The Slippery Slope of Necessity

There have been some signature events of the past few years that have gone unheralded, but yet are quite significant.

Probably few will recall the first time the Federal Reserve began purchasing US Treasury Debt. It was March 19 of 2009. A program of treasury purchases amounting to over $900B began, which defied the 96 year history of the Federal Reserve Banking System. If you question the impact of that event, simply look at interest rates for the last decade and you'll see them plummet to near zero (c'mon, how close can you get to zero when you're at 0.14%!?). You'll also see the Federal Reserve Discount Rate decouple from the LIBOR (London Inter-Bank Overnight Rate, a true market driven rate). Simutaneously, Gold climbed steadily from then-record-high prices of $956 to where it is today (between $1700 and $2000). Gas also went from $1.50 to where it is today, around $4 per gallon. This $900B purchase of Treasury Bills later became known as QE1 (Quantitative Easy Round One), because TARP 1 (Toxic Asset Relief Program One) had not had the intended consequence of freeing liquidity and credit.

Fast forward three years later, after a perpetual tug of war between Greece and the Euro Zone, and to a lesser extent between Spain, Italy, Portugal, and Ireland and the Eurozone, and the ISDA (International Swaps & Derivatives Association) just declared that Greek defaults (through an orderly settlement) do not constitute defaults to trigger benefit payments on CDSes. (CDSes are Credit Default Swaps where an insurer pays the default amount if a debtor fails to make scheduled payment on a debt instrument such as a MBS (Mortgage Backed Security) or a CDO (Collateralized Debt Obligation) - CDSes are also sold to Bond Holders as a hedge against the risk of holding a bond, including sovereign bonds issued by countries like Greece).

The impact of this news is hard to assess. Most of us are unaffected directly (unless your financial adviser happened to recommend Greek bonds, like Jon Corzine), but it could be one more domino that perpetuates a global financial collapse (I was going to use the word crisis, but we've gone from a threat to a literal collapse in the last three years that will make Lehman Brothers and Bear Stearns look like a walk in the park). If a stoke of the pen can reduce the protection of an insurance claim to nothing, then why would you hedge your bond risks with CDSes? Going forward, there will be no insurance because there will be no serious demand. Zip, nada, kaput! There will be no buyers because there's no payable benefit when governments and institutions intervene by fiat.

Since the default of Greece (still only in theory because they've borrowed Euro 130B to pay their obligations enough to get them some negotiating room with creditors at below 50% on the Euro, but by mid March, without the negotiation, they'll begin defaulting in mass) is all but certain, without any insurance, in spite of the massive returns on Greek debt (over 136% currently), why would anyone purchase more Greek bonds? If they can't pay today's outstanding bonds, how are they going to make payment on future bonds!? The cash starved country of Greece has just been sentenced to death.

But it's worse than that, because Spain and Portugal immediately sense the advantage of repaying 50¢ of each dollar (okay, okay, it's in Euros, but I can't find the Euro symbol on my keyboard), and more than a year ago, they began downplaying their own credit health in search of negotiated settlements. It's hard to say that the fudging of their numbers might be eclipsed by the actual destruction of their credit by true market forces when their ratings collapse along with their banks that may hold Greek debt. As they say, the contagion is spreading quickly.

In other, unrelated news, the IRS (branch of the Treasury) has released a binding interpretation of Rule 382. Rule 382 simply disallows a company being sold to transfer it's NOL (Net Operating Loss) during a sale - the loss for tax purposes is wiped out. You can imagine the horseplay that would ensue if companies could sell their losses as an asset. The rule was created in the 1980s but with respect to the TARP program in 2009, the IRS waived it for the purchase of bank assets, which came in the form of preferred stock in America's biggest banks. This meant the US Treasury bought it's own Deductions against forthcoming revenue. If it sounds crazy, that's only because it is. The official announcement ended with "The IRS Notices interpreted the law in the best interest of taxpayers". I can't imagine the contortions of logic necessary in giving away our tax revenue to undeserving banks, but not much makes sense these days.

