Some interesting facts and a few shocking figures from America’s central bank and the opinion of Thomas Paine.
[All figures are taken from the 2008 Annual Report [.pdf] published by the Board of Governors of the Federal Reserve System unless noted.]
Wouldn’t it be great to work for a company that makes money?
This is, of course, exactly what the FED does. The FED, in effect, prints money out of thin air and buys US Treasuries debt obligations from its “primary dealers” companies like Goldman Sachs and JP Morgan Chase. The Treasuries earn interest which the FED then uses to pay for its operations and salaries. What few probably do not know is that the FED returns this excess interest to the Department of the Treasury after first paying itself and the dividends to the owners of the FED. Pretty convenient little scam I mean payment system, eh?
In 2007, the FED earned $40.3 Billion from its security holdings, but passed $34.6 Billion to the government. The FED spent $3.3 Billion to run itself. (pg 6) Taking into account its revenue stream, I estimate the FED paid out roughly $3.9 Billion in dividends which are mandated by the government to be 6%.
We also find that in 2008 the FED paid 4.7 cents to print a $1 bill, and 12.5 cents to print a $100 Federal Reserve Note. (pg 28) Pretty good to make a 99.875% gross profit margin on your chief product! That pretty much beats any business I could think up!
On pages 31-32/40, we find that the Board of Governors of the Federal Reserve System spent $526.6 Million on the salaries and benefits for itself and gives employment to a 2,053-strong group of central bankers. A little bit of long division works out to $256,502.68 per person per year. Pretty sweet, eh? That’s a lot more than I make with my silly manufacturing job and the FED’s figure even has all its’ secretaries and IT guys factored in!
The minor leagues of the Reserve Banks employ 19,535 people who are paid $1,552.8 Million in salary, bonuses, and benefits for a pretty nice salary average of $79,488.10 per year. (pgs 21/34)
But surely such a high-profit business must have some kind of risk right? Well, the FED has identified it. The top risk of 2008 was “If the budgeted 44 percent decline in the volume of paper checks fails to materialize, the Banks would incur costs for higher-than-planned staffing levels.” (pg 21) That’s right! The top risk isn’t some gang of citizens with pitchforks showing up to tar and feather them just like in the old days, it’s too much paper! (Actually it’s related to check writing services) Good thing they can just print more paper to cover the cost if needed!
Jerry Nelson, who does Public Relations for the FED, was quoted by the Republic Magazine, Vol. 10 (available free for a limited time here):
Well up until 1981 we burned the shreds. When you shred the stuff it expands its volume by a 22 factor. We shred enough of this everyday in one vault in the Chicago fed to fill the college basketball court to both sidelines, both endlines, to the height of the rim. The whole court to the height of the basket. So, the EPA caught us burning it in ’81 and they threw a hissy fit like you wouldn’t believe. It’s the ink, it wears like metal because it is. Unfortunately it’s toxic consumer-unfriendly heavy metal. They had kind of a good point. The only change we’ve made in the ink composition since 1861– we literally got the lead out in 1969. Mercury, arsenic, cyanide, titanium dioxide, formaldehyde, lithium, valium, zinc still in there. So this is kind of nasty stuff. So, since it’s toxic and there’s no viable use for it, we package it up as souvenirs and hoist it off on visitors, make it go away.…
We fill 2 dumpsters [with compacted bricks] every week. And that goes into EPA-approved toxic landfill sites– hardpan, bedrock so it doesn’t leech into the aquifer and contaminate the groundwater. It does biodegrade – half-life is about 14 years.
Well, this is where I draw the freaking line, man. In 2007, the Reserve Banks destroyed $104.1 Billion in Federal Reserve Notes, turning them into the filthy, toxic waste that they truly are. I could never work for a company that has such a blatant disregard for the environment. And storage of hazardous waste is fairly expensive. Plus, the FED would fire me as soon as I point to the Constitution of the United States of America (Section 1, Article 10, Clause 1) which expressly forbids Congress to “make any thing but gold and silver coin a tender in payment of debts.” For you see, this is no new problem. As Thomas Paine once wrote in Dissertations on Government:
Paper money appears, at first sight, to be a great saving, or rather that it costs nothing; but it is the dearest money there is. The ease with which it is emitted by an assembly at first, serves as a trap to catch people in at last. It operates as an anticipation of the next year’s taxes. If the money depreciates, after it is out, it then, as I have already remarked, has the effect of fluctuating stock, and the people become stock-jobbers to throw the loss on each other.
If it does not depreciate, it is then to be sunk by taxes at the price of hard money; because the same quantity of produce, or goods that would procure a paper dollar to pay taxes with, would procure a silver one for the same purpose. Therefore, in any case of paper money, it is dear to the country than hard money, by all the expense which the paper, printing, signing, and other attendant charges come to, and at last goes into the fire.
Suppose $100,000 in paper money to be emitted every year by the assembly, and the same sum to be sunk every year by taxes, there will be no more than one hundred thousand dollars out at any one time. If the expense of paper and printing, and of persons to attend the press while the sheets are striking off, sighers, etc., be five percent, it is evident that in the course of twenty years’ emissions the $100,000 will cost the country $200,000. Because the papermaker’s and printer’s bills, and the expense of supervisors and signers, and other attendant charges, will in that time amount to as much as the money amounts to; for the successive emissions are but a re-coinage of the same sum.
