maintains that the financial "default" of the United States would be a "cure" that's far worse than any disease that those who advocate such a default presume to eliminate. Many if not most Austrian Schoolers
maintain the exact opposite.
Before answering the above poll question, please read the following excerpts -- the first from Tarpley's radio show, the rest from Robert De Fremery's excellent book, Rights vs. Privileges
"So what are they [the newly-elected Republican reactionaries] gonna do? Well, let's look back [to 1995]. Let's look back to Newt Gingrich [and] Dick Armey....What Newt did was to say: 'We're demanding savage, brutal cuts in Medicare, Medicaid, Social Security. We want to gut unemployment benefits; we want to gut welfare.' -- which still existed at that time (Aid to Families with Dependent Children)....And he attempted to do a coup d'etat from the House of Representatives...So we got to this moment in October/November of 1995. Many people did not believe that this would happen. But what it was, was then that Gingrich essentially issued a kind of ultimatum to Clinton, saying: 'I demand these cuts. And if you don't give me the cuts I want, we won't pass a budget, and we will also prevent the raising of the debt ceiling on the public debt of the United States.' And this then went to a confrontation. This is where we're headed now, and we'll talk about this in the upcoming segment. This is now the grave danger that hangs over the world -- a lunatic ideology which has now been given at least a share of power in Washington....
"So it was 1995. It was Newt Gingrich, speaker of the House, [and] Dick Armey of Texas....They wanted to force the cutting and gutting -- the same agenda -- of the New Deal
social safety net....So Gingrich then said: 'If you don't give me want I want, I will block the raising of the debt ceiling.' And the day that he made this announcement, the dollar went down 5% in one day. Now I submit to you: in the current situation of an economic depression and financial depression gripping the world, if you go to this brink, you will not get the dollar going 5% down in one day, you will get 25% down or maybe 50% down in one day. And that will blow up the world. That will pull down the rickety arrangements that we still have in the world that allow the production and sale and transportation of goods and services around the world. It is an action with genocidal implications, especially when you get further down the road to places like Somalia or Bangladesh, and Ecuador and Bolivia, and places like this. Let's just get into this, now.
"In the middle of this crisis [in 1995], Senator Pete Domenici of New Mexico came forward to say that he had been meeting with a group of ten Wall Street insiders. And these look like they were hedge fund operators. One of them was Stanley Druckenmiller, who was, of course, from the Soros group at that time. And these Wall Street insiders had assured Domenici that if it came to a choice between eternal deficit spending and living beyond your means and rising debt, if it came to a choice between that and a default -- the bankruptcy of the United States, something that's never happened in all of history; the United States fails to make a payment -- that the Wall Street people thought that default would be, of course, a bitter pill, it would be unfortunate; but in the long run it would be better.
"Now, here's my premise. I want to stake a firm policy position: Any government official who knowingly courts, promotes or connives to make the United States go into default -- who contributes to the national bankruptcy of the United States -- is guilty of high treason!
And there is also a little matter of wars. There's a war in Iraq, there's a war in Afghanistan, there's a war in Pakistan, there's a war probably in Yemen by now. Somalia also seems to be a theater of war. Basically every country around Iran is also a theater of war. If you attempt to bankrupt the United States government and force it into default under those circumstances, it is high treason. The Constitution says the Congress shall have the power to borrow money on the credit of the United States. And if you attempt to sabotage that provision, saying -- 'No, the Congress should not have the power to borrow money on credit of the United States, and we're going to enforce that by extra-legal means; we're going to do it through Moody's, Fitch, and Standard & Poor's, through the debt downgrade and the inability of the U.S. to float a bond issue.' -- then you're violating the Constitution. That's already impeachable right there. So impeachment first, and then the rest.
