WILSON OGG

Synchronous Folds Giving Rise to Consciousness and Matter

The Two-Way Flow

Biographical Data

An Unifying Approach to Consciousness and Matter

ECONOMICS

INTRODUCTORY REMARKS

Economics, the Enfolding Universe, and the Unified Theory

It might seem that the Enfolding Universe would have little in coomon with economics, generally considered a social science. The universe, however, in enfolding force with form, necessarily gives rise to consciousness and matter and the ways that consciousness becomes related to matter has immense ecomomic ramifications. Whether the ways that mankind relates consciousness with matter are based upon an genuine understanding of the relationship or upon unprovved presuppositions of the relationship have immense economic cobssequences. For these reasons, any discussions of the metaphysics underlying the means by which the universe expresses itself should include the field of economics, along with the manner that contractive and expansive forces operate in a society.

Scope of Discussion

This paper discusses in a broad sense economics. The word economics generally refers to a field of social science concerned with the production, distribution, exchange, and consumption of goods and services. For the reason that the medium of exchnge for payment of goods and services and for the settlement of debt is helpful in understanding economic principles, this paper sets forth, along with its discussion of economics as a social science, the bases of (1) money as a means of exchange as well as (2) the regulation of money supply under the central banking service of the United States, (3) an analysis of the Business Cycle, and (4) the Federal Reserve System, usually refered to as the Fed. For an article limited to free markets, see the article entitled Free Markets.

An nunderstanding of expansive and contractive processes and their effects on the economy, the money supply, manufactural productivity, and the labor market is required to further the establishment of a sound economy. A mastery of the economy`s expansive-contractive processes, as shown by the Unified Theory, should serve as the bases for the government, the business community, the banking industry, and the Federal Reserve System to adopt procedures and policies that would eliminate such developments as the present recession in the United States that started in the year 2000.

The economies of the United States and the developed nations of the world are based upon man-imposed processes of expansion and contraction that are often inconsistent with, and at times directly opposed to, the natural processes of expansion and contraction of the ecomomy. We face the extreme irony that as our technological ability to overcome such natural contractive process as a drought has been greatly enhanced, we fail to take corrective action and take non-corrective actions often based upon the special interests of those in control of the economy and do the direct opposite of what under the public interest should be done.

If man did not interfer adversely in the economy, technological progress would result in a very moderate decline of the purchasing power of the dollar combined with a very moderate increasse in the standard of living of the general population. Techological progress tend to reduce the cost of consumer products, thereby temporarily increasing the profits of manufacturers. Increasses in wages, however, tend to offset the reduced non-labor cost of consumer goods and the increase in demand resulting from higher income tend to lead eventually to increased prices of consumer goods. Expansive forces tend to occur before contractive forces, thereby allowing consumers to benefit from technological progress before contractive forces become operative to offset the techological gain. An understanding of the Unified Theory`s approach to the economy would lead to our being optimistic in our ability, under a sound and reasonable regulatory system, to avoid the grievous effects of depressions and for the general public to benefit from technological progress. We must overcome areas of prevalent ignorance and understand how the government may use fiat currency in a manner saving millions of dollars annually, with the American public benefiting substantially from the savings. We have the power and kmnowledge to do so but at the present time we seem to lack the will. It is hoped that this paper will overcome resistence to setting in motion available corrective procedures that will eliminate depressions, equalize the wealth of the American people, and give them time to appreciate not only technological progress but also increased spiritual insight and understanding.

Man should intervene in the economy only (1) to lessen the effect of a natural contraction, such as that of a drought or another type of natural decrease in available resources, or (2) to enhance in a controlled manner a natural expansion caused by, for example, increased agricultural productivity or by some other natural expansion of the economy, such as the discovery of resources serving as bases for a natural expansion of the economy or technological progress improving the standfard of living of people in general. Intervention should be limited and be used only to support natural expansive-contractive processes and should never be used, as is now often the case, in direct opposition to these natural processes

The failure to understand, or at least to act pursuant to, the interplay amomg expansive and contractive processes has led to much difficulty not only in science and advances in technology but also in economic factors, such as the so-called law of supply and demand and the interrelationships among capital, labor, and available resources. Depending upon poltical considerations, capitalists may receive an undue share of economic profts, in other cases labor may receive an undue share of economic profits, and in still other cases the owners of or those who control available resourses may receive an undue proportion of economic profits. Thus, when intervention by the government is desirable, it should be based upon an understanding of economic reality and further correction of inbalances in the economy.

The general public, political analyists, professional economists, and accountants are often ignorant of the total amount of government resources and expenditures. Financial data on total government revenue and expenditures are available in legally required Comprehensive Annual Fimnancial Reports, or CAFRs, issued by the financial officers of not only of the United States but also of the states, counties, and cities. These annual reports include not only general account funds but also proprietary and fiduciary funds held and managed by the government. News analyists and journalists are generally only concerned with annual budgets that contain estimates of revenues and expenditures for the forthcoming fiscal year. A state, however, may have a substantial budgetary loss but a very substantial total income. This fact can be only obtain from the CAFR of the particular state. The revenues from proprietary and fiduciary funds are many times budgetary or general fund revenues. Most discussions of economics, the monetary system, and the Federal Reserve System ignore the substantial and significant effect of financial data contained in CAFRs. Probably the major stock holders of American businesses are not mutual funds and investment funds but are proprietary and fiduciary funds owned and managed by the government. The news media exaggerates substantially the effect of mutual funds and investment trusts on the economy and often completely ignore the effect of government proprietary and fiduciary funds on the economy. Many factors entering into the expansive-contractive forces of the American economy are ignored along with an overemphasis on arbitarily selected factors.

Economics as a social science is concerned with the production, distribution, exchange, and consumption of goods and services. Its practitioners focus on the manner in which groups, individuals, entrepreneurs, and the government attempt to achieve efficiently selected economic objectives. Necessarily other fields, such as psychology and hopefully ethics, contribute to this objective. History in recording changes in human objectives will also come into play along with sociology that interprets the interplay of individual and social behavior.

