Central Banking vs. America

Let me issue and control a nation's money supply, and I care not who makes its laws." (Mayer Amschel Rothschild, Founder of Rothschild Banking Dynasty)

Many prominent Americans such as Benjamin Franklin, Thomas Jefferson, and Andrew Jackson have argued and fought against the central banking polices used throughout Europe.

A note issued by a central bank, such as the Federal Reserve Note, is bank currency. These notes are given to the government in exchange for an interest-bearing government bond.

This may be a good article, but it starts off with a pretty stupid statement. It is true that NOW the Fed and the Treasury exchange I.O.Me's and each pretends they have more than they had before.

But when the Federal Reserve was created, the notes they issued were gold backed (Treasury paper was specifically prohibited as collateral for FRN's by the original act creating the Federal Reserve), they were redeemable in gold on demand (real gold); and they were NOT LEGAL TENDER. FDR changed much of this in 1933.

My point is that that the author is just wrong, central bank notes were not always backed by paper.

ML/NJ

There's a lot of truth here. Central banks historically have been "engines of inflation." However, there are several common errors as well.

The central bank can issue paper money and use it to buy government bonds. The bank then earns interest on the bonds. However, it is not necessarily the case that the government has to borrow more money from the bank to pay the interest. The government can pay the interest, and eventually retire the bonds, with income from taxes. Unfortunately, governments tend to take the easy way out, and pile debt on debt. But that's a fault of governments. Central banking makes it easy, but central banking isn't necessary. Governments can run the printing press (as Zimbabwe is doing now) without the aid of central banks.

The discussion of fractional reserve banking is simply wrong. It repeats a common but erroneous misrepresentation of what banks do.

Assume a reserve ratio of 10%, as in the article. I deposit $100 in the bank (gold, silver, or bank notes, it doesn't matter). The bank must hold $10 in reserve, and can lend out $90. Next assume someone borrows the $90, and immediately deposits it in the bank, intending to write checks against it later. The bank now has deposits of $190 (my original $100 plus the $90 it loaned out and accepted as a deposit). It thus needs a reserve of $19, and can lend out another $81. Assume that $81 is also deposited back in the bank, and so on. It's easy to see that if this process continues, eventually the original $100 must be held as reserves, and the bank will have outstanding loans of $1000, on which it can earn interest. Obviously it charges more interest on the loans than it pays on the various deposits.

So far, it looks like the bank has done the equivalent of waving a magic wand over my original $100 and turned it into $1000. However, that's misleading. The borrowers are paying more in interest on the loans than they get on the deposits. They will therefore use the money for whatever purpose they borrowed it for in the first place (paying employees, buying stock, etc., etc.). As soon as they do that, the whole pyramid collapses back to the original $100.

There's no magic, and no chicanery here. The original $100 can be multiplied into $1000 only if all the borrowers along the chain deposit the money they have borrowed back in the bank and keep it there. That's the point that the critics of fractional reserve banking don't tell you about, while they're implying that a bank can take your deposit and lend a huge multiple of it. As soon as the borrowers actually use the money they borrowed, it's no longer there as a deposit, and can't be loaned out again. The borrowers obviously must continue to pay interest until they retire their loans, but the bank can't treat the loan as a deposit and continue to lend it out again.

There are enough legitimate criticisms of central banks. It's not necessary to drag in a phony one like this.

According to The Reserve Banks and the Money Market, by W. Randolph Burgess -- an officer of the Federal Reserve Bank of New York -- the original security for Federal Reserve Notes was short-term paper.

The paper used as security under the original terms of the Federal Reserve Act represented agricultural products or other goods in the process of production, or in movement from producer to retailer, in process of export or import, or on the shelves of retailer or wholesaler awaiting sale. The paper was required to bear the endorsement of a member bank and its maximum maturity at the time of rediscount was ninety days, except in the case of agricultural paper, which might run for six months.... [1936 edition, p. 73]

“The Federal Reserve pays the Bureau of Engraving & Printing approximately $23 for each 1,000 notes printed. 10,000 $100 notes (one million dollars) would thus cost the Federal Reserve $230. They then secure a pledge of collateral equal to the face value from the U.S. government. The collateral is our land, labor, and assets... collected by their agents, the IRS. By authorizing the Fed to regulate and create money (and thus inflation), Congress gave private banks power to create profits at will.”

Is this what they call *fiat* money?

See link at post #3

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