"Now, the other thing is: it will always be possible to show the conniving. Domenici was lucky. No charges were brought against Domenici. I called attention to this in my journalism at the time. What Domenici had done was to enter into a conspiracy with these hedge fund operators, and essentially say: 'Well, they're telling me that this is what we should do.' Now, did Domenici come forward and say: 'I have examined these hedge fund operators to find out if they have conflicts of interest -- if there's insider trading and conflicts of interest going on because these hedge fund operators are simultaneously shorting the dollar, shorting U.S. Treasury bonds, Treasury securities, and otherwise taking a short interest or short view on the economic prospects of the United States. Are they selling this country short? Are they selling the United States of America down the river?' Domenici never referred to this question. He never said whether he had quizzed them or asked them about possible conflicts of interest, of the kind you can see on CNBC. (When an analyst comes on you can find out whether they own the stock, whether they’ve shorted the stock, or whatever it is.) It will always be possible to show that members of the legislature have been conniving -- once you have subpoena power and you can go after them, which the Justice Department will continue to have -- you will probably be able to show contacts between them and people who are doing the shorting. And I believe you can still find on the Internet: Peter Schiff, the failed reactionary candidate in Connecticut, he says that [the] default of the United States would be a good thing.
"Why do they want it?
"Remember: these are right-wing anarchists. Their theory is to 'starve the beast.' That means, essentially, bankrupt the federal government. Their idea is that if you cannot borrow money, if you destroy the full faith and credit of the United States government and make that into a laughing stock, then the United States government cannot borrow for any
reason -- and this, of course, includes war. It's the same story. This is where you get into the little matter of a state of emergency and several wars -- quite a few wars going on now that you didn't have in 1995. But they feel that the response to the inability to borrow will be to force the government to live within the realm of the tax income, the tax revenue. And that will mean, of course, the destruction of Social Security, Medicare, Medicaid, unemployment benefits...and all the other essential programs that make up the tattered remnants of the New Deal safety net. And, again, they will probably say: 'Well, no, we'll do it in such a way so that the defense budget is shielded.' Well, once you have default, you can't borrow for any
reason. So they'll say: 'We'll maintain the funds going into the defense budget.' But, of course, once you can't float a bond issue, it's not clear that they'll be enough for that either. So this is a recipe for catastrophe.
"Such an event -- again, in 1995, it was minus 5%...in the dollar in one day -- if it becomes this mudslide, then you have a world catastrophe. Remember, if you read Surviving the Cataclysm
...you will see that the nightmare of Paul Adolph Volcker (as long as he was at the Federal Reserve) was that once the dollar began to slide -- and we now have this -- once the dollar began to slide, it might turn into an unstoppable mudslide, as we've seen in the California valleys when it rains too much and the vegetation is not enough, of various places in Latin America -- the whole side of the mountain comes down, and there's no force available to stop it. We now may be very close to this. So we cannot allow a bunch of right-wing anarchists in the Congress to throw their crazy weight around at the expense of the American people, because make no mistake: The national bankruptcy and default of the United States would be catastrophic for the average American working family. It would be a catastrophe.
"And it's very easy to make facile statements about this -- how the U.S. is bankrupt and all this stuff. It's baloney. The U.S. is viable, much more so than Moody's, Fitch, and Standard & Poor's. As a matter of fact, as I've said repeatedly, Moody's, Fitch, and Standard & Poor's ought to be quaking in the criminal dock because of their corruption in 2008, when they were telling you that Lehman Brothers was Triple A and [that] subprime was Triple A until minutes
before the bottom fell out of the whole thing, and those poor schmoes who believed them [were] left high-and-dry."
"There are those who believe that once bank credit has been allowed to expand, nothing can be done to prevent a collapse (that is, nothing economically sound and consistent with a free economic system). The Austrian school -- best represented by the writings of Ludwig von Mises -- takes this stand as evidenced in the following statement: 'There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.' (Human Action
, p. 570).
