THE Federal Reserve Thread pt 1 (merged)

[0mar]

I don't know how but Jews figure into this, as this thread is about bankers and money.

[FatherOfTwo]

oh boy, here we go.

[jaws]

Jaws,

Central Banks dont create most money, private banks do that. Central Banks create M1, i.e. printed money that you use when you pay in hard cash. Most other money M2, M3 etc is created by your private bank i.e. citibank etc via the fractional reserve banking system out of thin air.

The fractional reserve banking system is the biggest fraud ever inflicted on human kind. Money is created out of a tiny reserve of savings on a 10 to 1 ratio and then interest charged on the money created.

Imagine if you gave me $10000 and I used it to create a $100000 loan to some poor smug and then charged him interest and only paid you interest for the $10000 deposit. You would call me a fraudster and that is exactly what bankers are!

Those who control the money supply control the economy. That is to much power to put in a politicians or bankers hands.

I am a hard money advocate i.e. silver and gold are true honest money with no shanagans! They cant just be printed into reality like the current USD!

Contrary to what you've been told in economics 101, banks don't actually create money. They circulate money, pass it on from savers to borrowers. The 'money' you have in your checking account is not actually money, it is a debt the bank owes you. If you issue a check, then the bank has to call back some of its assets (loans made out) to redeem the check to the receiving party. Often this comes out of the bank's cash reserves, from where the concept of 'fractional reserve banking' comes from. Banks keep a fraction of deposits on reserve to meet their expected cash outflows.

The only agencies that can legally create money are the central banks. They can literally write down a number on a piece of paper and send it to private banks to deposit in their accounts. This number will be the banks' claim on actual currency that the central bank may or may not have printed yet. They can use this number to issue more loans. This is how central banks control interest rates. If a bank needs a million 20$ bills, it will draw down its federal reserve account for them. The federal reserve will in turn create a million 20$ bills with its printing facilities.

[jaws]

Bankers don't lend fish. They lend currency. The value of currency is not intrinsic, it is symbolic. It is not fact, it is fiction. It serves the purpose of currency as long as people agree to behave as if the fiction were fact.

That's absolutely false. Currency has a real intrinsic value, it is the easiest method to conduct exchanges. No other good makes it as simple to exchange wealth for goods and services or vice versa. You'll never get people to conduct their daily business in fish, because fish isn't a precise measure of value, depreciates rapidly thus is a poor store of value, and is big and not very valuable thus is a poor medium of exchange.

Currency represents, symbolically, much more value than you can get by eating it, or by burning it. More to the point, currency represents vastly more value than it cost to manufacture - so much more that it can be said that currency is not a good created by work.

A Microsoft Windows compact disc represents much more value than you can get by eating, burning it, or that it takes to manufacture it. Its value is still extremely high and it took an immense amount of work to make it valuable.

[MacG]

1) Lending money with interest isn't freeloading. The money you lend are your savings. You worked for them and saved them (or your parents did for you). The interest you collect compensates you for not enjoying the full extent of your wealth.

Maybe the money I lend are my savings, but that is certainly not the case with banks. They create the money out of thin air. And why should money posess properties which most useful real world items lack? Most of the useful stuff in this world deteriorate over time. How could you expect hoarded money to keep its value? Let alone *increase* due to interest payed? If I borrow a fish from you, how could you expect to get more than an equal fish back? Considering the alternate fate of the fish if you tried to hoard it, you should be happy that I preserved thae value of the fish for you by returning a fish of equal qualities as I borrowed from you.

2) Central banks aren't freeloading by providing nothing. They provide a very valuable and highly demanded good, money, an asset with extremely high liquidity providing a precise measure of value. People want money and need money to conduct transactions to enjoy the full productivity of their work. You try living using only barter. It's just not practical. Central banks answer that need by creating money.

Money is not an asset, money is a *representation* of real assets. And the banks overcharge grossly to provide the medium of exchange. If I "borrow" $200 000 at an average interest of 5% over 30 years to build a house, and amortize the entire loan over those 30 years, then the bank will collect 0.05*30*100000=150000 in interest payments. This without putting one single nail in the house, just providing the medium of exchange. If that is not usury, then what is?

3) The profits made from money creation are always ultimately SPENT. That means that there is no such thing as "lending more of it out than it was possible to repay." The debtor is always in a position to postpone paying back the principal by trading the products of his work. The profits a central bank earns go back to its owners (usually a national government) and are spent (usually in public services).

