Posted on 11/29/2005 1:19:18 PM PST by hubbubhubbub
"All the perplexities, confusion and distresses in America arise not from defects in the Constitution or confederation, nor from want of honor or virtue, as much from downright ignorance of the nature of coin, credit, and circulation." [1]
Abstract
Ignorantia juris non excusat (ignorance of the law does not excuse) is a well established principle dating back thousands of years. Roman and English law, precursors of the American system of jurisprudence, both recognized the maxim.
Be it not forgotten – justice excuses not the law. The laws of the land are to be made in pursuance of the Constitution. The Constitution has precedent. Any law not in pursuance of the Constitution is null and void, as if it never occurred. So the court has ruled.
"And there is virgin Justice, the daughter of Zeus, who is honored and reverenced among the gods who dwell on Olympus, and whenever anyone hurts her with lying slander, she sits beside her father, Zeus the son of Cronos, and tells him of men's wicked heart, until the people pay for the mad folly of their princes who, evilly minded, pervert judgement and give sentence crookedly." [2]
No man is above the law – not even the King. No law is above the Constitution – not even the King’s. All men are created equal. All men are judged accordingly. He without sin cast the first stone.
The ignorance of coin, credit, and circulation is unfortunately, a widespread occurrence – causing perplexities, confusion, and distress, all tearing at the social fabric of our nation. But who is guilty of these defects – who has caused them to be?
Is it the fault of the common man that he cannot understand the complexities of a monetary system that moved Lord Keynes to say that not one man in a million understands money?
No, the common man is not at fault, the blame lies elsewhere: it rests with those who have purposefully made the monetary policy so bizarre that even its keepers have a hard time understanding the delusion they have created.
John Kenneth Galbraith clearly understood the illusionary nature of the elite’s monetary economists when he stated that they:
“use complexity to disguise or to evade the truth, rather than to reveal it.” [3]
Fractional Reserves
The most dishonest monetary illusion is the shadow cast by fractional reserve lending.
"Because of 'fractional' reserve system, banks, as a whole, can expand our money supply several times, by making loans and investments." [4]
Let’s take a closer look at the sword of State the magi use to create their tricks of prestidigitation – the scepter of fractional reserves.
What is meant by fractional reserves? It would seem that reserves are reduced to a fraction, but a fraction of what? Perhaps we should seek the wise counsel of the Federal Reserve, as this is their raison d’etre.
Required Reserve Balances
“Required reserve balances are balances that a depository institution must hold with the Federal Reserve to satisfy its reserve requirement. Reserve requirements are imposed on all depository institutions – which include commercial banks, savings banks, savings and loan associations, and credit unions – as well as U.S. branches and agencies of foreign banks and other domestic banking entities that engage in international transactions.
Since the early 1990s, reserve requirements have been applied only to transaction deposits, which include demand deposits and interest-bearing accounts that offer unlimited checking privileges. An institution’s reserve requirement is a fraction of such deposits; the fraction – the required reserve ratio – is set by the Board of Governors within limits prescribed in the Federal Reserve Act.” [5]
According to the above, the Board of Governors set required reserve balances within limits as prescribed by the Federal Reserve Act that depository institutions must hold on account.
The required reserve ratio is clearly stated to be a fraction of demand deposits and interest-bearing accounts that offer unlimited checking privileges.
Notice the wording “since the early 1990s, reserve requirements have been applied only to transaction deposits”, as such language demonstrates that previous to the early 1990’s reserve requirements were applied to a larger composite – according to the usage of the word “only.”
Which in fact is true, as reserve requirements have been reduced several times since the Fed took control in 1913? A closer look at reserve requirements is in order.
Reserve Requirements
The Federal Reserve has the following to say in regards to reserve requirements:
“Reserve requirements have long been a part of our nation’s banking history. Depository institutions maintain a fraction of certain liabilities in reserve in specified assets. The Federal Reserve can adjust reserve requirements by changing required reserve ratios, the liabilities to which the ratios apply, or both.” [6]
Once again, we see the use of the word “fraction” when discussing reserve requirements, however, we now have the further clarification of reserves in “specified assets.” Obviously, these “specified assets” are critically important, as they are the reserves of our monetary system.
