Good afternoon and thank you, it's a pleasure to be here and have the opportunity to address
you on the subject of the Fed, more about that in a second.
And it is indeed an honor to be on the program that will culminate with the awarding of the
Gary G. Schlaubalm Prize for Lifetime Defense of Liberty to my very good friend and colleague
Walter Block.
I have had the great fortune to have had an office right next to Walters for the past
ten years and this is our eleventh.
So I consider that just a wonderful thing.
Before I get started, I have to tell you a story about something that happened to me
just over 20 years ago.
I went down to participate in actually two conferences in El Salvador sometime in the
fall of I guess it was 1989 and the first program was a panel that I was on and you
know people ask questions and that kind of stuff and afterwards I was sitting next to
to a fellow from the Stanford Institute, Alvin Rabushka.
He looked at the next program and he saw that I was going to be on right before him on the
next one when we were actually giving talks.
Rabushka turned to me and he said, and we just met that day, and he said, well, what
are you going to say, Bill?
And I said, well, it's pretty simple, I'm going to tell them they need to quit printing
Money, they need to cut their taxes, they need to free up international trade, get rid
of all barriers to international trade, they need to deregulate their economy. As I started
to talk, his face got longer and longer and he started to turn white and he says, what
What am I going to say?
As I listened to Doug and Tom and Joe and David this morning, I had that same feeling.
So I'm going to get a little bit off the topic.
I will talk about what, not counting for the Fed, but I'm going to get a little bit off
First of all, the National Bureau of Economic Research, the NBER, who is the official arbiter
of the business cycle in the United States and determines when business cycles, you know,
when we're in recovery, when we're in expansion, when we're in contraction, when we're in recession,
and those types of things says that we entered into a recession in December of 2007 and we
got out of that recession at the end of June in 2009. So, you know, that the recession
lasted for about 18 months, a year and a half, and that we have been in recovery ever since
Well, I beg to differ. I understand that the people at the NBER have degrees from Harvard
and Yale and Princeton and all that, which in some ways makes them suspect to me because
I happen to check. And, you know, Benny the paper hanger has his PhD from MIT. And so
I started looking. A number of these people have their PhDs from MIT, which makes me think
that they are, perhaps with respect when it comes to economics, idiot savants in the sense
that they're very good at doing mathematics but really don't understand economics. In
my opinion, we are in a depression. The main thing that the NBER looks at to determine
Whether we are in a recession or not is two consecutive quarters of negative growth of GDP.
Now by GDP they mean inflation adjusted GDP.
In other words, real growth, negative real growth for two consecutive quarters.
Unfortunately, GDP is one of these aggregate numbers which in many ways is meaningless.
And the way it is calculated would scare you if you actually saw what the government does to calculate this.
Equally important, someone this morning mentioned John Williams' shadow government statistics,
where he puts out numbers that are, in my opinion, far more accurate than the official numbers put out by the government.
The way you get to real GDP is you calculate nominal GDP.
You try and find out the total amount of money that was spent in the economy in a given period of time on newly produced final goods and services.
That's what GDP is. That's nominal GDP.
How do you get from that to real GDP?
Well, you use a deflator, a price index of some sort, and you adjust it then for inflation.
Now, I think it was Joe earlier mentioning yes, but each of us has our own individual price index,
the price index that is relevant to each of us, and that's true.
But when this real GDP numbers come out, they use the standard government concepts, and in this case, they use the gross domestic product deflator, the GDP deflator.
I want to tell you that they changed the way they calculate this deflator.
A few years ago, they went from base weights to chain weights.
Chain weights are a way to make the inflation rate look like it's not as severe as it is.
They do other things to make the official inflation rate understate the actual rate
of inflation.
If you understate the actual rate of inflation, then you necessarily overstate the amount
of Real Growth in the Economy. So when they tell us that the economy has been in recovery
since the middle of 2009, I say they're out of touch with reality. More importantly, looking
at GDP doesn't really give us a clue as to the real severity of the economy we're in
And now, according to John Williams' shadow government statistics, we have over 20% unemployment
right now. By any measure, 20% unemployment is a depression. Even the government, when
it puts out its U3, which is the third measure of unemployment, the U3, that it has, that's
That's the one that you hear on the newspapers and newspapers and on the TV.
That's the one that this week they said, oh it was 9.1% last month in September, but in
October it went down to 9%.
Well that's what they say with U3.
But if you go look at U6, where U6 takes into account not only those people who are
Unemployed, but those who are underemployed and those who are marginally attached to the economy.
Even the government admits that by U6, roughly one in six people in our economy is unemployed.
That's a depression, folks. That's not a recession, and it's certainly not recovery.
Okay? Well, how did we get here? We got here the same way Europe got where it is. We have
We have a welfare-warfare state. The government makes war. Now, Europe's pretty much given up on the warfare part of that, but the welfare part, they've seen us and raised us.
