This is a guest post by Austin Eldridge.The views expressed in this article may or may not be those of El Pensador.
The Fed. These words sometimes strike terror into your heart when you hear them. But, when someone mentions the Fed, do you know what they mean? Just what is the Fed? What is it for? Why was it created? In this post, I am going to do my best to answer these questions, and also point out the problems with the system. So, without further ado, let’s rock and roll.
The Federal Reserve System (also known as the Federal Reserve, and informally as the Fed) is the central banking system of the United States.
It was created on Dec. 23, 1913 when President Woodrow Wilson signed the Federal Reserve Act into law. It was originally created by congress (it is NOT a government program) to provide the nation with a safer, more flexible, and more stable monetary and financial system. (http://www.federalreserve.gov/faqs/about_12594.htm)
The Congress established two key objectives for monetary policy--maximum employment and stable prices--in the Federal Reserve Act. These objectives are sometimes referred to as the Federal Reserve's dual mandate.
But today, the Fed’s responsibilities have expanded (much like everything else in government), and they include:
1)- Conducting the nation's monetary policy by influencing money and credit conditions in the economy in pursuit of full employment and stable prices.
2)- Supervising and regulating banks and other important financial institutions to ensure the safety and soundness of the nation's banking and financial system and to protect the credit rights of consumers.
3)-Maintaining the stability of the financial system and containing systemic risk that may arise in financial markets.
4)-Providing certain financial services to the U.S. government, U.S. financial institutions, and foreign official institutions, and playing a major role in operating and overseeing the nation's payments systems.
Has the Fed really done all this, though? Do we really have a stable financial system? I would say no. After all, we are trillions of dollars in debt! (As I write this, America is $15,227,062,303,020 in debt, and it’s going up every second). The Fed is one of the main reasons for this, because they have so much control over our economic system. Also, we must ask ourselves, does the Fed have too much control, or are they overstepping their bounds? I personally believe they have too much control, control that they don’t really have the right to have, but, you can form your own opinions.
So, just how much of a problem is the Fed? Take a look at these 19 points taken from the Economic Collapse Blog. (Listed here are just the reasons themselves. I did not have room to fit the explanations due to the excessive length. You might want to look at the blog itself here to get the extended explanations.)
#1 The Federal Reserve system is a debt-based financial system.
#2 The Federal Reserve and the bankers have a monopoly on the creation of this debt-based money.
#3 The power of money creation and debt creation is in the hands of private individuals - not the government.
#4 The Federal Reserve itself is not much of a profit-making institution. Rather, it is a tool that enables others to make obscene amounts of money.
#5 The Federal Reserve is a perpetual debt machine
#6 The Federal Reserve system is designed to cause inflation.
The U.S. never had massive problems with inflation before the Fed was created, but now it is just wildly out of control....
#7 The Federal Reserve has decided to play bizarre games with our money supply.
#8 The Federal Reserve is undemocratic.
#9 The Federal Reserve runs the U.S. economy.
#10 The Federal Reserve favors the big banks.
#11 The worse the debt problems caused by the Federal Reserve become, the more money the IRS needs to collect from the rest of us.#12 The Federal Reserve creates artificial financial bubbles.
#13 The Federal Reserve is anti-free market.
#14 The Federal Reserve tells the rest of our banks what to do.
#15 The people currently running the Federal Reserve pretty much have no idea what they are doing.
If one of us could go down the street and appoint the manager of the local Dairy Queen as the Chairman of the Federal Reserve, it is very doubtful that person would do a worse job than Bernanke has done.
#16 Even though the Federal Reserve has such extraordinary power over the financial system, the American people are not permitted to examine their books.
#18 The Federal Reserve is dominated by Wall Street and the New York banks.
#19 The Federal Reserve has brought us to the brink of economic collapse.
(Keep in mind these are points from the Economic Collapse Blog, not myself or El Pensador, and the views expressed may not necessarily be our views.)
What have others had to say about this? “All the perplexities, confusion, and distress in America arise not from defects of the constitution, not from want of honor or virtue, so much as from downright ignorance of the nature of coin, credit, and circulation.” -John Adams in a 1787 letter to Thomas Jefferson.
“Of all the contrivances devised for cheating the laboring classes of mankind, none has been more effective than that which deludes him with paper money.”-Daniel Webster
"We have, in this country, one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board. This evil institution has impoverished the people of the United States and has practically bankrupted our government. It has done this through the corrupt practices of the moneyed vultures who control it". — Congressman Louis T. McFadden in 1932
"I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a monied aristocracy that has set the government at defiance. The issuing power (of money) should be taken away from the banks and restored to the people to whom it properly belongs."-Thomas Jefferson
And finally, a quote on debt from one of our favorite presidents, Ronald Reagan: “We don't have a trillion-dollar debt because we haven't taxed enough; we have a trillion-dollar debt because we spend too much”
These are just a few statements on the problems with the Fed. There are many more. Basically, the Fed is putting our liberty in jeopardy. The more debt you are in, the more vulnerable you are. Many people realized that, but, their wisdom was not heeded, and look where we are today. We are facing the biggest economic crisis since the great depression.
So, what can we do about it? That’s a tough question. Te best thing to do would be to end the Fed and go back to a gold standard. Alan Greenspan had this to say about the gold standard:
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. ... This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard”
Ludwig von Mises said “The gold standard has one tremendous virtue: the quantity of the money supply, under the gold standard, is independent of the policies of governments and political parties. This is its advantage. It is a form of protection against spendthrift governments”
Ronald Reagan was also firmly in support of the gold standard. (http://www.youtube.com/watch?v=ZjpT1qMC7Pk) Reagan said “There has never been a great nation that gave up the gold standard and remained great.”
Again, these are just a few of many quotes on the subject.
One last point I would like to touch on. Velocity. What is velocity? Simply put, it is the speed at which money changes hands. But let me explain. Here is an example given by economist Richard Maybury in his book “Whatever Happened To Penny Candy” (which you should read!). Imagine ten people sitting in a circle. Each has two things in his hands, a dollar bill and a baseball card. Now imagine each person selling his card to the person on his right for one dollar. Every card has been sold, and every dollar has changed hands once. The velocity of the money is one. Now imagine the same circle. Each person has a baseball card, but only one person has a dollar. Now imagine the person with the dollar buying his neighbors card. The neighbor then uses the dollar to buy his neighbor’s card, and so forth. The dollar goes all the way around the circle. That single dollar has done the same work as the ten dollars in the first example. But the money has changed hands not once, but ten times. Velocity is ten. So, a small amount of money can do the same work as a large amount. It can be used in the same number of transactions and have the same effect on prices if it changes hands quickly enough. So, why would people trade their money away faster? A decline in the demand for money.
Money responds to the laws of supply and demand. There is a demand for money, as well as a supply of it. All that to say, this is where our money problem has come in.
The problem is this: When money is printed in large quantities, the volume (amount) of money goes up. What happens when the amount of something increases? The demand for it goes down. The same goes for money. The demand goes down when the volume goes up. What happens when the demand goes down? The value decreases. When people don’t want or need something, it isn’t worth as much. This is what has happened with our money! We have had so much money, (which today just means paper that’s green), printed that there is a great quantity of it! Sounds good doesn’t it? Well it isn’t. Now that there is so much paper money in the system, the demand has gone down. The dollar is going more and more down the trail to being worthless. Thus creating another huge problem in the economy.
I hope this article helps you in your understanding of the Fed, what it does, and why it is a flawed system, as well as more understanding of the problems with inflation.
So, until next time, so long!