Money: Inflation, Fractional - reserve Banking
the Federal Reserve System
When things are going all right, we generally accept them.
However, when things are not going all right, we first try to
understand why. This applies not only to our cars, but to our
health, to our government, and to our nation`s economy. Of
major importance today in this regard is our "money
system.''' This essay addresses just that.
1. Introduction 4
2. Inflation 6
3. Fractional - reserve Banking 9
4. The Federal Reserve System 11
5. How the Federal Reserve
System Works 21
6. Afterword 24
7. Definitions 31
8. Selected References 38
Seriously, our country is in real trouble in more
ways than one. Our government no longer
represents the will of our people, instead it is run by
the money cartel that represents the special interests
that control our government by buying votes. We`ve
lost our individual freedoms under the Patriot Act.
The U.S. Treasury is now empty except for I.O.U.s
and only if others continue to buy America`s debts
can America continue to go forward. Most of the
manufacturing is gone to China and elsewhere.
There are few jobs waiting at U.S. manufacturers for
a demand stimulus to put Americans back to work.
We`re facing "stagflation," a sluggish economy
with high inflation and high unemployment, and
with high prices to boot. This situation can possibly
become worse than the Great Depression!
Vitally important as it is, very few people understand
very much about our "Money System," or about
"Inflation," or about our banking system which is
known as "Fractional - reserve Banking." (The
banking practice whereby banks can create money by
issuing an interest-bearing loan and keep a fraction of
their deposits in reserve.) Also, very few people
understand even a little about the "Federal Reserve
System," what it is, and just exactly what it does.
Most people regard these topics as intimidating and
boring, and most people don`t want to hear about
them, let alone know about them.
However, today the public`s attitude may be starting
to change. This is being influenced by today`s
financial crisis. This essay explains each of the
foregoing elements of our money system in easily
understandable ways and in everyday language.
After the explanations of Inflation, Fractional -
reserve Banking, and the Federal Reserve System, is
a discussion of the disastrous economic dilemma now
confronting America, its causes, its consequences,
and what to do about it.
Neither our elected representatives, nor politicians or
government officials, nor members of the Federal
Reserve System, the financial community, or the
mainstream media, who all have a fiduciary duty to
inform citizens with accurate and pertinent
information, have provided a modicum of
information to properly inform the public.
Some relevant definitions are provided and a list of
references for those who wish to learn more is also
The definition of inflation is "an increase in the
money supply," i.e., the relative value of the money
supply has gone down.
Inflation is actually a tax, a most insidious,
immoral, and unequal tax. This is because it falls
most heavily on those who are thrifty, those on fixed
incomes, and those in the middle and lower income
brackets. Also, Inflation punishes those who save.
Inflation is impossible without fiat money. Fiat
money is paper money without any intrinsic value.
The U.S. dollar is a classic example and the Federal
Reserve System creates it. Thus, the Fed generates
our most unfair tax. The Fed has inflated our money
supply almost constantly since the Fed was
established ninety five years ago and during this
period it has destroyed over 95% of the value of the
dollar. For example, something that cost $100 in
2006 would have cost $4.96 in 1913. .
Inflation is generally caused by the money supply
increasing faster than the growth rate of the economy.
Inflation can be effected to a considerable extent by
setting interest rates and by monetary policy. When
the general level of prices rises, each monetary unit
buys less goods and services.
Viewing inflation from another perspective, when a
person`s labor for a given period of time is paid for in
a fixed member of monetary units, the person could
buy less than the person previously could buy with
the same number of monetary units. Understandably,
price inflation devalues the worth of one`s labor.
Thus, inflation is immoral!
The Federal Reserve`s monetary policy, presumably,
is to try to expand the money supply (i.e. the amount
of units of currency) as the economy expands to
accommodate larger volumes of transactions at a rate
that will keep the country in a safe zone between
inflationary boom and deflationary bust. If the Fed
does not inflate enough, it causes a recession, and if
the Fed inflates too much, it results in double digit
inflation. Generally speaking, high rates of inflation
and hyperinflation are mostly caused by high growth
of the money supply.
The inflation rate is tracked using the Consumer
Price Index (CPI). This is misleading since the CPI
excludes food and energy prices. Hence, so-called
core inflation figures do not include these prices,
which have been rising rapidly.
However, there is another more significant way in
which these measurements of inflation obscure rather
than reveal. In the minds of the unknowing public,
inflation is commonly defined as an increase in
consumer goods prices, yet the long run driver of
inflation is an increase of the money supply by the
Our government and the Fed are deceptive in that
they try to get people to focus on prices when
thinking about inflation, but rising prices are a
consequence of inflation, not inflation itself.
Perhaps the most insidious and immoral effects of
inflation are its redistribution of wealth from the poor
and middle classes to the politically well-connected,
namely financial companies, government contractors,
o+il companies, big banks, etc.
This is because the price increases that take place
after growth of the money supply do not occur
simultaneously and to the same degree for everyone.
The tremendous inertia of the economy dictates that
once inflation of the money supply pushes through
price rises to the consumer, price inflation will run
until prices have reached a long run equilibrium.
Those who receive the new money first enjoy a
windfall. These persons are most often the politically
well-connected who receive it before prices have
risen. As they and subsequent recipients spend it,
prices begin to rise throughout the economy well
before the new money has trickled down to most
people. The economy has enormous inertia and it
can take years to respond to monetary policy
adjustment. In the past, the appearance of strong
inflation in the Consumer Price Index (CPI) has been
delayed up to a decade from the initiation of
increases of the money supply.
The average person is paying higher prices while still
earning his old income, which has not yet been
adjusted to account for the new money supply. The
average person is being silently ripped off and
usually doesn`t understand exactly what is happening
to him. Unfortunately, almost no one in the media or
in the political establishment who knows feels an
incentive to tell him.
Since inflation is, in effect, hidden taxation, it
provides funds for the federal government to use as it
chooses. Another detrimental effect of inflation is
that it discourages consumerism, namely an attitude
that discourages acquisition of material goods which
are considered beneficial to an economy.
