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Bernanke Gets it Wrong Again

September 10, 2012

So last Friday, Bernanke speaks and the price of gold goes up because from the sounds that came out of his mouth, it looks like quantitative easing is imminent. That is not all that went up, the price of gas at the pumps also went up this past Friday. So, instead of preventing inflation by prohibiting fractional-reserve banking as fraudulent, our government continues to move in the opposite direction. The masses continue to blindly confide in the banks without knowing how they really operate, use of paper and deposits instead of gold as money is accepted as if it’s always been this way.

And we have the central banking system known to us today as the Federal Reserve, which came into existence in 1913. After its inception, there was the centralization and absorption of gold into government vaults, greatly enlarging the national base of credit expansion. It also insured uniform action by the banks through basing their reserves on deposit accounts at the central bank instead of on gold. Since then no private bank gauges its policy according to its gold reserves but rather are all tied together by central bank action. Yes that’s right, whatever Bernanke says, he drags every bank in the nation along with him, like it or not. The comfort in that for private banks around the nation is that they can rely on the central bank as “a lender of last resort” in case any of them should happen to get in trouble and thus more confidence on the part of private banks and more confidence on the part of the public.

So what is the Federal Reserve or better yet, what does the Federal Reserve do? Whats its function? Well, going back to 1913 the government of the United States of America gave control of our banking system and monetary system to the Federal Reserve in three ways: (1) granting the Federal Reserve System a monopoly over note issue; (2) compelling all the banks throughout the country to join the Federal Reserve System; and (3) fixing the minimum reserve ratio of deposits at the Reserve bank to bank deposits (money owned by the public). This gave the Reserve control over the volume of reserves and the legal reserve requirements. This all sounds very complicated and the average reader may be thinking so what? Whats the problem here? Why is having a Federal Reserve so bad? Well, it would take a chapter for me to answer those questions, but I am going to try to simplify a few things and perhaps this will get your juices flowing as to what the problem is here.

Think about an upside down pyramid where at the very bottom is the amount of gold reserves an average bank has or had and then everything on top is the amount of credit in loans issued to private citizens and businesses. I am keeping this very simple. The gold reserve at the bottom of the inverse pyramid is small and as this upside pyramid expands its analogous to the expansion of credit to the public. Hopefully you are envisioning this rather well and I am writing under the assumption that you the reader understand that the money lent out to the public is supposed to be backed up by the gold on reserves, at least that’s how it used to work. Well, if in this upside down pyramid, the gold reserve at the bottom represents 10% of all assets and the credit represents the other 90% of the pyramid, how was the bank able to offer loans nine times what it had in gold reserves? That is exactly the point and that’s called fractional reserve banking. The difference now is that it’s not banks throughout the nation doing this each on their own, but they do it with the blessing of the Federal Reserve who is there to bail them out when the banks are loaned up  to their legal ratio and then some.

Can you deduce by now how inflationary this fractional reserve banking is? If I am a bank and I have ten dollars, I loan out ninety dollars and claim I have one hundred dollars in assets on the books. How is that possible? I just created ninety dollars that doesn’t exist and loaned it out. That is exactly what fractional reserve banking is. So what did Bernanke talk about last Friday? What have our politicians talked about earlier this year as a way to deal with our failing economy? They certainly have not talked about outlawing fractional reserve banking and if they had, I am afraid that the public would have had no clue what they were talking about. What banks are doing with the Federal Reserve as its leader is counterfeiting, the biggest counterfeiter in the country being the Fed of course. Counterfeiting is fraud and fraud is equivalent to theft. Banks that issue receipts to a non-existing tangible asset such as gold are really committing fraud and the public is none the wiser because they do not know the history of banking and money and how both work. I don’t advocate government intervention in anything except assuring our right to peace, prosperity and private property and the case can be made that our properties have been stolen. I say this because these receipts to non-existent gold cannot be claimed by their rightful property owners because it isn’t there, it doesn’t exist. The same can be said of our labor in the sense that we work hard for compensation and receive nothing in return except soon to be worthless pieces of paper whose only value is based on the confidence that we the people and mostly the international community places on it and that confidence on the part of other nations is growing weary by the day. Until we educate ourselves by reading articles such as this one and reading the works of economists such as Ludwig von Mises and Murray Rothbard, very little will change and that means we have some touch economic times ahead for the remainder of this year.

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