The Garden

“All the perplexities, confusion and distress in America arise not from the defects in the Constitution or Confederation, nor from want of honor or virtue, so much as downright ignorance of the nature of coin, credit, and circulations” –John Adams, 2nd U.S. President.

As I alluded to last week, there are many oddities surrounding our financial system that few seem to know about, much less understand. The John Adams quote above suggests that there is little of greater importance to a nation than for its people to understand the nature and function of their financial system. Even though John Adams was writing about this some 200 years ago, his observations are just as relevant today. Currently, the ignorance about the nature of money seems to be rampant in our country, present author included. It is from the standpoint that knowledge about the nature of money is essential to the well-being of society that I wish to examine this topic further.

Money, as we know it, comes into existence from a central bank called the Federal Reserve, or “Fed” for short. Despite the obvious oxymoron, the Fed is considered a “decentralized” central bank because it is scattered into twelve different regional banks throughout the country. The Fed is something of a hybrid between private bankers and publicly appointed officials. How exactly this balance works remains a mystery to me, but suffice it to say that the private aspects of the Fed represent private interests. In any case, the Fed, as I understand it, works by creating money according to its own self-defined principles, and then proceeds by lending (or loaning) this created money to other banks or financial institutions with an interest rate attached. The Fed is then, in theory, supposed to regulate (some might even say stabilize) our economy through the manipulation of these interest rates. That is, when interest rates are low, financial institutions are then more likely to borrow created money from the Fed and spend it elsewhere in the economy, thus circulating more money into consumers’ hands and facilitating more business. Likewise, the Fed can raise interest rates in order to drain money out of the economy and diminish business transactions, presumably to prevent the inflation (or devaluation) of U.S. dollars.

What I want to stress here is that the Fed creates money. This is to say, that every dollar currently in circulation in the U.S. economy originated within the Federal Reserve System. Put another way, there is not one genuine U.S. dollar in circulation today that was not created according to the Fed’s own money-generating criteria. By itself, that fact may very well be benign. However, where things get really odd is when the concept of interest is factored into the money creation process.

Since the Fed is largely comprised of private business interests, these private business are expected to sustain themselves based on their own revenue. That is, part of the Fed is designed to generate profit. One mechanism by which this profit is generated is the charging of interest to those who borrow their created money from them. Briefly, interest is a monetary fee charged to a borrower for the privilege of using a lender’s money. Usually, the amount of interest charged is some percentage of the principal (i.e. the original sum borrowed) and continuously increases until the borrower pays the debt off in full.

Now, there’s nothing particularly bizarre about the idea of charging a customer a little bit more for a good or service than what the good or service was originally worth—this is how businesses generate profit in the first place—however, the idea is not so cut-and-dry when talking about a country’s central bank.

Keeping in mind that the Fed is responsible for creating every U.S. dollar in circulation, and that this money is first circulated into the U.S. economy by different people or institutions borrowing these dollars from the Fed, then it stands to reason that the total amount of money in circulation is equal to the principal of each and every loan ever taken out from the Fed. In other words, there is exactly enough U.S. dollars in circulation to pay the Fed back for the principal of every loan ever issued. No less. No more. However, as I have already mentioned, the principal alone is not enough to compensate for the Fed’s generous loans; the Fed requires that the principal be repaid with interest. But, if every dollar in existence was borrowed into circulation based on the principal alone, then where are the dollars supposed to come from to pay the interest? If every U.S. dollar created only comes into existence through a process where that dollar must be repaid at a price greater than the dollar’s original value, then there is no way to ever repay the debt! There is more debt than there is money to repay it! The only solution to this problem, and the one most often invoked, is to simply borrow more created money from the Fed to pay off the previous interest. However, this only serves to push the problem further, as the newly borrowed money itself has its own interest rate attached. Without the possibility of the Fed either issuing interest-free money, or accepting non-Fed issued money as payment for the interest, there is no way for the U.S. economy to pull itself out of debt; a disheartening concept, to say the least.

Now, I am apparently not alone in this observation, as the above phenomenon has been identified by others as the “debt virus” theory. For example, a book by the same name has been written by a Jaques S. Jaikaran. Although there are critics of the debt virus theory, none of them have been particularly persuasive to me. For example, some have argued that the profits generated by interest fees are recycled back into the economy—interest free—when employees of the central bank use their wages to buy goods and services in the community, or when the Fed itself purchases goods and services per normal business expenses. In other words, the interest earned on the Fed’s loans is used to cover operating expenses, etc. just as any other private business would use profits to cover their operating expenses. While there is merit to this claim (the Fed and its employees certainly make purchases in the economy), this ignores the possibility that much of a business’ profits are reinvested in the business itself—in this case, loaning money and charging interest on it. So long as the Fed perpetually uses any of its profits to create new loans with interest, the nation’s debt can never be repaid, no matter how productive the nation might be. In other words, no matter how many hours Americans like you and I work to make and do things of real value in this country, the Fed will never be satiated. Somehow, I fail to see how this is in the best interest of you and I.

Finally, as I am not an economist I do not presume that the above account is flawless. With that in mind, I encourage anyone to dispute what I have stated either with me personally at my above email address, or by writing The Ranger News itself to potentially have your views published in an upcoming issue. The underlying theme to this is that our financial system is incredibly complex and we citizens are severely ignorant of its functioning. In fact, there seems to be good reason to suspect that the Fed is designed to work against average American interests. Further, amidst the financial turmoil we presently find ourselves wading through, it is imperative that we delve carefully into the whole structure of finances itself rather than assume that major financial crises happen purely by chance. The scale to which Americans find themselves in debt is sorely worth examining. This is why I encourage everyone to ask, “Why is there so much debt?” To illustrate how I might begin to answer this question, I’ll leave you with a quote by the famous international banker, Mayer Amschel Rothschild:

“Permit me to issue and control the money of a nation, and I care not who makes its laws.”

This entry was posted on Monday, September 29th, 2008 at 19:15 and is filed under Ranger News Editorials. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.