The Purpose of the Federal Reserve Banking System

March 18, 2020

By
Madhava Setty, MD

In Brief

• The Facts:Centralized banking has been devised for a purpose unseen and much different than what the public and most of our elected leaders/legislators believe. The purpose is not to stabilize, but to destabilize economies for ulterior motives.
• Reflect On:How does a system described in the article benefit the people at all? What is really going on here and how did we get into this mess? What alternatives and solutions would you think of?

Do Probability and Statistics interest you? Perhaps not. But what about the secret workings of a

casino? They are but two sides of the same coin. One side is science, the other application. Economics is the science of the production, distribution and consumption of goods and services. The application of economics, if honed to a specific, razor sharp intention becomes the most powerful weapon on Earth. This weapon is called the Central Banking system. No country owns this weapon. It is wielded by a tiny circle of people. The identities of these people are largely hidden, but it is abundantly clear they owe allegiance to no country, despot or political ideology. They deploy this weapon at their own discretion. We are the frogs in the proverbial pot of water and they are controlling the stove.

Some basics …

In the 2019 fiscal year the United States Government will spend 1.1 trillion dollars more than it will collect in taxes.(source) This number is called the “budget deficit.” Operating with a budget deficit is nothing new in our government’s history. This has been going on for decades, independent of which party has controlled the White House or Congress. If you were to add together all the deficits over the years you would arrive at a sum of approximately 22 trillion dollars. This number is called the “national debt.”

The ability to “pay off” this debt seems impossible, yet we continue to operate more or less the same way, borrowing more and more to meet our country’s obligation to social services, defense, infrastructure, and obligations to our debt holders. Most people are aware of these staggering numbers, yet few of us seem to consider basic questions about the system, like “Where does the money come from?” or “Who would be stupid enough to continue lending us these sums given our poor track record of even balancing our budget?” The answers to these questions are astounding and can lead to an understanding of our nation’s history and monetary system that is absolutely necessary to put nearly every aspect of geopolitics into perspective.

In “The Creature From Jekyll Island,” author G. Edward Griffin adeptly leads the reader on an intriguing exploration of the origin of money, lending and the banking system and its codependence with the governance of people. Through his thorough examination of military conflicts, the rise and fall of governments and repeated taxpayer funded bailouts, Mr. Griffin makes it abundantly clear that human history has been driven more by the inner workings of centralized banking and not the will of individuals or even the apparent vision of their appointed leaders.

The Federal Reserve, covertly conceived by the wealthiest few and brought into existence by Congress in 1913, is part of a global system of centralized banking that has been devised for a purpose unseen and much different than what the public and most of our elected leaders and legislators believe. The result of this system, as evidenced by repeated examples, has not been to stabilize economies but to destabilize them. In his diligent and erudite analysis, Mr. Griffin goes further in asserting that this has been the intention of the founders of the modern banking system all along. 

To accept his bold assertion it is useful to first consider how this is accomplished before understanding why it is done in the first place. A full analysis of this subject is obviously beyond the scope of a single article. However, we can still arrive at a basic understanding of the system and its repercussions here. 

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Show me the money

As stated above, the total national debt is on the order of 22 trillion dollars as of 2019. However, according to The Federal Reserve there is only about 1.7 trillion dollars of currency in circulation. Where are the other 20 trillion dollars? Clearly, it exists only as numbers attached to accounts existing in computer memory. Monetary transactions are no longer dominated by the exchange of currency backed by a commodity (like gold or silver), they are instead represented by the increase of a receiver’s account balance that corresponds to the equivalent decrement in the account of the payer. This, of course, seems like a reasonable system that is equitable to both parties. However, if you examine it more closely, certain fundamental questions arise, primarily, where did the money come from in the first place?

The total amount of money in circulation in 1950 was approximately 27 billion dollars. How do we now have 60 times more money? The answer is that it was created by our banks and the Federal Reserve, an institution uniquely endowed by our government to “print” money at its own discretion. This should strike you as unnerving for two reasons. First, our elected officials do not decide when more money is put into circulation, they have abdicated that authority to the Federal Reserve that acts independently. Second, why is there ever a reason to do this in the first place?

Clearly, the amount of goods and services generated by the country has grown with our population and its concomitant increase in our labor force. Also, innovation in manufacturing and the development of technologies have given rise to less expensive ways to make stuff. We have also engineered methods for extracting our natural resources, making the required raw materials more abundantly available for industry. These changes continually influence the supply and demand for goods and services that ultimately will dictate what things cost. These are the “market” forces that capitalism relies upon to self-regulate and ostensibly create an environment for innovation. If the amount of money in circulation is left untouched, prices will continually readjust to represent the total value of the total amount of goods and services generated by an economy. There should never be a need to put more money into circulation.

Where does money actually come from?

