The Daily Switch

The Federal Reserve: How It Hurts You-Part 1

Posted by Ender on March 3, 2009

In a recent post at TruPolitics.net, a self described liberal expressed his pride that his ideology created the Federal Reserve.  The average American does not fully know what “the Fed” is and does.  All they hear about is the Fed raising or lowering interest rates, but really have no clue as to how this affects their daily life.  If they really knew how the Fed destroys wealth, creates poverty and creates the same “bubbles” that they blame Wall Street for, would they really brag about its invention?  Would they really want to take credit for the misery it has caused?  Surely, they would not.  So how can the Federal Reserve really cause this much damage?  Two concepts need to be defined in order to understand how the Federal Reserve hurts you: money and fractional reserve banking.

Money

What is money?  According to Webster’s Dictionary money is “something generally accepted as a medium of exchange, a measure of value, or a means of payment.”  What this means is that it is an object that is worth something to most people.

Example of Money

Prior to money, people would use the barter system to exchange goods or services.  In this system I would give you three bunches of grapes if you fixed my shoes.  But what would happen if I wanted my shoes fixed but you did not want any grapes?  I would be out of luck.  So, money was created where I could sell my grapes for money and then exchange it to you for the shoe repair. 

Money was usually something of great value like gold that was easily divisible.  People would take this gold, or what have you, to a banker who would give them a deposit receipt.  This receipt would be proof to whoever the receipt was exchanged with that they could go to the bank and exchange it for the amount of gold on the receipt.  Pretty simple right?  Now that we have a basic understanding of money we can investigate how the Federal Reserve is destroying the money in your pocket and in your bank account, even as we speak.

Fractional Reserve Banking

Originally, banks would only give out receipts for which they had deposits.  Said differently, if the bank had 100 ounces of gold it would only give out receipts of 100 ounces of gold.  What would happen in the bank gave out 200 ounces worth of receipts or even 1,000 ounces of receipts?  The practice of keeping a reserve less than 100% of receipts distributed is called Fractional Reserve Banking.  This policy fraudulently inflates the money supply, which in turn, devalues money and increases prices.  Does this seem logical to you?  Would any other industry get away with what is essentially counterfeiting?

The History of the Federal Reserve

Trivia
Q: Which founding figure on a piece of our current currency created the first central bank?  (highlight for answer)

A: Alexander Hamilton ($10 bill)

The founding fathers understood the extreme danger centralized power posed to Liberty.  Thomas Jefferson was vehemently against the creation of a central bank.  Jefferson and his ilk knew that having a monetary system that could not be manipulated by the government would place rigid boundaries on the size of the government.  Living under the tyranny of the British Empire taught them to be ever vigilant in keeping the government small and out of their lives.  They also knew that the Liberty they enjoyed in America stemmed directly from its economic freedom.

Thomas Jefferson

Thomas Jefferson

Jefferson abolished the first central bank.  A second federal bank was created in 1816, which was later destroyed by Andrew Jackson.  Jackson led the country back to the gold standard in 1834.  Abraham Lincoln started to print his own paper money during the Civil War, however, the US was able to move back to the gold standard in 1879.

In 1896, a movement towards a central bank was led by J.P. Morgan and John Rockefeller.  Why would two titans of industry want something that would erode the value of the money they made?  “They wanted cheap credit and inflated money supply to finance the expansion of their empires” (Mises) In 1907, there was a run on some New York banks.  People found out that the banks were using the fractional reserve method, which frightened depositors into withdrawing their money.  J.P. Morgan bailed out the banks with $35 million of his own money.  (Guess who one of the banks was…Bear Stearns, funny huh?)  Using the fear of bank runs and bailouts Morgan, Rockefeller and the extremely progressive (read fascist) President Woodrow Wilson pushed the idea of a central bank on Wall Street and the public.

