Written by TheDailyBell.com
Larry Parks on the reality of green shoots, the fight against fiat and why Ellen Browne is right about banking but wrong about money
The editors of the Daily Bell are pleased to present this exclusive interview with Dr. Lawrence Parks (pictured left), the Executive Director of the Foundation for the Advancement of Monetary Education (FAME) - and a leading proponent of the fight for honest-money.
Introduction: Lawrence Parks holds a Ph.D. in Operations Research from the Polytechnic Institute of New York University and is the Executive Director of the Foundation for the Advancement of Monetary Education (FAME).Dr. Parks was a student of free-market economist Murray Rothbard and has studied monetary issues for more than 30 years.
He is the author of What Does Mr. Greenspan Really Think?, a popular book on the workings of the U.S. monetary system. His articles have appeared in Pensions & Investments, The Economist, Washington Times, The Freeman, American Outlook and National Review. He is an active member of many civic and social organizations, including The United Association for Labor Education and the National Writers Union. He is a frequent speaker on what he calls "The Fight for Honest Monetary Weights and Measures."
Daily Bell: Larry, thanks for coming back. Since we spoke last time, the mainstream press has begun to speak of a recovery from the economic crisis. Your thoughts?
Parks: It's unfathomable to me how anyone could be taken in by this dopey recovery/green shoots talk. Jobs are still hemorrhaging (see plot below), the trade deficit persists, the Chinese, the Russians, and others are publicly talking about replacing the dollar as the world's "reserve currency," whatever that means, banks worldwide still have almost $600 trillion (no typo) of derivatives outstanding (see plot below), and, more significantly, the Bank for International Settlements somehow calculates that there is $34 trillion (no typo) at risk (see plot below), i.e., it could be lost!
In effect, banks are gambling with the accumulated savings of the entire planet, putting ordinary people worldwide at unacceptable risk. Who gave them permission to do that?
What few realize is that the "economy," which used to be synonymous with productive capacity (a balance sheet item), has been redefined as the GDP, an income statement number, and a questionable one at that. Mindful that the CPI (another questionable metric) continues to be understated as John Williams of Shadowstats.com has so brilliantly documented, the GDP is overstated.
In fact, as Williams has demonstrated, the GDP has been, and continues to be, shrinking. Consider, also, that a good deal of the GDP, some estimate more than 30%, is the result of government spending. So, if the government has easy access to legal tender irredeemable paper-ticket-electronic money and spends it with abandon, does that mean that we're "recovering?" I mean, how stupid can stupid be?
And even the little green shoots (what a great metaphor that is) are largely the result of the Cash for Clunkers free cash to automobile buyers who arguably just transferred future purchases to now. And where did the money for the clunkers come from?
Again, all created flat out of nothing, thereby diluting the purchasing power of money that exists, and more importantly, diluting the purchasing power of money that has been promised for future payment, e.g., pensions, annuities, etc.
Also, seniors and disabled veterans are subsidizing the Cash for Clunkers program. Here's how: for CPI purposes, the Bureau of Labor Statistics is subtracting the clunker subsidy from the price of the new car. Thus, it lowers the CPI. But, Social Security benefits and benefits promised to disabled veterans are indexed to increases in the CPI. Thus, as a result of the Clunker Program, seniors and disabled veterans will not be getting increases in the benefits to which they are entitled. How come no one is complaining about this?
Now here's something that would really spur consumption: Some have estimated that if people had the wherewithal to switch partners, that we would all get crushed in the rush. So, why not give folks money to get divorced? Overnight, there would be more houses bought, more furnishings, more of everything! And, it wouldn't stop, because these folks would not be getting back together, at least as long as the money didn't run out.
