The Honorable Dr. Ron Paul
Early on in his book “End the Fed” Dr. Ron Paul makes the following statement: “Everyone should have an intense interest in what money is and how it is manipulated by the few at the expense of the many. Money is crucial for survival. It is necessary for maintaining a free society. A healthy economy depends on it. Limiting political power is impossible without it. Sound money is essential for preventing unnecessary wars. Prosperity and peace are impossible in the long run without it. To understand money, one absolutely must understand what a central bank is all about. In the United States, the central bank is the Federal Reserve, the instrument by which our money and credit are constantly manipulated for the benefit of a privileged few.” (End the Fed, pp.3-4).
He continues: “Over the years the Fed has been granted ever more leeway in the means it uses to inflate the money supply. It can now buy just about anything it wants and write it down as an asset. When it buys debt, it buys with newly created money. It maintains a strict system of low-reserve ratios that allows banks to pile loans on top of deposits as the basis for ever more loans.” (End the Fed, p 29).
So, have you ever wondered about the mysterious world of banking? Have you ever thought about where your money comes from and where it goes? Have you ever really thought about what your money really is and what it is not? Have you ever really taken the time to question what you’ve always been told about money and banks, be it from our political elites or from the banksters themselves? Really: even in the midst of this global economic crisis, have you really taken the time to learn about your money and your bank? You should, because what you don’t know about your bank and your money could hurt you.
Here is a question to begin with: Have you ever really thought about why we need to have the FDIC (Federal Deposit Insurance Co.) if there is nothing wrong with our banking system? We always assume that whenever we wish we can just show up at a branch of our bank and slip our card into the ATM or write a check and we can withdraw as much of our money as we want, even up to the total sum we have deposited. After all, we’ve always assumed and been told that when we open an account, say for example a demand deposit (standard checking account) that the money is there for our use, that it is obviously ours, and that we can demand its redemption at any time, without notice. We’ve either been told or led to believe that once we deposit our money in a bank it is there for safe keeping, until such time as we, it’s owners, should decide to utilize it for whatever purpose we should choose. If this is indeed so, then why would we ever need the FDIC to insure our money, now up to $250,000 per account, if it is just being stored there in an account? This is one of those things that ought to raise a red flag, because although on the surface it seems benign, once one scratches even a little bit below that surface one soon discovers a mountain of evidence that only leads to more questions, and one of the best-kept open secrets of all time. What is that secret? The secret is the fact that our banks are inherently insolvent. The reason is called fractional reserve banking. The primary culprit is the Federal Reserve.
How can that be? First, just think about it: why else would we need a guarantee that our deposits are insured by the FDIC - which really means that if the bank should fail then the Federal government will replace the money we had previously deposited (presently up to the sum of $250,000 per account) and that had been “lost” in the failure of the bank. It begs the question: what situation could possibly arise necessitating a guarantee from the Federal government to replace our money? Why would a bank fail? How could a bank fail? Isn’t their purpose just to safeguard our money that we have deposited to their care and safekeeping?
Actually, no. Their purpose it to make money, and the only thing most of these banks, primarily the mega-banks, like more than making money is making a lot of money. How do they make money? Buy lending out the money we deposit in accounts. Not only that, but they lend out more money than they actually have on hand in cash reserves. That is the essence of fractional reserve banking. As unbelievable as it sounds, this is not only legal but is the accepted system of banking encouraged by the Federal Reserve. Needless to say, the practice is extremely risky and inflationary. Indeed, were you or I to act in our own business in accordance with the dictates of fractional reserve banking – without a charter from the government to legally act as a bank, of course – it would be called fraud.
Simply put, the method works thus: Let us say you deposit the sum of $1,000 into bank X. Bank X issues you a warehouse receipt for you to demand your money at a time of your choosing. There is nothing that seems abnormal thus far. However, that is because most people who deposit money into bank accounts stop the thought process there and do not realize that the Federal Reserve allows for the banks to use your money as a “base” upon which they can legally “pyramid” more “money” that will be loaned out to other parties. How do the banks get this “money” which they pyramid? They quite literally create it out of thin air.
The noted free-market economist Murray Rothbard states that the modern system of fractional reserve banking is a system where the loan banker is “taking someone else’s money and lending it out at the same time that the depositor still thinks it is available for him to redeem. Or rather, even worse, the banker issues fake warehouse receipts and lends them out as if they were real warehouse receipts represented by cash. At the same time the original depositor still thinks that his warehouse receipts are represented by money available at any time he wishes to cash them in. Here we have the system of fractional reserve banking, in which more then one warehouse receipt is backed by the same amount of gold or other cash in the bank’s vaults. It should be clear that modern fractional reserve banking is a shell game, a Ponzi scheme, a fraud in which fake warehouse receipts are issued and circulate as equivalent to the cash supposedly represented by the receipts.” (The Mystery of Banking, pp. 96-97).