These are strange days, indeed. We are lied to constantly, telling us a new measure or policy is for our own good, when in fact, it is something to protect connected individuals. Ultimately, we later discover:

• that the AIG bailout orchestrated by Hank Paulson (then Secretary of the Treasury, previously CEO of GS) was critical for Goldman Sachs;
• that IRS Rule 382 can be selectively suspended for the exclusive benefit of the banks;
• that robo-signings and fraudulent foreclosures are swept under the rug with a payout of $7000 per family at a loss of their homes by a nation wide settlement setting aside individual claims;
• that Unemployment rates have gone down only by changing the formulae by which unemployment is calculated, through eliminating over a million of those whose 99 week benefits have run out;
• that the subordination senior bond holders to save Chrysler in bankruptcy was used to save the pension fund of the UAW, but then Chrysler was later sold to Fiat, but only first after being bailed out by taxpayer dollars;
• that GM, first bailed out by the tax payer, then given over to the union pensions, is turning a profit when said profit only results from stuffing the channel with Volts, so much so, that there's no more room on the lots for the Volt and production needed to be halted, costing 1,500 jobs

There's one thing in common with each of these events - "Necessity". Each time one of these breath taking measures was taken, it was because of a "Necessity". The American banks, the car companies, the banks again, the European Governments holding Greek bonds, the banks again, were too big to fail and our leaders assured us of the necessity. But when are we the people of America too big to fail? Each one of these measures undermines confidence, but it's only upon confidence that such a massive yet fragile construct as the global economy is based. Going back to "Necessity", I quote William Pitt from 1783, "Necessity is the plea for every infringement of human freedom. It is the argument of tyrants; it is the creed of slaves."

Some warn us that we are on the "road to serfdom", but I fear we are already there...

Crime of the Century

"Besides medical care, pension and defense expense are also need to be significantly modified as they are where the debt came from." - anonymous blog

You haven't been paying attention for the last 100 years, have you?! While I don't believe that medical care or an old age pension is an "inalienable right", nor that it's wise to amass armies for building nations, none of those expenditures are why we're so deeply in debt. Don't worry though, once Einstein had immigrated to the US, even he marveled at the miracle of compound interest. The clue is inside of a buried congressional report from the Subcommittee on Domestic Finance, Committee on Banking and Currency, chaired in 1964 by  Representative Wright Patman, called "A Primer on Money".

Flip to page 71 first, and you'll see how the Federal Reserve System went from earning only 7% of it's interest income from US Government Securities in 1914, to 99% by 1963. Now, to be fair, of those earnings, the Fed remits approximately 80% back to the Treasury (at least it did in 1963), but the bulk of US Government Securities are not directly purchased by the Federal Reserve.

Our Bonds are auctioned through the FOMC, first purchased through a dozen "Primary Dealers", some names of which you'd immediately recognize like JP Morgan, but a few of which are agents of European banks. After the dealers take their 2% commission paid by the Treasury, other parties, many of which are the large American and European banks, take possession of the securities and send them back to the Federal Reserve to be held in reserve as capital reserves for the banks. While there, rather than the Fed collecting interest which it would remit back to the treasury, the banks collect and keep the interest generated on the debt.

Now ask yourself this, where did the banks get the money to "lend to the government"? Don't even waste your time trying to figure it out, because before it was lent out, it didn't exist. Upon purchasing the bonds, the banks did a double ledger entry adding the money paid to their liabilities, the bonds in reserve as assets, creating no new net imbalance, but creating money from thin air which they can further lend to us consumers of debt (the muliplier effect). Are the banks liable for this newly "minted" currency? No, because the Federal Debt is backed by the Faith and credit of We the People. As we see now, we are on the hook, or our children, or their children, but not the banks. Yet they are the ones collecting interest...?! Go figure!

Of course, if the Federal Reserve purchased the Government Securities directly (ibid, page 48), there would be no commission, and short of the Fed's operating expenses (accounting and clearing), all of the interest collected would be remitted back. Considering we've been doing this wrong for 100 years, it's not a wonder that the debt is so huge, because our interest payments, even at today's low low rate of less than 3%, are over 20% of our tax revenues, equal to our expenditures on Social Security. It's too bad Lincoln's Greenbacks died with him, because he had the perfect formula for creating money without adding interest to the public debt.

Unfortunately, after McKinley fought the banks (and lost), by Wilson's time (1913), carrying on through FDR, and all the way to Obama, with the exceptions of Kennedy and Reagan who dared to mess with the Fed, our leaders have been complicit to this Crime of the Century. To keep us distracted, congress perpetuates arguments about taxing and spending, green energy and acid rain, affirmative action and air traffic controllers, and during a dry news cycle, they've even brought radio DJs and sports jocks for congressional hearings. My favorite of course was the debate over recognizing the contributions of Michael Jackson.

Wow are we ever a bunch of schmucks, a hundred years of getting sucked into a three card monty by the banks!

The American Illusion

"The chains of habit," said one man, "are too small to be felt until they are too strong to be broken" - Samuel Johnson

Before reading any further, first you must decide... if you take the blue pill, the story ends, you wake up in your bed and believe whatever you want to believe, go on paying your taxes, looking for deductions, structuring your behavior to conform with the tax code. If you take the red pill, you'll never look at taxes, our government, or even an ATM the same way again... don't say I didn't warn you!

