In Which I Beat Up on a Smart 12-Year-Old Girl (and on Many OC Friends of Mine)

I’ve asked lots of my friends from Occupy just what “End the Fed” means in practice.  Specifically, what replaces the Federal Reserve System once it’s ended.  I have usually gotten answers along the lines of “we have sound money” without a lot of evident thought of what that would mean.

Well, I have finally heard a good, clear, cogent explanation — on Facebook, of course, whence all good things come — from a 12-year-old Canadian girl named Victoria Grant.  It’s just 6 minutes long — let’s have a look and listen.

1. Victoria’s Speech

This is a well-stated critique with elements ranging from the entirely legitimate to the doesn’t-quite-get-it.  Best of all, it’s presented on an elementary enough level that even adults can understand it.  Some of it does not apply directly to the situation of the U.S., in critical ways — the Bank of Canada, Canada’s central bank, differs in its history and present form from the U.S. Federal Reserve system.  Still, the similarities are enough to be a good place to start a conversation.

Victoria’s speech hits on several themes:

(1) The unfairness of loaning private banks currency at low interest that will then be hired back from them at higher interests.

(2) The problem that banks can loan up much more money — “debt money” — than their reserves would allow.  (This is “fractional banking.”)

(3) The growth of the size of the national debt.

Victoria likes the old days when the central bank was owned by all of the people.  As a result, she says, Canada’s debt was held at a constant national level.  (It’s not clear to me — nor, I get the sense, to her — why this necessarily should have been the case, though.  One can have good or bad policies under various disparate systems.)  Then she describes how the present system works.

  1. First, the government borrows money from the private banks.
  2. The government pays compounded interest on those funds.
  3. The government increases taxes to pay for the national debt.
  4. This leads to inflation, less “real money” in the economy, and “real money” being converted to bank profits.

Those first three lines are the strongest part of her critique, while the fourth starts to make things murky.

Beyond this, she notes the existence of “fractional banking” — or, as she puts it, “the government gives banks the right to loan out money that doesn’t exist.”  (In other words, reserves need only be a fraction of loans.)  In other words, when you take out a loan from a bank, you don’t get real money — such as gold — but they “generate the fake money out of thin air.”  (We call this concept “credit.”)  Therefore, in our economy, “all money is debt.”

Victoria mentions that Jesus drove the moneychangers out of the Temple because they were “manipulating the currency to steal from the people.”  Citing “currency manipulation” as the problem Jesus identified — rather than the presence of commercial activity (and particularly oppressive ripoffs) in the House of God — suggests that Victoria’s sources may had laid it on a bit thick in educating her on this topic.  (Rhetorically, this is her “bridge too far.”)  The sin was overcharging in a spiritual venue, not debasement of the currency.  Still, if one categorizes both actions as “defrauding and robbing the people,” I guess one can make the case — but in doing so it puts many other lesser sinners in the category as well — “cheapening its currency,” if you will.

That past her, Victoria gets back to the good stuff, quoting a question (which I paraphrase):

Why should government, which has the power to create money, give that power to a private monopoly — and then borrow back at interest that which government can create itself , to the point of national bankruptcy?

Her solution (again paraphrased in a few places) is this:

If the government needs money, it can borrow it directly from the Central Bank.  The people would then pay fair taxes to repay the Central Bank.  This tax money would then be invested back into our economic infrastructure — and the debt would be wiped out.  We would then prosper with “real money” rather than “debt money” as the foundation of our economic structure.  The private banks would receive the money they are owed from the Central Bank and would then clear the debt with the Central Bank.

That boldfaced section struck me as sleight of hand, but it’s all worth discussing.  She says that we’re being “defrauded and robbed” by the banks and asks how we will “end this crime.”

Fair enough.  This is as well as I’ve seen it presented in that amount of time by anyone in the broad “Paulian” coalition that thrives in Orange County.  I agree with some of it; not with other parts.  So let’s look at the critique.

2. My Response on the Unfairness of Funneling Money to the Big Banks

Yes, absolutely: banks get de facto subsidies from the government, accomplished largely by the means she presents.  The banks get to borrow money cheaply from the government (at the “discount window”) and then loan it back to the government at a higher rate of interest (through buying bonds.)  This is a pretty great deal — I’d certainly take it!