“A depository institution satisfies its reserve requirement by its holdings of vault cash (currency in its vault) and, if vault cash is insufficient to meet the requirement, by the balance maintained directly with a Federal Reserve Bank or indirectly with a pass-through correspondent bank (which in turn hold the balances in its account at the Federal Reserve).” [7]
Now we see that depository institutions satisfy their reserve requirements by holding cash (currency) in their vaults, or if short, they get some help from the Fed or a correspondent bank. The next logical question is: how much cash are they required to have on reserve in their vaults.
From the same Fed publication, we find the following table:
(table didn't come across)
As can be seen from the above chart there isn’t a heck of a lot of reserves on reserve. Three of the five categories listed in the chart have zero (0) reserve requirements. One of the five categories has three (3%) percent reserves, and the remaining category has approximately ten (10%) percent reserve requirements.
So, what are the ramifications of the above listed reserve requirements? From the Fed’s publication, we find the following:
Autonomous Factors
“The supply of balances can vary substantially from day to day because of movements in other items on the Federal Reserve’s balance sheet. These so-called autonomous factors are generally outside the Federal Reserve’s direct day-to-day control.
The largest autonomous factor is Federal Reserve notes. When a depository institution needs currency, it places an order with a Federal Reserve Bank. When the Federal Reserve fills the order, it debits the account of the depository institution at the Federal Reserve, and total Federal Reserve balances decline.
The amount of currency demanded tends to grow over time, in part reflecting increases in nominal spending as the economy grows. Consequently, an increasing volume of balances would be extinguished, and the federal funds rate would rise, if the Federal Reserve did not offset the contraction in balances by purchasing securities. Indeed, the expansion of Federal Reserve notes is the primary reason that the Federal Reserve’s holdings of securities grow over time.” [8]
Federal Reserve notes are those little green pieces of paper we all carry around in our wallet or purse and refer to as cash. A dollar bill is a Federal Reserve note, as are fives, tens, twenties, fifties, and one hundred dollar bills.
From where does the Fed get the Federal Reserve Notes? Good question. Let’s try and find the answer.
Notice in the above quote the last sentence, which reads, “Indeed, the expansion of Federal Reserve notes is the primary reason that the Federal Reserve’s holdings of securities grow over time.”
With the Fed’s holding of securities entering the picture, we now have two questions to answer: Federal Reserve notes come from where; and what securities is the Fed holding due to the expansion of Federal Reserve notes?
The Treasury
The Treasury has a role to play in this monetary game of musical chairs. The Fed has this to say regarding the Treasury:
“Another important factor is the balance in the U.S. Treasury’s account at the Federal Reserve. The Treasury draws on this account to make payments by check or direct deposit for all types of federal spending. When these payments clear, the Treasury’s account is reduced and the account of the depository institution for the person or entity that receives the funds is increased. The Treasury is not a depository institution, so a payment by the Treasury to the public (for example, a Social Security payment) raises the volume of Federal Reserve balances available to depository institutions.” [9]
From this we see that the Treasury has an account at the Federal Reserve, and that the Treasury draws on the account to make payments by check and direct deposit. Where did the Treasury’s account at the Fed come from? Rather than finding answers, we are discovering more questions.
Open Market Operations
“Open market operations are the most powerful and often-used tool for controlling the funds rate. These operations, which are arranged nearly every business day, are designed to bring the supply of Federal Reserve balances in line with the demand for those balances at the FOMC’s target rate.” [10]
The more we look, the greater our task becomes. That is good, as often times its not just the answers that matter, but asking the right questions as well. We are getting warmer by the minute.
“In theory, the Federal Reserve could conduct open market operations by purchasing or selling any type of asset. In practice, however, most assets cannot be traded readily enough to accommodate open market operations. For open market operations to work effectively, the Federal Reserve must be able to buy and sell quickly, at its own convenience, in whatever volume may be needed to keep the federal funds rate at the target level. These conditions require that the instrument it buys or sells be traded in a broad, highly active market that can accommodate the transactions without distortions or disruptions to the market itself. The market for U.S. Treasury securities satisfies these conditions.” [11]
United States Treasury securities are the main market the Fed uses to conduct open market operations. As the money supply continually grows, the buying of Treasury securities by the Fed occurs more often then selling.
