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A
Venetian Tale
Once upon a time, in the fair city of Venice, there ruled a
wise and just Doge. He had observed and learned much about his people, about
himself and his power. So he let his people go freely about their business,
but he granted no privileges without charging the privileged with
countervailing responsibilities. One day three men asked for an audience,
"0 great and wise Doge," they cried, "we are sorely troubled
and in need of your help." The Doge asked what was troubling them.
"I am a mason." said the first man. "I
lay bricks for fine houses. Yet I am idle for the people will not pay my
price." The second continued: "I am an artisan. I make many useful artifacts. I use great skill and labor,
but the people refuse to pay my wage." The third man stepped forward and
said: "And I am a banker. I advance monies I am entrusted with to the
mason and to the artisan. But the people won't wait until the mortar sets and
the artifacts sell. They demand their money back
before my investments come to fruition."
"I can see that your plight is great,"
said the Doge, and he ordered his attendant to bring forth three swords. "You
shall go forth and compel those who will not deal with you voluntarily to
submit to your terms, for the stronger reason of the sword."
"No, no. your Honor," the three men cried, "this we did not
ask. We are no highwaymen. We are men of honor. We
could not fall upon our fellow countrymen to compel them to our will with the
force of the sword. It is you, O wise Doge, who must use power on our behalf.
Your power is great."
"Perhaps," said the Doge. "perhaps my power is great, but I must use it wisely or
else it will be lost." He went on: "You ask me to do what you would
not do because of honor." Then he turned to
the banker: "Is honor one thing to the banker,
and another to the magistrate?" He continued: "My power is a
privilege encumbered with grave responsibilities. The charter of your bank
confers a great privilege upon you. But your privilege is also encumbered
with important responsibilities. You must invest the funds entrusted to you
in a manner that they remain accessible to your patrons. You may not sink
liquid funds into brick and mortar. You must invest in merchandise that keeps
moving."
The Doge dismissed the three men with these words:
"I, too, am an honorable man. What is dishonorable to you, will never
be less dishonorable to your magistrate."
The promises men live by
At the heart of the irredeemable paper money system
of the United States
is the fact that the Treasury and the Federal
Reserve banks issue promises to pay which they do not redeem, do not intend
to redeem, nor have they got the resources to do so. In other words, the
Treasury and the Reserve banks have been given the privilege to issue
promises and, at the same time, they have been freed from all responsibility
to redeem these promises. Both of them wish to keep their favored
position.
A vitally important question arises here: On what
defensible ground can any institution claim the right to issue promises to
pay and at the same time insist that it should not be compelled to redeem
those promises? We have built an intricate legal system in respect to
contracts, based upon the elemental and widely- accepted standard of morals,
ethics, and common honesty, to the effect that the maker of promises to pay
must also assume the corresponding responsibility. We prosecute individuals
and institutions when they attempt to avoid the fulfillment
of their responsibility.
Harry Scherman, one-time president
of the Book-of-the-Month Club, wrote a penetrating book called The
Promises Men Live By. It dealt with some fundamental requisites of
satisfactory and honorable social and economic
intercourse. He noted that when men's promises cease to be good, trade and
production are hampered, credit collapses, people cannot buy, sellers cannot
or will not sell, chaos and social degeneration follow, if not immediately
nevertheless, inevitably.
Complacency and connivance
The commercial banks of this country create deposits
against their assets, which are payable only in irredeemable currency. As a
fraternity. these banks, by their failure to make
any concerted effort to end irredeemability have
become accomplices of the Treasury and the Federal Reserve banks. There have
been a few concerned and upright bankers who fearlessly spoke up against the
false and dangerous principle of privilege without responsibility. J.H.
Frost, Chairman of the Board, Frost National Bank, San Antonio, Texas,
in an address said, in part: "It would seem that bankers, as the
custodians of the people's money, should be more interested than any other
class of the population in the maintenance of sound money. Curiously enough,
however, the history of most, if not all, of the disastrous inflations of the
past indicates that bankers have usually been quite complacent - and often
have cooperated in producing monetary inflation. This seems to be largely due
to the fact that the liabilities of banks are all monetary and can be
discharged by payment in the monetary unit no matter how far the depreciation
of its purchasing power may have progressed. I believe that, if the bankers
of America
really understood what was happening to the people's money they would arouse
themselves and demand and finally effect a return by
this country to a sound currency redeemable in gold." (The Commercial
and Financial Chronicle. May 27, 1948.)
Holes in the balance sheet
It is an arresting and disturbing picture to see the
banking fraternity supporting irredeemable currency seeking special
privileges for themselves while avoiding the corresponding responsibilities
and, as custodians of the people's money, resisting the most basic step that
could be taken to terminate the depreciation of the people's money - a
restoration of the obligation to redeem promises to pay.
This is not merely a moralistic observation, but a
pragmatic one. Redeemable currency used to be the agent ferreting out unsound
and uneconomic debt and liquidating it before it had a chance to metastasize.
Banks were greatly limited in their power to shelter bad debt in their
balance sheets through incompetence or design. Depositors could, by
withdrawing the ultimate bank reserve, gold, force the bankers to maintain
the highest standards of liquidity and solvency.
Irredeemable currency on the other hand, makes it
impossible for the depositors to discipline the erring or dishonest banker. Previously,
the depositor could opt out of the banking system altogether by withdrawing
and holding gold, if he thought that the banks had become unsafe. By
contrast, all he can do under the regime of irredeemable currency is to move
his funds from one unsafe bank to another which momentarily appears less
unsafe.
As a result, the banks now have huge holes in their
balance sheets, as the market value of their assets is way below their
liabilities. For the time being, they keep themselves afloat either by
throwing good money after bad (that is, they increase the amount of
non-performing loans by the interest due, which is precisely the mechanism
behind the metastasis of bad debt), or by tricks such as selling their
headquarter buildings and paying out the proceeds as shareholders' dividend. But
the day of reckoning, while it can perhaps be postponed, certainly cannot be
avoided.
Antal E. Fekete
September, 2005
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