The expansion of the supply of money is less accomplished by the actual printing of legal tender than it is by the “creation” of debt. To illustrate this, let us consider a simplistic model of how a bank works. First, a bank serves as a secure place to store depositor’s money. The bank issues the depositor a receipt of deposit. Long ago these receipts were recognized as being more convenient than actually using coins to facilitate transactions. The “money” was in a vault, but the receipts of deposit, when they began to be accepted as payment by a third party, began functioning as money itself. Griffin explains that this form of money is termed “receipt money.” The modern representation of this convenience has taken the form of checking accounts. 

When the bank acts as a lending institution, it can also provide depositors with an added incentive to keep their holdings there in the form of interest. The bank can pay this interest on its deposits by lending this money out to other customers in the form of mortgages, business and personal loans, etc. and charging a higher interest on these sums. The ability of private citizens and industry to have access to money to purchase homes or invest in their businesses or education allows for economic growth and a higher standard of living and is generally considered a good thing and something we all depend upon.

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When we receive a loan to purchase something that we cannot “afford” we understand that it has not been given to us for free. We will pay for it over time. In fact, we will pay more for it through a loan than if we purchased it outright. The higher the rate of interest and the longer the term of the loan, the more we end up paying. In the case of a home mortgage paid over thirty years the borrower ends up paying several times the amount they borrowed. This is all spelled out to the borrower when they sign the promissory note and agree to the terms.

However, there is something insidious happening when banks lend money today. The money that gets lent is not possessed by the bank, it is owned by the depositors of the money. The depositors are free to continue to withdraw from their accounts, meanwhile the borrowers also have access to the very same pool of money. When your bank loans a sum of money to another party the amount in your account there does not get reduced. So, where does the money come from? The bank is essentially creating money out of debt and subsequently collecting interest on it. This money is added to circulation and when this happens, the value of every single dollar in the system gets depleted. Prices go up. This is inflation, and it can exact a devastating toll on the system depending on how much debt is created.

As amazing as it may seem, banks are only required to keep available a fraction (10% or less) of the amount of money they lend on hand to meet the needs of their depositors. Clearly there may come a time when a large number of depositors demand their money to be returned at the same time. This is the dreaded “run on the bank” which should send the bank into insolvency. However, this rarely happens these days for two reasons. One is based upon the confidence we place on our banking institutions to make sound loans and upon the economy in general. As long as we are confident that the bank will return our money if we asked, we won’t demand it back. Secondly, banks operating in the central banking system are able to borrow money from other banks to meet the demands of their depositors when needed.

The Fed is a Monetary Cartel that has been setting us up for bigger failures

The Federal Reserve, with the power Congress has endowed it with, sets standards for the portion of money banks within its system are allowed to loan compared to the money in their “vaults.” Because the profitability of the bank is directly related to the amount of money they loan out, banks are motivated to maximize the amount they lend. Furthermore, because a lifeline to more money through other banks exists, there is little reason for any individual bank to be conservative. By uniting banks under common lending practices it becomes clear that no individual bank will be allowed to go bankrupt. However, there now exists the possibility that many or all banks may fail simultaneously with a deep and widespread dive in consumer confidence and/or an accumulation of a great amount of bad debt. Note that the latter will automatically give rise to the former as in the case of the great recession of 2008 when it became recognized that a massive number of irresponsible home loans were made over the course of a decade.

When such a crisis arises, it is made clear to the public that a dire situation is at hand and it would result in major suffering for all if the government didn’t intervene. Government steps in by infusing the banking system with large sums of money. This money does not exist anywhere. It is created on the fly by the issuance of government bonds, essentially IOUs. But who would be willing to accept government IOUs in such a crisis? Nobody. Nobody, except the Federal Reserve. Through the purchase of government debt the Federal Reserve floods the system with essentially a limitless amount of “money.” This money did not come from the sale of goods and services or gold bars from the treasury. This money is ink on paper called Federal Reserve Checks which are used to fund government debt and ultimately result in greater balances in commercial bank accounts when the government spends it. The crisis gets averted. Or does it?

In the short run, the economy does not grind to a halt, and we laud the intervention as a success. However, there has been no increase in the amount of goods, commodities or services that the nation possesses. There is just more money out there. When that happens, the value of every single piece of currency, including the money in your wallet, drops. We grumble at the necessity of more taxes and less governmental services but few taxpayers realize the extent that their own wealth has been decremented by an unseen cost called inflation, the direct cause of poor lending practices of our banks. We are told that we are in a crisis for a number of vague and complex reasons having to do with rarely agreed upon economic theories and a failure of our leaders to appreciate them. In fact, the reasons are simple. We have a system where banks can and will make the most profit if they make more loans. When they fail, the Federal Reserve ultimately steps in by creating more debt, which we shoulder by allowing our earnings and savings to be devalued.

Let us briefly review. The Federal Reserve has united most banks to accept universal lending practices. This effectively prevents individual banks from defaulting on their obligations, but creates a situation where a nationwide or global banking crisis can occur. When (not if) that occurs, the Fed has an understanding with the government that it will infuse the system with money by “buying” government debt (in the form of government bonds) that will be used to “salvage” the system. The public will eventually pay for this in two ways. First, through the obligation to repay the debt and interest and second, through inflation as money floods the system. It should be clear then that this maneuver is designed to keep lending institutions in perpetual business aggrandizing their wealth.