Throughout the ages, man has been concerned with economic matters. Aristotle and Plato wrote about the problems of wealth, property, and trade. They were, however, prejudiced against commerce and felt that to live by trade was undesirable. The Romans who borrowed their economic ideas from the Greeks showed an equal contempt for trade. The Roman Catholic Church during the middle ages formulated canon law that condemned usury, which is taking interest from money loaned, and the Church regarded commerce as inferior to agriculture.

Standard economics has been divided into two major fields: Microeconomics and Macroeconomics. Microeconomists are concerned with the interplay of supply and demand in so-called competitive markets that leads to a multitude of individual prices, wages, profit margins, and rents. The assumption underlying microeconomics is that people behave rationally, a doubtful assumption. There is still a more doubtful assumption that treat supply and demand as governed by static and fixed economic principles even though the applicable governing principles may lead to fluidity in supply and demand. Microeconomists assume, for example, that people spend their income to give themselves as much pleasure as possible or, as they say, to maximise utility. The problem here is that there is not, and could not be, a fixed concept of what constitutes utility and thus nothing of profound significance is being said at all.

Macroeconomics was formulated by the British economist John Maynard Keynes in his treatiseThe General Theory of Employment, Interest, and Money(1935). Keynes believed that increases in unemployment resulted from inadequate aggregate demand. The cure for unemployment is thereby either more investment by business or more spending by government, resulting in larger budget deficits. The Keynesian approach involved substantial interference with the natural expansive-contractive processes of an economy and was clearly counter-productive The extensive government spending merely increased the contractive processes of the econmy that needed to be lessened. It would have been much better to feul the expansive forces giving rise to technological progress, thereby offsetting the contractive forces leading to unemployment. Increases in investment expenditures that do not further technological progress are counter-productive and lessen and do not increase the total wealth of a nation. Yhe 1930s constituted a period of great delusions among American intellectuals.

Rhe concept of the nation-state developed during the 16th century. Under mercantilism a major focus was on how to increase the wealth and power of the developing nation-states. Mercantilists sought to achieve self-sufficiency of the nation-state and valued gold and silver as the foundation of national power. Warfare became a common tool to enhance national power. With wealth in gold and silver, a king could hire and use mercenaries to fight, as did King George III of Great Britain with his use of Hessian troops during the American Revolution. The mercantilism in England and western Europe started in the 16th century and lasted to the early 16th century. Mercantilism lacked a coherent policy that would further expansive forces in mercantile economies and instead recommended policies that would enhance nationl power at the expense of other nations, with gains tending to be offset by losses.

The mercantilist stress on holding and using precious metals led to the development of misguided domestic policies. It was believed that it was essential to keep wages low and to encourage a large and growing population. With a large and ill-paid population, it was felt that more goods could be sold to foreigners at low prices. The working class person was told to work hard and avoid the extravagances of the upper class and of the growing but still small middle classes. Children were put to work at a very early age in order to further the nation`s prosperity. Children of the poor were sent to county workhouses at 4 to 6 years of age. Often with both parents working at very low wages, the parents were forced to send their children to the county workhouse. The emphasis, however, on technology in mercantile societies did lead eventually to technological progress and the decline of the mercantile economy. It contained within itself the seed of its own destruction.

As a result of the narrow and restrictive features of mercantilism, the physiocracy school developed during the second half of the 18th century. It was founded by Francois Quesnay, a physician at the court of King Louis XV. In his major work Tableau economique, he attempts to determine how income flows through the economy, anticipating somewhat national income accounting of the 20th century. The physiocrats believe that all wealth is derived from agriculture and through trade wealth is distributed from farmers to other groups. They favored free trade and laisez-faire, and they maintained that state revenue should be raised by a single direct tax on land. Adam Smith met with leading physiocrats and wrote mostly favorably of their doctrines.

The members of the classical school of economics accepted Say`s Law of Markets, a doctrine formulated by the French economist Jean Baptiste Say (1767-1832), which states that in a competitive market unemployment is negligible because supply tends to increase its own matching demand up to limit of human labor and the natural resources available for production. Increases in production and services also results in increases in wages and in other forms of income available to purchase the increased number of products and services. Under the Unified Theory, which accepts Say`s law, an ingredient force of expansive-contractive pattern of forces tend to generate an opposing force, which means expansive forces generate contractive forces and contractive forces generate expansive forces. Thus, a pattern of expansice-contractive forces generate many other patterns of expansive-contractive forces, with the expansive force of an expansive-contractive pattern generating the contractive force of another expansive-contractive pattern and the contractive force of an expansive-contractive pattern generating the the expansive force of another expansive-contractive pattern. Say`s law, in other words, recognizes the supplying of goods, an expansive force, generates a matching demand, a constractive force

Classical economics as a coherent philisophy dates from Adam Smith, with contributions by British economists Thomas Robert Malthus and David Ricardo, and with its culmination in the synthesis of John Stuart Mills. Many differences of opinion existed in the three quarters of a century from Smith`s Wealth of Nations(1776) to Mill`s Principles of Political Economy(1848). They did agree, however, on major principles. The all believed in private property, free markets, and that, in Mill`s words that "only through the principle of competition has political economy any pretensions to the character of a science." Strongly suspicious of government, they reconciled public benefit with the individual pursuit of private gain. Ricardo contributed the notion of diminishing returns, which held as more labor and capital were applied to land, yields after "a certain and not very advanced stage in the progress of agriculture steadily diminished." Thus, Ricardo believed that the application of labor and capital up to a point enhanced significantly expansive forces but after a given stage was reached the enhancement lessened. Smith believed that by permitting persons to follow their own self-interests national prosperity was enhanced. He was optimistic about man`s ability to improve the standards of life.