So, governments go out and spend money. They can't raise the taxes for it. People will
not pay the amount of taxes that the government wants to spend. Whether it's our government,
or the Greek government, or the British government, or the German government, it doesn't make
make any difference. That's why all the nations of Western Europe, the European Union, and
the United States run budget deficits, can't get enough money. Well, if you can't raise
the money through taxes, what can you do? You can go out and try to borrow it. Now,
by this I mean legitimate borrowing. And the problem with that is if the governments go
And particularly in places like the Eurozone, although we had heard about, you know, sovereign debt being, because it was sovereign debt having zero risk, it turns out the people sitting on Greek bonds and Italian bonds and Portuguese bonds, et cetera, they're experiencing real risk.
The people sitting on Greek bonds and Italian bonds and Portuguese bonds, et cetera, they're
experiencing real risk. Well, the third way, of course, to finance the government's deficits
is by printing money. Now, when I say printing money, I'm including the electronic version
Governments always want control of the money stock. They always want control of the money stock. They want to be in control because politicians,
Whether they be kings and emperors, or presidents or prime ministers, or parliamentarians, congressmen,
whatever, always want to spend more money than they have. Who wouldn't? They're spending
other people's money, OPM. So why wouldn't they want to spend money? Well, they run into
to a problem, they can't raise as much taxes as they want, they can't borrow the money,
so they have to print it. And of course, the problem, on one hand, the warfare state, but
on the other hand, the welfare state. And the welfare state part is, they have gone out
and told us that any problem we have should be solved and it should be solved by the government.
and it should be solved by the government and that means we have come as a people to depend on the government more and more whether it is to pay for the education of our children, for your social security check, for Medicare, for everything we have come to depend on the government we are no longer that self-reliant there are many
There are many self-reliant individuals in the country, but the country as a whole is
no longer self-reliant. That's been true in Europe for quite some time. So the government
has to get its hands on new money, okay? Now, let me bring it. Some people think the solution
is to go to a gold standard. Well, it depends on what you mean by a gold standard. If you
If by a gold standard you mean a government gold standard, such as the gold standards
that existed in Europe under the Latin Monetary Union in the latter part of the 19th century
and the early part of the 20th century, or whether you mean the gold standard as it existed
in Britain in the United States, again in Britain a longer period of time, but certainly
in the United States from 1880, 1879 actually on, you know, until we went off of it in 1933,
Britain went off in 1914.
That won't work either because as soon as you go to war, as soon as you go to war, people
won't pay the taxes.
Wars are extremely expensive.
Just ships are very, very expensive.
The cost of a modern aircraft carrier would scare you and that's without the planes and
the planes themselves are all cost tens of billions of dollars and they have at least
80 planes on a modern aircraft carrier.
It's very expensive, the government can't get the taxes, okay?
So what is the government to do?
Got to print money.
But if you're on a gold standard, you can't print money or at least you're limited in
in the amount because people will take their paper money and come back in and all their
bank deposits and say, give me gold.
And so what happens invariably when you're on that kind of government gold standard is
that eventually the government goes off the gold standard, okay, whether it was Britain
in 1914 and other nations in 1914, whether it was the United States going, how would
How would you describe it? 95%, 98% off the gold standard in 1933 and with Nixon finishing the job in 1971, you know, but you go off the gold standard.
So that's not a protection. The only real protection is not so much a gold standard, but private money.
people agree to use among themselves as a medium of exchange whatever they agree
voluntarily to use. Now most of us in the Austrian economics area sort of assume
that what would be used would be gold, that people would choose to use gold, but
it well might be that people would use gold and silver, you know, but not by
bi-metallic, not with a fixed ratio of exchange between them, but with the ratio varying between them.
In point of fact, the fact that we had a bi-metallic system caused us a lot of problems.
It started with the, what was it, the act of, I guess 1791, but Bob's looking at me, was it 1790, Bob, 91?
Okay, where we set up our monetary standards and interestingly enough, by the way, and I'll mention this right now,
the gold standard that we were on was unconstitutional. We were on a gold standard and it was unconstitutional.
In 1791, we determined that we would have both gold and silver coins, the most common coin in use of any size at that time in the United States was the Spanish milled dollar.
By weighing a whole bunch of them and taking the average, they came to the conclusion that the Spanish milled dollar had 371.25 grains of pure silver in it.
And they said, ah, that's what a dollar is.
And then they said, okay, and we're going to have some gold coins.
But they weren't gold dollars.
They were gold eagles and double eagles and half eagles.
And they specified the weight of gold in the eagle,
Such that it was a ratio of 15 ounces of silver to 1 ounce of gold, which got us in trouble because the world market rate at that time was about 15.5 ounces of silver to 1 ounce of gold.
