Hundredth Anniversary of the Federal Reserve: We "get by" IN SPITE



On December 23, 1913, one hundred years ago yesterday, Woodrow Wilson signed into law the Federal Reserve Act, which had been passed in the House on September 18th the same year by a vote of 287 - 85 and which had been passed in the Senate on December 18th by a vote of 54 - 34. 

The creation of a central bank in the US meant that the supply of money could now be controlled by a central planning body, in contrast to the previous basically laissez-faire systems (the US had experimented with several different systems with varying levels of government interference during its history prior to 1913), in which money and credit were not directly under the control of the government and banks could issue their own notes, and during some periods could issue their own scrip in exchange for deposits. 

The contrast between central banking and free banking is admirably contrasted in Breaking the Banks, by Richard M. Salsman, published in 1990 and available from the American Institute for Economic Research.  He characterizes central banking as follows:

[. . .] we describe central banking as any and all forms of government intervention in the banking system, specifically a legal tender monopoly on the issue of bank notes, a lender of last resort, mandatory deposit insurance, and the regulation and/or ownership of banks.  16.

The ramifications of the creation of the Federal Reserve have been profound.  One of the most important negative aspects of the central banking system has been steady erosion of the purchasing power of money, which over time has had a catastrophic effect on the people's ability to trust their money as a store of value.  The long-term impact of this erosion of purchasing power has been far greater than most people recognize, as we discuss in several previous posts, most notably in "Stand still, little lambs, to be shorn!" which itself is the title of a study published periodically by the AIER.

Perhaps not coincidentally, 2013 is also the one hundredth anniversary of the establishment of a federal income tax in the United States, via the ratification of the 16th Amendment to the Constitution in February of that year.  After the Constitution was changed to allow an income tax, Congress got to work writing income tax law, which was enacted in October of that year.

 

Both the income tax and the erosion of the purchasing power of the money in the US have together caused tremendous harm to the individual's ability to keep his or her own property and to increase it through productive labor.  It is very important for investors to understand the history and impact of both the income tax and inflation / loss of purchasing power on their money and ultimately their wealth.

 

Further, the creation of the income tax and the establishment of the central bank led directly to the ability of the federal government to grow tremendously in size and scope since 1913.  While a thorough critique of the performance of the Federal Reserve since its founding is beyond the scope of this writing, there can be no doubt that the ramifications of the existence of such an entity has been significant in its impact on the US and global economy.  While it can can be argued by reasonable people (certainly Milton Friedman was one) that the benefits of central banking outweigh the negatives, it is our view that the concentration of such power into the hands of a few must be handled very carefully and well articulated "rules of the road" must be followed in order to limit such power.

 

Regardless, here at Taylor Frigon Capital Management, we have always believed that individual men and women, as well as the country at large, have gotten by in spite of what we believe to be  often questionable actions by the bankers at the Fed.  See for example the previous post entitled, "We get by in spite," published December 23, 2009. 

And on that positive and hopeful note, we wish all our readers a very Happy Christmas and a Prosperous 2014!

Back from the New Telecosm Summit, 2013

We recently attended the New Telecosm Summit, which was the latest in a series of Telecosm Conferences inspired by the vision set forth by author and thinker George Gilder.  This year's event took place on December 3rd and 4th in New York City.

The concept of the "telecosm" refers broadly to the world unleashed by abundant information-processing capability coupled with abundant networking capability: the technologies which make information processing and sharing so inexpensive and plentiful that massive amounts of high-definition video data can be shared almost anywhere, even while mobile (not requiring people to use devices that are tethered to the network by a physical cord).  

The possible applications for such super-abundance are literally unlimited, since the human imagination is essentially unlimited, and we have all seen the impact of the creative applications that people have found for these new capabilities over the past ten or fifteen years, and the ways they have transformed numerous aspects of human life.  These transformations, and the technology that makes them possible, constitute the concept of "the telecosm."

This year's Telecosm conference featured talks on the progress of this paradigm, and some of its far-reaching ramifications as we can envision them today, as well as presentations by some of the individuals and companies who are working on ways to apply the capabilities of the telecosm to different areas of human life (including medicine), or on ways to expand those capabilities to new heights.

Of course, event chairman and Telecosm pioneer George Gilder gave the opening keynote, and during his remarks he laid out the powerful vision that he believes underlies the entire paradigm.  He notes that the incredible advances in information processing and information sharing on global networks during the past several decades was made possible by the "information theory" articulated primarily by Claude Shannon, who declared (in George's words during the talk) that "information itself is surprise, and creativity is surprise."  

This concept underlies the inevitable gravitation of information towards the electromagnetic spectrum, because the waves of energy in the electromagnetic spectrum behave in a very unsurprising and predictable way, making them an ideal carrier for information (unexpected blips in the predictable spectrum can then be used to carry coded information, in just the same way that puffs of smoke signals against a clear sky can be used to carry coded information).

George then explained how this concept has ramifications that go to the heart of the profound question of how economies grow and how innovation and creativity can flourish (these are both the same question, of course).  Most of those who have tried to examine this question of how to enable innovation, creativity and growth have focused on incentives of some sort, whether those incentives came in the form of government "stimulus" (a typically "Keynesian" or "demand-side" approach) or in the form of reducing penalties or obstacles to growth such as taxes or regulations (the typically "supply-side" approach), but George explained that the application of Claude Shannon's information theory to this question came as an epiphany to him, and enabled him to see that innovation and creativity are actually forms of surprise, and therefore forms of information!  

This insight enabled him to see that a healthy economy that enables the always-surprising creativity and innovation of individuals is really a knowledge system (because it is based on information), rather than an incentive system, in which those in power try to provide incentives to behavior as if they were guiding a chicken in a Skinner Box.   George explains that trying to manipulate humans using the Skinner Box method has failed miserably, but that by realizing that knowledge accumulates in very specific ways, and by seeing the economy as a knowledge system or a learning system, we find an entirely new perspective that has not been appreciated before.  

"A learning system operates differently from an incentive system," he said in his talk.  Specifically, learning and knowledge are accumulated through a series of "falsifiable experiments" -- and in the world of business innovation this means a series of "entrepreneurs creating falsifiable experiments" that may succeed or they may not.

George develops this important new approach to understanding creativity, innovation, and economic growth in his most recent book, Knowledge and Power.

Unfortunately, the temptation of those in power is and has always been to interfere with the critical series of "falsifiable experiments," by picking winners and losers.  One of the sub-themes of the conference this year was the degree to which the unpredictability and interference introduced by government officials and their cronies in various areas of business has created major disruptions to the promise of innovation and creativity over the past two decades.  

Thus, this year's Telecosm presented a tempered message that was balanced between the promise of innovation and creativity -- which in many ways have reached tremendous heights -- and the caution and uncertainty which still threaten both the telecosm and the wider economy.  We believe these concepts are very important for investors (and all participants in the economy and wider society) to understand and consider carefully.