But gold and silver require to be coined but once, and will last a hundred years, better than paper will one year, and at the end of that time be still gold and silver. Therefore, the saving to government, in combining its aid and security with that of the bank in procuring hard money, will be an advantage to both, and to the whole community.
Of course, Paine’s reference to “fluctuating stock” will make sense to any recent FOREX market trader, whether it’s the Polish zloty to the Swiss franc, or the US dollar to the British pound. Gold, in every major currency, is taking off on a upward parabola which only a fool would ignore. [.pdf] For did not Paine also write:
I remember a German farmer expressing as much in a few words as the whole subject requires; “Money is money, and paper is paper.”
All the invention of man cannot make them otherwise. The alchemist may cease his labours, and the hunter after the philosopher’s stone his rest, if paper can be metamorphosed into gold and silver, or made to answer the same purpose in all cases.
Gold and silver are the emissions of nature: paper is the emission of art. The value of gold and silver is ascertained by the quantity which nature has made in the earth. We cannot make that quantity more or less than it is, and therefore the value being dependent upon the quantity, depends not on man. Man has no share in making gold or silver; all that his labours and ingenuity can accomplish is, to collect it from the mine, refine it for use and give it an impression, or stamp it into coin.
Its being stamped into coin adds considerably to its convenience but nothing to its value. It has then no more value than it had before. Its value is not in the impression but in itself. Take away the impression and still the same value remains. Alter it as you will, or expose it to any misfortune that can happen, still the value is not diminished. It has a capacity to resist the accidents that destroy other things. It has, therefore, all the requisite qualities that money can have, and is a fit material to make money of; and nothing which has not all those properties, can be fit for the purpose of money.
I wrote about the “requisite qualities” of money:
Paper, considered as a material whereof to make money, has none of the requisite qualities in it. It is too plentiful, and too easily come at. It can be had anywhere, and for a trifle.…
But when an assembly undertakes to issue paper as money, the whole system of safety and certainty is overturned, and property set afloat. Paper notes given and taken between individuals as a promise of payment is one thing, but paper issued by an assembly as money is another thing. It is like putting an apparition in the place of a man; it vanishes with looking at it, and nothing remains but the air.
Money, when considered as the fruit of many years’ industry, as the reward of labor, sweat and toil, as the widow’s dowry and children’s portion, and as the means of procuring the necessaries and alleviating the afflictions of life, and making old age a scene of rest, has something in it sacred that is not to be sported with, or trusted to the airy bubble of paper currency.
By what power or authority an assembly undertakes to make paper money, is difficult to say. It derives none from the Constitution, for that is silent on the subject. It is one of those things which the people have not delegated, and which, were they at any time assembled together, they would not delegate. It is, therefore, an assumption of power which an assembly is not warranted in, and which may, one day or other, be the means of bringing some of them to punishment.
On our “modern” FOREX markets:
One of the evils of paper money is that it turns the whole country into stock jobbers. The precariousness of its value and the uncertainty of its fate continually operate, night and day, to produce this destructive effect. Having no real value in itself it depends on support upon accident, caprice and party, and as it is the interest of some to depreciate and of others to raise its value, there is a continual invention going on that destroys the morals of the country.
It was horrid to see, and hurtful to recollect, how loose the principles of justice were left, by means of paper emission during the [revolutionary] war. The experience then had, should be a warning to any assembly how they venture to open such a dangerous door again. As to the romantic, if not hypocritical, tale that a virtuous people need no gold and silver, and that paper will do as well, it requires no other contradiction than the experience we have just seen.
On the banker bailouts and Greenspan housing bubble:
There are a set of men who go about making purchases upon credit, and buying estates they have not wherewithal to pay for; and having done this, their next step is to fill the newspapers with paragraphs of the scarcity of money and the necessity of a paper emission, then to have a legal tender under the pretence of supporting its credit, and when out, to depreciate it as fast as they can, get a deal of it for a little price, and cheat their creditors; and this is the concise history of paper money schemes.
But why, since the universal custom of the world has established money as the most convenient medium of traffic and commerce, should paper be set up in preference to gold and silver? The productions of nature are surely as innocent as those of art; and in the case of money are abundantly, if not infinitely, more so. The love of gold and silver may produce covetousness, but covetousness, when not connected with dishonesty, is not properly a vice. It is frugality run to an extreme.
One could even sort of say that Paine predicted financial derivatives:
The evils of paper money have no end. Its uncertain and fluctuating value is continually awakening or creating new schemes of deceit. Every principle of justice is put to the rack, and the bond of society dissolved: the suppression, therefore, of paper money might very properly have been put into the act for preventing vice and immorality…
Paper money is like dram-drinking, it relieves for a moment by a deceitful sensation, but gradually diminishes the natural heat, and leaves the body worse than it found it. Were not this the case, and could money be made of paper at pleasure, every sovereign in Europe would be as rich as he pleased. But the truth is, that it is a bubble and the attempt vanity. Nature has provided the proper materials for money, gold and silver, and any attempt of ours to rival her is ridiculous.
When a man can say that he cannot trust the Government, the importance and dignity of the public is diminished, sapped and undermined; and, therefore, it becomes the public to restore their own honor by setting these matters to rights.
I do not trust my Government or even one little, stinky, toxic $1 Federal Reserve Note one little bit, and it becomes me to set this matter ‘to rights’.
I remain, even while sharpening my pitchfork.
Jake is also a contributor to Nolan Chart.