The way the monetary system is set up, provided foreigners don't lend to us, the U.S. Government is on track for creating as much as twelve additional trillions of dollars of legal tender irredeemable paper-ticket-electronic money to fund expected deficits. Here are the estimates from the Congressional Budget Office and a cumulative chart that I prepared:
Are foreigners, e.g., the Chinese, Japanese, South Koreans, et. al. going to continue to send us stuff in return of legal tender irredeemable paper-ticket-electronic money? If one thinks so, then it's probably okay to continue to purchase long-term U.S. Government securities paying 4% interest, also in legal tender irredeemable paper-ticket-electronic money.
In fact, all around the world, for the past eight years, at the margin folks have been rejecting legal tender irredeemable paper-ticket-electronic money and turning to gold, albeit in very small quantities. Here, courtesy of James Turk of GoldMoney.com, is the appreciation of gold vs. some of the major currencies during this period:
While the chart leaves off at the end of 2008, appreciation in 2009 is even more dramatic. Please be mindful that gold is not an "investment" per se. It is a speculation, and the speculation is that it will appreciate relative to legal tender irredeemable paper-ticket-electronic money.
Daily Bell: Does the derivatives market play into your thinking that fiat money systems always implode?
Parks: legal tender irredeemable paper-ticket-electronic money always depreciates to its cost of production (near zero), because there always comes a time when the monetary authorities cannot resist the temptation to over issue. The Catholic Church has a line for this, and the Catholic Church has this exactly right: "In the face of temptation, reason succumbs." This is the history of the world since the 8th Century in China. Why should anyone suppose that our central bankers or politicians have any more integrity or smarts than those of the past?
The derivatives, which are in essence just bets, are a symptom of the special privileges that the banks have garnered by bribing our so-called elected representatives with what are euphemistically called "campaign contributions." As Huey Long, the famous senator from Louisiana pointed out, the difference between a bribe and a large contribution is as thin as a hair. Actually, he was wrong: there is no difference.
Look at the contributions that the financial sector has given to our 535 Congressman and the Executive in recent years:
One of the many special privileges banks, for example, have achieved over a very long period, is that their balance sheets are protected by ordinary people. Their assets are protected systemically by the so-called "lender-of-last-resort" facility at the Federal Reserve, and their liabilities are protected at the micro level by so-called Federal Deposit insurance, which is not insurance but a subsidy to the banks.
Since their entire balance sheets are protected, what stops them from making crazy bets? In a word: "regulation." But, to get around the regulations, the banks make "off-balance-sheet" bets, e.g., derivatives.
And why not? If they win those bets they keep the money, and if they lose taxpayers will bail them out! This is nuts! No one else in society has their balance sheets protected in this way? Who made bankers a special class of citizen? And, what is the public policy justification for giving them these subsidies?
In addition, none of this is authorized by the Constitution, which our elected representatives have taken a solemn oath to uphold and defend (they must do this with tongue in cheek).
Daily Bell: The only solution, from your perspective, is a market-based hard-money standard, either gold, or gold and silver. Is that correct?
Parks: The solution to all of this is to reassert the monetary powers and disabil ities of the Constitution. Specifically, legal tender laws need to be repealed (which may even be sufficient), and gold and to a much lesser extent silver need to be re-monetized, as provided by the Constitution.
Our hero in the Congress, Dr. Ron Paul, has a bill tied up in committee to get rid of legal tender. More important than getting rid of the Federal Reserve, that bill needs to be passed. Please note that nowhere is the Foundation for the Advancement of Monetary Education advocating the so-called "Gold Standard." The Gold Standard, whereby money is linked to, redeemable into, pegged to, or in some other way tied to gold, an invention of the Bank of England, is an invitation to fraud and is not authorized by the Constitution.
What we're talking about is gold-as-money and silver-as-money. Silver would only be a subsidiary coinage suitable for small purchases and in almost no cases for future payment.
Daily Bell: Yes, our position at the Daily Bell would be that we don't need to legislate such standard. If fiat money continues to break down worldwide, as it seems to be doing, a gold standard would spontaneously re-emerge. People, including bankers, would simply revert to historical - private - money. In fact, we would argue that we've never left either standard - they have been legislated into a kind or gray or black market but nonetheless gold especially is still at the heart of financial commerce. Reaction?