Central banks dont make the big money, that is for the ordinary banks. And their profits are not ultimately spent, they can be hoarded also. The fact remain that only the principal is created when a "loan" is granted, the interest must come from your own or someone elses principal.

[nznutter]

Jaws, sounds like you are still in a high state of denial.

[That's absolutely false. Currency has a real intrinsic value, it is the easiest method to conduct exchanges. No other good makes it as simple to exchange wealth for goods and services or vice versa. You'll never get people to conduct their daily business in fish, because fish isn't a precise measure of value, depreciates rapidly thus is a poor store of value, and is big and not very valuable thus is a poor medium of exchange]

Currency would have intrinsic value if currency was gold or silver or some other tangible commodity. Nowadays its just a paper note and a paper promise to pay. Paper has no intrinsic value other than the ability to burn it for heat like the germans did during the weimar republic days.

[jaws]

Currency would have intrinsic value if currency was gold or silver or some other tangible commodity. Nowadays its just a paper note and a paper promise to pay. Paper has no intrinsic value other than the ability to burn it for heat like the germans did during the weimar republic days.

And gold and silver have no intrinsic value other than the ability to shape them into ornaments to be worn by vain housewives. The reason they have traditionally been used as currency are the same as that of fiat currency, they are compact, liquid stores of value.

The only advantage that gold and silver have over fiat currency is that they are difficult to produce. While fiat currencies are produced by central banks at costless effort to the profit of the central banks and the governments that own them, gold and silver are mined out of the ground by private mining companies that reap the profits themselves. It means the gold and silver supply grow slowly and are thus less succeptible to inflation, but they are just as much a confidence game as fiat money when it comes to their value as currency.

[nero]

jaws,

Keep up the good fight. I find it very depressing how easily this idea that there is a fundamental and simple flaw in the banking system circulates in the peak oil community. It makes us look like a bunch of nutters.

You very susinctely stated the falacies,but I'll reiterate what the problem with the original scenario was.

The original story had nothing to do with the fractional reserve system, it was simply an attack on the central banker's ability to make money and charge interest when loaning out that money. The key point it ignores is that all the money that the central bank earns in interest is spent. The central banker does not hoard the money. Either he has operating expenses like hiring someone to guard his valuable printing press, or he provides dividends on the profits to the benefitial owners of the central bank. The owners (the government) then spend the profits. There is no reason why the bank and therefore the government is going to eventually own everything.

[CARVER]

Well I think it is clear that this system has some flaws. What are we actually trying to achieve with it? And are we achieving it?

In the current system it seems that if you're 'lucky' and you are born in a 'rich' country and have rich parents, you probably can enjoy a lot of luxury without having to do an equal share of work for it.
If your parents are poor however you have to do more than an equal share of work to be able to live and get some form of luxury. This is because everything is owned already, it has already been divided and you don't get a cut. Some rich people will probably want to give you a loan, so you have to work for them to pay the interest. You don't really have a choice, so you could look at it as slavery.
You could instead go with the option to claim land and resources that are owned by others, but in this system this is not allowed (which means that a large group of people will work together to stop you). They will put you in prison, which costs them money and brings them nothing in return. So it is cheaper for them to give you a loan, unless they can live with killing people to keep what they got. And you cannot kill all the 'poor' people or put them all in prison, because then you don't have people to cheaply provide you all the goods and services you like.
If you would increase all the money and money debts by 100% it would not change a thing, because all the prices and property values would also increase by 100%. The actual numbers don't mean a thing (In the land of the blind, the one-eyed man is king).

If 15% of all the people own 66% of all the money, then you could think that in a democracy it would be easily possible to get a majority to agree to print more money and divide it equally among all the people. This would cause huge inflation, so the rich people would not like it, because they would see their wealth disappear. The people with debts would be happy because they would see their debts disappear. (this could be countered if all the interest rates follow the inflation rates). 'The poor' can live without 'the rich', but 'the rich' cannot live without 'the poor'. So why don't 'the poor' do this? Maybe because they are unaware, or maybe because the rich bribe the goverment officials so that it is not in their own interest to do so, or maybe because most of them have a dream to join 'the rich'.

The interest on the loans is partially a reward for the risk of not getting it back. Why not all say: "let's all stop paying it back", what are they going to do about it?

[Tapas]

I am delighted to read the responses. It shows that most of us are well aware of the underlying issues.

The idea of money was invented to make it convenient to exchange goods.