The first question we can ask is: what would happen if the banks did nothing else except this.  Theoretically, they’d just be cycling through a process giving them pure profit.  And guess what — that’s not just a theory.  In the wake of the economic collapse of September 2008, this is pretty much what banks did.  And, yes, it was a pretty huge scandal.

To understand why it was a scandal, you have to understand the answers to two questions:

(A) Why did we want to get money to the banks in the first place?

(B) What were the banks supposed to do with that money — and did they do it?

 First question first: why would we want to funnel public money into private banks?  Two reasons:

(A1) Because (maybe) we want powerful banks.

(A2) Because (maybe) they can do they job assigned to them better than anyone else can.

Why would we as a society want powerful banks?  To answer that, stop thinking about them as “banks.”  Start thinking about them as military forces.

2A1 The Case for Powerful Banks

Our permanent government wants powerful banks for pretty much the same reasons that it wants a powerful military:

(A1a) An offensive function: to impose our will on the rest of the world.

(A1b) A defensive function: to prevent the rest of the world from imposing its will on us.

You know that old saying that you can steal more money with a pen than a gun?  That’s the quasi-military function of our national banks  And the real money comes when you can steal money with a pen while pointing a gun at someone.  Our society has been blessed — or “blessed” — with strong banks and a strong military.  We may not notice it all of the time, but it’s the first thing that the rest of the world notices about us.

Having strong banks that can direct investment — or deny it — to various quarters gives us clout on the international stage.  That gives us advantages as a society (assuming that the banks have the same priorities as the rest of us — or, to extend the metaphor — that they are being “good soldiers.”)

Does our society abuse these advantages?  Sure we do — although that’s a separate question.  If we suddenly closed up shop and got out of the capital allocation game, would banks from other countries do just as much abuse?  Probably so.  Maybe less — but maybe even more.  Or existing banks would just go bye-bye and work against us.  And — as is common in military situations — the defensive function may have moral standing even when the offensive does not.

Here are some problems with having strong banks, which largely mirror the problems with a strong military:

(A1c) They may use their power domestically rather than internationally.

(A1d) Their loyalty may not reside with their sovereign — the American people.

(A1e) If they do their job well, the rest of the world may have reason to hate us.

Just as we worry about the military intervening in domestic politics — which sometimes happens, especially given the excellent reputation it tends to possess compared to Congress — we have to worry about the banks doing so.

We’ve seen this happen time and again, of course — they can do so largely by exerting massive influence on politicians and thus on legislation.  For example, I’ll talk about “fractional banking” below.  The main problems with it could potentially be solved through legislation.  Is this likely?  Well, that would not be the way to bet.

Beyond that, American banks — despite being American corporate citizens, much of the time — don’t have loyalty to our country.  I don’t mean to call them traitorous; I simply mean to note the oft-repeated dictum that their loyalty is to their shareholders.  (This would be an argument for nationalizing banks.  This is also not a good bet to happen.)  They can, seriously, change their citizenship.  Some companies do.  We sure know that their reserves like to travel abroad.  So their loyalty is not necessarily with the people or with the nation itself — to the extent we have a hold on it, it’s because we are so massively friendly to them and more stable than, say, China or India or Russia — and if you view them as “our military by another means” this is a really unhappy state of affairs.

But let’s say that they are loyal to us.  Let’s say that they are trying to advance American interests as much as possible.  Is that a good thing?  Well, one problem — as with a loyal and energetic military — is that they may well treat others really badly, something that others do not forget.  (Do you, Dear American Reader, remember our bombing Serbia in the late ’90s to keep Kosovo free?  Maybe not.  Do you know who does remember?  Serbia.)  Just as others tend to recall military damage, they will recall economic damage as well.  Need I say more on that point?

So, yeah, we — or rather our elites, whom we vote into office, in part because if you can’t get with this program you don’t get to be an “elite” — want to funnel money to big banks in part so that America will have strong banks, with the benefits that are supposed to accrue from that.  There’s another reason for doing so, though, that we’ll have to get past in order to reject Victoria’s critique that the goddamned banks are getting rich off of us: maybe they’re the best option for what we want them to do, making it worth our “hiring” them.  Let’s talk about that.

