End the Fed! is not Good Enough

We’ve all considered what we can do to promote liberty. We’re all familiar with the problem. We’ve heard one possible solution. We haven’t heard the other.

Have you heard the question, “what can I do help bring about a free society?”

Maybe you’ve thought it to yourself. Given the gravity of the question, you may have thought the appropriate disposition to such a question is humility. After all, don’t other people often have a good idea of what talents you bring to the table? Wouldn’t it be a relief if someone just told you what to do?

When Ron Paul is asked this, he quips, “whatever you want to do!” (easy for you to say, Ron!). Maybe you’re a bit further on in life: you already have a job, a career, maybe a business. Perhaps you even do well enough that you can afford to donate to freedom-friendly causes: support a student scholarship to Mises U, fund a graduate scholarship at a free market-oriented university institute, provide your most valuable resource — your time — by volunteering, and so on. If one or more of these is you, congratulations!

If one or more of these is not you, you might might like what follows. In fact, if you’re already successful, you might like it too. It’s that cool.

Ever heard of fractional reserve banking? The Austrian school of economics teaches that this concept is at the core of the warfare-welfare state. It’s the type of banking that allows the state to fund it’s interventionist, blow back prone foreign policy. It’s the type of banking that makes modern finance a morally hazardous minefield, rife with past and potential bailouts (and perhaps one day — bailins). It’s the type of banking that is ultimately responsible for the meteoric collapse in the value of the US dollar.

If war — both foreign and domestic — is the health of the state, then fractional reserve banking is the blood coursing through its veins.

What can be done about this? Some have proposed that better education is the ideal way to go. I myself used to think this. I went for a BA and an MA in Economics, then started my PhD, all with the intention to become a professor and spread the message of Austrian economics. “If only more people knew what was going on!”

…Then what, exactly? Let’s suppose I had been successful. Let’s suppose all the efforts to spread and to deepen sound understanding of just why things got as bad as they have were successful. The think tanks, the PhDs, the seminars, the institutes — for the sake of argument, suppose all these promoters of free markets and sound economics made superior, convincing arguments, and had a ready, willing audience to absorb it. Then what?

Better voting? Expatriation? Buy gold? Silver? Guns? Bitcoin?

My point here is not to debate the value of any of these options. My point is to present what I have come to believe is a better option. In fact, it’s an option that both strikes at the veins of the state and lets — no — enhances your ability to pursue any of these options too.

Consider, what are the key players in the fractional reserve banking system?

If you’ve followed Austrian economics, your first answer was probably the Federal Reserve (!!!). After all, the Fed expands the money supply by first declaring new money into existence and then trading it to commercial banks in exchange for banks’ bonds (debt). Commercial banks combine this newly conjured money with funds deposited with them by individuals and organizations. Then, on the authority of their state-granted charter, commercial banks turn around and make loans.

We have one magic act so far: the Fed’s conjuring of new money (“out of thin air” as it goes) that is then sent to commercial banks in exchange for bonds.

But there’s another, perhaps more insidious one. Commercial banks are required to hold something like 10% of their total loan value in liquid funds called reserves. These are called required reserves. The idea is that only some of the banks’ depositors will request to withdraw their money at any one time; therefore, they don’t need to keep all of their customers’ deposits on hand. Think of what this means, though. With $100 in total deposits from all sources (including the Fed), a bank can legally lend out $1000, assuming a 10% required reserve ratio. Where did the $1000-$100=$900 come from?! Magic trick number two.

Magic is a polite way of putting it. Though it isn’t the point here to go too in depth into the process of price inflation, suffice to say that this new credit enters the economy sequentially. The result — to put it broadly but sufficiently — is that new money flows through Wall St. first and then to Main St. The last to see the new money are those on fixed incomes, who, by then, pay higher prices for their everyday purchases. Fixed income in an environment of higher prices means lower wealth. This is a general sketch of the inflation tax, and it is the cost to society of the second magic trick of our inflationary monetary system.

Let’s circle back: the Fed conjures account balances at commercial banks (magic trick #1), and commercial banks lend up to ten times the value of their deposits by conjuring the necessary funds (magic trick #2, assuming a ten percent required reserve ratio). We now have the two sinister, legally protected, fraudulent monetary operations directly our sights.

Consider the popular libertarian solution to this conundrum: End the Fed! Which of our two magic tricks, identified above, does this solution solve for, if actually implemented? There’s something about the message — maybe the fact that so many of us never heard of it in our government schools — that makes us think: “if only more people knew!” Again, I ask: then what? Maybe freedom lovers are fortunate enough to get a man who understands this elected to Congress. Maybe we get him elected, time and again! Maybe we even get him to run for President of the United States, time and again! Maybe he’d have the platform, as discriminated against as he might be, to spread the message. In any case, even if this was a successful strategy, only the first magic trick would be subverted.

The only element of the Fed that has anything to do with commercial bank credit expansion (magic trick #2) is the setting of the required reserve ratio, a function easily performed by some bureaucrat elsewhere in the federal government.

Not only is End the Fed! not enough to reign in expansionary monetary policy, it’s also realistically unlikely.

Happily, there is a solution to this second, underappreciated problem of modern monetary policy. The tools needed to implement it are over 100 years old. Many of the wealthiest families in America own them. Disneyland, JC Penney, and other household names owe their continued existence, in part, to them. The appropriate mindset necessary to properly implement these tools has been thoroughly elaborated upon and is available to the public for the cost of dinner for two poor college students. Acquisition of the necessary tools and adoption of the appropriate mindset require no acts of congress, no special voting, no bullion purchases, no crypto currency, and no expatriation — in fact, it’s all a book and a phone call away.

The vast majority — I’m literally talking 99.5% and I mean literally literally — of financial professionals have no idea I’m talking about. Many self-styled personal financial gurus and television personalities despise the tool. I know one Austrian economist who gets it.

The tool is dividend-paying whole life insurance from a mutual insurance company. The man who first isolated the appropriate method is Nelson Nash. His slim book that explains his discovery is called Becoming Your Own Banker. He called this revolutionary understanding the Infinite Banking Concept (IBC). The institute founded to promote IBC is called the Nelson Nash Institute (NNI). The Austrian economist who gets it is Professor Robert P. Murphy.

Left to right: my girlfriend Mackenzie, Nelson Nash, me. Taken at one of Nelson’s seminars in Alvarado, TX on 10/21/17.

How does it solve for the second problem of monetary policy? Put simply: insurance companies cannot inflate the money supply. They are not banks. They’re in a totally different business.

Many, many questions, about how this all works abound. There are two ways to address them. One: buy Nelson’s book. It’s on Amazon (astonishingly, it only has 148 reviews as of this writing). Two: just ask.

Ryan! If this is so great, why don’t people know about it? Reflect on this. How many Austrian economists are also schooled in the mechanics of the life insurance business? Conversely, how many insurance agents are schooled in the Austrian view of monetary policy? Finally, consider the typical public reputation of both insurance agents and (allegedly) right wing, ideological fringe economists. It’s no wonder so few understand how to reclaim the banking function for themselves.

At this point, you might have the idea that while the tools and blueprint needed to do this are widely available, this must require some great standard of living sacrifice in order to execute these ideas. To the contrary, this is not about martyrdom. It’s about becoming your own banker. And it’s about time freedom lovers heard about it.

CEO, Griggs Capital Strategies. “Banks lend money that does not exist, and that is evil.” — R. Nelson Nash