And of course Gresham's law came into play, which meant that overvalued goods drive undervalued goods of the same type out of the market.
So the overvalued silver drove the undervalued gold out of the market, but the people in
the United States understood, now I'll come back to this other part in a second, but the
people in the United States understood that our monetary unit was the silver dollar.
And so in the 1830s, when they wanted to make an adjustment, they did make an adjustment,
but they didn't change the weight of the silver dollar, they changed the weight of the gold
and EGLE. Why is that? Because if you read the Constitution of the United States, there
are some clauses where money is mentioned, you know, and it says, Congress shall have
the power to coin money and regulate the value thereof. Coin money, not print money, right?
Didn't say anything about that. States were specifically prohibited from printing money.
Article 1, Section 10, no state shall emit bills of credit. Bills of credit was the then
and Current Term for Paper Money.
So they said states can't print money, the federal government can coin money, and the
reason the federal government couldn't print money was because they had experience with
the continental dollars and the expression not worth a continental was very current,
right?
And so what happened was they didn't give the federal government the power to print
paper money.
And of course, the 10th Amendment says explicitly that if the Federal Government hasn't been
given an express grant of power to do something, then it can't do it. Only the states or the
people can exercise that power. But then you go into the Constitution and you find the
The dollar mentioned specifically twice in there. Once in Article 1, I think it's Section
9, where it gives Congress the power to restrict the import of slaves. It doesn't use the
word slaves, but that's what they're talking about. After the year 1908, in other words,
For 20 years, you can import slaves, state's good, but not after that.
But in that same thing, it said the states, the Congress, can tax each imported slave
no more than $10.
And later on, in the Sixth Amendment, I think it's the Sixth Amendment, but you know, it
It says that you have a right to a trial at common law in matters where $20 or more is
at stake. Well now, if they thought that you were going to be able to print paper money
and inflate the value of $20 down to nothing or $10 down to nothing, why would they have
bothered mentioning the dollar in there? They thought they were talking about something
The Spanish mill dollar, or the dollar then that we created which had the same silver content as the Spanish mill dollar.
Later on, in the 19th century, as we went to use more and more gold, still gold eagles and double eagles and that kind of stuff,
Eventually, the government, right at the turn of the century, officially put us on a gold standard.
I think the year was 1900, exactly.
Well, that's wrong.
There's no warrant for that in the Constitution.
The warrant in the Constitution is for us to have silver money.
It's what it is.
I mean, you can't have gold coins, but that can't be your standard.
be a standard, the silver is a standard. Now that doesn't mean that that's the best thing
in the world and maybe we should have amended the Constitution. But if you don't like the
way things are turning out under the Constitution, then the concept of a living Constitution
where a majority of judges happens to be non-on the Supreme Court now, it wasn't always that,
where a majority of five out of nine judges can decide what the Constitution means, we
These five people can say it means whatever they want it to say.
So, enough about that.
A little bit of...
How much time do I have?
All right.
Well, about...
Get carried away. Sorry about that.
About three years ago, four years ago, it became apparent to some people that the U.S. economy and the world economy was in pretty bad shape.
In my opinion, the downturn actually started in 2006, and we've been in a downturn ever since and a depression has just gotten worse and worse.
Every now and then, serendipity occurs. I was really getting into the events, looking
at this, what's going on in the economy, it's turning down and we're really having a mess.
And in the very beginning, January, I guess it was or so, of 2008, I was asked, well,
what elective are you going to teach in the fall? And I said, you know, something I've
I've been wanting to teach for a long time,
current issues in macroeconomics.
And one of the students who was in that class,
a very fine student, is with us today.
And at any rate, it was just an absolute wonderful,
wonderful class because, or absolutely wonderful,
because I had not just that wonderful student,
but about 12 or 15 really great students.
And what we did was we read the Wall Street Journal
and we looked at the things in there
and we discussed what was going on in there
In preparing for that, I did something which I hadn't normally done. Up until then, I was a typical macroeconomist when looking at the Fed. I said, gee, what's the Fed doing in terms of monetary policy? What are they doing with respect to open market operations? What are they doing with respect to discount rates? What are they doing with respect to the reserve ratio? I didn't really look at their balance sheet. Then I started looking at their balance sheet.
And when I started looking at their balance sheet, I realized that there was something terribly wrong there.
And I actually filed a Freedom of Information Act request, which I'll tell you about in just a second,
but comes that fall and we're in class, and if I had to describe that class,
Last, I think probably the best way to describe it would have been with respect to the Fed,
the acronym of the day, because that's the semester, the term starting in September 2008
when they started coming out with the term Asset Backed Securities Loan Facility, called
the TALF, the Money Market Investor Funding Facility, MMIFF, the Asset Backed Commercial
The Paper Money Market Funding Facility, the CPFF, the Primary Dealer Credit Facility,
the PDCF, the Term Securities Lending Facility, TSLF, and the Term Auction Facility, the TAF.