2a2: The Case for Hiring Banks to Do a Job

You can believe that it’s worth funneling money to banks to do things even if your goal is not to grow them to the size when they can unleash holy terror on the rest of the world.  You can desire to do it because they’re just the best means to accomplish a socially useful task.  That task is: “allocating capital.”

From the perspective of good governance, allocating capital means getting money to people that need it and can do social good with it on terms fair to all parties.  One way to allocate capital is to have the government do it by itself.  Another is to have banks do it.  A third approach is not to do it at all.

Here’s the problem — offered by my better sorts of conservative friends — with having the government allocate capital: government can be corrupted.  If you’ve read 2000 words into this story, you’re probably already familiar with my writings about the Anaheim City Council, about the 405 Toll Roads, about the Poseidon desalination plant.  If not, do some searches here at and look around.

These are all areas in which the government — at the behest of private corporations, often boosted by unions who have a much more legitimate desire to keep a lot more people in the middle class than commercial interests have to keep a few more people in the upper classes — allocates public funds without evident attention to normal investment criteria such as and “is this really what we need?” and “can they actually deliver what they promise?” and “who ends up taking the loss if they don’t?”

Instead they seem to ask questions like “who will give me campaign funds?” and “who will hire me once I’m out of power?” and “how likely is the DA to come after me for this — hahahahaha?”  This is the kind of scandal that brings the better conservatives and libertarians and liberal/progressive/lefties together in an anti-corruption coalition — as we see today.

The main difference among such factions is, in my opinion, this: conservatives and libertarians think that the government is so corrupt that it’s pointless to do these things at all.  Usually, this means “tough luck, poor people.”  Liberals find that “tough luck, poor people” — or, more fairly to conservatives, “you’ll just have to depend on charity” — is an unacceptable answer and think that we should channel capital allocation through government a lot of the time anyway — but then use regulation and enforcement to watch the bastards like hawks.

Note that in the above situations, private capital won’t do some things at all without government bolstering their hand.  So we need to look at what happens when government isn’t promoting capital allocation — either directly with its own staff or indirectly through commercial or non-profit contractors.  Let’s go back to 2008.

The idea in 2008 was that, if we got money to the banks on the verge of what at the time apparently looked to a lot of smart and decent people (as well as others less so) like a new Depression, they would allocate the capital to consumers who would then spend money and spur demand — which would boost the economy.

There were alternatives to this — such as just giving every worker a $500 rebate (or whatever) on their taxes.  The Obama Administration did this — the Making Work Pay tax credit — and it worked well enough that Republicans refused to continue doing it, lest it get in the way of a Republican winning the 2012 Presidential election.  (Do you think I’m being too cynical here?  Trust me, I can get way more cynical than that on this subject.)  Another possibility was to pay off part of people’s mortgages — but that might support the unworthy.  So they money was instead routed through the “worthy” banks.

Let’s put up a new header just for the next two paragraphs.

2B. What were the banks supposed to do — and did they do it?

But the idea, so far as I can tell, was that the banks were well-equipped to see who was a good credit risk, so that we wouldn’t lose money on the deal — which, if true, showed that the people in charge (such as our possible new Fed Chair Larry Summers) had no real idea of how an economic stimulus was supposed to work.  Create demand, even if some of it is among the “unworthy,” and we all reap the benefits.  So, we let the banks siphon enough money out of the Fed that they were on a more stable footing and could begin lending, avoiding what was called a “credit crunch.”

The banks took the money.  They did not, however, lend it out.  (They were by then risk-averse — too little, too late, but just the same.)  And so we had a massive credit crunch in 2009 and the economy bled jobs — for years — and we’re not really even out of the hole yet.

2C. So, was letting the banks “defraud and rob” the public a good idea or not?

I can’t say whether it was a good idea in terms of strengthening our nation’s banks, although I do have an opinion.  If you’re a leftist, you’d favor nationalizing at least some of them, as well as separating investment from commercial banking.  If you’re a principled libertarian, you’d have no problem with the Chinese and Saudis coming in and buying up the American banks.  (Well, do you have a problem with it?)  If you’re a national security conservative, you might simply have wanted to leverage our military might into squeezing money out of other nations — which, sadly, ends up largely helping the defense contractors.