Summary To Date
Fractional Reserves refers to monetary reserves required to be on deposit in banks. The reserve requirements go from zero, to 3%, to 10%. Federal Reserve notes (cash) are the predominant reserve deposit. When banks need cash, they go to the Fed. The Fed holds U.S. government securities in its accounts. The U.S. Treasury has an account at the Fed. The Fed conducts open market operation of buying or selling Treasury securities. The remaining questions before us are:
Where does the Fed get the ever-increasing supply of Federal Reserve notes? Where did the Treasury account at the Fed come from? Where The Money Comes From
Trillions of dollars are said to be everywhere. I remember as a kid that a million was a big number. Today billions of dollars are tossed around from computer to computer without the blink of an eye. Trillions are now the topic de jour.
Budgets, deficits, and international money flows are all described using trillions or parts thereof. We have come a long way. The financial wizards circle high above the common man. But perhaps the way so chosen is the wrong way, for the good of all of the people – not just the elite few who control the strings of the purse, and profit thereby.
Let’s go within the Temple of the Wizards of Finance, to see what arts the conjuring is done by, to see what potions and spells are cast within fortune’s cauldron, and what strange brew precipitates there from.
The Beginning
On that fateful day when Federal Reserve Notes were first issued, it is obvious that a huge number of dollar bills had to be printed. Now, the printing press is pretty much obsolete; the only money that actually gets printed is used to replace old and worn Federal Reserve notes already in circulation. In vogue today is electronic money – fast food style.
The process actually begins with the Treasury Department printing a piece of paper called a bond, which is done electronically. Treasury bonds are debt obligations (liability) of the government to repay a loan - with interest.
The Treasury sells bonds to the public. The bonds the public does not buy, the Treasury deposits with the Federal Reserve. When the Fed accepts the bond from the Treasury, it lists the bond on its books as an asset.
The Fed assumes the government will make good on its promise to pay back the loan. This is based on the belief that the government’s power to tax the people is sufficient collateral.
Because the Fed now has an asset that it didn't have before receiving the Treasury bond, the Fed can now create a liability that is offset by its new asset.
The liability that the Fed creates is a Federal Reserve check. It gives the Treasury the check in payment for the Treasury bond.
THERE IS NO EXISTING MONEY IN THE FED'S ACCOUNT TO COVER THIS CHECK.
The Federal Reserve check is endorsed by the Treasury and is deposited in one of the government's accounts at the Federal Reserve. The government can use the deposits to write checks against, to pay for government expenses.
This is the first new money flow to enter the system. Various government contractors, vendors, etc. receive these checks as payment for services rendered, and they take the checks and deposit them in their commercial banks.
The Second Step
This is when the wizards of finance perform their greatest feats of magic. The deposits in the commercial banks take on a sort of split personality or dementia, brought on by a preponderance of delusional thinking.
On the one hand, the deposits are the bank’s liabilities, as they owe the total sums to their depositors.
However, because of FRACTIONAL RESERVE lending, the bankers get to lend out 9 times what they have on deposit.
The commercial banks get to list the deposits as RESERVES.
In other words, FRACTIONAL RESERVE lending allows the commercial banks to create 9 times more money then they have on reserve. The banks lend money they don’t have, and:
They get to charge interest on it.
As the newly issued money is put to work by borrowers, they then spend it and the receiver then deposits it in their bank account, and the bank starts the reserve lending policy all over again. This is why the
Money supply must expand by the amount of interest owed on the debt.
If it didn't, the debt would not be able to be serviced. There is no money created without creating debt, they are one and the same. Wealth is not created by creating money by fiat – only debt. As the Fed has admitted:
"Commercial banks create checkbook money whenever they grant a loan, simply by adding new deposit dollars in accounts on their books in exchange for a borrower's IOU." [12]
Conclusion
Fractional reserve lending invokes the moral hazard of fidelity of contract. Banks have on deposit (reserve) at most 10% of the “money supply.”
