rates are too low and they can't prime the pump and get money going and get the velocity
of money going fast enough that they would tax currency or either currency reserves in
the bank or possibly even currency held by the general public in order to have another
useful tool for monetary policy and then also to increase the velocity of money.
So this was an idea proposed a long time ago and it was pretty much rejected back in the
in the Keynesian era because the technology wasn't really there to do it.
And the idea was revived by a Fed economist later, but I'll kind of go through quickly
what it is.
So the reason for the carry tax lex is to penalize people for hoarding and saving money.
And you know, obviously savings is bad and the banks having reserves in the bank is bad.
We need to get that money out in circulation and moving as quickly as possible so that
We can all buy more big screen TVs made in China because that will save the U.S. economy
here.
Again, this idea was proposed a long time ago and was sort of put on the shelf because
the technology wasn't there to do it.
It was revived again later because now we have ATM cards with magnetic strips on them
that store the data and know how much to hold and how much was there and how long it's been
since you've used it.
It's got all of the technology that you would need to implement a currency carry tax.
So all we have to do is put magnetic strips in the currency and then we're good to go.
So this was the idea then.
There were two major kinds of carry taxes, again you can do it sort of the more traditional
idea just to tax the currency that the banks are holding in the reserves.
Again there's a concern now in the popular debate that we've, you know, through TARP
and all these other bailouts, we've given lots of money to these financial institutions.
We've actually given it to the bank holding companies and not as much of that as they
had planned is actually going out into circulation and helping to revive the economy.
So if we've got this public policy concern that we're giving them all of this taxpayer
money and they're not lending it out because they're just building up their reserves in
the banks, which of course, you know, lots of people in the Austrian circles are very
concerned that reserves are too high at the banks, then this would be a good solution
from their perspective to get that money back into circulation.
If that money does go into circulation and then people start saving and paying down their
debts and hoarding currency, then a currency carry tax on individual notes for people would
be the next logical step.
And again, this is an idea that's been proposed.
It's usually given credit to John Maynard Keynes.
He actually got the idea from Silvio Gesso. Gesso was a German-Argentine, considered something
of a crank that most people didn't really pay attention to, and he attributes the idea
to a Swiss merchant. But for our purposes, we'll consider this a Keynesian idea because
that's the one who sort of popularized the idea, and it's his disciples then that are
discussing and examining this.
On a side note, Erwin Fischer also wrote a paper on 1933 stamp scripts, which was a sort
of similar idea, so to just peg it as a Keynesian idea is sort of unfair, though Fischer didn't
hold the idea for long and didn't really promote it that strongly, though it was considered
by the Congress.
The reason this has come back into sort of the modern debate, there's a Federal Reserve
I met a Harvard official at the Richmond Fed, Marvin Goodfriend, who in 1999 gave a talk
at an economic seminar, sort of something like this, that was generally ignored by the mainstream
media, probably again, something like this.
And someone forwarded me a link to a small story that someone had written about it.
And yeah, it was Michael Belkin, an investment analyst and friend.
I was working in Ron Paul's office at the time, and we just thought it was outrageous.
And he was going on about this old Keynesian idea and it's hypothetical, we don't really
need to worry about it now, but wouldn't it be sort of academically interesting that we
could sort of go back and revive a Keynesian idea that was abandoned for lack of adequate
technology because of advancements that we've had since then on the magnetic strips on ATM
cards and the new anti-counterfeiting chips and other things that they were putting in
currency at the time.
And this was a popular debate that in order to make sure that the currency that we've
You've got, aren't counterfeited, they're putting in all kinds of anti-counterfeiting
things, Euro notes have these strips and all kinds of things.
We can use those then to implement the Keynesian idea.
So he wrote about this, he expended on a couple of papers and I just want to kind of give
him credit where credit's due for reviving this idea.
Again, I was working in Paul's office and Ron Paul thought this was just absolutely
and also testified against it. There was a subcommittee hearing in the banking committee
on production of money, again going back to counterfeiting and things like that, and Dr.
Paul pointed out that when he was a congressman in the 70s and 80s, there was a similar concern
about having good currency in terms of anti-counterfeiting and things like that and continuously questioned
them that they weren't going to put any kind of tracking or surveillance technologies into
the currency and they always replied that they're not.
But of course, sometimes government says and what government does aren't always the same
thing or that that changes over time.
Declan McCullough, who was then at Wired magazine, wrote an article and sort of popularized the
idea and called Marvin Goodfriend and Marvin, bless his heart, was so happy that somebody
from the real media was calling and interested in his ideas, not knowing what the reaction
was going to be when he went on.