In his influential work An Essay on the Principle of Population(1798), Malthus introduced pessimism to classical economics. He argued that hopes for prosperity were be nullified by excessive population growth. He believed that food would be increased in arithmetic ratio (2-4-6-8=10, etc.) but population tended to double in each generation (2,4,8,16, 32, etc.). Malthus believed that the "power of population is so superior to the power of the earth to produce subsistence that premature death death must in some shape or other visit the human race." For this reason, war, oestilence, plague, human vices, and famine would combine together to level the world`s population with the world`s food supply. Malthus believed in the voluntary limitation of population by late marriage and smaller families. He rejected contraception on religious grounds. Under the Unified Theory on the balance and equilibrium among expansive and contractive forces, there would be no danger of mass death from starvation. The forces towards having a larger number of children would be balancecd by opposing forces that would limit the number of children, such as the desire of married couples to limit the number of chidren in order to increase their standard of living. Thus, expansive forces are generally modified greatly by contractive and opposing forces.

Principles of Political Economyby John Stuasrt Mill was the leading economic text until the end of the 19th century. He accepted the major theories of classical economice but was more hopeful than Ricardo and Malthus that the working class could be convinced to impose limitations on their birth rate. As a reformer, he was willing to tax inheritances heavily and to increase the role of government in protecting children and workers. He was more strongly critical than other classical economists of the behavior of businessmen and even favored worker ownership of factories.

Opposing classical economics were the social philosophers Robert Owen of Britain and comte de Saint-Simon of France. It was, however Karl Marx who became the most important opponent of classical theories of economics; even though his approach was in general a rebuttal of classical economics, it did accpet features of classical economocs. Marx did adopt a version of Ricardo`s labor theory of value, which explains prices as a result of differing quanities of human labor required to produce different products. To Ricardo his labor theory of value was a means of explaining the variations in prices of countless products. To Marx it was the basis of the inequities and explotation of an unjust capitalist system. Marx became convinced from his study of history that that profit and property income generally are a result of fraud and force inflicted by the strong on the weak.

During the 17th and 18th centuries, landowners used their control of Parliament to deprive rheir tenants of traditional and well-established rights to common land. After being deprived of their land, the tenants, men, women, and children, were forced into crowded cities and to become wage earners in factories. Some came to America and helped to settle the English colonies in America and thereafter to participate in the formation of the world`s first democratic republic. In this situation, the contractive force of deprivation of long honored rights to land use generated the expansive force of settlements in a new land, America. Marx was concerned with those deprived of land who became wage earners and the conflict between capitalists who owned the factories and machines serving as the means of production and the workers or proletarians who possessed nothing but their bare hands.

The Marxist doctrine of exploitation ignore the fact that expansive-contractive patterns of forces generate other contractive-contractive patterns of forces, and Marx assumed contrary to evidence that a pattern of expansive-contractive forces would only become a more strongly embeded pattern. In the Communist Manifesto(1848, Marx and Engels recognized the matetrial achievements of capitalism, in effect, recognized that expansive-contractive patterns instead of strengtening only themselves generate many newly formed expansive-contrsactive patterns. Neverthless, they were convinced that these achievements were transitory and that the internal contradictions within capitalism would lead to its failure as a viable system.

The neoclassical movement started in the 1870`s. Neoclassdical economists, such as in Great Britain, William Stanley Jevons, in France, Leon Walras, and in Austria, Karl Menger, emphasized psychological aspects and spoke in such terms as the marginal utility of goods instead of the law of diminishing returns, of limitations on supply, and of Malthusian considerations. Instead of explaining market price by the differing quantities of human labor entering into the manufacture of diverse products, as did Ricardo and Marx, neoclassicists explain mrket price as based on the intensity of consumer preferences for various products.

In his Principles of Economics(1890), British economist Alfred Marshall formulated the principle of marginal utility to explain demand and the principle of marginal productivity to explain supply. Consumer preferences for low prices and seller preferences for high prices were adjusted in competitive markets to mutually agreeable levels. At a particuilar price level, buyers were prepared to buy precisely the quantity of goods sellers were prepared to sell. The same type of adjustment occurred in markets for money and human labor. In money markets, borrowers expected to use borrowwed funds to earn profits greater than the interest they agreed to pay, and lenders at a rate of interest they required in order to postpone the enjoyment of their own money. In a market with competitive wages, wages at a set level represented to the employer at the very least the value of the output attributed to the employee and to the employee an acceptable compensation for the tedium and faitigue of work.

Implicit in the neoclassical doctrine was political conservsativism. Its advocates clearly prefered competitive markets to government intervention. Until the great depression of the 1930`s, its advocates believed that the best policies were low taxes, limited public spending, and balanced budgets. They tended to explain disparities in income and wealth as a result of differences among human beings in intelligence, talent, ambition, and energy. Special advantages or special handcaps among people were downplayed.

Until the 1930s, John Mayard Keynes was a student of Alfred Marshall and an advocate of neoclassoical economics. Laissez-faire policies were not working to restore prosperty during the great depression of the 1930s, and the public and government leaders demanded fresh policies. which were supplied by Keynes in his work The General Theory of Employment, Interest, and Money. Keynes declared that existing explanations of unemployment were nonsense and that neither high prices nor high wages could explain persistent depression and mass unemployment. He explained persistent depression and mass unemployment in terms of aggregate demand, which is the total spending of consumers, busoness investors, and government. When aggregate demand is low, sales and jobs suffer and when high, there is prosperity.

Since consumers were limited in their expenditures by the size of their incomes, they could not be responsible for the ups and downs of the business cycle. Thus, business investors and governments were necessarily responsible for these ups and downs. In a recession or depression, it would follow from the views of Keynes that either private investment should be enlarged or government spending should be increased as a substitute for a shortfall in private investment. With a mild economic contraction, monetary policy, such as easy credit and low interest rates, might stimulate business investments and restore aggregate demand to an amount consistent with full employment. With a severe economic contraction, however, deliberate budget deficits by way of spending on public works or by way of subsidies to the needy were called for.