This means that if more than 10% of depositors go to the bank at one time to withdraw “our” money – there isn’t any money to withdraw beyond the 10% reserves.
Which means that 90% of the money supply is non-existent, nothing more than a fleeting illusion.
The bank’s solvency stands on the faith that no more than 10% of depositors will want their money at the same time. This means that although
Banks may appear to be solvent – they are without question illiquid.
Fractional reserve lending insures and guarantees that banks cannot possibly be liquid.
Banking is the only type of business that is allowed to function this way. If any other business used a similar modus operandi it would be subject to censor, arrest, court, and possibly imprisonment. Banks cannot fulfill all of their contracts if demand occurred at the same time. Thus, the banks are illiquid.
Why the double standard? Why the dishonesty? Why are they afraid of gold and silver money as the Constitution mandates? Because it would make them tow the line or go bankrupt. Less they forget - be ever mindful - even Zeus cannot deny Destiny.
Coming Soon – Open Letter To Congress Seeking Redress For The Return To Honest Money
[1] John Adams in a letter to Thomas Jefferson [2] Hesiod, Works and Days [3] John Kenneth Galbraith Money: Whence It Came, Where It Went [4] Federal Reserve Bank, New York The Story of Banks, p.5. [5] The Federal Reserve System Purposes and Functions The Implementation of Monetary Policy [6] Same as above [7] Same [8] Same [9] Same [10] Same [11] Same [12] Federal reserve Bank of New York, I Bet You Thought, p.19
Boy, you're gonna' stir up some people with this. People are afraid to look at this stuff cause there ain't much warm and fuzzy there.
I appreciate your summary. I guess most if it (in a rather amorphous way) was already in my understanding. So according to your understanding, this sort of thing can just keep going infinitely? It's not self-limiting, or rather, it's on a solid platform?
It just sounds so - unsettled, foundationless.
Actually, the Fed doesn't target the interest rate of bills, it targets the Fed Funds (overnight) rate.
If there's a banking crisis again similar to what happened approx. 70 yrs. ago what would you rather have in your posession.......a FRN that's worth no more than the ink and paper it's made with or a precious metal such as gold or silver? Also, even though this money is created out of thin air.......what do you suppose is the underlying collateral?.....because as we all know bankers are far from being very benevolent when it comes to their money.
your joking , right?
What it is saying about the solvency of banks and our currency is very important to our futures.
It pays to spend the time and read and discuss.
Regards,
Lurking'
As I'm sure you know this fiat system is backed by the "full faith and credit of the American public"......sounds good but are they telling us in a roundabout way that everything we think we own is the collateral for this incomprehensible amount of debt?
Unless the money supply can expand at the rate the economy is expanding it will produce deflation which cripples the economy. This is the reason gold and silver are no longer monetary instruments. Governments are not going to allow the economy to collapse and face rebellious citizens.
Gold and silver expand at a rate less than two percent per yr. (for the last 500 yrs. including the looting of the New World's metals by the Spanish) while our long term economic growth rate is a little over 3 per cent. Thus without the advent of credit and paper money we would not have grown as much as we have in the last hundred years.
It is also instructive to examine the origins of the Federal Reserve system. Bankers in the Money Centers fought the idea for decades believing they could handle the periodic financial panics. They did not care that it was the banks and the people in the hinterlands which suffered most during these panics as their money was drawn away to the Money Centers. Let the farmers go bankrupt.
But after the Panic of 1907 it became clear that without a financial giant of the stature of JP Morgan such panics could not be staved off and something else had to be done.
Then the financial class joined forces with the Populists and Progressives to come up with the Federal Reserve and its system of regional banks to assure that the money would not be drawn off to the East as was typically the case.
Most of those highly critical of Central banking do not understand its history or its function and write it off as a conspiracy against the common man. It is not.
How much incomprehensible debt are you talking about?
I agree that it is not necessarily be a conspiracy against the common man, however it sure doesn't work in our favor.