It's not just a coincidence that 1913 heralded both the Federal Reserve Act and the Revenue Act. The idea of a central bank, particularly one with a reserve (ability rush to the rescue in the even of a liquidity crisis) facility is not inherently evil, but what evolved as the FOMC is truly treacherous. We've survived two world wars, nuclear meltdowns, earthquakes, famines, Cabbage Patch Kids™,... even the Mullet and Leg Warmers, but our economy surviving after a century of being milked by banker families from Europe, it's not looking so good. Yah, you know who I'm talking about, not just the Rothchilds, but the Morgans, Kuhns, Rockefellers, Loebs, the Paulsons, Khans, Warburgs, Schiffs, et al., the ones that manipulated every banking crisis in modern history and surprisingly are always the ones our pristine and incorruptible leaders look to for a solution (can you say "unhealthy passive-agressive codependency").

The Income Tax is simply collected to service a contrived debt, where we lend ourselves money but pay commissions and interest to the Banksters. Think about it, we could issue Treasury Notes, or, we can commission the Federal Reserve System to control the money. If we print the money (Lincoln did in 1862 with $500M in Greenbacks, with no inflationary crisis ensuing), there is no interest, or if we issue Government Securities directly, the interest, if any, is remitted back to our own money stock. However, when we let private banks control our currency, first they take a commission (or fee), and then charge us interest, compounded annually, in perpetuity because we now need them to issue more debt so that we have money to pay the interest on top of the principal.

But, wait! The banks are neither the party creating the money (other than the delegation of that authority by a corrupt and slothful congress), nor the party that backs it. They create new money with simply a double ledger entry - a new loan note issued as a negotiable instrument (asset) = monies tendered to the borrower's deposit account (liability) - ergo no net impact on the balance sheet, but money from nowhere! You'd think the smart people in Washington could do that without relying upon the even smarter people in Manhattan, but maybe our elected representatives aren't as smart as we give them credit.

Remember, our money isn't backed by Gold or any tangible, but by the "Faith and Credit" of the United States Government, a government "of the people, for the people, by the people", meaning us. I don't recall seeing Greenspan, Bernanke, or for that matter Paulson or Geitner, and certainly not Moynihan or Dimon on an election ballot, yet together, these men (interestingly, no women) decide our monetary policy... independent of any of the three branches of government. Kinda sounds "unconstitutional" when you think about it too hard!

But, when the Federal Reserve Act was signed into law by the dauntless Woodrow T. Wilson late in the evening of December 23rd, 1913 (surprising that both houses of Congress could form a quorum so close to the holidays!), it needed to be coupled with Income Taxes so that the private banks could exact a usury from "we the people", both through our (I repeat our) government, and also individually. There was no angle for the banksters if the country couldn't be swayed into an easy-to-collect taxation. (next time you wonder why your representative wants to raise taxes, check to see if a bank is contributing to his campaign.)

If you don't believe there exists a consipiracy, it's easy to validate. Until 1913, we had no income tax other than sporadic attempts by politicians serving the Central Bankers' interests that tried repeatedly in spite of constitutional problems (1895, the Supreme Court struck down any income tax with Pollock v Farmers' Loan & Trust Co.) to levy taxes upon the citizenry without apportionment. How did the Union get along for over 100 years without this source of revenue? Even inflation adjusted, there was no mammoth debt and just prior to the Civil War, we even had a brief period of virtually no public debt, all revenue coming from Tariffs and Fees.

Strangely, it took almost 4 years for the 16th amendment to be ratified by the various states, and in spite of technical problems (some states ratified versions of the amendment with different wording, hardly the care needful for such a grand amendment that alters both the Constitution and nullifies prior Supreme Court Rulings), the Secretary of State, Philander Knox ratified the amendment. Also strange, Senator Aldrich of RI had been working with the banks from 1908 to 1913 on a Central Banking proposal. Even more strange is that no one at the time seemed to grasp what was about to unfold. Even in retrospect, few see the nefarious connections. Aldrich arranged the marriage of his daughter, Abby to John D. Rockefeller, Jr., son of the industrialist banker, and surprise, surprise, their son Nelson Aldrich Rockefeller ended up Vice President of the United States under Ford. Isn't it romantic when financiers have open access to the budoirs of Congress and the Whitehouse!