"Dr. von Mises believes that the expansion of bank credit causes malinvestment and squandering of scarce factors of production that will inevitably lead to a crash and ensuing depression. But a more plausible theory is that all economic activity is continually reaching a new equilibrium between the total circulating medium of exchange and the goods and services being offered for it. In other words, an expansion of bank credit leads to a collapse not because of mis-directions in production but rather because of the operation of Gresham's Law
. The use of bank credit as a medium of exchange gives us what Bishop Berkeley called a 'double money.' Even though bank credit is supposedly convertible into money on demand, nevertheless it is not as good as money. It is a short sale of money. And as the volume of these shortsales increases it is inevitable that Gresham's Law will eventually operate, i.e., the undervalued money (gold or legal tender 'fiat' money) will be exported or hoarded -- thus causing a collapse of bank credit.
"According to this theory, it is possible to avoid a collapse following a period of credit expansion simply by converting the existing volume of bank credit into actual money having an existence independent of debt, and at the same time take away the banking system's privilege of creating any more credit, i.e., force banks to confine their lending operations to the lending of existing funds.
" [Boldface emphasis added]
"There are some people who look with distrust upon 'printing press' or 'fiat' money. But they overlook one of the basic facts about money. It is true that we need a 'hard' money. But we should not make the mistake of associating 'hardness' with convertibility into gold
. The essence of a hard money is not determined by the material of which it is composed -- or the material into which it is convertible. The essence of a hard money is that its supply is fairly stable and there are precise limits to it. In other words, gold itself is a comparatively hard money because the supply of gold is inelastic. Bank credit convertible into gold is a very soft money because it is elastic and there are no precise limits to its supply, i.e., it expands and contracts. And a purely paper or 'fiat' money can be a hard money if we set precise limits to its supply, or it can be a soft money if we set no limits to its supply."
"Soothing words about the effectiveness of 'government mechanisms' to deal with a liquidity crisis will not allay the fears of those who know its cause. There is only one thing that will allay those fears and that is to put our depository intermediaries on a sound basis. To do this we must convert the existing volume of bank credit into actual money and require banks to stop the unsound practice of borrowing short to lend long.
"Under this stabalized system banks would have two sections: a deposit or checking-account system and a savings-and-loan section. The deposit section would merely be a warehouse for money. All demand deposits would be backed dollar for dollar by actual currency in the vaults of the bank. The savings-and-loan section would sell Certificates of Deposit (CDs) of varying maturities—from 30 days to 20 years—to obtain funds that could be safely loaned for comparable periods of time. Thus money obtained by the sale of 30-day, one-year and five-year CDs, etc., could be loaned for 30 days, one year and five years respectively—not longer. Banks would then be fully liquid at all times and never again need fear a liquidity crisis."
"Since the objective is to have a 100% cash reserve (legal tender) behind all demand deposits, the U.S. Treasury would be ordered by Congress to have printed and then loaned to the banks sufficient new currency to fulfill that objective. In determining the amount to be borrowed, banks would treat their legal reserves at their local Federal Reserve Bank as cash. Those reserves will become actual cash as explained later.
"The debt incurred by each commercial bank to the Treasury could be immediately reduced by the amount of U.S. securities each bank held—simply a cancellation of mutual indebtedness. Henceforth the commercial banks would be prohibited from using the cash reserves behind their demand deposits for their own interest and profit. Those cash reserves belong to the depositors. They are funds against which the depositors wish to draw checks.
"On the day the cash reserves of banks are brought up to 100% of their demand liabilities, they would have outstanding loans which I shall call 'old loans' as distinguished from the new loans that will be made in the future. As these old loans are paid off, each bank would be required to use these funds to pay off their savings and time depositors, and offer them, as an alternative, negotiable CDs. There would be no restriction of any sort on the issuance of such CDs. The maturity dates, the amounts, and the rate of interest would be set by each bank. But banks would not be allowed to lend the funds so obtained for a longer period of time than those funds were available to them; i.e., they would be required to maintain the back-to-back relation suggested by George Moore.