They're coming up with all these things. It reminds me of what's going on in Europe right
now. The fact of the matter is, what were they doing? They were looking at all these
financial institutions that were up to their ears in debt. They had liabilities over here
and some equity, they had these assets at book value that weren't worth anywhere near
what they said they were worth, and if they wrote them down, they'd be bankrupt. They
wouldn't have any more capital left. So what was the Fed doing with all these programs?
When you get all through, you blow all the smoke away about how long the term was and
the amounts and all that kind of stuff, they were doing several simple things.
Number one, they were going to the financial institutions and saying, we'll take the junk
paper off of your books in exchange for some good paper that we have, treasury securities.
So we'll take it off. That was one of the big things, just swapping good paper for junk
paper. The other thing that they were doing was lending them money with the junk paper
for securities. And the third thing they were doing was buying the junk paper. So their
balance sheet started the balloon. The balance sheet, which at the end of 1999, the Fed's
balance sheet was $670 billion. By the end of 2008, was $925 billion. So that was up
35% over eight and three quarters years. You'd say, gee, that's real restraint for the Fed.
The balance sheet actually shrunk from the beginning of January till the beginning of
September of 2008 from 925 to 905 billion.
It was at that point that Benny and the gang went wild.
From the September 3rd of 08 to October 2nd, it jumped from $905 billion to $1.5 trillion,
a 66% increase in one month. Think about that. And then after that, by the end of the year,
it had gone up to $2.265 trillion. In other words, they just ballooned the Fed's balance
sheet, to get this junk paper out off of these banks, keep the banks and these other things
going and all that.
Anyway, to make a long story short, I started looking at this stuff very seriously and I'll
give you the current numbers, not the ones from that time.
The Fed puts out a release, a statistical, they put out a whole series of statistical
releases.
The Federal Reserve's statistical release H41 from November 2nd, that's this past Thursday,
shows assets of 2.825 trillion, liabilities of 2.773 trillion, means that their capital
is 52 billion. That's a leverage rate of 53 to 1. Now if you believe that, you can
understand why people panic and say, oh the Fed could go bankrupt, the Fed this, the Fed
said that, oh man, we're in trouble and all that. But I tell you, the Fed balance sheet
is fraudulent. It's fraudulent. The Fed has no liabilities. If you look at the bulk of
that $2.77 trillion of liabilities, just over $1 trillion is Federal Reserve notes. That's
that paper money you and I use. How is that a liability to them? What are you going to
So, take your Federal Reserve notes to the Fed and say, give me something? What are they
going to give you? Just new Federal Reserve notes. Then the banks and depository institutions
have over 1.6 trillion of deposits at the Fed. If they go to the Fed, they say, we want
our deposits. Okay, here's paper money. Where does the Fed get the paper money? It's printed
by the Bureau of Engraving and Printing of the U.S. Treasury and sold to the Fed for
a nickel, whether it's a $1 note or a $100 note, it sold to the Fed for a nickel the
cost of production and delivery. Well, at one time it's true when those things were
redeemable in gold they were liabilities but they're not liabilities anymore. So I started
When a Federal Reserve bank engages in a transaction whereby it acquires Federal Reserve notes
from the Bureau of Engraving and Printing of the U.S. Treasury and is recording the
transaction in its accounting journal, which account does it debit and which account does
it credit? And for how much? Just tell me that. And then I got back a response. The
The Federal Reserve pays the Bureau of Engraving and Printing for the production cost of the
currency. That's that nickel. As opposed to the face value. They don't give them face
value for it. Well, that's where their profit is, right? I mean, wouldn't you love to be
able to buy $100 bills for a nickel? My wife would. So would my daughter. I wouldn't. That's
And then they say, once currency is delivered to a Federal Reserve Bank, transfers it out of or among Reserve Banks, they are recorded at face value.
Well, where is this jump in value shown on the books? And it's not shown anywhere.
And so then I looked at their audited statements, and they do have audited statements, it's audited by Deloitte and Touche, and you can find this on the web.
Accounting Principles for Entities with the Unique Powers and Responsibilities of a Nation's
Central Bank have not been formulated by accounting standard-setting bodies. The Board of Governors
has developed specialized accounting principles and practices that it considers to be appropriate
for the Nature and Function of a Central Bank.
In other words, they jury-rigged the books to get what they want.
The conclusion that I draw is that the Fed, as the U.S. government, is an institution
that's corrupt to its core.
So I leave you with this, Ron Paul says, end the Fed.
In my opinion, he's too soft-hearted.
I say end the Fed and put them all in jail.