The Keynesian, as well as the classical aproach, to economics are based upon a simplification and often inappropriate abstraction from the expansion-contractive patters of forces operative in an economic system. They both ignore the major affect of the abuse of monetary policy that contributed in a major way to the great deprression and the recessions in the United States since the 1930s. In order to understand the causal factors entering into recessions and depressions, a detailed understsanding of the Federal Reserve System System is essential. Many professors of economics are ignorant of the way the Fed operates and use principles of micoeconomics and macroeconomics to explain economic functions that are in actuality a result of a deliberate utilization of the monetary system by officials to favor special interests of particular investors who profit from depressions. Keynes himself seemed to lack a clear understanding of the causal factors entering into the great depression of the 1930s and was not in a position to recommend policies that would nullify these causal factors.

Money is any medium of exchange that is widely used for payment for goods and services and in settlement of debts. Money serves as a standard of value in measuring the relative worth of goods and services. The price of a commodity is the nmumber of monetary units it takes to buy the commodity. The monetary unit used as a measure of value need not be widely used as a medium of exchange. For example, in colonial America Spanish currency was commonly used, even though the British pound was the standard of value.

Without money there would be the direct exchange of one commodity for another, with trade being based upon barter. Among so-called primitive people barter is still used. Barter is an awkward means of conducting trade. A person wanting to trade an object must find another person who has something to offer in exchange. In a money economy, a person can easily sell something for money without the time and effort involved in bartering.

Where time-share weekly ownership of units at vacation resorts first developed, some owners did barter with other owners to exchange the use of their units. These owners, however, now deposits their ownership weeks to an association that handles the exchanges for them.

There are three main types of money, which are as follows:

(1) Commodity money, which has a value based upon the marerials used. Gold, silver, and copper were generally used for this type of money. Among primitive peoples, commodities such as beads, shells, furs, livestock, and so on were utilized as money. Before 1933 the United States used gold coins as a form of commodity money.

(2) Credit money, which is paper backed by promises of the issuer, whether the government or a bank, to pay an equivalent value in the standard monetary metal.

(3) Fiat money, which is paper money not redeemable in any other type of money and the value of which is fixed only by a government edict. Fiat money may consist of repudiated credit money, such as U.S. greenbacks issued during the American Civil War.

When under a government edict all creditors must take fiat or credit money in settlement of all debts, the money becomes what is termed legal tender. Where the supply of paper money is not excessive and consistent with the needs of trade and industry, the currency would tend to be generally acceptable and to be relatively stable in value. Where, however, the currency is issued in an excessively large volume, for example to finance government projects, public confidence in the currency declines and the currency would lose value.

Money of redemption, or standard money, is the money used by a country that may be converted into, and determines the value of, other forms of money. Modern standards have been generally standards based on gold or silver or fiat standards of inconbvertible paper units. The principal types of gold standard are as follows:

(1) Gold-coin standard used in the United States until 1933;

(2) Gold-bullion standard of a specified quantity of gold; and

(3) Gold-exchange standard, under which the currency is convertible into the currency of some other country under the gold standard.

The gold bullion standard was used in Great Britain from 1925 to 1931, and a number of Latin American countries have used the dollar-exchange standard. In modern times the silver standard has been primarily used in Asia.

History of Monetary Regulation in United States

First Bank of the United States Chartered in 1791

The first Bank of the United States was chartered by Congress in 1791 for 20 years, and the second Bank of the United States existed from 1816 to 1836. The Bank of the United States issued bank notes that maintained a fairly stable value. Along with the stable bank notes of the Bank of the United States, state chartered babks also issued notes that often greatly depreciated in valuew as result of lax state banking laws. After the closing of the second Bank of the Unitred States, most of the notes in circulation were those of state-charted banks and circulated in only a limited area.

First Coinage Act of 1792

Congress passed the first coinage act in 1792, which adopted a bimertalluc standard, and under hich both gold and silver coins were to be minted. The gold dollar contained 24.75 grains of pure gold, with the silver dollar containing 15 times as much silver, making the kegal mint ratio of 15 to 1. Under this ratio, gold was undervalued at the mint compared to its value as bullion, with the result that very few gold coins were minted. Silver dollars, moreover, were largely withdrawn from circulation because they were exported to the West Indies and exchanged at face vakue for slightly larger Spanish dollars. These Spanish dollars were then melted down and taken to the mint for coinage at a profit. Metallic currency was largely limited to a short supply of small silver and copper coins.

Effect of Adoption 1n 1843 of Mint Ratio of 16 to 1

In 1834 the Congress adopted a mint ratio of 16 to 1 by reducing the weight of gold coins. After 1834, silver became undervalued at the mint with the rswult that its market value was higher than its coin value. As a consequence, gold replaced silver as the montary means of exchange. To reduce a serious shortage in small coints, Congress in 1853 reduced the weightr of half-dollsars, quarters, and dimes by 7 percent. The new subsidiary coins were worth more as money than as bullion, with the rsult that they remained in circulation, Before 1853, small coins that remained in circulation were often altered to reduce their weight to bullion value.

Pressure from Silver Interests

In 1873 the mintage of silver dollars was no longer authorized, but mintage again was authorized and resumed in 1878. After the elimiation of silver dollars in 1873, the expanded production of silver in the West caused the value of silver to fall significantly in price. The silver interests vigorously campaigned for free coinage of silver, and in this campaign they were joined by political groups who favored free coinage in silver as a means of improving general economic conditions. The result of this pressure was the passage of the Bland-Allison Act in 1878 and the Sherman Act in 1890, which required the Treasury to purchase large amount of silver for coinage. The law also established the silver certificate, which remained remained as a part of U. S. currency until its retirement in 1968. The Sherman act introduced a large amount of over-valued silver into circulation, and caused a serious decline of gold reserves of the Treasury, and helped to bring on the panic of 1893, which led to its repeal by the Congress in that year. The silver forces were finally defeated and in 1900 the Gold Standard Act afformed the gold dollar as the standard unit of value. In 1913, the Federal Reserve Act was passed by the Congress, and this Act and the Federal Reserrve System are discussed later on in this article.