So he was all enthusiastic and started explaining about all of this because he goes to these
This is Boring Academic Converses and nobody in the mainstream or real media was very interested
in it.
He was so happy to get a call from Declan and went on and on and on, gave him an electronic
copy of the paper and everything.
It was a very high ranked popular story on the Wired News website and it kind of went
out from there and most people realized that he's talking about the government putting
tracking surveillance technology in your currency notes and it was about as popularly received
as you would imagine that with the technology crowd. George Solzhen who was here was quoted
by that article here and that article was seen by Lew Rockwell. Thanks Lew and Mises
for hosting all of this. And Lew also has a great piece on the Mises site commenting
on the Wired magazine article and he went on at greater length but I wanted to pull
up a selection of that there. Again, the main points of this are in order to implement
You would have a tracking device in the currency, so you know how you put your ATM machine and there's information that's transferred between the financial institution from the card.
If you do that with currency notes, if I take the money out of the bank and I buy something from J.H. and then he puts the money in his bank, we've now got a tracking device where we know that there's a contractual relationship that went on between me and him.
and this is sort of the currency equivalent or could be the currency equivalent of the anti-money laundering laws that we've got now on checking accounts and all of the Bank Secrecy Act and financial crimes enforcement activities so I guess from their perspective there's a hole in their surveillance on the actual currency and this is the obvious way to fill that hole which again has been widely recognized on our side but wanted to make sure I brought that to their attention.
So, Marvin Goodfront brought this idea up and rather than it just dying with sort of
a devastating libertarian critique, the idea was picked up and revived and examined and
studied and proposed upon by several other people.
I've took a selection of them here and in order to try to stay within my time, I'm
going to kind of just run through quickly.
What I'd like to point out as I show some of the places where you can go for more information
is to look at where they're publishing and where they work.
This will give you an idea of where the idea has sort of taken root.
So we've got the Cleveland Fed, and this is probably the best single short examination
of some of the literature in the background and the idea itself.
We've got some other papers here.
We've got the Dallas Fed, some more academic journals, and also the Brookings Institution.
So if you look at where the current environment is, we've got, you know, a Democratic President,
a Democratic Congress, Republicans charitably are in disarray, and there's a rebirth in
old Keynesian ideas.
So if we look at who is in power now and where they are going for their ideas, this is actually
a much more serious concern than it's been previously.
We do have a lack of fiscal discipline, you know, we've got Ben Bernanke hitting the Federal
The Federal Reserve was just enamored by all of the Great Depression ideas and trying to dust off all of the old things that the Federal Reserve did then or would have considered then and sort of reinventing new capabilities based on that experience and looking at those issues.
The president has been very dismissive of people proposing ideas or critiquing his ideas that don't share that FDR Keynesian paradigm for analysis, and he's been very explicit about this.
The carry tax fits within that paradigm of analysis, so it's something that we should be concerned about.
Again, going back to sort of why I'm concerned and looking at where we are now, we've got TARP and all the other financial bailouts out there and I'm sure other people have totaled up, I haven't gotten the last count, but you know,
we're now in the trillions of dollars that they're using for taxpayer money to get into the financial system and save the economy and get this all going again.
and it's not having the effect that they want it and from their perspective and Tim Geithner
and the others, it can't be that the idea was bad or that the plan was bad, it's always
just the implementation because now they've got their people doing the right thing.
So the problem then isn't that the government gave the banks lots of money to lend out to
the country, the reason that the economy is not taking off is that the banks aren't lending
the money.
I mean, you've got to understand how they're thinking but I have to imagine that's what's
The Theory of Money and Credit The Theory of Money and Credit
The idea that it's percolating. So it's good that our side is sort of brought up to date and aware of this.
Before I get into this, I guess to emphasize the two types of carry taxes.
There's the tax just on the reserves held by commercial banks.
And I'm using banks broadly for financial institutions, including thrifts, credit unions and others.
The other and much more serious concern would be the implementation of a carry tax on currency held by the general public.
If they're concerned about hoarding or people not spending money enough or the velocity of money is not high enough or whatever their concern is, the technology is now there and the political environment is there now to impose a carry tax on currency notes.
There are magnetic devices that they've used originally for ATM machines, but the technology
has been used for anti-counterfeiting capabilities in the euro note and some other currency notes
in order to, you know, again, protect the integrity of those notes.
But there's no reason why that couldn't be amended very quickly and easily to include,
you know, Hitachi made a silicon chip and others that could be used for the tracking
Banking Device Necessary to Impose the Carry Tax on the Currency Notes Themselves.