Parks: For day-to-day purchases, it doesn't matter much what one uses as money. Tokens, for example, work fine. For future payment, however, tokens are no good because there is no way to guarantee or even expect that their purchasing power will be maintained. Without legal tender laws, people would once again introduce gold clauses in contracts that provide for future payment, as they did after the Civil War. There would be a transition away from irredeemable paper-ticket-electronic money, although at some point irredeemable paper-ticket-electronic money will be completely rejected.
What we need to do is to mitigate the damage and somehow protect those who cannot protect themselves, e.g., seniors. As Professor Antal Fekete has pointed out, we need to reopen the mints to free coinage, i.e., people need a facility whereby they can bring gold and silver and have it coined.
The reason this is a proper function of government is because only the government can use the police power to enforce laws against counterfeiting with the death penalty, which is what we want. There's more to this than I can put in a simple interview. We'll have to leave this for a later time.
Daily Bell: We recently had a fascinating discussion with Ellen Brown, author of Web of Debt. We'd like your reaction to some of her perspectives.
Parks: I have read Web of Debt, and I also read the interview you did with Ms. Brown. She is a talented writer, and a decent person. She has properly identified the money that is created out-of-nothing by the banking system as a scam, and I applaud her efforts to expose it. However, her prescriptions and solutions are wrong in every way.
As an attorney, she can understand the constitutional issues relating to our money, and the best source is Dr. Edwin Vieira's magnificent The Monetary Powers and Disabilities of the Constitution. She will find that paper money, backed or unbacked, is not authorized, i.e., it is illegal!
Further, almost all of the Founders, sans Benjamin Franklin, who had nice things to say about paper money before the Revolution but recanted afterwards, condemned paper money. Franklin's company actually printed the stuff, so he couldn't condemn paper money on moral grounds as others had done.
Madison, the father of the Constitution, said it was unconstitutional. Washington, the father of our country, said it was "wicked." Also, Ms. Brown makes no mention of legal tender, which is the coercion in the system. As Jefferson pointed out, there is no power in the Constitution to make paper money legal tender. It is clear in Article I Section 10 that the States may tender payments only in of gold and silver.
Were the government, instead of the banks, to issue irredeemable paper-ticket-electronic money that was not legal tender, it wouldn't circulate. Gresham's Law, which states that bad money drives out good money, only applies when the bad money is legal tender. So, if I were to issue Parks Notes, who would be foolish enough to save them for their retirement? Nobody! But if the Parks Notes were legal tender, that would be a different story.
The entity that was most on top of the legal tender issue was the American Labor Movement. At the end of the 19th century, when McKinley, pro-gold, was running against Bryan who was pro-silver, the Labor folks asked the exact right questions: If our money is good and would be preferred by the people, then why must it be legal tender? And, if our money is not good, why should it be legal tender?
Another problem with paper money that Ms. Brown omits to mention is that it is no good for international trade, i.e., one loses the international division of labor. As former Chairman of the Board of Governors of the Federal Reserve System Paul Volker has correctly pointed out, a global economy requires a global currency.
The open issue is: what is that global currency going to be? Just recently, at a G8 meeting, Russian President Medvedev was photographed holding a gold coin and proclaiming it to be the future world currency.
This photo appeared in the London Daily Telegraph, but except for a paragraph in Bloomberg, in which the word "gold" was not mentioned - do folks think it might have been a copper coin? - this story was not picked up by any of the major media in the U.S.
Ms. Brown also is in error when she writes about how gold could not be re-monetized because of conversion issues with dollars.
Again, she needs to go back to the primary documents to find out what a dollar is. It is certainly not a Federal Reserve Note! She raises a red herring about there not being enough gold when, in fact, gold is the only commodity (with a minor exception being silver) that has more than a year's worth of production supply above ground: 60+ years worth.