The Great Depression

Devaluation of the Gold Dollar

As a result of the economic depression and the epidemic of bank failures in the early 1930s, major reforms in the nation`s monetary structure took place. Prresident Roosevelt issued executive proclamations in March and April 1933 that prohibited gold exports execpt under government license and called in all gold and gold certificates from general circulation, thereby ending the gold standard. The Gold Standard Act of January 30, 1934 returned the country to a modified gold standard with a devalued dollar. The act gave the president authority to lower the weight of the gold dollar to between 50 and 60 percent of its former gold content. The day after the passage of the act the president issued a proclamation reducing the gold content of the dollar to 59 percent of that established by the Gold Standard Act of 1900, or fromn 23.22 to 13.71` grains of fine gold.

Unlimited Coinage of Silver

The Thomas Amendment to the Emergency Farm Relief Act of May 12, 1933, commonly known as the Inflation Act, gave the president the authority to restore unlimited coinage of silver under a bimetallic system. Thereafter, the Silver Purchase Act, signed on June 19, 1934, authorized the nationalization of silver and declared that it was the policy of the United Ststes to have silver holdings of the Treasury to make up a maximum of one-quarter the value of the nation`s combined monetary gold and silver stock.

Executive Order of August 9, 1934

An executive order of August 9, 1934 required all silver in the United States, except for categories such as silver coins, fabricated silver, and silver owned by foreign governments, to be delivered to the mint to be coined or held as bullion for later coinage. Thereafter, under the Silver Purchase Act previously enacted, and subsequent legislation, the Treasury purchased large quantities of silver abroad and from domestic producers. These purchases raised the price of silver and limited the use of silver abroad, especially in China and India.

Recent Developments

As a result of diminishing gold reserve the United States in 1968 eliminated the gold-cover requirements for Federal Reserve Notes, silver certificates, and Treasury notes of 1890. This allowed the gold stock of the United States to be used for international payments until, in August 1971, the exchange of gold for foreign-held dollars was suspended indefinitely. In 1975, U.S. citizens were given the right to buy, sell, or own gold, but could not use it as a medium of exchange. Startimg in 1963, the price of silver rose above its monetary value. The United States Treasury by 1969 sold the last of its silver supply and discontinued redeeming silver certificates for the metal.

Money Need Not Be Based on a Precious Metal

Currency of a nation need not be based upon or redeemable by a precious metal. Under a well-regulated monetary system the money of a nation may be fiat currency issued pursuant to sound and reasonable standards. The value of coins need not be based upon their intransic metallic value, and paper currency need only to be treated as legal tender. There is also no reason, as will be discussed later in this article, for the Federal Reserve System to require government securities to back the creation of money under the reserve ratio. The government securities themselves are only back by the credit rating of the United States.

General Remarks

Bimetallism and Gresham`s law

A bimetallic standard has been used by some countries under which either gold or silver coins set the standard monetary value. These systemsa were usually not successful as a result of Gresham`s law, which states the tendency for the cheaper money to drive the more valuable money out of circulation.

Modern Systems`s Use of Fiat Money

Under most modern systems, the free convertibility of the currency into a metallic standard is not allowed. The value of money is set by government fiat rather than by its nominal gold or silver content. Modern currencies are managed currencies with valuation mostly dependent upon government policy and management. The monetary system of the United States is one of managed currency, with valuation primazrily set by the governors of the Federal Reserve System, and subject much to the special interests of the American and international banking industry. It is unclear whether the value of inconvertible-credit currency, where policies are based upon special interests and not upon sound monetary policies, can lead to currency at a fairly stable level.

Importance of Credit Instruments

Credit instruments are used in most business tranactions in the United States. Bank deposits are generally treated as a part of the monetary structure of a country, with the term money supply refering to currency in circulation and bank deposits. The amount of bank deposits and credit instruments are many times the amount of currency actually in circulation. According to the quantity theory of money, prices are largely determined by the volume of money outstanding. The volume and speed of turnover, however, of both money and bank deposits has been shown to be of great importsance in determining price level.

THE BUSINESS CYCLE

In General

The term business cycle refers to periodic changes in the economy. After the indistrial revolution, the level of business activity in industrialized caoitalist economies have gone through periodic changes from high to low and back again. One reason for the enactment of the Federasl Reserve Act of 1913 was to moderate the ups and downs of the business cycle.

The Phases of the Business Cycle

Although the timing of a business cycle is difficult to predict, most economists agree that the cycle has four phases, which are as follows:

(1) Prosperity,

(2) Liquidation, which is now usually termed a recession

(3) Depression,

(4) Recovery.

. These terms were originally used by the American economist Wesley Mitchell (1874-1048). Productivity, employment, wages, and profits increase during the phase of properity. As the upswing continues, production costs increase, shortages of raw materials develop, prices rise and consumers react to the rise in prices by buying less. Prices as a consequence decline and workers are laid off. The phase of liquidation or recession commerces, and business executives become pessimistic as prices and profits continue to decline, and factories are shut down and unemployment becomes widespread. The economy then enters into a depression. Economists may differ when a recession becomes a full-fleged depression. The United Statesd probably at the start of the year 2003 is in a depression. Recovery starts when there is an increase in consumer demand, the exhaustion of inventories, or government action to stimulate the economy.

Variations in Severity and Duration

The four phases vary considerably in severity and duration. Major cycles on the average have lasted slightly longer than eight years, while minor cycles have generally lasted from two to four years. The American economist Alvin Hanson (1887-1975} reached the conclusion that there was 10 major and 23 minolr cycles from 1857 to 1937. The most severe was the Great Depression in the United States during the 1930s.

