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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter



Today:  The Fed's Methadone Strategy

*** Markets closed... all major indexes end the "first 
half" in the red...

*** An informal salute to the Nation's most mild-
mannered revolutionary...

*** Baby Boomers' gift to the 21st century... and more! 

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In a shortened trading session yesterday, all the major 
indexes fell - but not by much. The Dow fell 22 to 
10,571... the S$P 500 lost a couple to close at 1234... 
and the Nasdaq shed 7, closing doors at 2140.

Going into the Independence holiday, and what is 
effectively the end of the "first half," the net result 
of 6 fed rate cuts is 'nul' - as they say here in the 
French office. The Dow has lost 2% of its value, the S&P 
is down 6.5% for the year and the Nasdaq follows up the 
rear... down 13% YTD.

The markets are, of course, closed today...Bill and Eric 
have taken what Eric called "an uninterrupted day to 
celebrate our nation's independence from the tyranny of 
the British." So, since the celebration of liberte in 
France won't begin for another 10 days, I offer you a 
single holiday salute. 

"God, who hath given the world to men in common," said 
John Locke, Jefferson's philosopher, and spiritual 
leader behind the Declaration of Independence, "hath 
also given them reason to make use of it to the best 
advantage of life and convenience."

Reason, it is believed by many, empowers man to remake 
the world to his advantage. At the Daily Reckoning, we 
often take a more skeptical view. In fact, on this 4th of 
July, 2001, it might be worth a look at what reason hath 
also wrought: The Creature From Jeckyll Island.

In a book of the same title, Edward Griffin, notes the 
basic plan for today's Federal Reserve was drafted at a 
secret meeting held in November of 1910 at the private 
resort of J.P. Morgan on Jeckyll Island off the coast of 
Georgia. It was the brainchild of Paul Warburg, a 
partner in Kuhn, Loeb & Company, representing the 
Rothschilds and Warburgs in their European holdings.

The purpose? According to Griffin, "a primary objective 
[of the meeting] was to involve the federal government 
as an agent for shifting the inevitable losses from the 
owners of those banks [being represented] to the 

Griffin quotes Paul Warburg: "Picture a party of the 
nation's greatest bankers stealing out of New York on a 
private railroad car under the cover of darkness, 
stealthily hieing hundreds of miles South, embarking on 
a mysterious launch and sneaking on to an island 
deserted by all but a few servants, living there for a 
full week under such rigid secrecy that the names of not 
one of them was once mentioned lest the servants learn 
the identity and disclose to the world this strangest, 
most secret expedition in the history of American 

"I am not romancing," Warburg claimed in 1930. "I am 
giving the world, for the first time, the real story of 
how the famous Aldrich report, the foundation of our new 
currency system, was written."

"The composition of the Jekyll Island meeting was a 
classic example of a cartel structure," says Griffin. "A 
cartel is a group of independent businesses which join 
together to coordinate the production, pricing, or 
marketing of their members. The purpose of the cartel is 
to reduce competition and thereby increase 
profitability. This is accomplished through a shared 
monopoly over the industry which forces the public to 
pay higher prices for their goods or services than would 
otherwise be required under free-enterprise 

At the risk of appearing too simplistic, I submit, the 
cartel achieved as much - and more. In 1913, the Federal 
Reserve act became law. At that time you could have 
purchased a simple pair of men's shoes for $5.50. By 
1938, when Hitler was just beginning the Anschluss of 
Austria and Czechloslovakia, the same pair of shoes 
would have cost you $7.38; in 1969, when Armstrong was 
taking large leaps for mankind in his own moonboots, 
they would have cost you $20.39... and today, on July 
4th, 2001, while George W. exhorts us in his Presidential 
Statement On Independence Day to "remember the 
achievements of our great statesmen, social reformers, 
inventors and artists," that $5.50 pair of shoes will 
set you back $100.

In 1910, "Wall Street was still the biggest kid on the 
block," writes historian and former assistant managing 
editor of The Washington Post, William Greider, of the 
founding of the Fed. "This trend was a crucial fact of 
history, a misunderstood reality that completely alters 
the political meaning of the reform legislation that 
created the Fed. At the time, the conventional wisdom in 
Congress, widely shared and sincerely espoused 
Progressive reformers, was that a government institution 
would finally harness the 'money trust,' disarm its 
powers and establish broad democratic control over money 
and credit... the results were nearly the opposite." 

Unbeknownst to the "reformers" of the time, the world's 
most wily capitalists had harnessed the machinations of 
government and the popular will to serve their own ends.

"Paul Warburg," wrote his biographer Harold Kellock, "is 
probably the mildest-mannered man that ever conducted a 
revolution. It was a bloodless revolution: he did not 
attempt to rouse the populace to arms. He stepped forth 
armed with a simple idea. And he conquered. That's the 
amazing thing. A shy, sensitive man, he imposed his idea 
on a nation of a hundred million people."

And yet, today, as a nation, we celebrate the spirit of 
Independence from tyranny of the few over the many. 
"...Men enter into society," wrote Locke, for "the 
preservation of their property; and the end, while they 
choose and authorize a legislative, is that there may be 
laws made and rules set as guards the properties of all 
society, to limit the power...of every part and member 
of that society.

"Whensoever...the legislative shall transgress this 
fundamental rule of society, and either by ambition, 
fear, folly, or corruption, endeavor to grasp 
themselves, or put in the hands of any other, an 
absolute power over the lives, liberties, and estates of 
others by this breach of trust, they forfeit the power 
of the people...and it devolves the people, who have a 
right to resume their original liberty, and by the 
establishment of a new legislative, provide for their 
own safety and security..." Who in America feels as 
strongly today?

