Many of the economic problems we face today can be boiled
down to a single root cause: Central Banking. In the case of the United States,
the central bank is called the Federal Reserve. A good read to learn the basics
of central banking can be found here. I highly recommend
reading this article. A book that covers everything you might have wanted to
know about banking is The Mystery of Banking by Murray Rothbard. Essentially,
the bank exists to control fractional reserve banking, fund wars, devalue the dollar, and ensure all of their cronies in Washington and Wall Street get richer.
Discussion of creating a United States bank began before the ratification of the Constitution. The first national bank of the United States was pushed by Alexander Hamilton and created in 1791. However, Thomas
Jefferson was appalled at the idea of a national bank. In fact, Jefferson wrote in a letter to John Taylor in 1816 (Monticello.org) that
...banking establishments are more dangerous than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is by swindling futurity on a large scale.Even before 1816, Jefferson was strongly opposed to a national bank. While Congress was deciding on creating the First Bank of the United States, Jefferson wrote a letter to George Washington outlining how the bank was unconstitutional. Not only Jefferson held this view of a bank, James Madison also felt the bank was unconstitutional. Madison later pushed forward with a bank to help fund the War of 1812, although that bank expired after twenty years (Millercenter.org). Was Madison being a hypocrite? Probably, but how else would he fund a war? One evil of a central bank exposed right there. Look for a more in depth history of the institution of the United States bank, and how central banks have funded wars throughout time in later posts.
How does fractional
reserve banking affect me? There is this little thing that banks (the place
where you store your money, not necessarily, in this case, the Federal Reserve)
called Fractional Reserve Banking. Basically, out of all of your hard earning
savings that you store in a bank, some percentage of that money is taken out of
the vaults and lent to some other entity in the hopes of making some return on
that investment. This is where the interest that gets added to your account
comes from. Banks have been doing this for eons, so it can’t be that bad,
right? Well, if a bank lent at market rates and the customer of that bank were
informed that not all of their money would necessarily be there if the customer
chose to take all of the money out, then it might not be so bad. However, the
lending rates are determined by (in the United States) the Federal Reserve, not by market forces. This has the
effect of leading people and businesses to believe they are richer than they
actually are. In other words, the capital base on which many businesses are
built is fictitious. Money is produced out of thin air using this system. This manifestation of money is known as the money multiplier. The money multiplier is a big reason that bank runs are so
devastating these days. For example, if you deposit $1,000 and want all of that money back,
and the Fed has set the fractional reserve lending rate at 90%, then that
$1,000 can have up to $4,685.59 associated with it (see Table below); therefore, $3,685.59 was created from nothing!. The Table below shows the initial investment by a bank's customer ($1000.00). Each column after the first in the first row under each reserve rate shows how much is lent to each subsequent bank for that reserve rate. The columns in the second rows under each reserve rate shows how much the initial investment grows with each loan. If this seems immoral to you, it is. Don’t worry,
most banks today are FDIC insured, so the taxpayer will carry all of the burden.
| Fractional Reserve Money Multiplier | |||||
|---|---|---|---|---|---|
| 90% Reserve Rate | |||||
| $1,000.00 | $100.00 | $10.00 | $1.00 | $0.10 | $0.01 |
| $1,000.00 | $1,100.00 | $1,110.00 | $1,111.00 | $1,111.10 | $1,111.11 |
| 10% Reserve Rate | |||||
| $1,000.00 | $900.00 | $810.00 | $729.00 | $656.10 | $590.49 |
| $1,000.00 | $1,900.00 | $2,710.00 | $3,439.00 | $4,095.10 | $4,685.59 |
Another operation conducted by the Fed is the introduction of money into the economy. One of the reasons they cite for doing this is to increase the “purchasing power” of the dollar. The Fed devalues the dollar to provide a false sense of security for the every citizen that uses US dollars. The simplest way to think of how the Fed creates money, thus devaluing the dollar, is that they take out a US bond against themselves further increasing US debt, and then they take that money and place it into the coffers of the banks within the Reserve's umbrella. That money then filters down through the public, but not after those that get it first spend the money. Therefore, the people who get the money when it is first introduced into the marketplace spend the money at almost full value, but by the time it gets to those at the bottom of the ladder, that money does not have nearly the same purchasing power (devaluation through inflation). If this system seems fraudulent, it is. If you and I were to engage in a system where you spent money I created by writing a check on a zero balance against myself, we would go to jail.
This is just the briefest of introductions to Central Banking. Much more will be written on this subject as this blog matures.