What about by the standard of giving money to the banks so that they could lead us out of the wilderness?  No, by that standard, it turned out to be a bad idea.  But it wasn’t — at least wasn’t necessarily — an entirely ridiculous one.  There was legitimate reason to believe that the banks, given money to lend, would … lend.  (There was also reason to think otherwise.)  The conspiratorially minded will think that Obama wanted to give the banks all sorts of money because he wants to favor the wealthy, but on balance I think that the 2012 election suggests otherwise.  (His bending over backwards to please the banks, even as they refused to lend, could have killed his re-election chances.)  My own belief is that the people negotiating the bailouts, who didn’t put any requirement that the banks do diddly in exchange for public largesse, were a combination of people who honestly trusted in their patriotism and people who knew better.  Which was Obama?  I don’t know.  I suspect he was the former; I suspect that Geithner and Summers were the latter.

In any event, it looks like this part of the criticism that Victoria offers has at least some — I’d say “lots of” — legitimacy.  So what about the other parts of the critique?

3. My Response on the Problem of Fractional Banking

The notion of fractional banking — that a bank should be allowed to lend out more money than it has in its reserves, which would be impossible if it were directly lending out something like GOLD — as the root cause of trouble in our financial system is almost completely separate from the question of whether we subsidize banks.  I think that it’s unfortunate that they’re even part of the same discussion.

Paulists see fractional banking as bad.  Without fractional banking, we’d have more or less the equivalent of the “gold standard,” where all banks could lend would be the share of the nation’s gold (or whatever we used to denominate money) in its reserves.  This means that when we run out of “hard currency” — you see where “hard” comes from, right? — we have no more lending.  You have to pay cash — certificate representing a certain amount of gold (or whatever) for purchases.  If you have it, great.  If you don’t have it, too bad.  Lending shuts down.

Does that last sentence sound familiar?  This is pretty much what happened in, give or take, early 2009.  Lending shut down.  What happened to the economy?  Well, it cratered.  If you want a “sound money” economy, you’re looking at the prospect of cyclic depressions.  That’s why economists led by Keynes offered a prescription of “counter-cyclic” government economic policy: when there’s too little money in the economy, pump it in through tax reductions and subsidies; when there’s too much, take it out through subsidy cuts and higher taxes.

The Obama Administration took some counter-cyclic actions, for which they reaped an enormous measure of grief, and those actions do seem to have helped spur the economy.  But Congress refused to go along with much of them — still refuses, by the way — and so the economy remains soft and wages and working hours remain low.

So here’s the problem that I see with the “End the Fed” crew — how the heck do they think that they could deal with this sort of situation?  Their solution, as I recall, is that in the absence of the monetary distortions created by the Fed there would simply be no problems demanding such solutions — and I have to admit that this strikes me as pie-in-the-sky wish-fulfillment bullshit.

Some of you may want to defend this idea — and please be my guest.  My guess is that if we actually game it out, you’re putting little value on social dislocation and mass starvation and such — which makes sense, I suppose, if you think that societal collapse is inevitable and you plan to spend it extremely well-armed in your bunker.  All I’ll say for the purposes of this discussion is that, if this is really how you feel, you don’t have to End the Fed.  The Fed is likely to accelerate social collapse; you shouldn’t resent it.  It’s primarily those of us who would like to keep living in society who have a problem because of it.

The problem I have with Victoria’s speech in this respect is that the existence of “debt money” — which is “credit” — in addition to “real money” is not obviously a problem related to the unfairness of the banking system and (she doesn’t bring this up, but I will) the massive disparity of wealth in our society that is both its cause and effect.  You can cut out the giveaways to the Fed with legislation — and there could even have been giveaways to private banks even with “hard money.”  (“One gold brick per bank!  We’ll get it back once they’ve saved the economy!”)

Among the other problems we have to deal with is how our country operates in a world where everyone else can get credit and we can’t.  Just think about that for a moment; it should not require much discussion.

One really interesting thing about Victoria’s speech is that she doesn’t even issue a call to “End the Fed.”  Look at her paragraph again, this time without the boldface:

If the government needs money, it can borrow it directly from the Central Bank.  The people would then pay fair taxes to repay the Central Bank.  This tax money would then be invested back into our economic infrastructure — and the debt would be wiped out.  We would then prosper with “real money” rather than “debt money” as the foundation of our economic structure.  The private banks would receive the money they are owed from the Central Bank and would then clear the debt with the Central Bank.

