For any stable economy to function, there must be a sound monetary system. A consistent store of value in the currency is necessary to promote saving, which in turn promotes capital investment. I, however, have major concerns with the monetary system in the United States, and hopefully after reading this short blurb you will share and voice these concerns with me.
The United States (along with the rest of the world) has a fiat monetary system. Fiat in Latin means "Let it be down". A fiat currency means that the currency is paper with no intrinsic value in it. It is not based on another commodity, such as gold. The system runs on the people's faith in the currency. This has been the case since 1932 domestically when FDR took the dollar off gold, and since 1971 internationally when Richard Nixon defaulted on gold payments to the rest of the world. Although I have my concerns about having a paper currency backed by literally nothing, my major concern comes from how money is actually created in this system.
Money is created in a number of different ways. One way money is created in the United States is through The Federal Reserve. Now, before I get into exactly how money is created, I think it is important to talk about what exactly the Federal Reserve is.
The Federal Reserve was created in 1913 as a response to a number of bank panics by a group of bankers, and passed into law by congress. It was signed into law by Woodrow Wilson. The Federal Reserve is the central banking system in the United States; the mother bank. It controls monetary policy, the value of the currency, interest rates, and the reserve ratio for all the other banks to follow. It is also important to note that the Federal Reserve is a private bank that has a monopoly on printing money. It has zero oversight by congress, and does not have an audit. No one really knows who is on the banking board of the Federal Reserve. The only check over the system is that the President appoints the chairman of the Federal Reserve, however the President must pick from a group of people that the Federal Reserve Board selects. It should also be noted that in the Constitution, the power to print and money is explicitly delegated to congress. Therefore the Federal Reserve can be viewed as an unconstitutional entity. It is a private corporation that prints the currency for a whole country.
Now let's get into money creation. There are a few ways money is created in America. One way is that congress decides it needs a little bit of money for some spending plan they have. The congress calls up the treasury, and the treasury calls up the Federal Reserve. The treasury then prints up a US treasury note, and the Federal Reserve prints up money out of thin air. The treasury and the federal reserve exchange their pieces of paper, and the money is then delegated to congress. The big important point here is that the Federal Reserve loans money to the government AT INTEREST! Now the second big way money is created is through the fractional reserve system. Fractional Reserve banking works like this. A bank is required to keep a certain amount of cash on hand, usually around 10%. Let's say I deposit a check at the bank for $10,000. The bank legally has to keep $1,000 of that as reserve in hard cash. The bank then lends out the other $9,000 to make money off the interest payments. Let's says someone takes a $9,000 loan from the bank, and then deposits it into their own bank account. 10% of $9,000 must stay in the bank. The bank must then keep $900 in its reserve, and lends out the other $8,100....This keep perpetuating until the orignal $10,000 turns many tens of thousands.
The important thing to recognize here is that all money is created by loaning, which means money is created out of debt. This means that there is always more debt in the system than there is money to pay off the debts. Then were does the money come from to pay the debt off? It can only come through this system again. So new money must always be created to pay off the old debts, but the new money being created creates more debt itself. The system is inherently inflationary, as new money must always be created for the system to work. I'm not saying this is a good or a bad thing, it just is what it is.
So people wonder, why is there so much debt nowadays? if you looks at a graph of the value of money since the creation of the federal reserve, the dollar has lost 98% of its value, and at the same time the money supply has grown at an exponetial rate. This also means that debt has grown at an exponential rate as well. Now you think about all the government stimulus, the trillions of new dollars created by the federal reserve, the 2 expensive wars we are fighting, and the fact that all this new money was loaned into existence, its no wonder there is so much debt. Milton Friedman was screaming about this for years, and was adamently against the debt based financial system, but he always said since it exists, it is essential to keep inflation as low as possible to promote savings and to keep the debt overhead from becoming too high.
The Revolutionary War that founded this country was a direct result from central banking. England was fresh off its 7 years war with France, and funded the war from borrowing from central banking. This left them when a huge debt overhead to pay off. Their answer was to tax the colonies to pay off the debt. At the time, the colonies were printing their own currency, but not out of debt. England then passed laws to outlaw the domestic currency, and forced the colonies to to borrow from their central bank, immediately throwing the colonies into debt. The founding fathers were very aware of how private banking printing a currency for a country could destroy it, so they wrote in the constitution that the power to print and coin money will be delegated to congress. This of course, has not been the case since 1913.
"I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." - Thomas Jefferson
Since A private for profit banking system has control over the value and regulation of our money in this country, I think it is very important the American people open their eyes and see what is actually happening in this country, before it is too late.
P.S.
And I might add that since the money supply has to keep growing, that is why the government has kept growing and gotten bigger....Look at the spending habits of the last couple of presidents....each has spent more and more than the last...Bush, to Clinton, To Bush, to Obama now blowing everyone away with the spending....and it's all to keep this system functioning and in check, one reason why I think when it comes to spending, there is no difference between democrats and republicans (look at Bush, the fake conservative), McCain would be spending just as much if he was President too, because they are owned by the system and keep it perpetuating.....
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