Published on July 06 2018

Doug Casey on Banking with the Fed

Justin’s note: Abolish the Federal Reserve.

Regular readers have heard Doug Casey make this suggestion many times. He’s been arguing in favor of this for years.

But not everyone thinks getting rid of the Fed would solve America’s money problems. In fact, one Bloomberg writer thinks the Fed should have even more power. Specifically, he thinks that everyday people—not just commercial banks—should bank with the Fed. You can read his entire essay here.

After reading this, I got on the phone with Doug… who I knew would have something to say…

Justin: Doug, what do you make of this idea?

Doug: It’s a silly idea, a stupid idea, a disastrous idea. The person who suggested this is glib, but clearly lacks a basic understanding of money, both its nature and its history. Nor does he understand how banking works.

Commercial banking, version 2018, has only a limited relationship with sound classical banking. Most people today are unaware what that is, or how it works. [You may want to read this brief description.]

Historically, private banks had two types of bank accounts, demand deposits and time deposits, or what most people know as checking and savings accounts. These are two separate, and very different businesses.

Demand accounts used to be a safe way to store your money. You paid the bank a fee for storing it, and writing checks against it.

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Savings accounts, or time deposits, are quite different in nature. These accounts might pay around 3% in interest per year. Banks lend out this money, perhaps charging borrowers 6%. The difference, or 3%, is the bank’s profit. Your money was tied up for the length of the loan.

Again, banks have historically provided two banking services—the storage of money and the brokerage of money. Money was a commodity, not just an accounting fiction, a floating abstraction. The distinction has already been lost, with checking accounts that pay interest, and “fractional reserve” policies with currency created from nothing. But we’d truly be in fantasyland if the Fed became everyone’s bank. Commercial banks could hardly make loans if everyone parked their money at the Fed. The Fed would be totally in charge of interest rates and all lending policies.

Justin: So this would be even worse than the current system?

Doug: Yes. The current banking system is very dysfunctional. It’s politicized and distorted, and I despise today’s “too big to fail” institutions, which are already practically arms of the State. Horrible things, paying their managements megamillions, while socializing their losses. But this would be much, much worse. You’d have bureaucrats making loans. It would be like banking with the Gosbank of the old USSR.

Still, I can see how someone might think this would be more efficient… or even safer than the current model. I mean the author’s right, in a perverse way. The Fed can’t go bust like private banks. It can just create new dollars whenever it wants.

I’m flummoxed that somebody came up with such a cockamamie idea. But maybe I shouldn’t be. The whole world is becoming so politicized. Governments have become involved in every aspect of existence, reaching into areas of people’s lives that they wouldn’t have dared to tread before. To say it’s like an octopus, with its tentacles insinuating everywhere, is now an inadequate metaphor. Government has become like a fungus, or a bacterial disease, infecting every part of the body politic. Anything appears possible.

Justin: Doug, you’ve issued a lot of warnings recently about government-controlled digital currencies. Do you think arguments like this will be used to lay the foundation for FedCoin?

Doug: Yes. Digital currencies are coming. Every major government in the world is trying to eliminate cash, starting with the big bills. The 500 euro note, the $100 bill, and even the $50 bill will all be dead ducks soon. There are parts of China now where cash isn’t even accepted; you have to use a smartphone to buy a coffee at a corner convenience store.

Soon all transactions will be done digitally. It’s wonderful—for the State. They’ll know every source of your income, who’s paying you, and for what. And every allocation of your assets—what you’re buying, what you’re reading and watching, what you own, and where it is. A digital money will make it easy for them to do this. Almost everybody already has a smartphone—even me, although I despise being tethered to the damn thing, and only use it when absolutely necessary.

But, perversely, having one and using it is becoming necessary. The next step will be a set of chips implanted in your body, serving most of the functions of a smartphone. People will love it, thinking of the convenience—you won’t be able to lose your wallet with the cash and ID it contains.

Justin: But it comes at a huge cost.

Doug: Right. You’ll have no privacy.

I mainly see the dangers—the State can track you absolutely everywhere, at all times. The government, or one of its agents, could decide to lock you out of your bank account. They could cut you off from your own money. And completely cut off your ability to buy, sell, travel, or do anything, should you be viewed as politically unreliable. I suspect that once you’re on a list, getting off will be much harder than getting off the TSA’s “no fly” list—which is nearly impossible.

It gets much worse than a complete lack of privacy. The Chinese government is leading the way with their Social Credit system. They’ll not only know everything you do, but everything you say and think. And what everyone else thinks about you.