In the absence of the gold standard, there is no way to
protect savings from confiscation through inflation.
There is no safe store of value. The financial policy
of the U.S., it being not quite a true welfare state, but
still with a little bit of capitalism, requires that there
be no way for the owners of wealth to protect their
3. Fractional - reserve Banking
The business of banking began in Europe in the 14th
century. To meet the growing demand for more
money and more loans, paper receipts were issued
some of which were counterfeit. Thereafter, the
receipts in circulation exceeded the gold held in
reserve and the age of fractional-reserve banking had
Fractional-reserve Banking is the banking practice in
which banks create money from nothing merely by
issuing an interest-bearing loan to the government or
to anyone who is eligible. The banks essentially
create money out of thin air and are required to keep
only a set percentage of their deposits in reserve,
enough to cover their cash flow needs and they have
the choice of lending out the remainder while
retaining the obligation to redeem all deposits on
demand. This practice is universal in modern
The way banks work is they pay a fixed interest rate
on money received on deposits and purchases of, for
example, CDs. Then they in turn, lend it out at a
higher interest rate, the difference being the bank`s
When people deposit funds in a bank to store savings
in the form of a demand claim on the bank, this is
essentially a loan to the bank, hence it is considered a
liability on the bank`s balance sheet. People may
think their money is down at the bank, ready to be
redeemed in cash at any time. However, the funds
may already be largely invested by the bank in
interest-bearing loans and securities. These are
considered assets on a bank`s balance sheet.
In the U.S. today, the minimum fractional reserve is
fixed by the Federal Reserve System at 10%. If the
are unusually large, the bank may raise new funds
from additional borrowings and/or sell assets, or by
other means to avoid running out of reserves and
defaulting on its obligations.
That process can expand the money supply by the
Fed`s making the required reserve percentage
smaller, or in one of or a combination of up to four
1. Attracting more deposits.
2. Using some of the bank`s profits.
3. Selling additional stock.
4. Borrowing money from the Fed.
(This is called going to the discount window.)
The bank`s collateral for these loans is mostly
commercial loans. The bank then converts its new
“loans” into “reserves.” Thus, the practice of
fractional - reserve banking has a cumulative effect
of money creation by banks.
Economists generally tend to agree on the mechanics
of fractional-reserve banking, but they more and
more disagree sharply on its moral and economic
This seemingly fishy process of fractional-reserve
banking may sound like shades of George Orwell, but
this is actually how a Fractional - reserve Banking
4. The Federal Reserve System
The founder of the Rothschild dynasty, Mayer
Rothschild, is quoted as saying: "Let me
issue and create
a nation`s money and I care not who writes
The typical American citizen as well as most
Congressmen and Congresswomen understand
relatively little about our money system. This is
largely because the workings of the system are
extremely complex, information is hard to come by,
and the Fed`s posture and jargon are intimidating. To
most people, the Fed is a complete mystery. Its
operations for, most of them are incomprehensible,
undemocratic, and most reprehensible. Its high time
that our government policymakers, our members of
Congress , and more average people, smarten up and
understand just what the Federal Reserve System is
and how it works.
The Federal Reserve System (also referred to as the
Federal Reserve or the Fed) is the central banking
system of the U.S. Central banks are charged with
the responsibility to implement a country`s monetary
policies. It was established by banking cartelists
creation of what became the Federal Reserve System
in 1913. The legislation establishing it was
shepherded through a carefully prepared
Congressional Conference Committee meeting
scheduled for between 1:30 and 4:30 AM on
December 22, 1913. The Federal Reserve Act was
slipped through Congress on December 22nd when
many members of Congress were on Christmas
holidays and most others who stayed behind in
Washington hadn`t had time to read it An unwitting
or complicit President Woodrow Wilson signed it
into law on Decenber 23, 1913.
The Fed is not part of the federal government and
there are no reserves. It is a quasi-public,
independent, for-profit corporation owned by
stockholders. Because of a provision in the Federal
Reserve Act, the identities of the Class A
stockholders were to be kept a secret and not
revealed. However, it was ultimately learned that
seven European and four New York banks control the
Fed through about 300 stockholders.
There are twelve regional Federal Reserve Banks in
twelve districts. They have 25 branch Banks, and
many member Banks.
First, some background:
Prior to World War I, the banking system in the U.S.
(and in most of the world) was based on gold,
however there were two previous
central banks in our nation`s history, both of which
practiced "fractional banking" at the 10:1 rate and
both of which were deceptive and fraudulent. The
first central bank was the First Bank of the United
States (BUS). It was created in 1791 after bitter
dissent in Congress and was given a 20-year charter.
It misused and abused its charter by defrauding the
public and establishing a legal form of usury. Public
outrage prevented the charter`s renewal.
The second central bank, the Second Bank of the
United States (SBUS) was chartered in 1816 five
years after the expiration of the First Bank`s charter
and it created the money for the country`s westward
expansion. This central bank caused inflation by
encouraging land speculation and creating money for
loans. Then, the central bank made it readily
available to loan to almost anyone, who sometimes
doubled or even tripled their lamd acquisition costs.
The economy boomed. Then, citing the need to
control inflation, the bank shut off the money. This
caused large numbers of foreclosures and business
and personal bankruptcies. The central bank then
seized the assets that secured the loans. SBUS lost its
charter in 1836.
The basic plan for the third central bank, which
eventually became the Federal Reserve System, was
drafted at a highly secret meeting in 1910 at the
private resort of J.P. Morgan on Jekyll Island, a tiny
island off the coast of Georgia.
Seven very rich and powerful members of the
financial elite of the western world (all were
members of the Illuminati, a secret society), bankers
and economic policymakers, including Senator
Nelson W. Aldrich (father-in-law of John D.
