The Federal Reserve Bank (FRB) is the Central Bank of the United States. The FRB says that is in an independent bank, but others say it is a private bank. Perhaps it is more like old Ma Bell, the only phone company in business, but government regulated aka a government regulated monopoly. Whatever the legal status of the FRB is, it is not really helping the people of the United States.

Congress, in Article I of the Constitution was vested with the authority to coin money and to regulate the value thereof. We are now in a position where the Treasury prints money, gives it to the FRB, and the FRB distributes it out to the people.

The U.S. Treasury actually keeps its’ money in the FRB (look at the definition under “fiscal agency services) and checks drawn on the U.S. Treasury are redeemed from the FRB. Talk about having a large client. When the U.S. Government runs out of money in any given year, it tries to sell U.S. Savings Bonds and when not enough of them are sold the FRB buys them from the Government. Then the Government deposits the money back into their FRB account to continue writing checks from the U.S. Treasury account. Where can anyone sign up for that gig?

In case you missed it, when we have a deficit the U.S. borrows the money via the sale of U.S. Savings bonds and then pays it back with interest, with much of sales to the FRB. The FRB essentially has an endless supply of money as will be explained here. It is maddening and confusing and hopefully this will be explained properly.

Fractional Reserve Banking is one of the keys to the seemingly unlimited supply of money at the FRB. In the United States and all over the world, your bank does not have to have enough money on the books to cover all of their deposits. They only need to keep a fraction of the money deposited there. Small lending institutions (deposit accounts of less than $48.3 Million) only need to keep 3% of their deposits in reserve. If the institution has deposits of less than $7 Million, no reserve is necessary. For most larger institutions, the required reserve is a much healthier 10% reserve. Oh, and there is no reserve on your savings account. In case you wanted to find a bank with different policies not controlled by the FRB, Congress took care of that with the Monetary Control Act of 1980 and allowed the FRB to control reserve requirements “for all depository institutions, regardless of Fed membership status”. Hooray for big government. The FRB freely admits that the point of all this power is for the FRB to have control over money supply.

The process of money expansion is explained in more detail than you probably want to know in a 40 page booklet titled Modern Money Mechanics produced and distributed by the Federal Reserve Bank of Chicago. A bank only has to maintain a fraction of their total deposit account funds. If the bank has $100,000 in deposits and the reserve requirement is only 10%, then the bank only has to hold onto $10,000 and it can lend out the other $90,000. If a person gets a loan for that $90,000 and then deposits it in their bank, the next bank can write a loan for up to $81,000. If the process continues, that original $100,000 will eventually become $1,000,000. Keep in mind that funds and money are flowing continuously through several banks, accounts, loans, and other transfers. Electronic banking has only made this process easier.

Something important to note is that debt loan making is the instrumentality for making the money grow. The FRB monitors banks to ensure that their reserve requirements are met. If a bank is running short because they have been very successful at making loans or other seasonal monetary issues, they can borrow from other banks to meet their requirements, or borrow from the FRB to meet their reserve requirements. The interest rate that banks charge each other to meet the reserve requirements is called the fed funds rate, the rate that the FRB charges to banks borrowing funds is called the discount rate. By banks borrowing money short term to meet their regulatory reserve minimums, banks can make loans forever with money they don’t really have just as long as the sufficient reserves are there.

To recap: banks take in money belonging to their account holder, they loan out the same money, they charge interest on the money they have loaned out, then they borrow money in the short term if they have not kept their “reserve” of the money that belongs to all of their account holders. You could buy a car with a loan from money the bank doesn’t really have and then default and the bank gets a car with money they never owned in the first place. On a larger scale, this is happening with real estate. Just think about that for a minute, financial institutions can loan out money they don’t own and if the debtor defaults, the collateral becomes the property of the institution. In any other setting, that would be fraud, or theft by deception, or something. The system is broken.

The bottom line for the FRB is to control the flow and the amount of money available. You may be wondering where the banks are supposed to keep their reserves and how does the FRB monitor it so well? The banks are supposed to keep their money reserves in their own accounts with the FRB. Yes, the FRB is not just the bank for the U.S. Treasury, but it is the central bank for all of the banks in the United States. On a lesser scale, the banks do keep some reserves in their vaults so they have cash on hand, but when so much more money is flowing electronically, there is no way to keep all of that cash on hand anywhere.

As of December 2006, currency in circulation—that is, U.S. coins and paper currency in the hands of the public—totaled about $820 billion dollars. The amount of cash in circulation has risen rapidly in recent decades and much of the increase has been caused by demand from abroad. The Federal Reserve estimates that the majority of the cash in circulation today is outside the United States.

