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Legal Tender Renders Planning Impossible
by Keith Weiner
There is much confusion over what the legal tender law does. I have read articles, written by people who are otherwise knowledgeable about economics, claiming that legal tender forces merchants to accept dollars under threat of imprisonment. Recently, I wrote a short article for Forbes clarifying how legal tender law works in the US.
Legal tender law has nothing to do with merchants. If you want to sell steak dinners in your restaurant for silver, you may legally have at it. Unfortunately, the tax code discourages your would-be customers as I wrote in another article.
The legal tender law targets the lender. It grants to debtors a right to repay a debt in dollars. In practice, this means that if you lend gold, the debtor gets a free put option at your expense. If the gold price rises, he can repay in dollars. If it falls, of course he will be happy to repay in gold. It’s a rotten deal for the lender.
The relationship between lender and borrower is mutually beneficial, or else it would not exist. The parties are exchanging wealth and income, creating new wealth and new income in the process. The government is displeased by this happy marriage, and busts it up by sticking a gun in the lender’s face. His right to expect his partner to honor a signed agreement is violated.
Because no lender will lend gold under such circumstances, gold is relegated to hoarding and speculation only. This strikes a blow to savers, because the best way to save is to lend and earn interest. Savers are forced to choose between hoarding gold, getting no yield, or holding dollars and getting whatever yield crumbs are dropped by the Fed.
If there’s no lending in gold, what takes its place? The Fed force-feeds credit in ever-larger amounts, and at ever-falling interest rates.
The Fed is supposed to make its credit decisions in order to optimize two variables. First, employment shouldn’t be too high or too low. Second, consumer prices shouldn’t rise too quickly or too slowly. The Fed has little ability to predict employment and prices, and even less control over them.
Most Fed critics focus on the quantity of money. Is there too much, or too little? Is the rate of increase too fast or too slow? Is monetary policy too tight or too loose? Lost in this noise is any discussion of who the lender is.
If you buy Treasury bonds, then you know you are lending to the government. You are enabling welfare spending, and a few cases of lending to such worthy activities as housing speculation.
What if you don’t? Well if you deposit dollars in a bank, you are funding the bank’s purchase of Treasury and other bonds. You know, or reasonably ought to know, that this money is being lent.
But suppose you don’t even do that. Suppose you keep a wad of dollar bills under the mattress. You are still lending. The dollar is the Fed’s credit paper. You are financing the Fed’s activities, which consist of buying Treasury bonds and various other bonds.
You’re the patsy. You are the lender.
Anybody who wants to earn dollars is bringing demand for dollars to the market—in other words, making a bid on dollars. With what do they bid? They bid with their labor, with tangible goods, and with land. All assets today are bidding on the dollar, though most people look at it inside out. They think that all assets are offered for sale at the right price.
In any case, this universal bid on the dollar provides credit to the Fed. By placing wealth in the Fed’s hands, everyone gives it their savings to lend out.
Forget about what this does to consumer prices. There are much more serious implications. In place of the delicate, mutually beneficial relationships involved in lending, the Fed sucks the savings from the people, and pumps it out at high pressure. The Fed’s indiscriminate deluge of credit is not a substitute for individual thinking, planning, acting, and lending.
The consequence is incalculable destruction.
The legal tender law does not attack the ability to do a trade here and now, “cash on the barrel head.” It attacks something subtler but just as important. It destroys your ability to plan long range, to prepare for the passage of time. Time is a universal in the human experience. We all work during our adulthood with urgency, because some day we will grow old and be unable to work. To plan for that day, we save while we work and lend our savings to earn interest.
The motivation to borrow also comes from planning for the passage of time. The entrepreneur wants to start or grow a business now, while he has the opportunity, and energy. That’s why he is willing to pay interest out of part of his profits.
In a loan, the borrower gets money immediately, but the lender gets paid later. Time is an integral part of the deal, as one party prefers to be paid later.
In the free market, nothing comes between the saver and the entrepreneur. In central banking, by contrast, the legal tender law attacks the very heart of the free market, like an insidious poison. It disenfranchises the saver, enabling the Fed to plunder his nest egg and undermine his retirement plans.
At the same time, the Fed abuses the hapless entrepreneur too. It lures him to borrow with the promise of low rates, and then like Lucy pulling the football out from under Charlie Brown, cuts the interest rate again. This drives down his profit margin and plunders his capital.
