Understanding the Federal Reserve

9 Oct


Looking at the above title, the reader may conclude that he has begun to read an article that he might better save until he has a holiday weekend in which to read it. And there can be no doubt that volumes could be written describing the Fed and its inner-workings. For readers who do seek a comprehensive description of the Fed, I can recommend no source more highly than The Creature from Jekyll Island by G. Edward Griffin.

However, the purpose of this article is to describe as simply as possible what the function of the Fed is. As Mr. Griffin himself points out, the central function of the Fed is remarkably simple. Whilst the Fed is cloaked in mystery, its central purpose is not complex. However, even when boiled down to the simplest of descriptions, it is still confusing.

Why should this be? The answer is that it is intended to be confusing. The Fed was created, one hundred years ago, in secrecy, and slipped into being under questionable circumstances. If its function were to be clear to the public, it would rightly be regarded as no more than what it is – the scam of the century.

The principle purpose of the Federal Reserve is to create debt and, at the same time, to monetise that debt. As simplistic as this statement is, it would not be surprising for any capitalistic businessperson, when reading it, to reply, “Say, what?” This would be understandable, as the statement does not resemble conventional monetary or business thinking.

Here is as brief a description of how the Fed’s function is implemented as I can put into words:

  • The government issues bonds which are for sale to the public. Some may not be bought by the public. Then the Fed steps in.
  • The Fed purchases all the government bonds that have not been purchased by the public. It pays the government with a cheque (not with precious metals, or even paper currency notes). This cheque in not backed by anything. It is simply a “promise to pay.”
  • The Fed then categorises the government bonds as “reserves” and, under the fractional reserve concept, gives itself permission to create nine dollars for every “dollar” held in reserve. (Remember, there are no actual dollars held in reserve, only bonds. Are you confused yet? If so, you’re in good company.)
  • The first “dollar” created of every ten dollars is provided to the government so that it has “money” to spend.
  • The other nine “dollars” are loaned out by the Fed to banking institutions.

And that’s it. Essentially, the government sells the Fed bonds that are backed by nothing and, in return, receives payment that is backed by nothing. The benefit to the Government is that it has an opportunity to gain unlimited funding, allowing it to take on unlimited expenses. The benefit to the Fed is that it may loan unlimited sums of money, backed by nothing, at interest, to banking institutions.

Of course, if you were to conduct an activity of this sort, you would be imprisoned as a scam artist and rightly so.

In considering the above description, it is easy to see why the financiers who came up with the concept of the Federal Reserve chose to cloud its purpose. It is also easy to see why they chose to call the institution the “Federal Reserve,” even though it is neither a federal agency, nor is it a reserve. Their goal was to imply a level of credibility that was undeserved.

What’s in it for the Fed

But, why on earth would anyone create such a charade? Well, from the point of view of the financiers who created it, it is a banker’s dream. Imagine, beginning with no money of any kind, writing a cheque backed by nothing and receiving bonds that may be regarded as reserves, then issuing (fiat) currency notes amounting to nine times the value of that “reserve.” Add to this the ability to lend out that fiat currency to banks at interest. In a very short time, you would not only potentially control the financial industry, you would also control decisions made by the government, as it could not function to extreme excess without you.

What’s in it for the Government

Governments, historically, rely on taxation to provide them with money to operate. They do their damnedest to increase taxation over time, but, no matter how much tax they burden their people with, it is never enough to fulfil the desires of any government. They invariably want more money to spend. The creation of debt and the monetisation of that debt allows them to spend unlimited amounts of money. The fly in the ointment is that the increase in money invariably causes inflation, and, since the creation of the Fed in 1913, the dollar has lost over 95% of its value.

If the creation of fiat currency is gradual, the system can generally sustain the increase. However, the more dramatic the increase, the more likely the system will collapse under its own weight. The US government, along with many other governments in the world, have, increasingly, made ever-greater promises for entitlements and benefits to voters, and the money to pay for these entitlements and benefits must come from somewhere. For a time, the government may borrow against the future (for example, using social security receipts for other purposes), but sooner or later, the odiferous effluvia hits the fan.

That time is very soon, and, unfortunately, the people of the US (and other affected countries) are the fan.

What’s in it for the Citizenry

Before we get too cynical here (or have we already?), as long as the process of monetisation is gradual and controlled, there are benefits for some of the public. After all, the entitlements and benefits that have been received by the populations of many countries could never have been paid for through taxation alone. There are quite a few people out there who could never have received their flat-screen TV, had it not been for government largesse.

There are, therefore, some very real benefits, and it must be said that many of them can even be long-term. In fact, a large number of people were born since 1913 and died of old age before 2012, who have escaped the economic calamity that looms in the very near future. However, the benefits that they may have received really represent a “redistribution of wealth.”

If we were speaking instead of free-market capitalism, we would have to state that, over the long haul, the effect of the Fed has been to provide extreme wealth and power to a few clever fellows and some goodies for those who did not work for them, but also, ultimately, to degrade the free-market system to the point of near-collapse.

What remains to be seen is, if there is a collapse in the American monetary system, whether those who are behind the Fed can manage its continuance. If they can maintain the present confusion as to its real purpose, they just may succeed.

If you enjoyed this article, you might like our complimentary report, The Best of Jeff Thomas. Pulling no punches, Jeff shares his thoughts on the greatest threat to gold ownership, finding a bolthole on a budget, as well as the coming hyperinflation. You may download this report immediately in our member’s area. Or, if you are not a member, you can join here.

Tags: federal reserve


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