I’m entirely unclear on what she means — and, further, what she means if she really is of the stripe with the “End the Fed” people.  Let’s break it down:

1. If the government needs money, it can borrow it directly from the Central Bank.

So are we talking about hard money or not?  The government has a lot in Fort Knox; the New York Fed has even more in its Manhattan vault.  How would this work?

2. The people would then pay fair taxes to repay the Central Bank.

Is this not what we already do?  (Or is the key word “fair” — in which event it’s changing the subject?)

3. This tax money would then be invested back into our economic infrastructure

I have a feeling that the terminology used here may be a way of saying “no more social welfare programs” — in which case people should at least be honest about it.  What parts of our current federal spending don’t count as “economic infrastructure”?

4. And the debt would be wiped out.

I’m pretty sure that this must skip a few steps.  The debt gets wiped out how?

5. We would then prosper with “real money” rather than “debt money” as the foundation of our economic structure.

If in fact this would be getting rid of “debt money,” then we’d be all the more recession-prone.  And that’s not “prospering.”

6. The private banks would receive the money they are owed from the Central Bank.

OK.  And they’d receive this in “debt money” or in “real money”?  Do we have enough “real money”?  What happens to their assets currently denominated in “debt money”?  Do they turn into “non-money”?

7. And would then clear the debt with the Central Bank.

If this means what I think it means — and it may not — then I don’t see how it solves the problem.

The solution, in my mind, is not to “End the Fed” — because I don’t think that her plan makes sense — but to make sure that it is run well.  Humanely and well.  In other words: elect good people and support good regulatory legislation.  Do not make low inflation its sole goal, either.  Avoiding recession is every bit as important.

4. My Response to the Growth of the Size of the National Debt.

Is the national debt a problem?  Sure — because so much of it is effectively wasted.  But the notion that you eliminate the national debt by simply putting a cap on the amount of money that can be distributed — a cap tied to “real” resources of some sort — seems fanciful, a much more polite word than “crazy.”

What it does seem to guarantee is that poor people won’t be able to get the credit they need to live in a modern society.  If the plan of the “hard currency” crowd is for something other than a die-off when things run out, I invite them to make it clear and explain how and why.

There’s another solution to the size of the national debt, if one cares about it: tax the wealthy more, cut wasteful military spending, etc.  Or a better solution is not to sweat it so much.  The dollar is a “fiat currency”; what it buys is not a share of gold bullion, but a promise that the government will repay it at face value.  The ripoff of the public by the banks — the legitimate part of Victoria’s criticism — is not what has ballooned the deficit, though it certainly didn’t help things.

The national debt, to the extent that it’s a problem we want to solve, is a result of our taking in too little and spending too much on things that don’t offer us a return.  (And yes, human services offers us a big return — unless, again, our solution to our woes is to let the poor and infirm die.)  So yes, cutting credit down so radically that we simply had little to spend might well “solve the problem” of the national debt — but it’s in the same sense that a fatal massive heart attack “cures” brain cancer.

I’ve been looking for a good explanation of the “End the Fed” position and I’m glad that, to a degree, I’ve found one.  (While it came out of the mouth of a 12-year-old girl, I presume that she didn’t come up with this position, or this presentation, in a vacuum, so I think that I can fairly credit it to advocates at the conference at which she spoke.)  Now, having found one — I’d like a better one.

Fort Knox U.S. Bullion Depository

Fort Knox Bullion Depository: Easy to be hard.

About Greg Diamond

Somewhat verbose attorney, semi-retired due to disability, residing in northwest Brea. Occasionally runs for office against bad people who would otherwise go unopposed. Got 45% of the vote against Bob Huff for State Senate in 2012; Josh Newman then won the seat in 2016. In 2014 became the first attorney to challenge OCDA Tony Rackauckas since 2002; Todd Spitzer then won that seat in 2018. Every time he's run against some rotten incumbent, the *next* person to challenge them wins! He's OK with that. Corrupt party hacks hate him. He's OK with that too. He does advise some local campaigns informally and (so far) without compensation. (If that last bit changes, he will declare the interest.)