Legal tender law takes away your ability to plan for the future. It replaces a hundred million individual decisions whether or not to have tea, with a giant high-pressure fire hose that blasts hot wastewater indiscriminately. No matter whether they open the spigot further, or close it slightly, the scalding deluge of Fed credit is not in any way equivalent to the individual planning, saving, and borrowing that would go on if we had a free market.
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<<But suppose you don’t even do that. Suppose you keep a wad of dollar bills under the mattress. You are still lending. The dollar is the Fed’s credit paper. You are financing the Fed’s activities, which consist of buying Treasury bonds and various other bonds. You’re the patsy. You are the lender. Anybody who wants to earn dollars is bringing demand for dollars to the market—in other words, making a bid on dollars. With what do they bid? They bid with their labor, with tangible goods, and with land. All assets today are bidding on the dollar, though most people look at it inside out. They think that all assets are offered for sale at the right price.>>
Which is why I call this stock market hyperinflationary.
There are no assets to these prices. Prices are just fiat now, multiplying like cancer, sometimes used for this or that propaganda or geo-political purpose but inexorably, exponentially growing. Fiat is taking on its own existence now, and unless the printers can succeed in some future 'controlled crash', then they are already out of control today. I think all these articles hand-wringing over the 'price' of gold/stocks/houses/oil/food are missing the POINT. It's not about "price" now. There is no price. Anyone feeling rich from these big fiat numbers is simply enjoying counting their BIIIIIG pile of beads, which they got in exchange for Louisiana being purchased right out from under them.
Now, it is about getting control of whatever assets you can, and holding them safely until there we can establish a proper valuation system for them. Show me an investor whose wealth is in the 'market', and I'll show you an investor whose money is not working for them. Our current 'price' system is on its last legs, suffering the same fate they all do, when transactional notes are mistaken for the assets themselves. I believe there will be (is already) a crash, but it is a crash upward, and looking at 'price' points along the way is just noticing the individual sparkles of a waterfall.
Sice 2009 the SP500 companies have earned $4T in income. Their stock prices have doubled in that time. But those corps have returned $3.8 trillion to investors in the form of buybacks and dividends, funded by an orgy of corporate borrowing of "free" money. Instead of employing people, investing in capital stock, new research, new markets, etc. they have just strip mined their companies. Investors are left holding the bag, with an asset with a much worse balance sheet and much worse prospects for the future. IBM is the poster chiild for this.
Iraq, Libya, Ukraine are all about legal tender, and forcing it on others, anybody we can, Australia is next.
Ditching CO2 taxes was a no no, almost as bad as accepting gold.
So your conclusion: FED = Not Good
ABOLISH THE BANKS, AND THE FED.
Problem solved, once the leaches of society are all breaking rocks for road building to rebuild our crumbling infrastructure.
Job creation, and more spending money in everybody's pocket.
Send all politicians, lawyers, and religious leaders to hard labor camps as well.
We could rebuild the world in about a week, and enjoy peace as humanity, not as political and religious factions dying for the whims of some sociopaths.
ya but those leeches are a majority, and havily armed with AK47s, and they never bought guns through legal channels, most were illegals when they got their weapons cache.
I like your generalization, and I might seek further optimization:
_career_ politicians (people who have no "skills" other than lobbiest) -> jail
_damage-seeking_ lawyers (people who fish around or ambulance-chase) -> hard labour
_career_ religious "leaders" (people who "make a living" by fleecing money/power) -> off the cliff
But ya... all to hard labour wouldn't be bad either.
get over it....
Gold can be saved as a wealth asset. If you believe, as I do, that it will soon be worth a lot more, consider it a call option on the uncertain future.
Fiat currency...oddly enough is essential for gold to function properly and most efficiently as a wealth asset. If it is lent, that creates paper gold as your note can be used in leiu of real gold...that leads to gold reserve banking.
Here is the article that convinced me:
http://www.usagold.com/halldiscussion.html
This concept is completely contrary to the usual thoughts of gold buyers but it proves how gold can (and will ) function as a superb wealth asset in the future.
I am actually trying to work today so I'm recycling part of something else below, but legal tender laws are a big part of what gives the FED it's de facto monopoly (as opposed to its concurrent statutory monopoly) on the money supply, discounting/clearing, and settlement (as opposed marketplace competition with Treasury Dollars, Silver Notes, Private Bank Notes, et al.)
ABOLISH US LEGAL TENDER LAWS!
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Fractional Reserve is only a small part of the problem, but FULL RESERVE is a large of why the evil Rinse, Repeat cycle of failed reforms HAS NOT BEEN BROKEN every time it has been tried.