Today, perhaps a quarter of that gold, almost five billion ounces in the aggregate, is coined. Thus, if more money is needed, people would be able to bring their gold to the mint to have it coined. In addition, every year since antiquity, more gold is produced, generally about 2% of the outstanding.
Virtually none is lost. The amounts used for dental fillings, electrical contacts, etc. are today only about 100 to 200 tons per year, out of total yearly production of about 2,500 tons, and even some of that is recovered. Were it not for the dishonest practice by banks of issuing receipts for gold for which they did not have gold, a practice that Ms. Brown correctly recognizes as dishonest, there would never have been a problem with gold-as-money.
Daily Bell: What it comes down to is that as a free-market thinker and Austrian economist, Larry, you believe the root of the West's current economic problems are mostly monetary, and have to do with the substitution of paper money for real money. While Ms. Browne sees many of the same problems you do, she believes the solution to our money problem is to make central banking accountable to democratic forces - really accountable via oversight, valid audits, etc. Would this help?
Parks: Central banking is an abomination. It is dishonest. It is not authorized by the Constitution, i.e., it is unlawful. We don't want anyone or any institution creating money out of nothing, and that is what central banks do.
Daily Bell: She doesn't think the Quantity Theory of Money is correct. Your reaction?
Parks: Ms. Browne is correct that a contraction of the money supply is always harmful. That's one of the virtues of gold-as-money: it never contracts and it always expands. The reason is that there are no material industrial uses for gold. Virtually all of the gold ever produced still exists. In the case of silver, however, today it is primarily an industrial metal. Interestingly, until the middle of the 19th century, there were no industrial uses for silver.
Daily Bell: While she has many free-market sympathies, she seems to believe that the market itself should not control rates or the money supply, but that these functions are better left to government and central banks under direct democratic supervision.
Parks: She is entitled to her own opinion. In fact, the key defining role of government, any government, is that government has the monopoly on the legal use of force. Why should people be coerced in any way as to what they use as money?
Daily Bell: She says central banks don't create money but that commercial banks do. This is a summation with which we were not familiar.
Parks: Almost all of our money is created by banks. However, the Federal Reserve creates money when it purchases U.S. Government securities. Further, as Mr. Greenspan has pointed out many times, the Federal Reserve has the power to create money "without limit." This is really nuts, because it puts everyone's savings and promises of future payment at risk. If folks knew the facts, I cannot imagine why anyone would vote for this. Also, there is no power to "create" money, just to coin it. Further, people have to produce things, only God can create them.
Daily Bell: In her interview, she explained that democracies could supervise central banks and banking in general if given the proper tools. She explained that she had faith in the sort of government "of the people, by the people, for the people" described by Abraham Lincoln. How would that work?
Parks: It wouldn't work. In fact, legal tender irredeemable paper-ticket-electronic monetary systems are dishonest. No amount of regulation will cure that defect.
Daily Bell: Larry, thanks for the insights.
After Thoughts with Scott Smith
It is always a pleasure to put questions to Larry Parks because he knows so much about money both currently and historically. Of course, he is a free-market economist, not a Keynesian, and therefore has particular beliefs about money - what it is and what it is not.
For Larry, money is silver and gold. As he points out there is no reason that governments have to be involved through a specific "standard" and that the market itself is perfectly capable of sorting out monetary necessities.
Ellen Browne sees the world differently. She and Larry have some of the same difficulties with banking and central banking, but, as we understand it, Ellen's perspective is that the powers that belong to central banking should devolve to regional and national banks more directly responsible to government officials.
Our problem with Ellen's perspective is that it trusts the government to do what it evidently cannot, which is to supervise money. History, for thousands of years, as Larry points out, is replete with examples of ways that money has been inflated in various ways by various governments. Larry also makes the important point that fiat money always turns to ruin because people simply cannot resist the power to print more of the stuff.
From our perspective, Larry's arguments are well thought out and the scholarship he reveals, as always, seems appropriate to the task at hand. We hope our readers find something of merit in this discussion between two earnest and interesting minds.
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