Causality Underlying the Business Cycle

In General

The business cycle is not inherent in the expansive-contractive patterns of forces constititing the economy. The business cycle results from some form of interference with these patterns. The interference could be man-made and be caused by mismanagement of the economy by those entrusted with the responsibility of regulating the money supply, such as the Board of Governors of the Fed. The interference cold be a number of years of drought or a major discovery of precious metals or a new source of energy to feul the industrialized economy. The sources of interference are usually many and diverse, with these sources interfering with the harmonious working together of various and numerous components of the expansive-contractive patterns of the economy. Expansive-contractive forces that should occur synchronously often get out of step with one another and take place berfore or after the time required for a harmonious interrelationship to exist. For example, over-optimism by msamufacturers might increase the supply of goods beyond the demand from them, resulting in falling prices of the goods and decrease profits by the manufacturer. Conversely over-optimism by purchasers might increase demand beyond actual need, resulting in higher costs and decrease profits by the purchasers.

Suggested Causes for Cycles

Two suggested external causes for cycles include sunspots and economic trends. The sunspot theory of British economist William Jevons was at one time widely accepted. Jevons believed that sunspots affected meterological conditions which, in turn, affected the quantity and quality of harvested crops and thereby the economy. Under the psychological approach, British economist Arthur Pigou believed that the optimism or pessimism of business leaders may influence an economic trend. President Hoover during the early years of the Great Depression appeared publicly optimistic, hoping to stimulate the economy. The importance of optimism or pessimism is not that they may cause an economic trend but that they interfer with the harmonious working together of expansive-contractive patterns of forces, causing for example supply to get out of step with demand. In an economy of business leaders exercising realism business cycles as we know them would probably not exist.

Relationship Between Investment and Consumption

The relationship betweeen investment and consumption affect business-cycle fluctuations. New investments have a multiplier effect,with investment money paid to wage earners and suppliers becoming inome to them and to others as the wage earners and suppliers spend their income. At the same time, an increasing level of income spent by consumers has an accelerating affect on investment. Higher demand necessarily leads to greater incentive by business men to increase investment in production. Under this analysis, the fluctuations, however, would be minor and would not explain the decline from prosperity to depression. Such a decline can only be explain by serious and major interference with expansive-contractive patterns of forces. Only excessive optimism or excessive pessimism, devoid of any bases in reality, along with the abuse of regulatory authority over the monetary system, can account for the extreme fluctation of the business cycle from prosperity to depression.

Moderating the Cycle

Since the Great Depression, the government has taken action to moderate severe economic declines. These actions have not been based upon a real understanding of the causal factors underlying severe declines but do make more tolerable the affect of the declines. For example, unemployment insurance provides most workers with income when they are laid off. Social security furnishes an increasing number of retired persons with at least some income. Government support of farm prices purportly help farmers from a disastrous loss of income. The stock market is now regulated by the Securities and Exchange Commission and by the Federal Reserve System purportly to prevent a recurrence of a financialy disastrous collapse such as that of 1929. The Fed, however, seems to be a major contributor to economic problems faced by the United States today and the SEC has taken no effectively action to stop the excesses of the stock mazket. If anthing, government actions have contributed to the failure to address the real causes underlying our monetary system and have allowed persons to become immensely rich during severe economic declines by getting assets ten cents on the dollar. The public remains ignorant while its leaders are representing not the public but those who gain from economic upheavals.

Special Cycles

Building Industry

Along with the business cycle, special cycles may result from interferences peculiar to particular industries. The building industry apparently has cycles from 16 to 20 years in length. Prolonged slumps in the building industry added to the severity of two of the most severe American depressions, that from 1872 to 1873 and the Great Depression during the 1930s.

Wholesale Prices

Some economists believe that a long-range cycle, lasting about fifty years, also occurs, and is established by a pattern in wholesale prices. From 1790 to the early 1800s wholesale prices rose, from about 1815 to the 1850s, wholesale prices decline , from 1850s to the mid-1860s, wholesale prices rose, from the mid-1860 into the 1890s, wholesale prices decline, thereafter wholesale prices rose until 1920, and thereafter fell until 1933.

Economic Quantities

Studies of economic trends were made during the same period by the Russian economist Nikolai Kondratieff. He analyzed economic quantities, such as wages, raws materials, production and consumption, exports, and imports in Great Britain and France. His data seemed to establish long-range cycles similar to those described above for wholesale prices; but his data are not conclusive. His "waves" of expansion-contraction fell into three periods, averaging 50 years each, 1792-1850, 1850-96,and 1896-1940.

THE ECONOMY AND THE FED

In General

The Federal Reserve System, popularly called the Fed, is the central banking system of the United States. The Fed serves as the banker to both the banking industry and the government of the United States. The monetsary and banking system of the United States is regulated by the Fed. The Fed issues the national currency and regulates the monetary and banking system. The Fed is really a part of the U.S. government,with the government being responsible for its cost of operation. Many economic textbooks inappropriately treat the Fed as being owned by member banks. It is not.

History

The National Bank Act of 1864

Before the passage of the Federal Reserve Act in 1913, there was for a 50-year period of frequent economic crises, often accompanied by collapses of the banking system. The American banking system was not able to respond with flexibility to business cycles. The National Bank Act (1864) divided the banking system into

(1) central reserve city banks, first in New York City and Chicago and Saint Louis were added in 1887,

(2) resewrve city banks in 16 large cities other than New York and Saint Louis, and (p> (3) Country banks.

All national banks were required to hold reserves, and country banks could hold a proportion of their deposits in reserve city banks. If country banks needed additional reserves to meet the cash demands of their customers, they would go to reserve city banks, which in turn would demand funds from central reserve city banks. There was frequent collapses of this awkward system, with susdpension of specie, ie., gold coin, payment. Banking crises occurred in 1873, 1883, 1893, and 1907. After the 1907 panic, a bipartisan congressional body, National Monetary Commission, was formed in 1908.