The way it would work, again, you've got a currency note, you withdraw it from the bank
and it marks where it was taken out, when it was taken out, to whom, how much, everything
else and the longer you hold the currency in circulation, the more the tax would accrue
and the less value you would have to the money that you're hoarding.
So I guess if you hold it long enough, the currency would actually expire.
So let's say it's a 1% a month tax, I'm making up an arbitrary number depending on what their
concerns are, it's just preposterous and again, devastating to the idea of trying to increase
savings and investment in the economy.
But again, if your concern is the velocity of money and money not traveling fast enough
and People Hoarding Money, yeah, if there's a carry-tax on money, I'd probably spend it
as quickly as I could too, because you've got all of the incentives now not to save and
invest. Anyway, it's just so ridiculous to me, it's hard to describe. Again, the flip
side of this is that you've got a lot of people that are very concerned about financial terrorism,
the war on drugs and the money that they're getting from laundering the money and everything
And despite their legitimate concerns about the drug war, terrorism, or whatever else,
we don't have a very good record on using financial intelligence to prevent terrorist
attacks.
We did have 9-11, despite the fact that we've had the Bank Secrecy on the books since 1970.
We've been getting lots of financial intelligence for 30 years before 9-11.
So to the extent that it's not working, getting the financial intelligence that they want
to prevent terrorism, we've outlawed money laundering, you know, for 15, 20, 30 years.
We still have drugs on the streets, I live in DC on Capitol Hill, you don't have to go
very far from the Capitol building to find neighborhoods where this is all very common.
And rather than just admit that this approach doesn't work, most of the people that believe
in this approach, just believe that they're not going far enough, that we've hampered
them too much, we've put too many restrictions on them, we haven't given them all of the
tools that they need to make this work.
Given the fact that the drug trade and other people that are trying to avoid the financial
surveillance given on checking accounts and other financial instruments in the formal
financial sector, that they're using cash and trying to avoid that surveillance, this
This then would become a likely alternative to sort of fill that hole in their financial
surveillance on the rest of us.
You know, it's drug dealers that are using cash, it's, you know, others, and this is
just a way for us to go after the bad guys, however they're defined.
So just be concerned.
Marvin Goodfron, when he presented this in 1999, again, it was very academic.
The economic conditions then were very different than they are now, and he was very clear that
This idea should only even be considered from his perspective under very specific, limited and at that point very hypothetical economic conditions.
Unfortunately, economic conditions have changed.
He only considered this at a time when the economy stagnant, which it wasn't in 99, but might be a more apt description now,
in an environment of stable or falling prices and when nominal short-term rates are at or near zero.
Their main concern is that they lose the monetary policy tools of changing interest rates as
you approach nominal zero interest rates.
So this is a way for them to get around that zero bound restriction.
And again, the technology now is there to implement it where it had not been when any
of these conditions might have existed before.
So how many people in this room, show of hands, think that this is a bad idea and you would
So none of you are concerned that we've given the banks all of this money and that they've
built up their reserves in the bank. None of you are concerned that drug dealers and
terrorists are getting away with using currency to blow up our buildings and to contaminate
our kids with heroin or something else. What's wrong with all of you people?
So even if you're, you know, I'll go out on a limb and assume that, you know, some
of the people in this room might be some of those crazy Austrian economic, you know, sympathizers
and assume that you've got all of these crazy ideas about, you know, concern about over
leverage in the financial system or government's control on our lives.
Instead of being concerned, I'll kind of spend it, you might actually want to be hopeful
about it and look at it as half full.
If they do implement this, is the desirability of Federal Reserve notes going to go up or
down?
I mean, all changes are at the margin.
So, assuming everything else is the same, we've actually reduced the desirability of
Federal Reserve notes, and that, I think, is not necessarily entirely bad.
We've also got an implementation in practice of an old Keynesian idea that would have been
revived and probably not very well received.
So, it's good to have a kind of a healthy skepticism towards, you know, Keynesian ideas
and just accepting the FDR, Keynesian paradigm without question.
And for that matter, I have to have a healthy skepticism towards government and the Federal
Reserve and central banking generally.
And it would also, I think, increase the conditions for alternatives to what we've got now.
So, if there's anyone in the room that's sympathetic to, you know, 100% reserve or
at least concern about the over leverage that we've got or sympathetic to the idea of gold
as money or other alternatives to Federal Reserve notes as money. This would certainly
put us farther down that path. So again, half glass full or half empty depending on how you
look at it. Thank you.