Hmmmm. Is the majority of cash outside of the United States related to this debacle? With an estimated GDP for 2006 of $13.22 Trillion there must be a lot of e-dollars out there somewhere.

So when the FRB needs to control the money supply, what does it do? The process is explained in Modern Money Mechanics. We ha
ve seen how money grows through loans. When *new* money is needed in the market, the FRB buys securities (bonds, Treasury Bills, or something) from a private dealer. The private dealer then takes an FRB check to their bank, the bank then redeems it from the FRB! It is like new money entering the system because it *is* new money to the system that can then expand to 10 times the original amount issued. That is how the FRB manipulates the fed funds rate. The banks lend to each other based on a free floating money market and when there are more dollars to go around they don’t charge as much for their loans to each other to make their minimum reserve amounts. The FRB has been doing this for a long time and they are good at it. When the FRB needs to restrict the amount of money, they sell their securities in exchange for dollars and don’t send any of it back out. It takes money out of the system and makes loans more expensive or possibly not available at any price.

Unlimited Money?

With the FRB having all of this money, and deposits from the U.S. Government, and only having a 10% reserve requirement (if any) and the U.S. Mint available to print money when it is needed, and any money loaned to the U.S. getting deposited right back into the institution, the FRB really does have an almost completely unlimited pool of money to work with. It is not like any other bank in the United States, but it is like all of the other Central National banks all over the world and the IMF.

What are Dollars Worth?

One of the goals of the FRB was to protect and maintain the value of the U.S. Dollar. So how have they done since they were created in 1913? A dollar nowadays is worth about a nickel in 1913. Check for yourself.

The U.S. went off the Gold Standard in 1933 and confiscated private gold holdings except for “rare coins” (probably held by rich people). U.S. Citizens could no longer redeem their dollars for gold. In 1971 the gold standard was completely abandoned and foreign exchange dollars were not backed by gold either. There is nothing backing the Dollar these days and nothing that makes cash inherently valuable.

Federal Reserve Notes used to be some sort of deposit receipt as evidence that gold was deposited with the FRB. From a publication from the FRB:

In the United States neither paper currency nor deposits have value as commodities. Intrinsically, a dollar bill is just a piece of paper, deposits merely book entries. Coins do have some intrinsic value as metal, but generally far less than their face value.

What, then, makes these instruments – checks, paper money, and coins – acceptable at face value in payment of all debts and for other monetary uses? Mainly, it is the confidence people have that they will be able to exchange such money for other financial assets and for real goods and services whenever they choose to do so.

Money, like anything else, derives its value from its scarcity in relation to its usefulness. Commodities or services are more or less valuable because there are more or less of them relative to the amounts people want. Money’s usefulness is its unique ability to command other goods and services and to permit a holder to be constantly ready to do so. How much money is demanded depends on several factors, such as the total volume of transactions in the economy at any given time, the payments habits of the society, the amount of money that individuals and businesses want to keep on hand to take care of unexpected transactions, and the forgone earnings of holding financial assets in the form of money rather than some other asset.

Control of the quantity of money is essential if its value is to be kept stable. Money’s real value can be measured only in terms of what it will buy. Therefore, its value varies inversely with the general level of prices. Assuming a constant rate of use, if the volume of money grows more rapidly than the rate at which the output of real goods and services increases, prices will rise. This will happen because there will be more money than there will be goods and services to spend it on at prevailing prices. But if, on the other hand, growth in the supply of money does not keep pace with the economy’s current production, then prices will fall, the nations’s labor force, factories, and other production facilities will not be fully employed, or both.

The FRB also agrees that our monetary system is built on a collective agreement that dollars have value. The goal of the FRB is to grow the money supply so that people can keep the economy going based on loans and debt but not too much or inflation might cause rioting in the streets.

Is this a form of slavery?

By law, we have to accept dollars as our money for exchange. People go to work to pay for homes, cars, small businesses, credit cards, clothing, and other things and largely financed by debt. Housing prices are out of control and the purchasing power of the dollar is getting weaker so we have to work harder. Our taxes go to the federal government and the money is paid to the FRB to take care of outstanding debt and interest. Our house, car, and credit card payments are going to lending institutions who did not own the money in the first place and we are encouraged to keep spending to keep the economy going so we can all keep our jobs so we have a place to live.

The money that we earn is going to banks, credit card companies, the government, and other people in high places that work to keep the system going just the way it is. They like the system just fine because it keeps the working masses in their place. Because of Fractional Banking and the legal ability for a lending institution to create loans with money they *don’t* have a moral right to lend and if they fall short, they lend to each other at much *lower* rates, it has made us a nation of wage slaves.

For more reading about the Federal Reserve: (it has a video too)

No wonder the Church of Jesus Christ of Latter Day Saints has told us to get out of debt.

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