Many falsely believe that the Income Tax was implemented to fund the War Efforts in Europe, but I checked my calendar, and Duke Franz Ferdinand wasn't assassinated until 1914, the year after the Revenue Act was passed and the 16th Amendment was ratified. It seems more likely that we needed a war to justify the new income tax than a tax to pay for the war, which the US didn't enter until 1917 (even after the sinking of the Lusitania in 1915). So, what fiscal purpose did (does) the Income Tax serve? Sure, we grew government, but my gosh, the banks have grown even faster. We haven't avoided recessions or even long drawn out depressions, so we have to wonder why we're paying into the Federal Reserve System at all!?

Which takes us back to the Fed, by holding interest rates high (under the auspice of boogeyman inflation), by using private dealers for selling Government Securities in the "Open Market" (hardly "open" if only members of the banking cartel can bid), the National Debt increased almost exactly dollar for dollar with the interest on our debt. It's a bit more complicated now because of foreign investments, but one must ask why the Federal Reserve, which is empowered to purchase Securities directly from the Treasury (which it can then remit back to the Treasury with the interest accrued, thus extinguishing the debt and abating the interest), has historically ran our debt through interest-collecting private banks and commission collecting security dealers in less-than-open bond auctions? I note with caveat, this has been the modus operandi for over 95+ years, until the current crisis.

Of course, something changed in 2008. Interest rates are now unsustainably low (.14 of a percent), and the Fed now holds Trillions of Dollars of Government Securities. A couple of explanations might serve...

1. Why have high interest rates on the bonds if it's just going to be remitted to the treasury?
2. Consider that the banks inadvertantly through a rampage of mortgage securitizations and exotic derivatives pretty much cooked the goose that would otherwise provided gilded eggs,... there's still a pulse, but it's getting weak.
3. Finally, consider the danger of duration mismatch on all those mortgages (the ones not yet in default) issued at sub 5% interest rates, that if the interest rate were to even get close to 5%, the member banks of the Federal Reserve would be screaming bloody murder because through Fractional Reserve Lending (or "Fictional Reserve" lending), the books only clear with new money, which, if interest rates rose (and they have, just check your credit card statement), the banks would lose money in perpetuity.

But that's another chapter in what can go wrong when you entrust the wealth of a nation to greedy old men. Next time the discussion turns to "green jobs" or "universal healthcare", consider these just slight of hand tricks that distract us from the Crime of the Century.

The Gold Factory Part II

Part II - Revolutionary Economic Policies

The troops, returning from a victorious conquest, were praised as heroes and the entire Kingdom of Aygonot celebrated with the King. While widows and orphans grieved for their losses, many soldiers took delight in their plundered loot, and formed a line to claim their wages as promised vis-a-vis the Gold Warrants issued on the field. For the first few days, the reserve of Gold in the Treasury fluctuated, increasing at first with the deposit of the King's Bounty, but then decreasing with the gold redemptions by returning soldiers. Knowing of the King's love for Gold, and his tendency to covet the levels in inventory, even that which was foresworn and committed, the Goldstein Brothers (the two factors of the Treasury) began to fear lest the King should become aware of the rapidly depleting inventory, particularly Donduit, the more reserved and conservative of the two brothers.

Then a strange phenomenon occurred. After the public victory celebrations wrapped up, many soldiers, primarily those from more distant fiefdoms, began to redeem Gold for Gold Warrants. Let it be repeated, rather than exchange Warrants for the promised Gold, individuals were actually exchanging Gold in their possession for the Warrants. Though odd at first sight, it is not a surprise that this began with the soldiers living far away from the Capitol, because of the persistent threat of roadside bandits. The notion that it was safer to carry paper than the physical gold incorporated a sense that the security afforded by an orderly kingdom outweighed the surety of physical possession of the tangible wealth. Further to the surprise of the Treasury, common merchants and town folk began exchanging Gold for Gold Warrants, even though only in modest amounts.

When Isaiah and Don audited the Treasury, Don was relieved, and Isaiah delighted, to find that the inventory level had barely dropped as a result of the war. In preparing a report for King Aygonot, the Goldstein Brothers were careful to include an assessment (albeit theoretical) of the value of the conquered land in addition to the inventory levels of physical Gold, thus showing a glowing report of the financial health of the Kingdom. Because the concept of Gold Warrants was new, there was some debate among the brothers as to how to account for the Warrants in circulation, but in the heady euphoria of the Kingdom's successful expansion, Isaiah won over a reluctant Don, and any accounting of the recently issued warrants were left off of the books.