Rockefeller, Jr.), then Chairman of the National
Monetary Commission and representatives of the
House of Morgan, Rockefeller, and Rothschild, who
represented an estimated one - fourth of the total
wealth of the entire western world, met secretly to
agreement on the structure and operation of a
banking cartel. A cartel is the concept of business
enterprises joined together to fix prices and prevent
competition, which is alien to the free enterprise
The cartel`s purpose was to influence Congress to
enact legislation that would covertly establish a
private central bank. One of the models for it was
Germany`s central bank.
The cartel`s original agenda was to:
( I ) Maximize profits by minimizing
( 2 ) Make it difficult for new competitors
to enter the
( 3 ) Utilize the police power of government
the cartel agreement.
The reason for extreme secrecy was that had the
public known that rival factions of the banking
community had joined together, it would have been
alerted to the possibility of their cooking up a cartel
agreement, which is exactly what they were doing.
There was considerable opposition to central banking
from many politicians, who were suspicious of a
central bank due to its proponents, i.e., Wall Street`s
"money trust." They knew that governmens and
politicians do not rule central banks, central banks
rule governments and politicians. The more astute
politicians also understood the character and
motivation of the Wall Street bankers.
Therefore, in order to sell the plan to Congress, the
cartel had to be hidden and the name "central bank"
had to be avoided. The word "Federal" was chosen
to make it sound like it was a government operation;
the word "Reserve" was chosen to make it appear
financially sound; and the word "System" was chosen
to conceal the fact that a new central bank had been
created. There were to be four regional banks (later
increased to twelve) so people wouldn`t think that the
Federal Reserve was controlled from New York.
During the last quarter of the 19th century and the
beginning of the 20th century the U.S. economy
underwent a series of banker-initiated mini-
depressions or financial panics which provided a
strong demand for the creation of a centralized
banking system and helped get Congressional support
for a proposed Bill. The last financial panic was
initiated by J.P. Morgan in 1907 by circulating
rumors that America was going broke. This renewed
the demand for banking and currency reforms and
was the main motivation for the central banking
After having been at Jekyll Island for nine days, the
cartelists emerged from their secret meeting with
the groundwork for a central bank in the form of not
one, but two versions, to confuse the formidable
opposition. The first version was incorporated into
Senator Aldrich`s Bill.
An Iluminati-front organization publicly announced
their support for the Aldrich Bill, however the Bill
failed since its sponsor was closely allied with J. P.
Morgan, so the Iluminati went to Plan B, which was
the second version prepared at Jekyll Island.
Meanwhile, Woodrow Wilson won the Presidency
and the democrats gained control of both houses of
Rep. Carter Glass of Virginia met with President
Wilson after his election to prepare a Bill, known as
the Glass Bill, which was actually the Aldrich Bill in
disguise. Now Plan B was set into motion. The
Glass Bill was introduced in the House and it passed.
To avoid the mention of central banking, President
Wilson himself suggested that the twelve regional
banks be called "Federal Reserve Banks"and he
proposed that a special session of Congress be
convened to vote on the Federal Reserve Act.
Senator Robert Owen of Oklahoma drafted a Bill
which was more
comsistent to the suggestions of the bankers, and
Senator Gilbert Hitchcock of Nebraska, called for
elimination of some provisions, namely stipulation
that note redemption be in gold and public ownership
of the regional reserve banks, which would be
controlled by the government.
In the Senate, the Glass Bill became known as the
Glass-Owen Bill. Senator Owen who had earlier
opposed the Aldrich Bill, made some additional
revisions and some points were modified. It was
passed quickly by the Senate and signed into law by
President Wilson on December 23rd.
An hour after the Bill was voted into law, the
Illuminati took control of the American economy.
Eustace Mullins, in his book The Federal Reserve
Conspiracy, wrote: "The money and credit resources
of the U.S. were now in complete control of the
banker`s alliance between J. P. Morgan`s First
National Bank, and Kuhn, Loeb`s National City
Bank, whose principal loyalties were to the
international banking interests."
One of investment bankers` major fields of
investment in the late nineteenth and early twentieth
centuries was underwriting government bonds that
had been issued to support the government`s
obligations to the Fed. This gave them a strong
incentive to pressure and manipulate governments to
levy taxes with which to pay off their bonds.
Hence, also in 1913, the 16th Amendment to the
Constitution was ratified to authorize the income tax.
Its purpose was to create the illusion that real money
had been lent and therefore real money had to be
repaid. The investment bankers worked together to
cartelize commercial banks. Regardless, they arrived
at a cartel agreement that had five stated objectives:
1. Stop the growing competition from the
nation`s newer banks.
2. Obtain a franchise to create money out of
nothing for the purpose of lending.
3. Get control of the reserves of all banks to
prevent their exposure to currency drains and
4. Get the taxpayer to pick up the cartel`s
5. Convince Congress that the cartel`s purpose
was to protect the public.
They realized that the bankers would have to become
the politicians and that the cartel would have to
operate as a central bank. All of the principal nations
had central banks at that time. . While the record
shows that the Fed failed to achieve its stated
objectives, that`s because those were never its true
goals. As for the five previously stated objectives, it
has been an unqualified success.
According to proponents of the Federal Reserve
System and many economists, the previous national
banking system had two main weaknesses: an
"inelastic" currency and a lack of "liquidity." The
Federal Reserve System provided for both. The
function of the Fed is said to foster a flow of credit
and money that will facilitate orderly economic
growth and a stable dollar. Its original stated
a. To give the country an elastic currency.
b. Provide facilities for discounting
c. Improve the supervision of banking.
Its broader objective was said to help counteract
inflationary and deflationary movements. However,
the Fed was deliberately designed as an engine of
If the Fed creates either runaway inflation or a
depression, it can trigger a political crisis that will
lead America to either total fascism, or a return to the
Constitution and a new American golden age of
peace, liberty and abundance.