The concept was sound, the implementation was flawed. Let me explain.

In my opening example, I had 40 people in an island under the barter system. Each individual had to produce something of value, like a bucket of fish, or a bag of wheat, or a basket of fruits, in order to trade with someone. If you had nothing to trade in, you got nothing in return. In essence, there were no free loaders. Each individual had to contribute something positive, produce something tangible that others wanted, in order to survive.

By trading, each individual got to enjoy a greater variety. The fishermen who only caught fishes, could also enjoy some bread and fruits by trading with the farmers and gardeners. Barter was a mutually beneficial social construct. You were always exchanging tangible goods for another set of tangible goods.

Now suppose these 40 people got together and decided collectively on a simple plan. They would use coupons to make the system of barter easier. Every tangible item they produce will have a certain coupon price associated with it.

For example:
1 bag of wheat = 10 coupons
1 fish = 5 coupons
1 apple = 1 coupon

A family that has produced 2 extra bags of wheat could take it to the tribal council (government) and exchange it for 2 x 10 = 20 coupons.

A family that has caught 8 fishes for the day may decide to keep 3 for the family meal and trade in the remaining 5 for 25 coupons.

A family that has grown 15 apples may decide to give away 10 apples to the tribal council in exchange for 10 coupons.

At the end of the day, the tribal council has taken a tally of the surplus goods from each family. The council has 2 extra bags of wheat, 5 fishes, and 10 apples in their inventory. The council has given out 20 + 25 + 10 = 45 coupons.

The families are now free to shop in the central market with coupons issued by their council.

Note something very important here:

1. The council does not charge a single penny for issuing the coupons.

2. The council cannot issue a coupon unless someone offers a tangible product.

3. The more surplus products the families create out of their labor, the more coupons they get.

4. As the family sizes increase with children and grandchildren, so does their capacity to generate work and so does the coupons in circulation.

5. The initial count of 45 coupons issued by the council may now have exceeded 450 as the population increases 10 fold.

However, these 450 coupons have been issued against 200 bags of wheat, 250 fishes and 100 apples, symbolically speaking.

At no point in time are any fake coupons created. Each coupon is backed by a tangible asset. The coupon or currency is simply keeping an accurate and honest count of the GDP of this community.

The central council or government is not charging a single penny to print these coupons.

Under this system there could be no gross exploitation by any single member. You could still carry on with your barter, plus enjoy the advantages of carrying coupons with you to the village market to buy whatever you want. Each coupon that you obtained from the council had to be purchased in exchange of real goods that you physically created.

This is the ideal concept of money. Money is simply tracking the flow of energy and facilitating commerce. When a community grows in size and produces more, so does the money supply with it.

Now in this second part, I am going to explain the fraud that lies hidden in its present day implementation. If you follow this simple example, you will realize the outright scam that has been going on for generations with the private banking industry.

Imagine now, instead of the central council issuing coupons in exchange for actual goods, a private individual stands up and says - I will print all the dollars you may need. I will charge you 6% interest on every dollar that you borrow from me.

Let's study the long term consequences of this seemingly innocent pact.

A family that once had to grow 5 apples to obtain 5 dollars, can now simply 'borrow' 5 dollars from the private banker who is more than happy to 'loan' this amount at 6% interest. It costs the bankers nothing to 'create' this dollar.

People naturally like to live beyond their means. It feeds their greed. Most foolish people fall into a debt trap, thinking it would be easy to pay back the seemingly small interest at a later date. When he defaults, the banker owns a part of him - the collateral for his loan.

Consider the case where the money supply increased 10 folds from 45 coupons to 450 coupons when the population boomed in the previous example. There was no additional cost to the islanders to increase the supply of coupons. It was issued by the government reflecting the 10 fold increase in material goods.

In the private banking scenario, all these $450 would have to be purchased from the banker. Each dollar purchased would carry a 6% interest. This means even if every member of the tribe gave back the $450 to the banker, they would still owe him $27 in interest.

1. How are you going to pay back the interest?
2. If you pay back the principal, the money supply has vanished to zero!

It is mathematically impossible to pay back the interest on the principal. Trying to pay back the principal will in turn shrink the money supply which again will collapse the economy.

Another way of understanding why the interest cannot be paid back is when you see how money is tied to energy. Energy, a physical entity, cannot be 'grown' with time perpetually like money can in a bankers book which is an artificial construct.

