Monetary Policy

We all know that money makes the world go round, but what makes the money go round? That's the more important question, I think... And it's a question that you could take many different approaches to answer... For my approach here, I'll keep it very high-level and generalized, hence the Wikipedia links... If you'd like a more detailed analysis, I suggest you search for the same topics I've linked to here in the United States Legal Code.

How is money created?
All money is created from debt. It's very important to understand that seemingly contradictory statement... But it's really very simple, and absolutely true. The money that we use today is known as Fiat Currency. And our banks operate on the Fractional Reserve Banking system. In short, this means that our dollars, euros, pesos, yen, yuan, rubels, etc. are not backed in any way by precious metals. There is no guarantee that you can bring your paper currency to the bank that issued it and get gold or silver in return. And furthermore, a bank is not required to physically posess any more than 10% (our current reserve ratio) of the money that it issues.

So with those guidelines in mind, here is how money is created from debt in the USA... The Federal Reserve Bank and the United States Government work in perfect harmony to handle the finer points of the process. The Fed is what's known as a Central Bank. Despite the .gov web address on the Federal Reserve web link, it is not solely owned and controlled by the US Governent. The Federal Reserve Bank is a private corporation with a US Government Oversight board that was founded in 1913 with the passage of the Federal Reserve Act. If you read the text of this act carefully, you will see that the State does not own the Bank, but rather they are separate entities. The Federal Reserve Act is their contract to a mutually exclusive relationship in the business of creating currency. Well--not exactly mutualy exclusive, thanks of course to the World Bank. But I digress...

The Board of Governors of the Federal Reserve Bank is selected by the President and the Senate. However, if you read deeper into the United States Legal Code (Title 12, Chapter 3), you learn that the bank itself has a good deal of influence over the selection process. As a result, the pool of nominees that the President and Senate have to choose from are more-or-less selected together by the bank and the government to serve their mutual interests, which mainly involve the transmutation of debt into money.

The actual debt-to-money conversion is very simple. The US Government issues bonds to the Federal Reserve Bank, and in turn, the value printed on those bond are deposited into the US Government's Treasury. This is more or less a loan from the Federal Reserve bank--which mind you is not required to retain any precious metals to back the currency which it offers--to the Government at low interest. The Government of course is free to do more or less what it pleases with this money. A large portion of this money is granted to a small number of private corporations otherwise known as the Military Industrial Complex, and the rest of it is dispersed to other corporations or used for the purposes of public welfare.

Where do our taxes come in to play?

The Government then levies a tax on the income of US Persons (meant in the contractual sense, not the individual sense, that's why it's Persons and not people) in order to repay the interest on its debt to the Federal Reserve Bank.

What about the rest of the banks? How do they get money?
The Federal Reserve bank enjoys special status as the Central Bank in the US Fractional Reserve System. Like other banks, it only has to retain 10% of it's assests in any sort of physical form. Unlike other banks, the only assets it is required to hold are US Government Bonds. It esentially creates paper or digital money with nothing but the authority of our Legal Tender Laws to back it.

As a Fractional Reserve bank the Fed is free to loan 9 times the value of the bonds it holds out to other banks at low interest at its Discount Window. Private banks "buy" this money from the Central Bank and loan it out at slightly higer interest than the Fed charges them. The majority of the loans issued by private banks at this stage in the chain are issued to large corporations and to other private banks. The corporations use these loans to do things like meet their payroll, develop their businesses, etc. And the other private banks issue higher-interest loans, like mortgages, credit cards, etc.

What if the loans can't be repaid?
Not to worry, most of the loans written in this first stage of the game described above are insured by the Federal Government. This might seem odd since the Government itself cannot get any money to actually pay the loans back without taking more loans from the Fed itself... But regardless, they do indeed insure many large-scale loans. And there are many instances of large scale corporate bailouts by the government. You'd think that in a free-market economy, poorly managed corporations that could not repay their loans and poorly managed banks that wrote too many risky loans would be allowed to fail and corporations that were run better would absorb their business and succeed. Well, in a free-market economy, that's what happens. But, as is evidenced by the information above, we do not operate a free-market economy.

But I work for my money! It doesn't come from thin air!!
Of course! I work hard for my money too... On our level of the chain, we do have much more of a free market, and much more freedom to make our own breaks. The part of the economy that most of us participate in involves an equal exchange of labor for the money that we are paid by our employers--or if you're in business for yourself, from your customers or clients.

But, regardless of how hard you work or what your salary is, our money itself does not require the same equal exchange of labor to produce. It does not require x number of hours or labor to produce x number of dollars. It requires nothing but the issuance of US Government Bonds to the Central Bank. Invariably, the money that gets deposited into your bank account was created as a result of US Government debt. US Dollars cannot be created in any other fashion. Our money supply is not constrained by the laws of supply and demand. This is unfortunate, because a monetary policy that operates within the constraints of the laws of supply and demand does a pretty good job of keeping the majority of the money in the hands of the many and in keeping the value of the currency stable, while a monetary policy that does not operate within the constraints of the laws of supply and demand has led to the majority of the money being concentrated in the hands of the few. Not to mention the dollar is highly unstable...

What about preciuos metals?
Why are precious metals precious? Simple--because demand for them is high. Gold and silver have very high value in many different sectors of the economy, ranging from electronics manufacturing to jewlery making to demand by investors and beyond... By rule, precious metals require x number of hours to produce x amount. By "produce," I mean extract from the gound, divide into equal and accurately measured portions, and place some sort of seal on them to guarantee the accuracy of the measurements...

Precious metals are not exactly money in the modern world... Not anymore at least. There is no guarantee that you can go into a store and plunk down a silver coin and get whatever value that coin holds in the form of goods or services. Instead we have the aforementioned Legal Tender Laws to impose the US Dollar as issued by the Federal Reserve Bank as acceptable for all debts, public and private.

A hundred years ago or so, many shopkeepers wouldn't take paper money but would gladly accept a Government issued silver coin... While people could use precious metals to transact commerce in the days before Legal Tender Laws (1965 in the US) were passed, most people stopped using them when paper money was introduced en masse by the Federal Resreve system. Up until 1933 when private ownership of gold was made illegal, this paper money was backed by precious metals--meaning you could go to the bank and demand gold in exchange for your paper money.

In the years that followed the 1933 gold confiscation, the price of gold has become completely disconnected from the value of gold. And thus, banks and governments can issue as much currency as they want without the constraint of having to actually posess anything of real physical value. Over the years, things like the Bretton Woods Agreement, and then the Nixon Administration's dissolution of the Bretton Woods Agreement have removed any sort of influence of supply and demand from our money system.

By disconnecting our money supply from precious metals and therfore supply and demand, we have enabled vast amounts of industrial and technological growth, which in many cases is a really wonderful thing. Unfortunately, decoupling the money supply from the laws of supply and demand has also made it highly unstable and has led to concentration of that money in the hands of the few.

So whose money is it?
The currency we use today belongs to the Federal Reserve bank. It is not our money, it's theirs. We use it because our government is kind enough to tax us in order to repay the interest on the debt it incurrs to produce said currency and also to pass a Legal Tender Law to force us to use it even though it has no real physical value beyond the paper it was printed on. We use the money because we have little choice. And the power to create and regulate the creation of said money is concentrated in the hands of those who benefit the most from it--the Federal Reserve Bank and the US Government. So if you trust the government and banks and you don't think there's any corruption, well then great... But I don't share that trust, and I would think that anyone who's done any objective research into it wouldn't either.