Contrary to what people have been led to believe,
virtually all of our money is now created as loans,
i.e., computer entries, advanced by private banks,
including member banks of the Federal Reserve
System. Banks create the principal but not the
interest to service their loans. To fund the interest,
new loans are continuously taken out, inflating the
money supply, thereby reducing the value of our
money, and consequently increasing prices. All of
this is true, however the Fed`s primary function is
to convert debt into money. Thus, in a sense, our
money is created out of less than nothing,
Just how the Fed converts debt into money is fairly
complex. It sounds absolutely crazy, since the
process is not intended to be logical but to confuse
and deceive. This is but one of the principal reasons
why the Federal Reserve System is so little
understood by so many of us.
It`s vitally important to stress that this process of
artificial expansion of the money supply is the root
cause of inflation. This expansion then leads to
contraction of the money supply, and, together,
they have produced the destructive "boom-bust"
cycle wherever fiat money existed.
Three years after the initiation of the Federal
Reserve, PresidentWoodrow Wilson said:
"I am a most unhappy man. I have unwittingly
ruined my country. A great industrial nation is
controlled by its system of credit Our system of
credit is concentrated. The growth of the nation,
therefore, and all our activities are in the hands of a
few men … We have come to be one of the worst
ruled, one of the most completely controlled and
dominated Governments in the civilized world no
longer a Government of free opinion, no longer a
Government by conviction and the vote of the
majority, but a Government by the opinion and
duress by a small group of dominant men."
The power of the Federal Reserve System - a system
controlled by a small group of dominant men -
derives solely from its power to issue debt-based
money in the form of U.S. dollars and to charge
interest on their issuance. We are paying our jailors
for our enslavement and are fools for so doing. Who
would have thought - except Thomas Jefferson.
The increasing public awareness of the precipitous
decline in the value of the dollar in recent years
dramatically undercut all the government`s promises
that the system was just fine. It wasn`t. It`s now
long past time for Americans to smarten up and look
beyond the proponents of our fiscal status quo whose
monetary system has destroyed the value of our
dollar and unfairly and mercilessly penalized our
poor and middle class citizens.
Since its inception in 1913, the Fed has presided over
the crashes of 1921 and 1929, the Great Depresssion
of `29 to `39, recessions of `53, `57, ` 59, `75, and
`81, a stock market “Black Monday” in `87, and1000
plus percent inflation which has destroyed over 95%
of the dollar`s purchasing power.
To illustrate, by 1990, an annual income of $10,000
was required to buy what took only $1,000 in 1914,
assuming one was buying like goods.. That loss in
value was transferred to the federal government in
the form of hidden taxation. And the Fed was the
mechanism by which it was accomplished. The
government held back more money than they allowed
to flow into the system which was the hidden tax.
The Banking Act of 1935 amended the Federal
Reserve Act, changing its name from "Act" to
"System" and reorganizing it. Headed by a seven
member Board of Governors, appointed by the
President and confirmed by the Senate for a 14 year
term, the Board acts as overseer to the nation`s
money supply and banking system. The Federal
Open Market Committee comprised the Board of
Governors, the President of the Federal Reserve Bank
of New York, and four other Reserve Bank
Presidents. There are 25 branch Banks and many
member banks. All Federal Banks are members.
Since the Federal Reserve System can create all the
money the federal government could ever want, the
federal government could operate without levying
any taxes whatsoever. The obvious question is,
“Why does the federal government bother with taxes
Essentially for three reasons:
(1) Taxes fo not have the same effect on the
monetary system as "fiat" money.
(2) To perpetuate public ignorance, which
is essential to the success of the scheme.
People might otherwise wake up to the
fact that inflation is actually a tax.
(3) The second principal purpose of federal
taxes, particularly progressive taxes, is
to redistribute the wealth from one class
of citizens to another. These override
the free market and bring society under
the control of the master planners
within government. (It`s sometimes
said that progressive taxes are weapons
by which elitist social planners can
wage war on the middle class.)
5. How the Federal Reserve System Works
These six steps may be considered an over-
simplification of just how the Fed creates our money.
Nonetheless, they present the essentials and should
serve the purpose.
1. The federal government creates a bond,
sometimes called a Treasury note, and gives it to the
Federal Reserve System.
2. The Fed then writes a check to Congress for this
and all government bonds and other debt obligations
it has and it creates “fiat” money to back up the
check. (Fiat money is money created by the order of
government with nothing of tangible value backing
3. The Federal Reserve check received by the
government is then deposited in the government`s
account in one of the Federal Reserve banks, where it
is transformed into many government checks and
used to pay government expenses.
4. Recipients of the government checks deposit these
checks into their own bank accounts and these
deposits are reclassified as "reserves." These checks
are the means by which the first wave of fiat money
enters the economy.
5. Commercial banks are required by the Fed to hold
10% of their deposits in “reserve.” 90% of these
deposits are called “excess reserves" and are
available for lending. These excess reserves are
converted into bank loans which are made with new
money created out of thin air for that purpose. This
increases the nation`s money supply by ninety
percent of the bank`s deposits. When this second
wave of new money moves into the economy, it
comes right back into the banking system in the form
of more commercial bank deposits.
6. The process now repeats itself but with slightly
smaller numbers. It takes about twenty eight times of
deposits becoming loans becoming deposits
becoming more loans, etc., for the process to play
itself out. The amount of fiat money created by the
Fed is approximately nine times the amount of the
original government debt. The total amount of fiat
money created by the Fed and the commercial banks
together is approximately ten times the amount of the
underlying government debt.
This is exactly how the Federal Reserve System
creates America`s money.
As the new money enters the economy it reduces the
value of all money in the nation. The result is the
same as if purchasing power had been taken from
people in taxes. This process is actually a hidden
tax equal to up to ten times the national debt.
Congress and the Fed essentially have a partnership
in which the Fed collects interest on the money which
was created and Congress has access to unlimited
funding without telling voters that they are actually
being taxed, since this is being done by inflation.
