Fed, Statements, Policy, Effects, Money, Markets
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It used to be like people would make everything, they needed to do, all by themselves. Gradually they realized that exchanging products and services with each other is more efficient way to get things done. So, barter trade started. After that people came to the understanding that barter is not as efficient as they originally thought. It was not always easy to find someone who was ready to exchange your products or services in return for something you needed. So, people started selling their products and services for metal coins, mostly gold. Theft and loss of those precious coins was always a threat. Hence, people started depositing those coins in secured vaults at local goldsmith shops, who were the original source of these coins where they could just remit the receipts of deposit anytime for the money they needed to spend. Goldsmiths would charge a small fee for this service.
Out of convenience, later, people started to accept the receipts of deposit for their products and services. With the passage of time goldsmiths came to the conclusion that at any point in time they have enough gold in their vaults. Therefore, they started loaning the gold in their vaults to people who needed credit for consumption or business, at an interest. This was the beginning of banking.
They also found that at any given time it never happens that everyone comes to them to redeem their receipts of deposit. This lead to fractional reserves. They started loaning the credit vouchers valued more than what they had in their vaults. This used to become a problem when there was a run on banks. Banks simply did not have enough of the gold to redeem every receipt of deposit and bank would go bankrupt. In that case depositors would lose their money. It is safe to say that fractional reserves showed the dangers embedded in this idea, at the very beginning of it.
Although fractional reserve had already been practiced many times in many parts of the world, U.S. started with 100% backing of its currency with gold. But, as government and welfare expanded, and we started going to wars one after the other, government could not print enough money, if they had to back it up 100% with gold. Big banks were already lobbying for a central bank, right from very beginning. Two central banks failed. Finally, in 1913, they chartered Federal Reserve Bank, the modern and American version of central bank. Federal Reserve is a conglomerate of private banks, in which private banks hold shares and are paid up to 6% divided per year.
Nevertheless, to deceive U.S. citizens it was named as Federal Reserve, giving a false impression that it is a government agency. Federal Reserve is above and beyond all the laws of this land. Its operations and policies cannot be changed, affected or modified by any branch of government, including Congress and its actions cannot be challenged in any court, including Supreme Court. It cannot be audited and has no real oversight, whatsoever. President nominates the chairman who needs to get approval from congress and few members of the board represent regional Feds. Most of the board represents shareholder banks, though. Most people nominated for chairperson have direct or indirect links to Wall Street and big banks.
Chairman is nominated for a fixed term and cannot be fired by anyone or any branch of government during his or her term. This totally tyrannical institution, on the other hand, is awarded with immense powers and authority. It prints paper money, literally, out of thin air and then loans it to federal government on interest. Since the only real source of money for federal government, Fed, is charging interest on it, the amount of money borrowed from Federal Reserve can never be paid off. It is because government has to borrow more money from Fed to pay interest on money it borrowed previously and interest just keeps pilling up.
Federal Reserve issues about 5% of all the money created in our economy. The rest is issued by private banks. Yes, you read it right. Ninety-five of our money is generated by commercial banks. How? It is a bit complicated. The bottom line is that all the money which is being created, now, is being created out of debt. Surprised again? Yes, this is the reason why most people find themselves in a lifelong dip into the ditch of debt.
When we gave up the gold standard, question was, where money is going to get its value from? Of course, as you may understand that a piece of paper has almost no value, at all. As the gold standard was gone, The value had to come from some other source. You will be surprised, again, to know that in this new monetary system, mostly designed by big bankers, the value of money comes from debt. This is the reason why most politicians give only lip service to debt reduction.
But, no politician, actually does something substantial to actually reduce the deficits and debt. They all know that without debt the whole system collapses. Traditionally, the real value of money used to come from the real productivity of an economy and then it was backed by gold. Whatever the value is left, money, still gets it from real productivity of an economy. This is the reason why Dollar is still far more valuable than, say for example, Rupee. But, the system is, unfortunately, flipped into the favor of big government and its expenditures. Federal Reserve loans money to federal government.
Federal government pays it to employees and contractors. They go and deposit this money in banks. Say, for example, 100 Dollars were paid. These hundred Dollars get deposited in banks. Banks, now have 100 dollars in reserves. With fractional reserve requirements, now, mostly around 2%, banks can issue 5000 Dollars, in credit, based on that 100 Dollar reserve. So, banks generate 4900 Dollars of money with 100 Dollars issued by Fed. This process is repeated over and over because everyone who gets paid goes back to deposit that money in a bank. Since, in the next steps in this process, money is coming from a private source, banks can issue, roughly about 98% of deposit as credit, each time the money is deposited back in any bank or banks.