Government digital currencies are an immense threat not just to financial freedom, but any type of freedom. It’s a “kinder and gentler,” but much more insidious, version of 1984. I’m honestly shocked that people aren’t up in arms about this. They should be furious that governments are moving towards digital currencies. Or that some fool can put forward the idea of using the Fed like a commercial bank, and be taken seriously.

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Justin: I worry that governments could implement their own digital currencies without much resistance. I mean, most people these days value convenience over privacy. So I wonder if we’ll ever reach a point where the average person asks, “Hey, what’s going on here?” Or maybe everyone will just surrender their privacy for the sake of convenience.

Doug: That appears to be the trend. And trends in motion tend to stay in motion.

The average person has been programmed to trust the government. It starts with their grade school civics books, and continues through college courses on “political science,” where Boobus americanus is assured we live in the best of all possible worlds. Sure, everyone knows governments make mistakes and are occasionally clumsy. But the average person actually thinks the government’s his friend.

This is why they’re perfectly willing to give up privacy for convenience. They think their interests are in the hands of competent, good humored, and good-natured people. But that’s not the case at all.

The government is an entity with its own interests. It’s like a parasite or a predator that is living off of society at large.

This trend will likely continue until there’s a crisis. And that could take many forms. It could be a financial crisis. It could also be a nuclear attack or an EMP [electromagnetic pulse] attack. Or maybe a solar flare will occur that renders most electronics useless. Or the government itself could simply collapse. That’s happened many hundreds of times throughout history.

My view is that the response of governments and central banks to the crisis of 2007–2009 has sowed the seeds to a vastly different and much bigger crisis. It’s going to have consequences that go way beyond just another financial or economic upset. And it’s way overdue.

When it happens, the people who trust the government with their wealth are going to be out of luck. We’re looking at a trend that’s both very bad and quite unsustainable.

Justin: If digital money controlled by central banks isn’t the solution, then what is? Is physical gold still the answer? Or is a decentralized digital currency like bitcoin better suited for today’s world? Maybe it’s a combination of the two?

Doug: Well, gold has historically been money, with silver a secondary alternative. They’re market-based money. They’ll continue to serve as money in today’s world. Bear in mind that the experiment with central banking and fiat money is less than 100 years old. It’s a blip in history. Like the USSR, which only lasted from 1922 to 1991. Most people idiotically thought it was going to be an everlasting element of the cosmic firmament, but it turned out to be just a delusional scam, with less reality than a criminal version of the Wizard of Oz.

Central banks and fiat money are to real money what the USSR was to real societies. Gold is going be reinstituted as money. One reason I suspect this will happen soon is because the Chinese are going to back their yuan with gold to make it acceptable to all 60-some countries that will be part of their One Belt, One Road system. Ideally, the yuan will be fully redeemable with gold to everyone, like the US dollar was before 1933. Or at least semi-redeemable, as the US dollar was before 1971.

I hope the Chinese succeed. But there’s a chance that the huge distortions that have developed in their economy will prevent them from implementing it.

Ideally, currencies—which started out as government substitutes for gold—would cease to exist. The mark, the lira, the pound, the dollar were just local names for a specific amount of gold. In the future, a dollar could again be just a name for .05 ounces of gold. And it could be transferred digitally on the blockchain. There’s zero reason that money has to be a function of the State in today’s world, however.

I have nothing against using smartphones in general, and see no reason why you shouldn’t be able to use your smartphone to buy and sell things in particular. The problem is when the government is involved in the mix. The addition of the State will likely turn a wonderful technological innovation into a dangerous poison.

Justin: And could this be accomplished without central banks?

Doug: Yes. Again, there’s no reason why government should be involved in the money system at all. In fact, there’s every reason why the government shouldn’t be involved in the money system. Governments have a natural inclination to debase the currency. They do this because creating money is an indirect form of taxation.

Governments have been doing this since money was first coined, in Lydia (which was located in what is now western Turkey) in the 7th century BCE. And yet, everybody still thinks government should be involved in money, and central banks—a much more recent innovation—should regulate it. But neither is the case. Government shouldn’t be involved in money and central banks should be abolished.

Justin: Good stuff. Thanks for taking the time to speak with me today, Doug.

Doug: You’re welcome.

Justin’s note: This October, you can meet Doug—along with all your favorite Casey analysts—at our first-ever Legacy Investment Summit. You’ll have the chance to meet some real financial industry heavy hitters: Bill Bonner… Mark Ford… Teeka Tiwari… You’ll even get to hear from special guests John Stossel and Glenn Beck.

This is unlike anything we’ve done before. For the first time ever, we’ll be joining forces with two other leading financial research firms to bring you together with some of the brightest minds in finance. You can learn more right here.

Reader Mailbag

Do you think we should abolish the Fed? Do you agree with Doug’s take in today’s interview? Share your thoughts with us here.

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