One of the reasons the Fed was created was to enable
Congress to spend money without the public knowing
it was being taxed. Americans have paid a
completely hidden tax over the past 100 years that
was equal to many times the national debt without
ever realizing it. This was in addition to their
federal income, excise, and import taxes.
If ever there was a cockamamie scheme to delude and
confuse the American people, this certainly takes the
cake! It isn`t any wonder that very few people
truly understand it! The $64 questiion is, who
benefits from all of this?
The Fed`s Class A stockholders are the major
beneficiaries. Each year, billions of dollars are
earned by them from U.S. tax dollars which go to the
Fed to pay interest on bank loans. The members
of Congress are also beneficiaries in that they have
unlimited funds with which to perpetuate their power.
Of further benefit are officials within the Federal
Reserve System who have been able to harness the
American people to the yoke of modern feudalism
without their knowing it.
The Federal Reserve System is a privately held for-
profit corporation owned by stockholders. It is our
central bank, and it has the exclusive, legal control of
America`s money supply. It is not part of our federal
government. It is operated for the benefit of its
owners under the guise of protecting and promoting
the public interest. Furthermore, the Fed`s actions
are, to say the least, not only undemocratic, they are,
for the most part, immoral and dishonest.
The Fed is the starting point:
The chain of events begins with fiat money created
by our central bank, the Fed, which leads to
government debt, which causes inflation, which
destroys the economy, which incrementally
impoverishes our citizenry, which provides an
excellent excuse for increasing governmental power,
which is an on-going process culminating in
Today, just ninety five years after the Fed was
created by an Act of Congress, ostensibly to stabilize
our economy by establishing and controlling
monetary policy, i.e., the manipulation of the money
supply, credit, and interest rates, among other things,
it has clearly failed in its stated objectives. And, the
major cause of the present growing economic
crisis and the reason for Amerca`s fall from power
can be attributed to the Federal Reserve System.
This is not to say that the Bush Administration`s and
Congress`s deregulatory philosophy, plus the
creativity and greed of the "Wizards of Wall Street"
did not horribly compound the economic situation.
Why was the Fed the major cause of today`s
Because the Fed set the stage for the housing bubble,
which is where our nation`s dilemma really began.
The Fed`s policy of artificially cheap credit caused
the housing bubble.
When one considers the conspiratorial circumstances
under which the Fed was created, why and by whom
it was created, its unstated objectives, and who owns
the Fed, and when one analyzes its actual
performance over the years, it becomes evident that
the Fed is merely a privately-owned and very
powerful cartel with a government façade. The Fed`s
stockholders have already profited enormously from
its business agenda, which agenda may very well be
nearing its end.
Each year, billions of dollars are "earned" by the
Fed`s Class A stockholders from U.S. tax dollars
which go to the Fed to pay interest on bank loans.
The Federal Reserve Act was enacted by Congress
and sigmed into law by President Woodrow Wilson
who later bitterly regretted what he had done to
Nonetheless, fiscal policy rather than monetary
policy is our nation`s present problem. The growth
of consumer debt has exceeded the growth of
consumer income to such an extent that an increase in
consumer credit and bank lending probably isn`t
possible. Americans can no longer borrow more in
order to consume more. American consumers are
overburdened with debt.
The expensive bailout requirements grow, and on top
of them now come the much needed infrastructure
and stimulus projects, and both are on top of the
trillion-dollar fiscal and current account deficits.
The question is who will finance this? Not America.
America is tapped out. The U.S. savings rate is zilch.
Home mortgage foreclosures are in the millions.
Unemployment is already well over 10 million and
For years, the federal government has depended on
foreigners, mainly Japan, China, Russia, and the Gulf
States to finance the budget`s shortfall. But, how
much longer can these countries be depended upon to
do so? While much of China`s economy depends on
exporting to America and China remains America`s
largest creditor, it is already feeling the pinch. It
recently sent a signal that that time might be drawing
If the rest of the world does not finance our growing
bailout and stimulus package, not to worry, there`s
always the Federal Reserve to fall back on. It`s
unlikely they`ll fail to come up with the money for
our government to pay its bills even though they`re
scraping the bottom of the barrel. They always have
come through. All it will cost "we the people" is a
little interest and a little more devaluation of our
money. Hyperinflation be damned. This will be
relatively painless, since our economy`s enormous
inertia will delay most price rises until long after the
Fed has pumped up the money supply. Our children
and grandchildren will bear the brunt.
Unless the Plunge Protection Team (PPT) which was
created by President Reagan in 1988 formally called
the Working Group on Financial Markets (WGFM)
has something new up its sleeve.
The Exchange Stabilization Fund (ESF), the
Counterparty Risk Management Policy Group
(CRMPG), and the Plunge Protection Team (PPT)
are organizations colluding with our federal
government to rig markets. The PPT includes the
Secretary of the Treasury, the Chairman of the
Federal Reserve, the Chairman of the S.E.C.. and the
Chairman of the Commodity Futures Trading
Commission. It uses Treasury funds, i.e., taxpayer
money, to make the markets look healthier than they
are, keeping investors in the dark about how shaky
the market really is. The PPT is not accountable to
Congress. Their money is funneled through the Fed`s
"primary dealers," a group of about thirty favored
Wall Street brokerage firms and investment banks.
The device used is a type of loan called a "repurchase
agreement" or "repo" which is a contract for the sale
and future repurchase of Treasury securities.
Sometimes the recipients of this free money never
have to repay it.
In the opinion of the noted and highly regarded
economist, Nouriel Roubini, "Today, we in the U.S.
have a subprime financial system. Our various forms
of debt all suffer
from some or all of the same traits that first surfaced
in the housing market."
For example, a few very big banks are responsible for
a massive investment scheme known as "derivatives"
which now total hundreds of trillions of dollars.
(Derivatives are contracts whose value is based on
another underlying financial asset.) Were there to be
a massive "derivatives" default today, there isn`t
enough money in the total global economy to bail out
Throughout the 90s, Roubini studied the economies
of Mexico, Korea, Brazil, Russia, and several
southeast Asian countries, all of which had financial
crises. While each crisis was different, most had
huge current-account deficits, which they typically
financed by borrowing from abroad in ways that
exposed them to the national equivalent of bank runs.