Lurking'
Governments do not use the same accounting methods as private companies. If it did our debt would not look anything like it is portrayed now. There is no accounting for the billions and billions of assets the government has in the standard descriptions.
How many millions of acres of lands are owned by the fedgov? It owns most of the land of entire states. How many buildings, vehicles, and assets of every kind? If the Navy buys a billion dollar aircraft carrier only the debt increase is accounted for while for a private company the expenditure would be offset by the acquisition of the new asset.
If all the fedgov assets are accounted for do we really even have a national debt?
The concept of fractional reserves is what permits banks to exist usefully. Let's say you have earned $100,000, and you deposit it in Bank A. Assuming a 10% fractional reserve requirement, Bank A must hold $10,000 and can use the other $90,000. It loans $90,000 to Adam to buy a house. Whomever Adam bought the house from now deposits the money in Bank B, which then holds $9,000 and loans $81,000 to Bob to buy a Mercedes. The Mercedes dealer puts the money in Bank C, which then holds $8,100 and loans $72,900 to Chuck to start a business, and so on. This cycle continues until all of the original $100,000 is held by various banks in reserve deposits (Bank A's $10k plus Bank B's $9k plus Bank C's $8100, etc.) and the total amount loaned equals (1/reserve rate)*original deposit, or $1,000,000. This multiplying ability allows $1 million of business to be transacted from your $100k deposit, thus generating ten times the economic benefit of the original money. Because Bank A is earning interest on its $90k loan to Adam, it can pay you interest on your savings balance (which is still $100k, of course). Now, it's true, your entire $100k is not sitting in your bank's vault, but it's unlikely you'd need to withdraw all $100k at once. And of course in the real world banks have thousands of depositors, and it is extraordinarily unlikely that they would in aggregate need to withdraw 10% of all funds on deposit at any given time. In addition, there have been safeguards in place since the Great Depression that allow the Federal Reserve to back up chartered banks if there were such a run on the bank.
The funds are not foundationless - instead of being backed up with cash deposits, they are in essence backed up by the loans the bank has made, which are assets backed by debt in the same way that dollar bills are assets backed by debt (Treasury bills). Essentially, by having loans on hand instead of cash, you are investing in private debt instead of government debt. And, of course, you always have the option to buy Treasury bills, which would bypass the whole banking system and let you own government debt directly - which is what your dollar bills are, anyway.
Now, what would happen if banks were required to hold 100% of their deposits on hand? First, they couldn't make any loans - any money you deposited would have to sit in the vault in case you wanted to withdraw it. With no loans, they would earn no interest and so could not pay you any interest - in fact, they'd have to charge you for holding your money, since they couldn't use it. Banks would just be cash warehouses, and you'd pay for the privilege. Also, if you wanted to buy anything, you'd need cash up front, or you'd need to find a private person who could directly loan you the entire amount himself. Banking would essentially no longer exist.
Yes. And our creditors are the Chinese, who I am sure will always love us like a rich and indulgent uncle.
Thinking back....It was a C minus that I got in that FM course.
Great posts. Thanks.
Oops! You're right, of course. Regardless, the process is neither secret nor a conspiracy.
But I thought that you'd have notes that say, for instance, this note redeemable for 1 ounce of gold? How does the increasing value of gold increase the money supply? You still have the same number of notes. Same number of ounces.
Interesting thoughts......however, I'm real curious about what the fedgov uses for collateral to create all this debt? Are they using all their assets or are we citizens somehow backing the debt?
Shhhh.....if they think you've uncovered their process, the Plunge Protection Team might feel the need to rub you out.
Let's hear what this "simpleton" thought about it. Remember, from 1776 until the Constitution was ratified and the Coin Act enacted, our young country almost choked on worthless fiat paper "Continentals," leading to radical movements such as Shay's Rebellion.
"Specie is the most perfect medium because it will preserve its own level; because, having intrinsic and universal value, it can never die in our hands, and it is the surest resource of reliance in time of war." --Thomas Jefferson to John Wayles Eppes, 1813. ME 13:430
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