The reason people don’t know a lot about the Federal Reserve is that most of it activities are done in secret.  The Federal Reserve Act was written in secret.  The parties involved pretended they were going on a hunting trip in Georgia, but instead spent the week writing the Act.  The Federal Open Market Committee, which decides whether to increase or decrease money supply, is ironically completely closed.  There are no transcripts of what transpires in their meetings only brief summaries are released.

The US continued down the path of Fractional Reserve banking until 1971 when Richard Nixon stopped redeeming gold for paper.  Currently, we have unbacked currency.  So, how does the Fed impact you?  Look forward to Part 2.

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6 Responses to “The Federal Reserve: How It Hurts You-Part 1”

  1. Emerson said

    Great intro, I look forward to part two. One important thing to remember about the Fed is that it is ‘effective’, it does ‘work’. Whether or not the results are beneficial, or if its very existence is legal or necessary is quite clear to those who look a little deeper.
    The Fed is an especially dangerous tool of the left because on the surface it is very easy to point to the fact that it can increase lending over night. The left can point to it and say how great this is, the powerful government is making stuff happen. The public is too lazy to look to see the long term affect of these actions, and instead embraces the simple notion that making more money available is infallible. Having recently graduated from a public high school, and being enrolled in college courses I have been able to see first hand the Fed’s glorification by liberal teachers and professors. In these classes students have little chance to see the adverse affects of the Fed, mainly because they aren’t given time to question it, or even a stage to do so.

  2. […] WordPress.com « The Federal Reserve: How It Hurts You-Part 1 […]

  3. […] said.”  Not only that but it will seek to give the Fed more power than it already has.  (Learn More Here) The Fed will “oversee large companies, including major hedge funds, whose problems could pose […]

  4. Habla Espanol said

    Though many libertarians and conservatives continue the drumbeat against the Fed, the simple question remains as to how the nation would have survived in October, and at other intervals when faced with the dramatic and virtual collapse of the banking system. Sound dramatic? Consider Red (as in “we’re in the red”) October 2008, when the proverbial poop hit the ventiladora after banks and AIG could no longer bail themselves from the binge of toxic asset profiteering. The nation knows this period for the crisis-generated bail-out to save the banking system from imminent collapse.

    This is not hyperbole. Wall Street types will tell you that we were at point in which we were literally hours from an implosion. Had it not been for a sudden, dramatic infusion of cash courtesy of Bernanke, companies would not have been able to pay employees, and in fact, people would have found themselves unable to use an ATM for the simple purpose of getting a $20 bill from a checking account. (Wall Street bars would have collapsed next..)

    In all seriousness, the idealogues among us might argue that the collapse should have happened — AIG, and the beneficiaries of the buying/selling of toxic assets should have suffered the consequences. There is some merit to this argument but sadly, had it not been for the Fed, too many others would have gone down with the Titanic of reckless profiteering as well.

  5. Ender said

    Hi Habla, It’s funny that you bring up this side of the argument today. I read an article in the NY Times on Saturday which can be found here.

    In the article, one of the larger firms (Goldman Sachs) who were supposedly on the brink of collapse due to AIG’s fall, declares that they were not at risk and are not at risk of insolvency. They took the money because, “Accepting a loss it was not required to take would have gone against Goldman’s duty to its shareholders…” Goldamn Sachs has said from the beginning that the risk associated with AIG was immaterial and yet they were one of the reasons the bailout was pushed through.

    And what about the other banks/companies that have started to give back the bailout money? I remain unconvinced that we were on the verge of complete economic collapse.

    Also, if you are going to take that side of the argument then you must be prepared to answer the following question:

    Would the crisis have even occurred, to the extent it did, without the Fed’s existence?

    The answer is no.

  6. RaiulBaztepo said

    Hello!
    Very Interesting post! Thank you for such interesting resource!
    PS: Sorry for my bad english, I’v just started to learn this language 😉
    See you!
    Your, Raiul Baztepo

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