Most of them had poorly regulated banking systems
plagued by excessive borrowing and reckless lending,
weak corporate governance, and excessive cronyism.
Exactly how did our country get into this
economic mess in the first place?
In every previous instance, the cause of serious
economic crises was expansive monetary policy
that generated a boom in an asset. Too-easy
monetary policy and too-low interest rates induced
ordinary people to acquire whatever they desired in
an asset boom. Call this "instant gratification," if you
will. Then, when monetary policy tightens, the boom
This time, it was the housing boom`s turn to be the
asset. The serious trouble began when the Fed
lowered interest rates to nearly zero in 1993. The
Fed`s policy of artificially cheap credit caused the
Housing bubble. This caused people to feel
wealthier, to live beyond their means, and to make
When the Fed artificially lowers interest rates, it
misrepresents economic conditions and misleads
people into making unsound investments. These are
called malinvestments. They would not have been
undertaken were it not for the Fed`s false signals,
artificially lowering interest rates. This action
encourages economic booms and sets the stage for an
What is at the root of the basic economic problem
today is not a shortage of liquidity. It`s the opposite.
For too many years there has been too much
liquidity. The basic problem is in the credit market.
The market lacks confidence.
Anne Schwartz is 92 years old, old enough to
remember the period from 1929 to 1933. She may
know more about monetary history and banking than
anyone alive. She co-authored with Milton Friedman
"A Monetary History of the United States." (1963)
Ms. Schwartz says, "today`s basic problem in the
credit markets is that banks don`t know who is still
solvent and who isn`t. However, the Fed is treating
this as a liquidity problem. To assume that the whole
problem is lack of liquidity misses the point. Today,
the banks have a problem on the asset side of their
ledgers, "all these exotic securities that the market
does not know how to value."
When bankers refuse to lend not only to their best
customers, but to each other, apparently fear has
become stronger than greed. What`s causing this fear
is uncertainty over the underlying value of securities
backed by home mortgages. The collapse of the
credit default swap market mean`t that bankers could
no longer establish the true state of their assets,
without being in default of Basel II.
Professor Joseph Stiglitz, Nobel laureate and former
Chairman of the White House Council of Economic
Advisors, at the 2008 World Economic Conference in
Davos, blames "the whole U.S. economic
establishment for failing to regulate the housing and
credit markets adequately, allowing huge imbalances
to build up. He said that the Federal Reserve and the
Bush Administration didn`t want to hear anything
about these problems."
Other than what has already been said in this essay,
mostly about the Fed, what other factors have
caused our economy to self-destruct? And, how
could our Congress have been so derelict in its
The answer is that some very serious mistakes were
made by some of our previous administrations,
both Democratic and Republican, all the way back to
President Jimmy Carter and the Community
Reinvestment Act. and most recently by the Bill
Clinton and current Bush, Jr. administrations
pumping up the home building industry and pushing
for the dream of home ownership, particularly among
minorities. Lack of both government and Federal
Reserve regulations concerning home mortgage
lending practices and insatiable Wall Street greed
were further factors.
The credit default swap was invented a few years ago
by JP Morgan Chase Bank in New York. The "credit
default swap" market is now a $62 trillion market,
nearly four times the size of the entire U.S. stock
market. A credit default swap (CDS) is a credit
derivative or agreement between two counterparties.
Swaps have long been a profit gold mine for Wall
Street. They are totally unregulated and there are no
public records to show whether sellers have the assets
to pay out if a bond defaults. Sellers of protection
aren`t required by law to set aside resources in the
CDS market. The Commodity Futures Trading
Commission (CFTC) wanted to regulate Swaps but
the financial industry lobbyists convinced Treasury
Secretary Larry Summers and Fed Chairman Alan
Greenspan to allow Swaps to remain unregulated.
The key to enabling the huge global
growth in credit during the last decade can be tied
directly to the sale of credit default swaps without
All the government programs since the Great
Depression were mean`t to prevent recessions and
depressions. Yet, all that was done was to set the
stage for the greatest economic disaster in history. In
retrospect, perhaps the biggest and most fundamental
mistake was that the premises of Keynesian
economics, particularly central economic planning,
which our policymakers subscribed to, failed.
Beside the imploding banking system, another
problem is that the U. S. federal debt is close to the
point at which just the interest on it is more than the
taxpayers can afford to pay. What`s more, by failing
to deal with the subprime crisis, the Bush regime and
Congress have added a financial crisis to the
exhaustion of consumer demand and the problems of
financing huge trade and budget deficits.
The answer to the second question regarding the
failure of our Congress in disregarding the Fed`s
arrogance was not exactly dereliction of duty. It was
more Congress`s gross lack of understanding of our
nation`s money system, and even far less
understanding of the intimidating complexities of the
Federal Reserve System. Admittedly, authoritative
information about the workings of the Fed is hard to
obtain by anyone, including members of Congress.
One of the reasons for this is that perpetuating public
ignorance is essential to the success of some of the
Fed`s practices. Besides, the Fed was originally
designed to confuse and deceive. In this it has been
Nouriel Roubini says that "we have a subprime
financial system." True, that`s part of the problem.
Tom Friedman is getting warm. In the recent New
York Times he says that "our "present crisis is not
just a financial meltdown crying out for a cash
injection. We are in much deeper trouble. That`s
why we don`t just need a bailout. We need a reboot.
We need a buildout. We need a build up. We need
a national makeover."
Congressman Ron Paul says, "The basic problem is
that the proponents of big government require a
central bank in order to surreptitiously pay bills
without direct taxation. Raising taxes would reveal
the true cost of big government, and the people would
revolt. A country cannot forever depend on a central
bank to keep the economy afloat through constant
money supply growth." Eventually the system will
fail to respond and we`ll find ourselves in what
economists call a liquidity trap, where the Fed cannot
input money into the economy because its monetary
policy no longer works.
