’s
the government started to issue gold and silver certificates,
backed by gold and silver deposits.
Then a major
change occurred with the use of fiat money, which cannot be redeemed
for a commodity like gold and sliver. Pres. Nixon in the early
70’s persuaded Congress to discontinue the requirement of
backing up the system with gold and silver. The belief that prevailed
was that there was sufficient integrity and confidence in our
monetary system so that fiat money would be honored in buying
goods and services, especially if prices remained stable.
Another term
with middle age origins but very much applicable today is fractional
banking. Goldsmiths or hoarders of gold would issue receipts for
deposits, with the receipt itself considered as valuable. From
the deposits the goldsmiths realized they could make some money
by loaning out some of the deposits with interest, as long as
some fraction was kept back as reserve. The failure of not keeping
adequate reserves was dramatically demonstrated in the classic
movie, “It’s a Wonderful Life” starring Jimmy Stewart.
Fractional banking, holding a certain amount in reserve, is a
cardinal feature of modern day banking.
Central Banking
in the U. S.
With the expansion
of the country, there was recognition that a central banking system
was necessary. Other countries had central banks. 1791 was the
date of the first U.S. central bank, patterned after the Bank
of England. It successfully accomplished three things: It served
as a bank for the government itself. It served as a regulatory
agent in monitoring the money supply. It acted as a regular private
bank. But banks in the various states disapproved of a central
bank on the grounds that competing against it would be unfair
since the national bank set the rules. There was fear that eastern
interests would stifle westward growth, and that foreign ownership
of shares would be unhealthy. Some felt that the national bank
was simply unconstitutional. With Jefferson’s support, the
bank was discontinued.
State banking
activities did not provide a better solution. Besides offering
their own bank notes, even barbers and blacksmiths got into the
act. Inflation was out of control through the early 1800’s.
These difficulties gave rise to a change in attitude and a second
national bank emerged, in 1816. The Supreme Court upheld the constitutionality
of the second bank by a vote of 9 to 0, but it was mismanaged
and plagued with wildly fluctuating reserve requirements and sudden
bank note recalls. Even though Nicholas Biddle was able to initiate
reforms, anti-bank Pres. Jackson in 1828 vetoed the renewal charter
and central banking was again defunct for decades.
Interesting
local history
Meanwhile,
Michigan’s history with banking had some distinction in that
in 1837, the Michigan Act was adopted as the first of the nation’s
free banking laws. It allowed the chartering of a bank without
government restriction except for enforcing legal contracts and
prohibitions against fraud. Banks had to provide collateral to
the state auditor and a reserve requirement was necessary. Though
these requirements were positive and necessary, free banking was
fraught with fraud and failures. One fifth of all banks closed
with one year and the average life was five years. Banks improperly
inflated deposits and were unable to redeem their notes.
Another national
bank proposal
But because
some degree of federal control was needed, the National Banking
Acts of 1863 and 1864 were passed which, interestingly, left out
the controversial central bank formation. Its purpose was to:
Create a system of national banks. Create a uniform national currency.
Create a secondary market for Treasury securities to help finance
the Union’s side of the Civil War. With the government taxing
state bank notes at 10%, many state banks converted to national
charter. State banks then gave up creating their own bank notes,
but they survived as state banks by the utilization of checking
accounts.
A central
bank finally accepted
Banking was
still not stable. Reserve requirements were such that banks could
not meet depositor demands. Wealthy individuals like J.P. Morgan
even tried to stabilize banks with their own wealth. But after
a panic occurred in 1907, a senator, two bankers and an investment
official met secretly to formulate a plan for reform, this time
calling for a central bank. Subsequently, in 1913, Congress agreed
to the concept and the Federal Reserve System became a reality.
It called for a system of 12 regional banks, owned by commercial
banks. A board including public representation would supervise
the system.
Besides providing
supervision of the banking system nationally, the FRS also (1)
controls the economy by raising or lowering the reserves required
at member banks, (2) raises and lowers interest rates, and (3)
buys and sells Treasury bonds. These features can effect more
rapid changes in the economy than the activities of the federal
government, who can affect the money pool only by raising or lowering
taxes or by deficit spending. Most world governments control central
banks with the political party in office, whereas U.S. and Germany
are the only two countries with independent central banks.
Dennis concluded
his remarks by saying that William Grieder’s Secrets of the
Temple presented the following interesting phenomenon: at the
turn of the century even the most uneducated could readily understand
the prevailing monetary activities. Today not more than 10% understand
economics to such a degree, as it has become a mystical system
guided by ivory tower priests who disclose very little information.
Discussion
In determining
how the total worth of personal credit cards fits into the money
pool, they are measured by the amount allowed on the cards. The
gold standard has had some strong advocates: Ayn Rand, Alan Greenspan,
current FRS chairman, but since gold has a finite supply, and
since even one country could dominate the market because of gold
in their topography, money supply could be seriously limited.
Greenspan is not only FRS chairman, but he is over the New York
City Federal Reserve Bank, which is considered the leading U.S.
bank because of its history and location. With the stock market
now the larger part of our economy, Greenspan is geared more to
stock market activity. The President with the approval of Congress
appoints Greenspan. The gold in Fort Knox is merely in a state
of storage. It is no longer part of our monetary system. It can
be owned, and made into products, but its worth is like any other
commodity in existence. Deliberations of the FRS board are secret
in order to keep our monetary system stable and free from rumors.
Dennis described the officials of the FRS as “scientists
of economy”. Is it preferable to invest in the stock market
for pension purposes, as opposed to the Social Security system?
An example was recently provided over NPR radio regarding city
employees in an Alabama county. It was determined that benefits
were considerably greater with the stock market than with the
Social Security system. With our electronic monetary system so
popular, and which doesn’t have to be represented by actual
currency, what effect does that have? It is not likely to eliminate
all currency, since some people have to depend upon the handling
of currency. Poor people are more likely to not have checking
accounts or credit cards. A difficulty with a credit card was
described when one of our members had a credit card that was recently
rejected at a restaurant. A follow-up revealed that the FBI had
invalidated the card when it was discovered that an unauthorized
charge had been made on the card, as a result of a possible national
or international scam. The World Bank’s existence may have
some implications for our own monetary system, the effects of
which are not entirely known at this time.
Don Hansen,
Recorder
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