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The first step to break the cycle of evil is to break the MONOPOLY - this has to be done on a whole bunch of levels, some of which include:
1) Solely tying the money supply to the creation of government and bank issued debt has to go (which also addresses granting the banks a monopoly skim on the proceeds of money creation by the issuance of government debt), and allowing money to be created by the federal government borrowing needs to be completely eliminated.
2) Expanding the range of institutions participating in the creation of money (bring back the Subtreasuries, establish public banks at the State and Municipal levels, the establishment and licensing of commodity banks, and bringing certain types of NBFIs into the cycle without intermediary banks.
3) Creating the legal framework and mechanisms to allow digital money to exist outside of banks (if you have USD in ANY form other than paper notes- it exists ONLY at a licensed bank (regardless of whether this is supposedly segregated cash in a pension plan, a PayPal or equivalent account, even BitchCoin Exchange balances, these institutions all have to use intermediary banks).
4) Creating the legal framework and technical mechanisms required for "self-extinguishing money" (this is actually not THAT difficult as it existed in the pre-digital days of the real bills [receivables] trade, before even electric calculators).
5) Abolishing legal tender laws and the monopoly on issuance of bank notes by the Federal Reserve (this infringes on the contracting rights of private parties and prohibits competition among note issuers who might have a superior product - the notion that JPM and its toxic crap balance sheet creates notes that trade at par with my local CU and its mortgage based balance sheet is ludicrous).
6) Abolishing Universal Banks and developing specific regulations for Retail, Commercial, Investment, Custodial and Commodity banks as well as CUs.
7) Instituting effective concentration risk/market share caps - specifically the banking units of JPM, BoA, Wells Fargo and Citi must be broken up (this is in addition to revoking their authority to operate as universal banks, which necessarily involves commingling funds since money is fungible)
8) Fixing Fractional Reserve - worthy of and requiring an entire book in and of itself, particularly since the last time I checked the reserve requirement calculation regulations themselves were about 1000 pages. However, there are 2 critical points: 1) there needs a mechanism whereby liquidity CAN be injected into the system in times of crisis to facilitate clearing and settlement, and that liquidity is WITHDRAWN once the crisis passes (the abolition of legal tender laws and the creation of self-extinguishing money would facilitate this. 2) The type of reserve and its discounting must be appropriate for the type of bank and the services it offers - a situation which mandates negative absolute rates, regardless of inflation would be an unmitigated disaster and in addition to impoverishing the masses and some of the banks would then concentrate real wealth in the hands of those bankers that survive.
http://www.zerohedge.com/news/2014-06-13/currency-war-140-years-monetary...
"ABOLISH US LEGAL TENDER LAWS!"
Sort of like saying, "Abolish the mob's extortion rules."
No, abolish the criminal DC US. The legal tender laws go with them to the guillotines.
To abolish the Washington Den of Criminals you just need to remove yourself from its jurisdiction. And as soon as one or another state does so (my money's on Texas or Alaska), it'll be game on for a new era of freedom and game over for the world's foremost impediment to it.
If fiat currency is reduced to merely being an effective medium of exchange and it NOT used as a store of value...does this not solve the problem without goint through all the 'formation of...various...banks?
LVP, I believe you have staked the heart of the problem. FOFOA opened my eyes to the TWO SEPARATE AND DISTINCT functions of money, as store of value and as medium of exchange, which I had (surprise) never learned in school. But everything else flows from this distinction. It is by conflating these two functions into one, pretending they are the same, that enables a government to fool its people with its fiat. If people were educated to recognise these 2 functions as DISTINCT, and intrinsic to money, then I don't think government would ever be able to finance a war with fiat again.
Yes! but there is large segment of the "market" (both individual and business) that doesn't want the RESPONSIBILITY/WORK of finding an appropriate non-monetary savings/investment vehicle for the fruits of their labor. If market providers have the option of offering competing notes that could better act as a store of value, and trade at an appropriate premium, the "convenience "types are more likely to participate.
There is also the issue of chronic bank balance sheet opacity, but again, if banks can actually offer competing notes , then stronger banks with better balance sheets have an incentive for greater and simplified disclosure, which wasn't technically feasible the last time there were competing banknotes (silver notes are an exception since they one could ascertain the premium without the interwebz, but I'm not sure I'd accept Jack Lew's signature as proof there was metal to back the note).
But without setting up competing banks then the Federal Reserve or something that inevitably will evolve into its evil twin will still have a monopoly on the money supply.