Of course, having faced the prospect of a humiliating defeat, relief as much as jubilation created an intense conflict in the mind of King Aygonot. In an expression of gratitude, he called a private conference with the Goldstein Brothers and rewarded them with a generous token of appreciation – in the form of Gold Warrants, of course. He further inquired of them how he might further extend the success of this brilliant new economic policy, for he knew that it had played an indispensable role in the latest victory. Without depleting the Kingdom's reserves, he was able to boldly lay out a plan of conquest before his nobles, additionally eliminating the risk of transporting troop wages through hostile territory, and furthermore vanquishing the long observed calamity of the enemy enriching themselves by looting battlefield casualties or robbing the paymaster's wagon en route. So, was there a means whereby “proxy wealth” might be used to expand peacetime economic growth?

While acknowledging the merits of promissory notes in the battlefield, Donduit cautioned against issuing more Gold Warrants, envisioning future problems with counterfeit or disputed notes. He further pointed out that within the Kingdom, there was still a problem of theft and banditry so the warrants did not offer much additional security, duly noting that the warrants were only redeemable at the treasury counter so there wasn't any such problem without the kingdom. Finally, Don sternly warned of the temptation to over leverage the Warrants, that it would become easy to gaze at the impressive inventory of Gold Bullion and fail to see that a portion of it was committed.

However, Isaiah noted that the miraculous use of the Gold in the Capitol for use in locales at a great distance away without having to move the Gold was far too great of a discovery to squander because of hypothetical risks. Of course, in the current atmosphere of success that enshrouded the kingdom, Isaiah's arguments were much more exciting and in the end prevailed, particularly when it was observed that the reverse exchange of Gold for Warrants, even if nominally, was beginning to occur.

To wit, King Aygonot called a week long council of regents, gathering the lords of all the provincial fiefdoms. He even haled the foreign lords of the conquered lands to attend, which they did with mixed feelings of trepidation and hope. Following a tour of the Treasury, an awe inspiring privilege, even for those who had already witnessed the wealth of the Kingdom, the council convened and Isaiah was invited to present a set of new laws governing the Treasury. They were simple, but provided a solid outline that the Treasury would redeem Gold in value proportionate to a share designated upon the face of the Gold Warrants. Because, it was noted, soldier's issued a wage by means of a warrant, the warrants would be transferrable to next of kin, and others to whom the holder would grant. Because the soldiers of the King frequently enjoyed wagering bets (although discouraged, it was virtually unenforceable to ban such and it provided a distracting past time for troops that might otherwise indulge in libations and other unseemly conduct while away in battle), the warrants were also designated as a medium of exchange in lieu of gold within the theatre of war.

It was further proffered, that, for the purpose of raising an army, warrants could be issued, albeit at a discount rate. All parties present, though it was not outwardly discussed, recognized that over time, the accidental destruction of certificates, the loss thereof in the battlefield, and however unfortunate, the death of the warrant holder, would lead to a natural rate of redemption less than what was actually issued. This anomaly would only benefit the King directly, and the feudal lords had already witnessed that Gold Warrants were perceived by conscripts as having slightly less value than physical gold. It was therefore agreed that the King would issue to the Lords, Gold Warrants at a discount rate of 5% less than face value, meaning for every 20 ounces of Gold negotiated, the Lords would receive 21 Gold Warrants.

It should be noted that this compromise would not have been considered except that the Goldstein Brothers spent many hours by candlelight auditing the issuance and redemption of the Warrants, and in a final report authored by Isaiah, argued in conclusion that less than 90% of the Gold Warrants would be eventually redeemed, representing an immediate profit to the King, simply by issuing warrants in lieu of physical gold. At a margin of over 10%, it was possible for the King to agree to a split with his Lords, knowing that every issuance represented a statistical margin of at least 5% of the face value of the certificates. Isaiah further put forth an argument (fiercely opposed by Donduit) that in perpetuity, the non-redemption rate of warrants would likely increase to even higher rates, and would never need to be reconciled. This was far too nuanced for the King, especially in these prosperous times, but whatever arguments supported the model of proxy wealth were quickly embraced regardless of any coherent understanding.

As the conference was about to conclude, Isaiah requested yet another audience before the council. During the second to last day, reports from the Treasury came in, confirming a theory that Isaiah had silently formulated, namely, that the Gold Warrants might be effectively used as a broad medium of exchange, in other words an instrument of barter throughout the Kingdom. Recognizing the seal of the Treasury and the endorsement of the King on the Gold Certificates, local merchants, only slightly reluctant at first, began accepting the Gold Warrants for the purchase of goods and services from the troops, especially those that had travelled from the provinces. Further, to his delight, Isaiah observed that merchants began informally using the notes as a means of paying for supplies. Isaiah realized that with the exchange of paper certificates, there was a substantial increase in commerce because of the ease of which business could be transacted. Inquiring with the King's sheriff, the Sheriff of Aygonot, he further discovered that reports of theft and banditry had noticeably declined, though the sheriff cautioned that not enough time had passed to demonstrate a real meaningful trend, further proposing that the bandits didn't know what to do with this new sophisticated form of wealth and warning that they would no doubt eventually figure out a way to take advantage thereof. Of course, Isaiah ignored the latter caution while fully promoting the preliminary findings signifying a reduction in criminal activities.

