Another essay from the vault – written when Ben Bernanke was appointed – now very relevant as his future is uncertain – and his misdeeds and incompetence have become public knowledge.
I finally understand the mysterious nature of money. Rather than begin at the beginning, let’s work backward from recent news – Greenspan’s retirement and the naming of the new Fed dauphin, Bernanke. If you watch CSPAN you saw Bernanke and the assorted crooks yapping about what should be the Fed’s focus after Greenspan – achieving “full employment” or “controling inflation”. These two bogus shibboleths have been offered as the Fed’s reason for being since 1913. There have been others – moderating the “inherently” boom-bust cycle of capitalism, ensuring an “optimal supply” of money, etc. – all to justify the existence of what is essentially a mass counterfeiting and embezzlement operation – The Fed.
Ever since the rise of the modern state kings and parliaments have been grasping for control of the mint. The reason why should be as obvious as why a counterfeiter likes counterfeiting – its handy to be able to spend money without first having to earn it or, in the case of the state, to tax it. Taxing is cumbersome and ineffecient, and the people’s natural resistence to it placed a barrier to power that states wanted removed.
Things started small – monopolizing weights and measures enabled rulers to clip coins, spending the excess on favored groups and wars, though on a small scale. It wasn’t until the 20th century brought the twin hammers of income taxation and nationalized (and eminently inflatable) paper currencies that the bloodbath could begin. The slaughter of 170 million people in only 100 years couldn’t have been funded by gold shavings.
So, to pull off the Big Plan, financiers and their pet politicians realized that they needed a much slicker technique than the old printing press. Simply running off more and higher-denomination notes is a very third-world way to inflate. You still see this in backwaters like Zimbabwe, but the people catch on quick, and such governments suffer more than the usual number of uprisings.
It happens like this – the Fed’s “Open Market” committee holds a ceremony every few months, for the amusement of the press, to decide what shall be the interest rate on inter-bank loans. This is a distraction from the committee’s main activity which, as its name implies, is purchasing assets on “the open market”. Which assets is irrelevant, though in practice its usually federal bonds (to the immense benefit of the federal government).
The Fed buys assets with checks written against its own account, which is filled with nothing but air – money created out of thin air. The process of inflation begins – with each dollar put into circulation that wasn’t exchanged for something of value (like a sandwich, or an hour’s labor, etc.), the purchasing power of all other dollars is reduced. Prices rise.
So, pretend Joe Schmoe of Joe Schmoe Tractors just received a $1 million check from the Fed for assorted farm gear. The money supply is increased by $1 million. Joe deposits the check at his own bank. The bank, to its delight, sees this is a check payable at the Federal Reserve. It rushes to the Fed, and deposits the check in its own account with the Fed, thereby increasing its reserves by $1 million. Now, by law it can lend out $6 million to its other customers, also created out of thin air. Its bad enough when the bank does this so-called “reverse pyramiding” of its reserves with your hard-earned paycheck. But to create its own phantom money on top of the Fed’s phantom money is a double-whammy. So there you have it – counterfeiting (phantom money) at both levels, and embezzlement (banks lending out your real – and the Fed’s phantom – money) at one level.
If you’re confused, that’s because you’re supposed to be. Only a select few politicians and technocrats understand the process, which they leverage to their own emolument.
The upshot is that the Fed’s inflation does more to keep poor people poor than any capitalist bogeyman the Left would like us to believe, and its the cause of the modern boom-bust business cycle that ruins so many honest entrepreneurs, while rewarding the Haliburtons and Brown&Roots of the world.