"After each bank had paid off its time depositors, it would still have a sizable amount of 'old' loans outstanding. As the rest of these old loans were paid off, these funds would be used to further reduce the banks’ indebtedness to the Treasury. The treasury, in turn, would be required to use these funds to retire U.S. obligations held by investors outside the banking system. And as the Treasury did this, these investors would presumably buy negotiable CDs offered by the banks.
"Any remaining indebtedness of the banks to the Treasury could be paid off with funds derived from the sale of their 'Other Securities.' Indeed, a good argument can be made for having the Treasury figure in advance how much of each bank’s securities are going to have to be sold and require them to start selling those securities gradually, the day the changeover is made.
"As for the Federal Reserve Banks, they too should borrow from the Treasury sufficient new currency to bring their cash reserves up to 100% of their demand deposits (funds deposited by their member banks for safekeeping plus all government funds against which checks are being drawn by the government). The indebtedness of the Federal Reserve Banks to the Treasury could immediately be canceled by a mutual cancellation of indebtedness as was done by the commercial banks, i.e. by canceling an equivalent amount of U.S. obligations held by the Federal Reserve Banks. The remaining U.S. obligations held by the Federal Reserve Banks should also be canceled in view of the fact that they had originally been bought by the mere creation of bookkeeping entries. That practice would be abolished.
"The supply of money would now consist of the total coin and currency in existence, i.e., the amount previously existing plus the amount newly printed and loaned to the commercial banks and the Federal Reserve Banks. There would no longer be any confusion about what was meant by the supply of money. And the money supply would no longer be altered by such things as the lending activities of banks, or the decisions of individuals to switch funds from a checking account to CDs, or the payment of taxes to the U.S. Treasury, or the disbursement of funds by the Treasury, etc. Whenever an increase in the money supply was needed according to whatever rule of law was adopted (a strong case can be made for a 'population dollar', i.e., a constant per capita supply of dollars), the increase could be made with absolute precision by simply retiring that much of the remaining National Debt with the new money.
"S&Ls and MSBs [money services businesses] should be made to operate as they were originally intended, i.e., those who place their funds in such institutions must be reminded that they are shareholders and that they can draw their funds out only when those funds are available for withdrawal. A run on such institutions would no longer be a threat to the banking world. Nor would the failure of bankruptcy of any large bank, corporation, or municipality be the threat to the banking world that it is today. Any such poorly managed entity could, and should, be allowed to go through bankruptcy. There would be no danger of precipitating the type of financial stringency or credit crisis that is feared so much under our present financial system, and justifiably so.
"The multitude of governmental lending agencies that have arisen since the early ‘30s should be dismantled. The lending of money is not a proper function of government
. It has been sanctioned so far because banks operated in such a way as to imperil a continuous flow of funds to areas that needed it. With banks now operating on a sound basis, free market forces should be relied upon to keep money flowing in the most healthful manner for all.
"Having corrected the destabilizing element of our monetary system, we should reject the concept of deficit financing and a compensatory budget. Those concepts arose under the old system because when the business and investment world lost confidence—thus leading to a contraction in the supply and/or velocity of money—the government was forced to indulge in deficit financing to try to keep the supply and/or velocity of money from contracting too far. Under the new system the supply of money is non-collapsible and therefore changes in the velocity of money (caused by changes in liquidity preference) would be minimal and self-regulating.
"Government supervision or regulation of banks would now be greatly simplified. In place of all the governmental agencies with overlapping functions that are busily engaged in regulating various activities of banks, we need have only one agency. Its sole function would be to make certain each bank is keeping its cash reserves at 100% of its demand deposits, and that the maturity profile of its outstanding CDs meshes with the maturity profile of its loan portfolio. Except for these restrictions, banks would be free to set the amounts, the maturity dates, and the rates of interest on the CDs they issued. They would also be free to make loans for any purpose they pleased, secured by any collateral they deemed adequate."