So, standing before the King and his council of visiting lords, Isaiah presented a plan for wide spread adoption of the Gold Warrants, that they might be used for every form of transaction, during peacetime as well as in war, on the Battle Front and in the marketplace, for the purchase of any and all goods and services, and the repayments of all debts, both public and private. Furthermore, Isaiah proposed an assortment of denominations to accommodate transactions both large and small, to further encourage wide spread adoption. At Don's insistence, Isaiah included a provision that only the King could issue Gold Warrants,
and that the King further established a system of weights and measures, and established an assayers office in anticipation that the citizens of the Kingdom would begin converting their Gold to Warrants. At Isaiah's insistence, Don recommended his nephew Wayan Goldstein for the post, who was, in fact, Isaiah's eldest son.

In spite of the subtle nepotism (which was broadly tolerated and even anticipated), these reasonable guidelines were well received.  However, there were a few of the Lords, particularly those from the annexed territories, that felt the scheme relied too heavily on the benevolence of the King and the trustworthiness of his stewards in the Treasury, without specifically mentioning the familial ties. Voicing these concerns caused a rumbling among the other Lords who echoed a demand for greater accountability and a stronger guarantee of redemption upon demand. They went so far as to suggest that an indifferent third party be responsible for maintaining, auditing, and guarding the Treasury.

Calling a short recess, King Aygonot met privately with the Goldstein Brothers. For the first time, the King listened more intently to Donduit than Isaiah, noting in contrast, Don's furrowing brow to Isaiah's over jubilant grin. Don proposed a monthly accounting report from the Treasury noting the shares of warrants in circulation, and moving the Treasury from the main castle to a new location within the Capitol to be guarded by a staff consisting of soldiers provided by each of the provincial lords.

However, Isaiah suggested that the Treasury remain as is, and noting with the potential flux of gold conversions, that the report be produced annually, and to protect the financial privacy of both the King and the Provincial Lords, that there be no disclosure of warrants in circulation. Anxious of the discord dividing the council, the King felt inclined to offer Don's proposal, and seeing the King waiver, Isaiah offered an additional incentive, that within his plan, the King offer not only a 5% marginal discount for raising armies, but for all direct transactions with the Lords, reminding the King of the early discovery that in excess of 10% of warrants were redeemed. Noting the hazards of guards in the treasury from without the Capitol, Isaiah suggested that the Treasury security be remunerated by a tax excised from the provinces, but guarded by men loyal to the King.

In the end, Isaiah's proposal had greater appeal to the King, and in theory, at least, was better suited to fulfilling the goals of the Kingdom without impeding the anticipated rate of economic expansion. Upon reconvening the council and presenting the compromise, the King was pleased to see the Lords embrace the marginal profits on all transactions granted by the Treasury to the fiefdoms. Furthermore, having already accepted the Warrants themselves were encouraged by the reports of merchants already accepting the warrants for commerce. Finally, having toured the Treasury, having briefly handled the Gold, they retained a strong sense that there was little risk involved provided the Treasury remain solvent and accountable to the King. In their minds, whatever reservations the Lords harbored with respect to the risk of paper warrants, they noted the current stability of the Kingdom, the burgeoning opportunity for profits, and their personal enrichment as their individual populations converted their Gold for Warrants.

At the conclusion of the Council, the mood, if possible, was even loftier than during the prior victory celebrations, because so many new innovations had been introduced not only for the ongoing expansion of the Kingdom through conquest, to bolster economic growth through transactional efficiency, and perhaps to cure social problems as well.

Of course, and perhaps foremost, the Lords were very pleased with a new revenue stream that cost virtually nothing, but presented a monopoly capture of an additional 5% margin on the conversion of Gold within their fiefs to Gold Certificates. When each returned to their own domains, they promoted the new plan and some, even with heavy hand, compelled the conversion of their gold to warrants, reaping the immediate 5% surcharge.

As we shall see, the immediate increase of wealth in the provinces amounted to 5% over night, with a promise of a residual flow of income. At the same time, the gold reserves in the Central Treasury would amass considerably in the same time frame, so much so, that an annex had to be built to store the incoming Gold. This introduced an era of unprecedented growth and numerous programs, both financial and social, were introduced which could dip into the Treasury.

