The Nationalization of the Banking Industry

I’ve often said that world governments work in close cooperation with the world’s banking industry. It’s a natural partnership; one creates the money for the other to spend. Of course, our government was founded to be something different. It says right in Article I, Section 8 of the US Constitution that the Congress shall have the power, “To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures.”

Despite the fact that Section 8 of the Constitution uses the word “coin” in lieu of print, it is not a blanket prohibition against the issuing of paper money as many of my Libertarian friends believe. The same section of the US Constitution specifies that Congress does have the power “To borrow Money on the credit of the United States”. During the War of 1812, the US Treasury was issuing paper interest bearing notes in order to finance the war and to circulate in lieu of bank notes which were greatly reduced in circulation due to the expiration of the charter of the Bank of the United States in 1811. In a letter by Thomas Jefferson to celebrated French author Say,  dated March 2, 1815 Jefferson wrote:

The government is now issuing treasury notes for circulation, bottomed on solid funds and bearing interest. The banking confederacy (and the merchants bound to them by their debts) will endeavor to crush the credit of these notes; but the country is eager for them a something they can trust to, and so soon as a convenient quantity of them can get into circulation the bank notes die.

So it’s not that the US government was not able to issue notes of paper that would circulate, but that it could not “print” money. That is to say, it could not issue fiat money that was legal tender. The treasury notes that the government issued were a paper money, but the notes were promises to pay gold and silver at a future date. More importantly, no one was under any obligation to take them. Compare that to our present day paper money which must, by law, be accepted for “all debts public and private.” 

The Constitutionality of the government issuing fiat money as legal tender has often been questioned as I discussed in my book. The Supreme Court of the United States declared the United States government had no authority to declare fiat paper money as legal tender in 1871, but President Grant appointed two justices to the Supreme Court who favored fiat money and that decision was soon overturned with Knox v Lee. The problem is that, as Thomas Jefferson himself wrote as Vice President in 1798 that the US Government lacks the Constitutional power “of making paper money or anything else a legal tender,” and yet that is what it has done and continues to do. 

Our modern arrangement does not have the US Government itself issuing the fiat money, but instead it is issued by the Federal Reserve, a private bank. As I mentioned at the state of this post, this arrangement, of the government giving legal tender powers to a private bank that then controls the issuance of money is an old one. It was first tried in England with the Bank of England acting as the monetary extension of the policies that were enacted by Parliament. The reason the government uses its powers to endow a separate body with one of the most fundamental and abusive powers of the state is simple: it garners the support of the monied interests by allowing them the power to control the issuance of the currency. As long as the government is then allowed to monetize its debt by having a central bank uses some of its money creation power to buy government bonds, then both parties are happy; the government has de facto use of a printing press and the private bankers give the legal tender the aura of respectability in return for using the printing press for their own private purposes in the meanwhile. 

But what should happen if the bankers go broke? It might seem a paradoxical question given that they have the power of the printing press, but what would happen if they made so many bad loans that to use the printing press to inflate away the loses would pose too large a threat to the system? I don’t ask this situation lightly, because it’s the situation we’re in today. As the New York Times January 16th story states, the Rescue of U.S. banks hints at nationalization.  With mounting loses, the government has had to step in an absorb bank loses as well as give banks additional funding by way of acquiring equity stakes in these banks. But we are now at the point where the government is basically the largest shareholder of banks such as Citigroup, and, by also being in the position to decide who has to bear what loses and how much of these loses to absorb, the government is now in the position to decide whether a bank shall remain in business and how much profit it will be allowed. This is, of course, in addition to its powers as the single largest shareholder of these banks. 

In essence, the puppet of banking has slipped off the hand of government in this puppet show and any casual observer can tell that its really the entire banking industry has collapsed down to the government’s printing press. Furthermore, the government is now engaging in the seemingly capricious decisions of what gets the benefit of the printing press and who doesn’t. If the banking system, why not the auto industry? If the auto industry, why not, as Hustler Publisher Larry Flynt asks, the porn industry. After all, pornography has fallen on hard times too. 

This situation is dangerous for the government, because it presents the spectacle of modern finance to the public in a way that makes it easy for the common man to understand how the powers of government are being used in a very arbitrary way for the benefit of certain groups. They will also quickly come to under stand that if they are not amongst the groups who are benefitting, then they are amongst the groups that are being made to pay for it. Although, in this case, the payment will be made by way of inflation. The printing press will run and bailout the banking and the auto industry, but the rest of us can do nothing but watch as our money loses value.  This will expose the simple truth of Frederic Bastiat who wrote that “Government is the great fiction by which everyone endeavors to live at the expense of everyone else.”

3 thoughts on “The Nationalization of the Banking Industry”

  1. Just to Obama-bash 🙂

    “As the nation’s 44th president took office from George W. Bush, deepening fears about financial companies battered stocks, producing the biggest-ever percentage loss for the first day of an administration.

    At the close, the Dow Jones Industrial Average was down 332 points, or 4%, to 7,949.

    The percentage decline is the worst ever for the Dow on a president’s first day in office. That would break the old record, 2.9%, set on Nov. 22, 1963, when Lyndon Johnson took over after John F. Kennedy’s assassination.

    The Nasdaq Composite Index had shed 88 points, or 5.8%, to 1,441, and the Standard & Poor’s 500 Index was down 45 points, or 5.3%, to 805.

    Financial stocks were by far the biggest losers today after money management firm State Street (STT, news, msgs) disclosed large unrealized losses and Wells Fargo (WFC, news, msgs) was hit by an analyst downgrade.”

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