Currently the required reserve ratio on transaction accounts is ten percent. What this really means is that for every $10.00 issued in credit or loans the bank must have only $1.00 in reserve either on hand either in cash in the bank’s vault, or in combination with its reserve account with the Federal Reserve. It also leans that a commercial bank may pyramid up to ten times what it has in reserve. For example, suppose bank X holds $1 million in reserve between the cash in its vaults and what it has in its account with the Fed. In accordance with the ten percent required reserve ratio bank X may now pyramid credit to loan out to other parties on top of that $1 million to total an amount not to exceed $10 million. This means that while the bank physically holds $1 million, it can issue credit and loans by literally creating an additional $9 million out of thin air. Of course bank X will require repayment of the principle plus interest – a principle that it created from nothing. Thus bank X creates the addition $9 million at no cost to itself out of nothing, yet the party to whom the “new money” is loaned out to must repay the principle and interest with real money.
What is worse, and will be discussed in depth in a later piece, is that this is precisely the practice fundamentally responsible for the boom and bust business cycle, and the inflation-contraction schedule that seems to never end, because in modern times it is driven almost entirely by the policies of the central bank, in our case, the Federal Reserve. Yet, many misguided economists and academics, as well as the self-serving political elites, falsely portray this system a capitalistic, when it is absolutely nothing of the sort, because by virtue of its existence the central bank receives special authority and special favor from and with the government which, in effect allows, it to regulate the commercial banks by manipulating reserve ratios and interest rates in a manner specifically aimed at inflating the money supply and fostering the conditions for a “boom” cycle. The central bank also has the monopoly on the creation of currency, that is, in our case making dollars by printing them. The central bank by setting a reserve ratio also grants the commercial banks the privilege of creating “money” through creating credit, which is what is pyramided atop the reserves and loaned out.
The Federal Reserve, the central bank of the United States, is enabled in its misguided, deceitful and destructive mission by the political elites of both parties, most of whom are not even curious about the topic of money, central banking or fractional reserves. Indeed, Dr. Paul points out: “Many of the people who are supposedly in charge of monitoring the system are surprisingly ignorant about even the most basic aspects of how the system works... This ignorance is what allows conservatives and liberals alike to spend, borrow, tax and inflate to finance their various programs, both foreign and domestic.” (End the Fed pp. 114-115).
The situation is further complicated by the fact that the dollar has not been tied to gold or any other commodity since 1971. It is a purely fiat money, which means that its value or perceived worth is wholly arbitrary. It is worth what people will pay for it, and thus its value is tied only to the perception of the monetary policies of its issuer, the Federal Reserve.
Fractional reserve banking has been in practice since the Bank of England instituted it in 1694. It has never succeeded in creating a stabilized economy because, of course, of its inherent insolvency. Early on the practice was employed with some real gold reserves on hand in order to boost confidence in the institution and the practice; however, once the banks became over extended or fully “loaned up,” and their financial position was correctly perceived by the public as being too unstable to last, the inevitable flood of depositors would demand redemption of their notes in gold specie which, of course, the bank did not possess. Thus, the bank would suspend payment in gold specie and would only issue notes that were given “legal tender” status, meaning that one was bound by law to accept the paper issue just as one would accept hard gold.
The only real difference between the modern American approach and the original is the current absence of gold as a base for value of the dollar. Hence, the modern American approach is fraught with even more risk than the original, and we are now paying the price.
Thomas Paine once wrote: “But when an assembly undertakes to issue paper as money, the whole system of safety and certainty is overturned, and property set afloat. Paper notes given and taken between individuals as a promise of payment is one thing, but paper issued by an assembly as money is another thing. It is like putting an apparition in the place of a man; it vanishes with looking at it, and nothing remains but the air. As to the assumed authority of any assembly in making paper money, or paper of any kind, a legal tender, or in other language, a compulsive payment, it is a most presumptuous attempt at arbitrary power. There can be no such power in a republican government: the people have no freedom — and property no security — where this practice can be acted.” (The Complete Writings of Thomas Paine, pp. 405ff).
For more info: Economics Ron Paul End the Fed Murray Rothbard Mystery of Banking Ludwig von Mises Austrian Economics
Comments