The only way to pay back the debt is to borrow more money from the bankers. So long there is more resources and energy to exploit, the population can grow and keep borrowing more and more amounts of money.

As the population grows, so does the debt load in proportion. You must also realize another trickery going on. Up until 1970, the dollar was partially backed by some amount of gold reserves. The bankers passed a law during Nixon's rule relieving the Federal Reserve of this obligation. The dollar became a 100% fiat currency. Simply stated, the bankers have been printing funny money out of thin air and charging the US Government interest on full face value.

It costs mere pennies to print a $1000 bill. We the citizens pay interest on the face value for this favor. Our federal debt is 7.8 Trillion dollars. We pay an annual interest of $330 billion on the borrowed capital.

Money performs an important role in society. However, there is an ocean of difference between a nation state coining their own currency vs. a private banking cartel taking over the banking system of a nation.

[nznutter]

Great reply Tapas, best yet!

Indeed the current system is deeply flawed.

I think that owning essential tangible goods that will be less available due to a declining energy supply will be the only way to preserve wealth in the future i.e. copper, silver, oil, natural gas, etc. These are goods that are essential to our way of life and will remain so for the forseeable future!

[allenu]

Tapas, interesting post.

I've been trying to educate myself about economics and central banking lately, so I would like some clarification if you don't mind. In your explanation, is the Fed basically the guy issuing the money and charging interest?

And if your explanation is correct, then yes, that's extremely flawed, because if it's completely fiat money, and the producers are charging for the printing of more money, the only way to cancel the debt is to reduce the money supply. Clearly, you can't dig up more money from the ground.

Doesn't this mean your economy would have to "grow" faster than the debt amount such that you'd have extra money lying around to throw at the debt? Clearly if your economy is stagnant or growing slower than the debt, you won't catch up to it. Actually, assuming this is true, is this partly the reason why it's so important that our economies grow and become more efficient?

[I_Like_Plants]

Money is a fine idea, fiat currency, like all debased currencies, leads to a crash. The Romans crashed at least partially through debasing their coins, Weimar Germany's marks went into an inflationary spiral, the US had experiments with fiat currency in the past, and it always failed. Our current fiat currency is Federal Reserve Notes, issued by a cabal (or kahillah if you prefer!) not the government and thus not only untenable but illegal. Kennedy tried to start us back on the path to a real, legal currency and look what they did to him - Oswald suddenly acquired Mossad shooting skills!

[Tapas]

In your explanation, is the Fed basically the guy issuing the money and charging interest?
And if your explanation is correct, then yes, that's extremely flawed, because if it's completely fiat money, and the producers are charging for the printing of more money, the only way to cancel the debt is to reduce the money supply.

Yes, the Federal Reserve is the Central Bank of the United States. It is privately owned. At this point the dollar is a 100% fiat currency. It is not backed by any tangible items like gold or silver. It does not cost anything for the owners to generate a million dollars except the cost of printing.

The Federal Reserve was created with the Federal Reserve Act of 1913. By this single act passed by the gullible Congress, the bankers took complete control of the financial power of the US. The US Government relinquished its constitutional right to print its own money. The Feds lends the US Government money with interests.

It might be a good idea to explain the concept of Fractional Reserve Banking at this point.

The Federal Reserve being the central bank of the US controls all other banks like Bank of America, MBNA, Wells Fargo, etc.

Let's say you deposit $1,000 of your own money into BankABC. They can now turn around and loan that same $1,000 to me charging 10% interest while giving you back a 3% interest on your savings account. Seems fair? So far, yes. After 1 year, your savings account goes up to $1,030. I repay BankABC $1,000 plus $100 in interest for a total amount of $1,100. The bank makes a net profit of $70 with this single transaction, which goes to pay for its daily operation.

So far so good. Looks a fair business. But now comes the magic of Fractional Reserve. BankABC is allowed to inflate its assets by a factor of 10. Simply put, it means the moment you deposit $1000, BankABC can claim to have 10 x $1,000 = $10,000 in their holdings.

Its gets very interesting from this point! BankABC can now loan out $1,000 to 10 individuals, each required to pay back the principal plus interest at 10%.

So by the end of the first year, the bank has made a whopping $11,000 from their initial assets of $1,000 and given you a pitiful $30 reward for your investment.

Are you outraged? Is this highway robbery? Does this sound fair? Does this practice look legal? Would you not rather give up your day job and become a banker? Looks like the easiest way to make money to me! This in a nutshell is the concept behind fractional reserve - lending out more money than you actually have.

