Posted by
Jack Fisher on Tuesday, July 14, 2009 3:29:06 PM
Few things are more powerful in a civilization than money. For better or for worse, money is a fundemental building block of society and a key engine to prosperity. It is also a major source of power. Whoever has money has the potential to wield power. So in a free society, one would expect the value and power of money to be limited in the same spirit as government is limited. Unfortunately, the opposite is true.
The power to control the supply of money and regulate the value of the dollar rests in the hands of the Federal Reserve. This single independant body of unelected officials meets in secret and carries out it's policy with little oversight and next to no accountability. They have the authority to print money out of thin air and destribute it as they see fit. They also have the ability to adjust interest rates to their whims. They claim to be a defender of the market when they are by definition a mirror opposite of the market. Few organizations wield the kind of power the Federal Reserve wields. It is independant, hence not subject to oversight by any branch of government. Yet few question their power and even fewer understand the flawed system in which they operate.
The Federal Reserve, like all central banks, practice what is known as fractional reserve banking. David Kretzmann summerizes the practice as follows:
The fractional reserve banking system gives banks the chance to keep only a portion of their deposits in reserve, allowing them to loan or invest the rest. Today U.S. banks are required to keep only 10% of their deposits in reserve. So if you deposit $100 in the bank, legally the bank is only required to hold $10 of it in reserve. This provides cash for "day to day" privileges and allows the bank to invest in securities and loan out funds, among other things.
So what this means is that whatever money one has in the bank, they will only officially have access to 10% of their deposit. Most people don't contemplate this. They assume that when they deposite X amount of dollars, they'll be able to withdraw the same amount at any time. The bank never makes it clear that this is not the case. It is because of this misunderstanding that panics occur and banks go under. It is, essentially, a kind of fraud. An organization (the bank) is promising one thing to another (the customer) and doing something else. So in essance the fractional reserve system is a kind of fraud.
So why was the Federal Reserve founded in the first place? The country ran fine without one for over a century. David Kretzmann explains again:
Fast-forward to 1907. This was the time of the last "panic" before the Federal Reserve Act was signed into law, creating the central bank, in 1913. Once again this crisis came about because banks were unable to give customers their initial deposits. This caused a whole stream of withdrawals (or attempted withdrawals) by bank customers around the nation. Banks had placed the deposits into income-earning securities and did not have the necessary cash to meet customer demands.
After the Panic of 1907 and the umpteenth failure of fractional reserve lending, the attacks still were not aimed at the fractional reserve system. This system, when protected through law, gave banks the undoubted opportunity to inflate the money supply, overextend themselves in ways that would never be sustainable in a free market economy, and give little regard to the customers' original property. Instead, economists began calling for a "lender of last resort" to bail out banks if they were caught overstretched in commitments. Many people don't realize it, but the U.S. financial system has been in bailout mode for nearly a century since this event. In an otherwise relatively free market system, banking started as the largest sour grape of interventionism in the bunch.
Now here's how their logic followed. Because the fractional reserve system was inherently flawed, creating the many panics of the past, the government created an organization that would use the same flawed system to prop up the other flawed systems by making loans with money printed out of thin air to banks that keep their reserves. It is essentially solving a problem by creating a bigger problem. The end result is inflation, financial bubbles, devalued money, and false prosperity. Since the Federal Reserve came into existance, the US dollar has lost 95% of its value. It has also been behind depressions and recession, including the major housing bubble that burst in 2008. But is the Federal Reserve deemed a failure? Is it reprimanded for it's actions? Not in the slightest. In fact, President George W. Bush and President Barack Obama have both talked about giving MORE power to the Federal Reserve. It fits the very definition of insanity, doing the same thing over and over and expecting a different result.
Nowhere in the constitution does it say the government can create an entity like the Federal Reserve. The essance of the American Republic was to limit the power of government, not grant it an authority that can easily be abused. A free society can't be free if the livelihood of the citizens are at the mercy of an entity like the Federal Reserve. Under the principles of free socities, government is only supposed to protect the rights of individuals, regulate a court system based on rule of law, provide for a national defense, and enforce contracts. And fractional reserve banking like that of the Federal Reserve is a fraud on the people, plain and simple. There can be no true freedom or prosperity when the peoples' money is at the mercy of a central bank. It is a tyranny few realize, but a tyranny that has the potential to do the greatest damage on the free society.