Central Banks make money by doing nothing

It is important at this point to look more closely at the money making machine the banks use for generating profit. Recall that banks are only required to hold no more than ten percent of their deposits (assets) on hand and are free to loan out the rest. However, there is a greater harm they can exact through our banking system’s definition of an “asset.” Let us say that a bank holds $1,000,000 in deposits. It can write $900,000 worth of loans on that money keeping $100,000, or 10% of it on its books as “reserves.” That money loaned out does not exist, it is created the moment the loan is written. Once written, that loan, effectively the promise of the borrower to pay it back, is now considered an asset of the bank too! This means that the bank can subsequently write loans of 90% of that “asset” (or another $810,000) as well. Once the second round of loans go out, they too are considered assets. This iterative process effectively allows the bank to “loan” out $9 for every $1 it was given as a deposit. The bank uses the one million dollars in deposits (reserves) to “create” nine million dollars in debt and, of course, earn interest on it. The term “earn” is highly questionable in this scheme. The bank provides no real service, creates no tangible product, does no labor and assumes little risk yet is able to collect a continuous stream of money from assets that never existed until the moment someone agreed to borrow from them. This is called “fractional reserve banking” and as shocking as it seems, it exists wherever an economy has abandoned a commodity (gold or silver) backed currency. In other words, everywhere.

The Fed makes the most when we are at War

Turning back to Mr. Griffin’s assertion that the system has been designed to create instability, we can see that the banking system reaps the greatest benefit when needs exceed resources. The Federal Reserve (and any central bank) has the sole authority to create money when the need for debt arises. Is it unreasonable that central banks, functioning without accountability to any authority, government or otherwise, would welcome every opportunity to exert this power, especially when it is so lucrative to them? 

If we were to examine the situation from a central banker’s perspective we would regard global events in the context of debt. What kind of event creates the greatest and most urgent need for resources? War. War requires a nation to redirect their youth away from the creation of goods and services and into military service. There is the cost of munitions, fuel, care for the wounded and ultimately reparations. The bigger and the longer the war the better …if you were a central banker.

The Greatest Conspiracy in our history is still in play today

Could there really be an unholy alliance between central banking and governmental war machines? This may be obvious to some, but to many this approaches absurdity. A government for and by the people seems too powerful to be influenced by financiers and monetary policy makers. If banking insiders had any influence over our elected officials, the media would bring immediate public attention to it, right? In order for this kind of treachery to take place it would require the hidden collaboration of a very small group of extremely influential persons in government, central banking and the media. This would be a conspiracy, which many believe would be impossible today.

There is no question that it has happened in the past. As detailed in “The Creature from Jekyll Island,” the United States entered WWI after The Lusitania, a massive British liner with 195 American civilians on board, was sunk by a German U-boat attack. Prior to setting sail from New York, The Lusitania was loaded with tons of weaponry including six million rounds of ammunition purchased with funds raised for England through JP Morgan’s investment house. This was done in broad daylight with the ship’s manifest a matter of public record. The German government protested that using such a ship to transport weapons was in direct violation of international neutrality treaties. The American government denied this was taking place. The German embassy then appealed to the American people directly, placing ads in newspapers urging them not to book passage on The Lusitania as it represented a strategic target that would fall under German attack. The U.S. State Department prevented these warnings from being run.

At this time J. P. Morgan, one of the chief architects of the newly created Federal Reserve, was profiting from selling English and French bonds to American investors to raise money for their war effort against Germany. In addition, the two countries spent significant sums on products purchased from companies in Morgan’s control. When it became clear that Germany was nearing victory through their control of shipping lanes in the Atlantic with their U-boats, Morgan’s income stream was threatened. England, France and the American investing house knew their causes would only be saved if the United States entered the war against Germany. At the time this seemed a practical impossibility as Woodrow Wilson, approaching reelection, was riding a broad anti-war sentiment sweeping the country. This all changed when the The Lusitania sank. Morgan had, in the meantime, purchased control over major segments of the media and flooded the public with pro-war editorial. The media, the banks and our government worked together to see that America entered WWI on April 6, 1917. War expenditures, as always, were fueled by monetary expansion engineered by The Fed. Between 1915 and 1920 the monetary supply doubled and the value of our currency dropped by nearly 50%.

WWI is one of many examples in our planet’s history where the spoils of war went largely to the inner circles of the banking system that often finance both sides of conflicts. If this version of history still seems too incredible to believe, consider this: How often would a nation engage in war if it didn’t have the money to pay for it? Nations rarely do, unless they have a central banking system. Conventional history books paint our species’ long tradition of conflict as good vs. evil or liberty vs. tyranny while characterizing dictators and their ideologies as threats to the greater good. The real threat is hidden in plain sight and is far more diabolical, as it is not confined by borders or allegiance to governments that inevitably rise and fall.