The Federal Reserve Act of 1913

It was the report of the National Monetary Commission that led to the Federal Reserve Act of 1913. Instead of establishing a system under which the government would issue fiat currency under appropriate regulations of the Federal government that would fulfill the needs of flexibility and stability, a system masquerading as a private banking system was established, with nearly all risks assumed by the American taxpayer and all profits going to the banking industry. Thus, responsibility for the costs of policy decisions were separated from the profit motive, with the result that decisions could be, and were, made, that led to immense profits to the banking industry while at the same time immense expense to the American taxpayer. If a monetary system is based on fiat currency, there is no need for the government to become indebted to the banking industry in the process of the issuance of fiat currency. The process of multiplying currency under a so-called reserve ratio, with government securities serving as a basis for multiplication, as established by the Federal Reserve Act of 1913 is nothing but a disguised gift of billions of dollars each year to the banking industry. It had become clear that a sound monetary system must be the responsibility of government and cannot result from the activities of numerous banks constituting the banking industry. To have those dedicated to the profit motive making banking decisions for which the government is responsible is absurd. The so-called independence of the Fed encourages decisions being made by persons not accountable for their decisions.

Board of Governors

The powers of the Federal Reserve System are administered by a board of governors, which is responbsible for all policy issues relating to bank regulation and supervision as well as to most aspects of government control. Rhe board is not an opersating agency and the day-to-day implementation of policy decisions is the responsibility of the district Federal Reserve banks. Most economic textbooks state, and many professors of ecomomics believe, that the district banks are by owned by the commercial banks that are members of the Federal Reserve System. In reality they are owned by the government and in final analysis by the American people. Although the members banks have what is termed stock in the reserve banks of which they are members, the stock has no attributes of ownership whatsoever, with the profits of the reserve banks going to the U. S. Treasury and with the losses being borne by the U. S. Governmen and the American people. The profits of member banks necessarily go their stockholders, even though member banks make no contribution towards the expenses of the Fed. The ownership illusion is apparently for cosmetic purposes only and to obsure the extent of government subsidization of the banking industry. The members banks have no control over the System, with the control being in the Board of Governors and the heads of the Reserve banks. There is, however, no doubt that the Board of Governors, and the heads of reserve banks, generally act in the interest of the member banks. The lack of formal control of the Fed by member banks is an essential part of the governmental subsidization of the banking industry. It needs no formalized control for its interests to be fulfilled.

Complex Regulatory Apparatus

In General

In some instances the authority of the Federal Reserve is shared with other federal agencies. The Comptroller of the Currency and the Federal Deposit Insurance Corporation (FDIC) share power, for example, with the Federal Reserve in the mergers or examination of banks. In the highly significant area of regulating the nation`s money supply, pursuant to either national goals or the goals of the special-interests of the banking industry, the Federal Reserve acts alone and is solely responsible for violations of the public interests.

Freed from Congressionsl Supervision

Congress has no control over the income and expenditures of the Federal Reserve banks and over the Fed`s Board of Governors. The Fed is self-financing with revenues coming mainly from Reserve bank holdings of income-earning securities, consistinbg primarily those of the U.S.Government. Although not understood by many economists and politicians, these government securities are in fact owned by the American people. After deductions of all expenses of the Reserve banks are debited, any income in excess of expenditures by a booking keeping transaction goes to the U. S. Treasury. It does not go to the member banks since they have no incidents of ownership over the securities. Much of the expenses of the Reserve babks are operational expenses in providing services to its member banks and regulatory expenses.

Structure of the Fed

The base of the Federal Reserve system consists of the member commercial banks. All national banks are required to join the system and state-charted banks may join the system. Members purchase so-called capital stock in their district Reserve bank and are entitled to a statutory six percent stock "dividend", which is payable whether the Reserve bank has any profits whatsoever. They also have the right to vote for the directors of their Reserve bank. Membership also permits a bank to obtain many services, sometimes without charge, such as to request and usually obtain short-term credit from the Reserve babk, to have its checks cleared by that bank, and to obtain currency and other services from the Reserve bank. The member bank, in return, is required to maintain a non-interest bearing deposit, the "required reserve," with the reserve bank. Instead of being a "required reserve" it is really a privilege that allows the member bank to create money on the credit rating of the American people. For example, if the reserve ratio is ten to one, the member bank can lend out ten dollars for every one dollar it actually has and to do this with the back-up of the Federal Reserve system. Although the money is created using the credit rating of the American government and the American people, the bank does not pay any interest for this privilege. Only banks may do this not credit unions, savings and loan associations, or ordinary American citizens.

Expansion and Contraction of Currency

The expansion and contraction of currency is primarily achieved only by the selling and buying of government securities. Even though the American currency is a form of fiat money, fiat money in America is only created by the government`s becoming indebted to the members banks who buy government securities. This indebtedness need not be created, and the currency might be expanded or contracted by means other than the issuance of interest paying government securities.

Borrowing of Reserves

Since the Monetary Control Act of 1980, banks can borrow reserves from their reserve bank, that is, they can, in effect, purchase the privilege of creating money under the applicable reserve ratio. The act imposes the so-called reserve "requirement" on all depository institutions and also requires that the Reserve bank charge a fee for services previously available without charge. The stated reason for allowing banks to borrow reserves from the Reserve banks was to increasde the liquidity of the entire banking system. During the 1990s it was to fuel the Dow-Jones industrial averages. During the year 1999, before the stock market collapse, the Reserve banks lent interest-free reserves to member banks and allowed them to repay the loan of reserve with money created by the loans themselves. For exampole, by borrowing a million dollars in reserve, if the reserve ratio was ten to one, the bank could create ten million dollars and use one million of this created money to repay the loan to the Reserve bank. The money created during 1999 did not increase the over-all liquidity of the economy, and it had no place to go but into the Dow-Jones industrial average. The borrowing of reservces is a means that money can be created without the government`s becoming indebted to the member banks. In fact, borrowed resreves could become the major means of expanding the currency and the paying back of borrowed reserves the major means of contracting the money supply. By reliance on borrowed reserves to enlarge the money supply instead of interest-paying governmrnt securities, the American government would save billions of dollars each year.