... To be continued in Part III

The Gold Factory

Part I - War & Profits

There was a king, a very ambitious king. We shall call him King Aygonot the Fourth. Not content with a kingdom of nominal size and viewing the richness of neighboring kingdoms, he sought to expand it both geographically and economically within. To this end, the King assessed his inheritance which in addition to the lands over which he reigned, included a considerable reserve of gold.

This wealth was kept safe in the Treasury, and the treasury was guarded by a small legion of soldiers and managed by two Jewish factors. It's not important that they were Jewish other than King Aygonot IV was a Christian and since at times lending and borrowing were necessary in the affairs of the kingdom, his ancestors, the Aygonots, a long time ago had enlisted a Jewish family, the Goldsteins, the task of lending, borrowing, and accounting for the treasury of gold. At this time, it was the two brothers Isaiah and Donduit (or just Don) that managed the affairs of the Treasury. While Isaiah was somewhat prone to speculation, Don was very conservative and acted as a force of restraint against Isaiah's capricious leanings.

When the king felt he had a sufficiently large army, he set out to conquer a smaller neighboring kingdom. He had already spent a considerable amount of his Gold to conscript and arm his conquering forces, but because of the prudence and foresight of his noble ancestors, it required only a small withdrawal from his capital accounts in the Treasury.

The first battle, through which a strip of land on the border was conquered, was wildly successful, though it was not sufficient to completely overtake and subdue the neighboring kingdom. The troops returned from the battle, drunken with blood and victory, and modestly enriched through the spoils of plunder. While the king frowned on such behavior (for he was a noble king and believed in decency in both society and in warfare), he was inclined to tolerate the looting to a certain degree because it reduced the required outlay to pay for the troops if their wages were subsidized by “commissions” (where did you think that word came from, anyway?).

During the next few weeks, the king prudently resolved to attack again, but this time drive his forces rapidly into the interior of the neighboring kingdom to overtake the castle fortress of the other king. The two kingdoms had a long history of territorial border disputes, but neither had ever ventured so far as to invade the domicile of each other’s capitols. However, being attacked on the border, the neighboring kingdom began amassing defenses, drafting all of the peasantry between the capitol and the disputed border into a rag tag army.

When King Aygonot's forces entered the neighboring kingdom, they moved rapidly with little resistance towards the capitol. They were, as a matter of fact, quite surprised that they did not encounter even a fraction of the defensive forces that they met previously.

But when they arrived at the fortress of the other king, they were astonished, and their hopes of an easy victory were shattered, for what the defensive forces lacked in terms of sophistication, they more than compensated for with sheer numbers. With only brief hesitation, the Aygonot forces began to decend upon the castle fortress only to be halted by fixed defenses and hordes of armed peasants. What was anticipated to be a quick victory, began to take its toll as the defending army added new peasants to its numbers daily.

At one point, the Aygonot Captain realized that to avoid defeat, they would need, in addition to fresh food stocks, more troops and his men realizing the risks before them began demanding a supplement to their wages. He sent back a messenger who delivered the news to the King. Conferring with his factors, the Goldstein brothers, King Aygonot was advised that abandoning the current enterprise would be a total loss, that whatever they left on the battlefield, would be a loss with no gain whatsoever as an offset. The entire exploit would be a wash. Aware of the losses, and fearing the resulting ridicule and what would certainly amount to disfavor among his countrymen over whom he reigned, he commanded the factors to prepare a ration of Gold for raising new troops, a portion to pay for food stocks, and yet another as wages for the current troops.

A garrison was quickly assembled and guarded the food supplies and gold as they traveled deep into the neighboring kingdom. This turned out to be a perilous task, and an unmitigated disaster. The contingent discovered a small army pursuing them from behind, and realizing that turning back meant a certain violent conflict, not to mention a delay in their mission, they forged ahead more rapidly. But their hopes were dashed when they met another defensive army before them, thus finding themselves surrounded. The entire legion was sacked and both the food stuffs and Gold were confiscated by the resident kingdom's forces and delivered to the opposing king. Now, in addition to heavy fighting losses, a severely fatigued offensive force, the Aygonots were deprived of both food and wages. Conversely, the defending kingdom was now enriched with the conquered Gold, and adding to its treasury, now was able to raise up new troops, which the king promptly did.

When word of this got back to King Aygonot IV, he fell into a deep depression. His initial victory notwithstanding, he was facing an extreme loss of both wealth and face if he was to abandon his cause at this point. He gathered his military commanders that were not yet in the field of battle, brought in the nobles from the fiefdoms within his Kingdom, and inquired of their expertise on a plan to turn this catastrophe around. After several days of meetings, he realized that his nobles were idiots, each conflicted by their own interests, and it was a mistake to involve them in the process. While his generals offered good tactical advice, it amounted to a very expensive proposal, as it required raising new troops and further risks of losing both Gold and more men in trudging through enemy territory to carry out the plan. If King Aygonot could only find a way to reduce the risk, he might yet see victory.