Congressman Paul adds,"Not until the excess debt
and malinvestment is liquidated and we restore the
principles of the Comstitution, limit government
power, restore commodity money without a Federal
Reserve System, reject world government, and
promote the cause of peace by protecting liberty
equally for all persons. Freedom is the answer."
I might add that the principles of the Constitution
were not many, e.g. fiscal prudence, sound money,
separation of church and state, and a limited military
and limited government. I might also add that the
reason the Federal Reserve System still exists is that
% of our people don`t even begin to understand it.
Ron Paul, for one, tells it like it is! Fortunately, there
are also others with new ideas and alternatives that
could take advantage of the bankers` follies that are
causing the collapse of our financial system.
Fortunately, this is now giving us an unexpected
opportunity to focus on and readdress our money
system. However, much more of the populace will
have to wake up, turn off the TV, and acquire a
reasonable understanding of money and banking,
including an understanding of commodity money.
Fortunately, free speech is still available on the
incredible Internet, and in independent media, and in
books. This requires that "we the people" must all
pitch in, get organized and develop a formidable
action plan. .
Adjustable Rate Mortgage (ARM) - A type of
mortgage loan program in which the interest rate and
payments are adjusted as frequently as monthly.
Autarchy - Unrestricted rule or power.
Bailout - A rescue from financial difficulties.
Balance of Trade - The difference between exports
and imports of goods and services.
Basel II Accords - Throughout the world, banks
must comply with what are known as Basel II
regulations. These regulations determine how much
capital a bank must maintain in reserve. The riskier
the loans a bank owns, the more capital it must keep
Basel Bank for International Settlements - The
supervisory organization of the world`s major central
Bear Market - A decline of at least 20% in the
Standard & Poor 500 Stock Index.
Bubble - An illusionary iinflation in price that is out
of proportion to underlying values.
Budget Deficit or Surplus - The difference
between tax revenues and expenditures.
Capitalism - A social and economic system of
political freedom based on the recognition of
individual rights and in which all property, including
the means of production, is privately owned or owned
by corporations, and operated for profit in a free
market economy. It is the only moral and just social
Cartel - An association formed to maintain high
prices and restrict competition. A community of
interest among businessmen in the same field, a
mechanism for coming together as partners at a high
level and to reduce or eliminate competition.
Central Bank - The government approved
institution responsible for a country`s monetary
Collectivism - The social concept that the group is
more important than the individual and that
government is justified in any act so long as it is
claimed to be for the greater good of the greater
number. Collectivism and freedom can be viewed as
"mortal enemies." Socialism, fascism, nazism,
welfare-statism and communism are its most notable
Commodity Money - Money whose value comes
from a commodity out of which it is made.
Communism - A system of government for a
classless society in which there is communal
ownership of all property including basic economic
resources, wherein the state plans and controls the
economy and a single part
Counterparty - The other party that participates in
a financial transaction.
Counterparty Risk Management Group
(CRMPG) - A private fraternity of New York
banks and investment houses that was set up to bail
out its members from financial difficulties by
manipulating markets with the approval of the U.S.
Government and the Federal Reserve.
Currency - Money in any form when used as a
medium of exchange, facilitating the transfer of
goods and services.
Deflation - A contraction in the supply of money or
credit and debtors can no longer fulfill their debt
Demand Deposits - Deposits that can be withdrawn
at any time. Also callef Transaction Deposits.
Derivative - A financial instrument whose
characteristics and value depend on the
characteristics and value of an "underlier." Familiar
examples are "futures" and "options'"
Discount - The difference between the face amount
of a note or mortgage and the price at which the
instrument is sold.
Exchange Stabilization Fund (ESF) - A fund
controlled by the Secretary of the Treasury to keep
sharp swings in the dollar`s exchnge rate from
"upsetting" financial markets.
Federal Reserve System - The central bank of the
Fiat Money - Legal tender, especially paper
currency, authorized by a government but not based
gold or silver.
Fiscal Policy - Decisions by the President and
Congress relating to taxation and government
Fiscal year - The U.S. government`s fiscal year
begins on October 1 of the previous year and ends on
Free Trade - Trade between nations unrestricted by
import duties, esport bounties, domestic production
subsidies, trade quotas, or import licenses.
Fractional - reserve Banking - The banking
practice whereby banks can create money by issuing
an interest-bearing loan and keep a fraction of their
deposits in reserve.
Fraud - A wrongful or criminal deception intended
to result in financial or personal gain.
Futures Contract - An agreement to buy or sell a
specific amount of a commodity at a particular price
on a stipulated date.
Giro Banking - 100% reserve banking.
Gold Standard - A monetary system in which
currency is convertible into fixed amounts of gold.
Gross Domestic Product (GDP) The sum total of
the monetary value of all goods and services bought
and sold in a given year.
Hedge Funds - Imvestment vehicles that pursue
returns on their underlying investments within the
financial markets, e.g., stocks, bonds, commodities,
currencies, derivatives, etc. and include shorting,
leveraging, arbitrage, swaps, etc. They are typically
limited partnerships that are used and restricted to
accredited investors, i.e., wealthy individuals and
institutions. They are similar to mutual funds but are
allowed to use aggressive strategies, such as above,
that are unavailable to mutual funds.
Hyperinflation - Inflation that`s rapid and out of
Illuminati - A secret society founded in Germany
soon after 1776. The Order of Illuminati is said to be
a secret society within a secret society. Conspiracy
theorists propose that world events are being
controlled and manipulated through present day
governments and corporations by this secret society.
In this context, Illuminati is often used to represent
the nations of the world to a New World Order
(NWO) in order to further the cause of peace..
Inflation - A persistent decline in the purchasing
power of money.
Infrastructure - The basic facilities needed for a
country to function.
Legal Tender - Money that must legally be
accepted in the payment of debts.