The Twelve Reserve Banks

The twelve district Reserve banks are located in the following cities: Boston; New York; Phildelphia; Cleveland, Ohio; Richmond, Va.; Atlanta, Ga.; Chicago; St. Louis, Mo.; Minnneapolis, Minn.; Kansas City, Mo.; Dallas, Tex.; and San Francisco. Each bank has a nine-member board of directors, divided into three classes. Class A and B diectors are elected by the member banks, and Class C directors are appointed by the Board of Governors. The board is responsible for the administration of the bank and, subject to approval of the Board of Governors, for the appointment of the bank`s president and vice-president. The directors also set the discount rate, subject to review by the Board of Governors, which is the interest rate charged to banks for borrowing from the Reserve banks.

Implementation of Decisions of Board of Governors

Reserrve banks implement decisions made by the Board of Governors and by Reserve babk officers. State member banks are examined by the staff of Reserve banks, with national banks being examined by the staff of the Comptroller of the Currency. The FDIC examines insured non-member banks. Sales and purchases of securities for Federal Rerseve System`s own account are handled by the Federal Reserve Bank of New York, which also handles international financial activities.

Monetary Control by Fed

The Fed has two types of monetary controls, which are:

(1) General controls, which are controls over open-market operations and the required reserve ratio; and

(2) Selective control, which is control over the margin requirement or the ratio of cash required to purchase securities.

With open-market operations, the Federal Open Market Committee (FOMC) first determines a money supply target. The FOMC consist of the seven governors, the president of the Federal Reserve Bank of New York, and four other Reserve bank presidents serving on a rotating basis. If the money supply grows too slowly, the Fed purchases government securities, or sells to member banks securities already held by the Fed, thereby increasing reserves by allowing the banks to create more money. The purchase of securities by member banks is inflationary in nature. If the growth of the money supply is considered to be too rapid, the Fed will sell securities held by it on the open market instead of to member banks. Open-market operations are the most frequently used method of monetary control; but similar results might be achieved by changing the required reserve ratio. An increase in the reserve ratio by allowing less money to be created is deflationary while a decrease in the reserrve ratio by allowing more money to be created is deflationary. Among its minor general controls, the Fed can decrease or increase the discount rate. An increase in the discount rate, makes borrowing more expensive, thereby reduces bank demand for reserves.

MP=Py

The basic responsibility of the Fed is to achieve to the greatest extent possible price stability. From the formation of the Fed to the middle 1980`s the Fed, instead of achieving price stability, became a major source of price instability. See edirorial by Milton Friedmam, WSJ, August 18, 2003. From the middle 1980`s, the Fed has been much more successfull in achieving price stability. The formula MP=Py is a way of expressing that the quantity (M) of money times the velocity of circulation (V) equals the price level (P) times output (y). None of these variables are directly controlled by the Fed. Under the present setup, the Fed primarily controls the volume of its own obligations, which is the base of the monetary system.

Open-Market Operations and Lending of Reserves

Where the Fed through its open- market operations buys securities, it adds to the base, and when it sells securities it subtracts from the base. Although generally ignored by most economists, when the Fed lends reserves to member banks, the Fed is also adding to the base. The power of the Fed to change the discount rate and, to a degree, reserve requirements are of minor significance compared to its open market operations or its lending of reserves. By its control over monetary aggregates, such as M1, M2, or M3, it can determine the annual percentile rate by which these aggregates raise or fall.

Pegging of Interest Rates

As a part of the Fed`s control over the base, it is enabled to peg various interest rates, such as the federal-funds rate, or the three-month Treasury bill rate. The fund rate in practice is pegged by open-market operations, and in this process the rate of monetary growth is determined. In order to keep prices stable, the Fed must have the quantity of money change in such a manner as to offset movements in velocity and output.

Disadvantage of use of Government Securities for Bank Reserves

For the government to sell securities to the Fed as a means of increasing bank reserves is a very expensive means of increasing reserves and results in iummense subsidization of the banking industry. There is no sound reason for the American government to accumulate debt to the banking industry in order control the liquidity of the economy. In effect, the banking industry is creating money by the use of the credit rating of the United States without the industry paying interest on the use of money the American government allows it to create, and the American govetrnment then pays interest to the banking industry on the money we allowed the industry to create. The reality of what is going on is obsured by calling a privilege a "reserve requirement" and by the implication that the banking industry is somehow extrending a favor to the American government by the purchase of securities with funds we allowed the industry to create. The American government could sell to the members banks the privilege of creating funds along with the banking inmdustry being required to surrender the privilege of creating money when the economy is over-heated. Memnbers of both political parties are beholden to the banking industry, and it would be very negative to the ambitions of politicians to attempt to further the public interest in our credit based economy. Instead of using a reserve requirement for expansion of the money supply, or instead of selling to member banks the privilege of money creation, the government could instead issue currency as needed for monetary liquidity and stability.

CONCLUDING REMARKS

To understand the American economy, a person not only should have a sound understanding of economics as a social scoence but also a detailed understanding of the American monetary system and the American Federal Reserve System. With such an understanding, a person would probably realize that the United States could issue fiat money without the need of becoming indebted to the banking industry and the unnecessary accumulation of a large national debt. The important thing is that fiat money is created pursuant to rational and highly controlled regulatory procedures. A person also needs to understand the difference between budgeted and non-budgeted revenues and expenditures of the government and of government agencies. He needs to become adapt at analyzing the Comprehensive Annual Financial Reports of government entities for the reason that these CAFRs are usually completely ignored by even the financial press.

©Wilson Ogg