So you see that the member banks are allowed to magically multiply their holdings by a factor of 10, while the parent bank - the Federal Reserve gets the top honors to print new currency out of thin air. Its all an act of magic that would put David Copperfield to shame.

It is a simple pyramid scheme. There has to be a steady stream of borrowers to keep this scheme afloat. You are correct to state that the economy has to "grow". Growth can only happen when there are plentiful resources. In the last 70 years, most of our spectacular growth has not come out of actual human labor, but from the miracle of fossil fuels. It has allowed each human to enjoy the services of 80 energy slaves. Every individual from the lowest factory worker to the top CEO has benefited from the gift of fossil fuels.

The energy supply has peaked or almost about to. This fact sends chills into the minds of the bankers. The entire pyramid scheme collapses when the growth stops.

[allenu]

I remember reading an economics textbook that described the creation of money by banks as you have described via the fractional reserve system, and it made no sense when I first read it, and it still doesn't. I understand how it can work, but I don't see why it should work that way.

Also, I thought about the whole notion of the economy growing. Can't an increase in efficient be considered growth as well? That is, if we go back to the notion of tying value to resources, at first, I could say that each fish I sell is worth one coupon. Later, as I improve in efficiency, each fish that I catch becomes marginally easier to catch. I realize I would like more coupons (hey, I'm greedy), and that fishing is easy enough that I decide to sell two fish for each coupon. My neighbour is still selling at one coupon per fish, so all his customers come to me instead. No energy has been created, but I efficiency has been introduced. I could see this being an argument for why a central bank would loan out money and require interest on it.

[I_Like_Plants]

And the correct term is "International Bankers" you know, the folks who set up the Federal Reserve here in the US then set up the working class in the US to fight with the working classes of England, France, Germany etc in WWI, because it was profitable!

A certain leader with some faults but the bright idea to kick out the Int'l bankers and start up a non-debt-based monetary system in Germany in the 1930s had the unpleasent experience of the International Bankers declaring war on him, and since the International Bankers own the media, we still believe now that he was the bad guy. He took his country from deep Depression and starvation/rioting in the streets to prosperity in a very few years, it was able to defend itself from the IB's attacks on all fronts and almost won.

Now I see us leading right back up to that kind of thing happening again, we're in the Weimar period now.

[I_Like_Plants]

Read Heinberg on this, we're in a grow-or-die system. Stasis means death, downscaling means death, it has to run at full speed, faster and faster, or it collapses.

[MonteQuest]

Tapas is spot on. Here's a monster thread on the issue from a bit ago.

Our Money System and Oil Depletion; Are they Compatible?
http://www.peakoil.com/fortopic3761.html

[Tapas]

Can't an increase in efficient be considered growth as well? That is, if we go back to the notion of tying value to resources, at first, I could say that each fish I sell is worth one coupon. Later, as I improve in efficiency, each fish that I catch becomes marginally easier to catch. I realize I would like more coupons (hey, I'm greedy), and that fishing is easy enough that I decide to sell two fish for each coupon. My neighbour is still selling at one coupon per fish, so all his customers come to me instead.

What you are describing here is a free market economy. This is a good thing. You increase efficiency. You lower the cost of your product. You gain more customers. By competition everyone gains. This should not be confused with Capitalism which is a different beast. The beast has to keep growing to survive. While free market helps everybody, the benefits of Capitalism are heavily skewed towards a few.

Here is a clear and concise explanation of the birth of Central Banks, lending money with interest and the Fractional Reserve System of banking.


I Want The Earth Plus 5%


There are some additional links at the end of the article.

[Tapas]

And the correct term is "International Bankers" you know, the folks who set up the Federal Reserve here in the US then set up the working class in the US to fight with the working classes of England, France, Germany etc in WWI, because it was profitable!

You are absolutely correct. The International Bankers first gained their foothold in England when they succeeded in creating the Bank of England. Their fascinating role in the World Wars is illustrated by Monte's book Madmen at the Helm.

I would recommend everyone to request a copy from Monte. I was awake all night as I read through this 111 page research that covers the history of the New World Order, the Central Banks, the two World Wars, the Korean War, the Vietnam War, the Gulf War and 9/11. This book brings all the pieces of the puzzle together.

There is a common saying - nothing in politics happens by chance. There is always a reason. Monte's book reveals the invisible hand of the ruling elite.