A topic of great interest to me lately has been central banking and the US Federal Reserve. I won't pretend to understand all of the nuances of central banking strategies or those employed by our Federal Reserve, but the entire concept is certainly counter-intuitive. As with any economic theory, there are pros and cons, but the question I'm still seeking an answer to is: are fractional reserve and central banking the monetary foundations of a truly free society?
To understand central banking and our Federal Reserve, one must understand fractional reserve banking. Under this type of banking, banks are legally obligated to retain only a fraction of their customers' deposits. The fraction is regulated by the Federal Reserve and is currently set at 10% for banks where their net transaction accounts are greater than $58.8MM. For institutions with less than $58.8MM, the fraction is even less. Obviously, to understand what this means, a definition of "net transaction accounts (NTAs)" is needed. NTAs is the sum of the dollar amount of the bank's customer deposits and accounts receivable (loans). This means if you go down to your bank and deposit $10K, your bank can turn around and loan up to $100K to other customers or businesses. Pretty sweet deal for your bank, eh? As a result, under this type of banking, banks are not warehouses or safes for your money, they are essentially vehicles to mobilize your savings so their drivers can turn a profit.
This type of banking can only survive with a central bank. Imagine this scenario: You deposit $10K in your bank (for the sake of simplicity, we'll pretend your $10K is the only deposit). Your bank promptly turns and loans $100K to Joe Schmoe to open a business. Joe goes to his bank with the $100K check and tries to open a new checking account with the $100K as his initial deposit. Joe's bank accepts the check and sends a request for the $100K from your bank. Problem...right? Your bank only has $10K! Without a central bank, your bank would be prosecuted for embezzlement.
So where does the extra $90K come from? The Federal Reserve - our central bank. Since your bank is a member of the Federal Reserve system, it has deposited your $10K with the Federal Reserve, which operates as your banker's bank. Where does the Federal Reserve get the $90K? It simply creates it out of thin air. Without the Federal Reserve, your bank could only have lent out $9K. Assuming a 5% interest rate, your bank would have had the opportunity to earn only $450 off of your money. Instead, through the magic of central banking and the printing press, your bank now has the opportunity to earn $4,500. Amazing, right?
This example is on an extremely small scale. Consider the multiplicative effect when consumers are depositing billions of dollars with their banks. It's then easy to to understand how banking is the industry which churns out the most wealthy people in the world. When you also consider the fact that this multiplicative effect is backed by governments throughout the world, you can see how the cards are stacked heavily in favor of the banking industry. After all, when your employer pays you $50K annually, there is no government backed program which allows you to invest $500K in the stock market. That would be absurd, right?!
This privilege to turn each $1 deposited or loaned into $10 of interest earning assets is reserved only for the banks. Backed by their friends at the Federal Reserve, our banks enjoy tremendous benefits. After all, what happens when they over leverage and run the risk of actually losing money? The Federal Reserve prints money to bail them out and then turns and places those newly printed funds on the back of the taxpayers....Incredible.
So what's my point? Now that we understand fractional reserve and central banking, we can see the true purpose of the Federal Reserve: it exists not for the American people, but for the banking industry. It exists, just as Ron Paul and others say, to privatize banking profits and to socialize banking losses. Consider the notion of "too big to fail." How did these institutions' balance sheets get to be so large? ---> Fractional reserve and central banking. These types of banking perpetuate an economy which thrives only through the issuance of credit, inflation, and people being willing to over leverage; as opposed to an economy which encourages the distribution of wealth through the most efficient and responsible use of capital.
Finally, I'm back to my original question: are fractional reserve and central banking the monetary foundations of a truly free society? A society in which government favors no group or special interest over another...I think not.
No comments:
Post a Comment