Leverage - The use of borrowed funds to increase
LIBOR - The London Interbank Offering Rate.
The interest rate that banks charge each other for
loans, usually in Eurodollars. LIBOR is the primary
benchmark for interest rates around the world.
Liquidity - The ability of an asset to be converted
into cash quickly and without any price discount.
Also, the amount of money available for investment.
Liquidity Trap - A situation in which prevailing
interest rates are low and savings rates are high
making monetary policy ineffective. The term was
coined by John Maynard Keynes.
Margin - Borrowing money from your broker to
buy a stock and using your investment as collateral.
Margin Call - A broker`s demand on an investor
using borrowed money to deposit additional money
or securities to bring the margin account up to a
certain minimum balance.
Malinvestment - An increase in the suppl;y of
money in the economy which is not from consumer
demand. A misallocation of resources into sectors in
which there is insufficient demand.
Manufacturing Trade Index (MTA) - The USBIC
Manufacturing Trade Index tallies the monthly trade
balance for fifty core American lndustries, presents a
monthly total for 50 sectors combined, and spotlights
the "best" and "worst" performers.
Monetary Policy - Decision by the Federal Reserve
System to expand or
contract the supply of money or credit.
Monetize - To convert into money. To finance with
Money Market - The trade in short-term, low-risk
securities, such as certificates of deposit and U. S.
Money Supply - The total amount of money
available in the economy at a given time, primarily
represented by currency in circulation, funds in
checking and savings accounts, and money market
mutual funds. The Federal Reserve System classifies
it in three monetary aggregates, M1, M2, and M3,
ranging from the narrowest definition of liquidity
(such as currency and checking account balances).
The Fed ceased publishing M3 statistics in March
2006 despite objections that M3 was the best
indicator of how quickly the Fed was creating
Mortgage - A loan to finance the purchase of real
National Debt - The sum total of government
borrowings. It excludes unfunded debt, namely
entitlements, i.e., Social Security, Medicare,
Oligarchy - Government by a few.
Plunge Protection Team (PPT) - Formally called
the Working Group on Financial Markets (WGFM)
was created by Preasident Reagan in 1988 to make
the markets look healthier than they are.
Plutocracy - Government by the rich.
Ponzi Scheme - A fraudulent scheme in which
investors are paid with the money of later investors,
rather than from profits.
Posse Comitatus - A statute preventing U.S. active
military from participating in American law
Producer Price Index (PPI) - Measures changes in
wholesale prices, published by the Bureau of Labor
Statistics. Formerly called the Wholesale Price
Index, or (WPI).
Pyramid Scheme = A fraud based on recruiting an
increasing number of investors.
Repo or Repurchase Agreement - A contract for
the sale amd repurchase of Treasury securities.
Repo Rate - The discounted rate at which a central
bank repurchases government securities. Sometimes,
a central bank makes a decision regarding the money
supply level and the appropriate repo rate is
determined by the market.
Republic - A political order in which the supreme
power lies in a body of citizens who are entitled to
vote for officers and representatives who are
responsible to them.
Reserve Currency - Currency kept in reserve by a
government for the payment of international debts.
This status was given the U.S. dollar by the Bretton
Woods agreement of 1944.
Reserve Requirement - The percentage of funds
the Federal Reserve Bank requires that member
banks maintain on deposit at all times.
Securitization - Mortgage buying entities that take
on the risk, package loans, and issue mortgage-
Security - A type of transferable interest
representing finncial value.
Short Sale - Borrowing a security and selling it in
the hope of repurchasing it more cheaply before
repaying the lender.
Socialism - Social organization advocating state or
collective ownership of the means of production and
distribution of goods.
Subprime Mortgage - a mortgage granted to a
borrower with a low credit rating, or whose credit
history is not sufficient to get a conventional, or
Supply - side Economics - A school of
macroeconomic thought that believes economic
growth can be most effectively created by
incentivising people to produce more, essentially
cutting taxes of those with high income and capital.
Conversely, Keynesian macroeconomics contends
that tax cuts should be used to increase demand not
supply and should be targeted at low income
Stagflation - Sluggish economic growth coupled
with high inflation and high unemployment occurring
Swaps or Credit Default Swaps (CDS) -
Insurance contracts that financial institutions buy
from other financial institutions to protect themselves
against losses in the event of a default on securities
they may hold. The market for CDS Swaps is
completely unregulated. The seller does not have to
have capital to back up the insurance it sells. This
market ballooned because hedge funds found them
Tariff - A tax on imported or exported goods.
Term Deposit - A deposit held at a bank for a fixed
Time Deposit - A deposit that the depositor can`t
have back for a certain period of time.
Treasury Securities - Bills, notes, and bonds issued
by the U.S. Treasury.
Trust - A combination of firms or corporations for
the purpose of reducing competition or controlling
prices throughout a business or an industry.
Usury - Charging an exorbitant or illegally high
interest rate on a loan.
Velocity of Money - The rate at which money
changes hands. The average frequency with which a
unit of money is spent in a specific time period.
- The premise that a cut in tax rate would result in
increased tax revenues. An extreme version of
Supply Side Economics used by George H.W. Bush
in the 1980 election campaign to deride Reagan`s
"Supply Side" policies
8. Selected References
The Case Against the Fed by Murray N. Rothbard
A History of Money and Banking in the U.S. by
Murray N. Rothbard
What Has the Government Done to Our Money? By
Murray N. Rothbard
Secrets of the Temple: How the Federal Reserve
Runs the Country by Willian Greider
Thhe Creature from Jekyll Island by G. Edward
The Revolution - A Manifesto by Ron Paul
The Federal Reserve Comspiracy by Eustace
Debt and Delusion by Peter Warburton
Bailouts and Bail-Ins by Noriel Roubini
How the Federal Reserve Runs the US by Steephen
The Web of Debt - by Ellen Hodgson Brown
597 Este Es Road
Ranchos De Taos, NM 87557