Today, as you "celebrate with pomp and parade...guns, 
bells and bonfires," the revolutionaries who've long 
since past, don't forget the unsung among them, who have 
also given us our nation... and our currency.

Happy 4th,

Addison Wiggin
Paris, France

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A 4th of July Daily Reckoning Guest Essay

By Gary North

Think of the Federal Reserve System as a senior producer 
in an international fiat money drug cartel. Think of 
Alan Greenspan as its godfather. He uses commercial 
banks as his pushers. 

When users build up tolerance to the existing supply of 
fiat money, the FED has to increase the dosage in order 
to maintain the economic boom. In this system, the 
economy is never allowed to "get clean." The addiction 
to fiat money is forever. 

But Greenspan is a kindly godfather. He means to produce 
no serious harm. He doesn't want to see America as
a nation of helpless addicts to the really hard stuff. 
He wants the whole world to move from the heroin of fiat 
money to methadone. If we will just keep coming down to 
the banks for our regular supply of the drug, we will be 
able to postpone the horrors of going cold turkey. 
Economic "cold turkey" is a recession that is not 
overcome by a wave of fiat money. The Great Depression 
was cold turkey. 

The whole world today is addicted to fiat money and 
long-term debt. Long-term debt makes sense when the 
money supply is constantly being expanded. You can pay 
off your debts with depreciated money. But the debt 
system keeps the addicts coming back for more. The 
longer the addiction process continues, the more 
dependent every section of the economy becomes on a 
continuing supply of fiat money. 

Today's users are counting on the easy availability of 
the central bank-supplied methadone. The universal 
assumption of the cartel's directors is this: methadone 
does not produce the fearful effects of long-term 
resistance to the drug's stimulating effects. Addiction 
is a permanent condition, but it can be handled 
emotionally by the addicts. 

The problem is this: the addict has no incentive to get 
well by breaking his addiction. The central bank 
continually adds to the money supply, generation after 
generation. This makes the level of accumulated debt 
ever greater. The addicts keep building up their IOU's. 

The biggest addict today is the U.S. government. It has 
made promises to voters regarding Social Security and 
Medicare. These promises involve unfunded debts so huge 
that they cannot be paid off in terms of money with 
anything like today's purchasing power. To put it 
bluntly, the U.S. government is on methadone today, just 
like everyone else, but this methadone dependence must 
lead, statistically speaking, to the heroin habit. 

For the United States, the day of demographic reckoning 
may be as far away as 2017, but 2011 should see 
preliminary signs of crisis in the Social 
Security/Medicare systems. The first Baby Boomers were 
born in 1946. They will reach age 65 in 2011. For Japan, 
the crisis will begin soon: In 2003. For Italy, 2005. 
The other major industrial nations will follow in short 
order. The United States is at the end of the row of 

We can see it coming. But methadone-addicted users in 
Washington see nothing coming further out than the next 
Congressional election. 

I realize that my analogy may sound a bit nutty, but it 
is closer to the truth than most people think. I wrote 
the initial version of this essay in 1964, which was 
published as a booklet, "Inflation: The Economics of 
Addiction." Since that time, the dollar is down in its 
purchasing power by about 75%. 

There is an addiction effect with fiat money. The world 
found out in the 1930's what happens when the flow of 
fiat money ceases. Politicians are determined never to 
allow this to happen again. 

So far, the voting public agrees. The central banks of 
the world continue to keep the funds flowing. A national 
economy has its ups and downs, but it never falls into 
the disaster-level mode of 1932. This seems positive. 

But the relentless pressure of debt never decreases. The 
public, along with their governments, continue to make 
assumptions about the future that cannot possibly come 
true with today's money supply and price level. 

So, the central banks continue to increase the money 
supply, general prices never fall, and aging populations 
remain unconcerned with the statistical brick wall that 
faces all of us, in every industrial nation. 

Addicts ignore unpleasant reality. 

Gary North,
For The Daily Reckoning

At age 25, Dr. Gary North was the youngest elected 
member of the Economists' National Committee on Monetary 
Policy. He served as a senior staff member of the 
Foundation for Economic Education and as a research 
assistant to U.S. Congressman Ron Paul. To receive 
Gary's free e-letter, Reality Check, send an e-mail 
request to:
About The Daily Reckoning:

Daily Reckoning author Bill Bonner

Bill Bonner is, in spite of himself, a natural born contrarian. Early each morning, Bill writes The Daily Reckoning—his take on the financial markets and what’s going on in the world—and sends it off by e-mail before most Americans’ alarm clocks have buzzed. Many readers say it's the first thing they want to read when they get up—not only because it's informative and thought provoking, but also it's inspiring, in its own quirky and provocative way.

Of course, there's much more to Bill than his daily market commentary. He's also the founder and president of Agora Publishing, one of the world's most successful consumer newsletter publishing companies. Bill's passion for international travel and big ideas are reflected in the company he's successfully built. In 1979, he began publishing International Living and Hulbert's Financial Digest . Since then, the company has grown to include dozens of newsletters focusing on health, travel, and finance. Bill has vigorously expanded from Agora's home base in Baltimore, Maryland since the early ’90s—opening offices in Florida, London, Paris, Ireland, and Germany.

Agora's publication subsidiaries include Pickering & Chatto, a prestigious academic press in London and Les Belles Lettres in Paris, best known as a publisher of classical literature in bilingual editions.


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Last modified: July 05, 2001

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