At this time, his factors, the Goldstein Brothers, came to him in seclusion and proposed a way to both raise troops and to deliver wages to the fighting forces without the additional risk of transporting the Gold. They recalled that the Romans had paid their advancing armies in salt, which at the time was a valuable commodity in itself, but was also purely a representation of wealth held for future exchange by the armies when they returned to Rome. Isaiah reasoned, and aware of the high risk that transporting Gold through enemy territory, Don quickly concurred, that in lieu of Gold, that warrant certificates for redemption of Gold could be used. While Don held reservations on further use of the Gold Warrants, Isaiah argued for their use not only for field wages, but also in the raising of new troops and even for paying for the food supplies and arming of the forces.

In making his decision, the King went to the treasury to audit his remaining wealth. While much remained in reserve, the King was disturbed by the amount already depleted in the current conflict and couldn't help but visualize what further defeat might do to his stockpile. The physical space previously occupied by the bullion aroused such intense emotions, that the King thereafter was easily persuaded to use Gold Warrants for both wages and upfront military expenses, and as we shall later see, for other financial obligations within the Kingdom.

The principle behind the Gold Warrants seemed sound, and in light of wealth physically lost through the theft of Gold en route, it was the only prudent means to deliver wages to his armies. The King also realized that soldiers killed on the field, if the territory was surrendered, not only meant a loss of the soldiers, but if the soldiers were carrying any of their wages on their person, the enemy could rummage among the casualties and confiscate that Gold as well, then turn around and use it to raise their own forces. With warrants, the soldiers would return after the war, redeem them for Gold, and the Gold would remain within the Aygonot Kingdom, safely transported from the treasury to the homes of the returning veterans. The Gold Warrants would be of absolutely no worth to the enemy.

With a plausible solution at hand, King Aygonot’s spirits were lifted and he ordered the Goldstein Brothers to acquire a press and print the Gold Warrants using the best papers, the finest inks, and an elaborate design that would be very difficult to forge or counterfeit. Before the ink was even dry on the first set of Gold Warrants, the King, recognizing his earlier failure to send enough forces to get the job done, quickly dispatched an order to quadruple the printing and once again gathered his nobles and regents. He presented to them an opportunity to partake of a share of the current enterprise, that they would receive in exchange to providing troops, a portion of the Victor's Spoils. The king explained the hazard of transporting Gold through enemy territory, and showed them the new Gold Warrants. The Goldstein Brothers had done such an excellent job in printing the warrants, that there was not a soul among the nobles who wasn't more than a little impressed with the validity and genius of the plan to issue these. So much so, that in lieu of real Gold, they themselves committed troops in exchange for the Gold Warrants, for they knew that even within the homelands of the Aygonot Kingdom and even within their own fiefdoms, there were occasional robbers that made the transport of valuables a risky undertaking. In contrast, they were aware the legion of soldiers guarding the King's treasury.

However, before accepting the Gold Warrants, the lords demanded a tour of the treasury to verify that the Gold was intact and adequately accounted for. Even though somewhat depleated, the Treasury was stocked far beyond what the regents could conceive and they were more than duly impressed, if not inspired. With no hesitation, they accepted the warrants and returned to their fiefs to gather troops, who, of course were informed of how the warrants work, and readily enlisted. The enlistees were not afforded a tour of the King's Treasury, and the feudal lords found that the conscription process was marginally more expensive compared to when they used physical gold. Some chose to keep all of the Gold Certificates and pay with real gold, while most simply paid a higher price. Eventually, all of the required troops were drafted and sent forward into battle.

Back in the neighboring kingdom, the large contingent of troops and fresh food stores arrived. The slaughter on both sides was immense, with four defenders dying for each of the Aygonot troops. But pure attrition eventually gave the Aygonots certain victory over the fortified capitol, and a surrender was negotiated. Although the defeated king was promised the status of a noble in the newly enlarged Aygonot Kingdom, the king realized the common fate for a defeated king was death, and in the dark of night, he stole away with a small band of his own soldiers and as much of his wealth that he could fit on several coaches. As he retreated into the interior of his former kingdom, his convoy was intercepted by some of his own lords, who summarily executed the king and his family and parted their wealth between them. Within a few months, even these interior fiefdoms were all eventually absorbed into the enlarged Kingdom of Aygonot.

... To be continued in Part II