Imagine making money, not by working, but by favor of your government. The government passes a law saying only you can create money. You create money and lend it to the government, which promises to pay you back the same amount plus interest. You own a central bank. Call it the Federal Reserve, so others think it has a good purpose.
The money you create can buy anything in the world. Everyone but you must work for money. Everyone else must work to repay the money you loaned to the government, plus interest. You are truly elite.
The imagined scenario just described is not imaginary. It is reality, and has been since 1913, except for one minor point. You personally are not among the favored ones in the money creation scheme. The favored ones already had immense wealth before 1913. Influence flowing from their immense wealth controlled the U. S. government and secured their favored status as owners of the new central bank.
Even if you have studied the Federal Reserve’s activities, you may think this description of the central bank is darker than the truth. No. The truth is darker than what has been said.
Where Fed Dollars Get Value
Critics of the Federal Reserve often complain that the Fed creates new dollars with value “out of thin air,” or that fiat currency issued without backing of hard assets has no value. Neither complaint is valid.
The Fed sometimes creates new dollars by printing them on paper – for people who need to carry dollars in their wallet. More often, the Fed simply transmits numbers electronically into a bank account with notice to the bank that dollars have been delivered. No bank disputes when the Fed tells them this.
New dollars created by the Fed immediately have the same unit value as each other dollar already in the global pool. If the Fed adds new dollars with greater total value than new goods and services produced in the economy (as the Fed has been doing at the rate of $85 billion per month until the recent tapering to $65 billion per month), the unit value of each dollar falls.
You see, Fed-created dollars get their value from the dollars already existing – all those dollars already earned or borrowed. The new Fed-created dollars suck value from dollars already owned in the private economy. If the Fed were to create fewer dollars than the value of growth in the economy, the value of existing dollars would actually rise as that growth occurs. But that has not happened in more than a decade.
Instant, Secret Taxation
When the Federal Reserve creates too many dollars, the effect is the same as if the Fed taxed the private economy. Each person with dollars loses purchasing power as that purchasing power flows into the new dollars in the Fed’s hands. Each person who works for dollars loses earning power.
The Fed has money to spend, either to lend to the U. S. Treasury or to buy mortgages. Capital is taken from the people without the need for filing a tax return or making a payment. No one even calls it a tax, and the public is unaware of what has been done.
So the value of each dollar created by the Fed comes from the capital of the people. Yet the people also eventually must pay taxes to Treasury equal to every borrowed dollar plus interest, so Treasury may retire the debt.
The Federal Reserve’s Windfall
Whatever number of dollars Treasury borrows from the Fed, taxpayers must repay with interest. The Fed will receive that amount. Yet private capital (by the process of inflation) provided all of the value in the dollars created by the Fed. The Fed added no value, but winds up owning dollars in the total sum of the Fed-owned federal debt plus interest.
In these circumstances, is it surprising that the Fed is eager to monetize the federal debt at every opportunity? Every dollar created and loaned to Treasury is a dollar which must be repaid to the Fed with interest. The productive energy and ingenuity of the entire nation is the collateral securing payment in full.
“Policy” Transfer of Residual Earnings
One caveat to this explanation of the Federal Reserve’s activities needs to be mentioned. The Fed announces each year its provision for transfer to the Treasury of an announced sum, which is said to be its residual earnings for the year. For example, on January 10, 2014, the Fed announced its Reserve Banks had provided for transfers of $77.7 billion to Treasury for the year 2013, stating:
“Under the Board's policy, the residual earnings of each Federal Reserve Bank are distributed to the U.S. Treasury, after providing for the costs of operations, payment of dividends, and the amount necessary to equate surplus with capital paid-in.”
Though such announcements convince some that the Fed does not profit unduly from its operations, take a closer look. Fed “policy” does not have the force of law and is subject to change unilaterally by the Fed. Amounts of dividends are unstated in rates or amounts. Fed surplus is topped up to equal capital paid-in. Congress does not audit the Fed and is too intimidated even in good times to demand such an audit.
Another notable feature of the Fed’s fiscal operations is that the Fed enjoys an unlimited budget for its own operations before any transfer of funds by the Fed to Treasury. The Fed spends plenty to assure the allegiance of every academic institution and economist, so none will challenge any theoretical lunacy trotted out as monetary policy.
The Central Bank As Anti-Capitalist
A central bank is a most ingenious device for stripping wealth out of a nation, considering the affinity of politicians for borrowing and spending. This explains why U. S. ruling elite schemed incessantly to get another central bank after President Andrew Jackson brought an end to their previous central bank in 1833.
In 2014, after 100 years of owning control of the Federal Reserve, the favored ones are by far more wealthy and powerful than ever. In sharp contrast, the U. S. government is heavily indebted and near insolvency. Americans who work for a living are debt-ridden far into future generations.
Those who own control of the Fed also control the U. S. government. Every government power is used to advance the interests of these ruling elite and to diminish the influence and prospects of the public.
Many complaints are heard currently about “crony capitalism.” This is an unwarranted slur against capitalism. The conduct called “crony capitalism” is not capitalism at all, but instead is capitalism’s worst enemy and nemesis: mercantilism. Mercantilism is the classical term for the economic system involving government controlled by the ruling elite. Mercantilist government puts money into pockets of the ruling elite by monopolistic charters and other favoritism.
The ruling elite’s despised nemesis is the class of people who rose (in the “middle”) between medieval rulers and their subjects. The “middle class” fought against elitist governments and won human rights to produce, to compete, to prosper, to enjoy fruits of their labors, to form governments and to make laws justly governing society. The middle class invented capitalism as business by tough competition. The ruling elite hate it and use government influence to fight it. That is the current experience.
What is said about the Federal Reserve in this discussion is by no means the whole story. As reported in previous discussions here, and in much greater detail in my book The Fruits of Graft, the Fed assists the international banks in setting bank lending rates by collusion rather than open competition. And Fed owners clearly have huge advantages over other investors in gaining access to “confidential” tactics and plans vital to U. S. financial markets. ~
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