Concerns about the money system and the federal Reserve

Overview

Much discussion and hype has surrounded the money supply.
Those who understand it least are the most concerned (which should encourage you).
I believe there are some real concerns about money in the United States of America and some exaggerated concerns based on a lack of understanding or faulty assumptions.
I want to discuss both kinds of concerns on this page.
If you have others, please comment below to me for investigation or explanation.

Paper money is worthless

Those who want you to invest in gold and silver and other “real” money try to scare you into thinking that paper money has no value but the paper it’s printed on.
For those of us with paper debts I think we wish that were true.
Any legally enforceable contract involving debt is treated much the same way as our current money system.
Dollar bills are simply promises by the government to pay the value equal to “one dollar”.
This is a self referencing amount which in theory could be set to the value of the paper but this would be ridiculous.
The government has a vested interest in the happiness (or at least complacency) of its citizens.
There would be no reason to make the value of the dollar so low as to be worthless.
On the other hand, the government (or the Federal Reserve) allows (or designs in) inflation, which is a tax on those holding the money.
Why is this a tax you ask? It’s because the value of the money goes down when inflation happens.
The value lost is exactly what is gained by the US treasury when it’s “obligations to pay” are similarly reduced.

The Federal Reserve is actually owned by foreigners

False. The shares of the Federal Reserve are all owned by member banks much the same way a credit union is organized.

There are no privately held shares and the banking institutions who own the shares happen to not be significantly owned by any one foreigner.

Please see this excellent article on the subject.

The money system is unstable

There are those who believe the money system is inherently unstable and will inevitably lead to meltdown.
Many people have predicted dates when this will happen – much to their embarrassment.

The thinking goes that since each dollar in circulation is borrowed (right?) from the Fed it will need to be paid back to the Fed with interest.
The money to get that interest is not in existence and therefore must be borrowed from the Fed to pay off the existing debt as well.
In this scenario the Federal debt must increase year over year infinitely and exponentially.
(Here is a great example of this thinking).

Anyone who believes this must think the bankers are stupid or part of a conspiracy against the government.

This theory also sounds a lot like an excuse why the government runs a deficit almost every year and has a humongous debt.
Other than the war of 1812, the government has only had a significant debt since the 1930s.
It was not the money system itself that caused the spending problems but the inability of the elected officials to show restraint or accountability.
(Here is a great article on where this could all be headed.).

No, it is not the money system itself that is unstable but the elected and appointed officials that run the government who are unstable.
You can see here how the money supply is really handled. It’s not exponentially unstable by design.

If the government spends only what it gets in taxes there is no debt to gather interest from the Fed.

If the government borrows extra money to spend above what it gets in taxes it has to pay the borrower interest on the debt (of course). It is convenient to borrow this money from the Fed. Most any profit the Fed gets is given back to the treasury.
The Fed goes to international markets to get any money more than what is absorbed by the US population.

So.. what’s wrong with the “Earth plus 5%” article?

  1. The premise that the bank starts out with all the money is a false one.
    The Fed was created by deposits (investments?) from member banks.
    Member banks got the money from depositors like us.
    Originally these deposits were metal backed (representing Gold or Silver or whatever)
    which came from someone digging it up out of the ground.

  2. Most people don’t understand that the Fed returns any interest after expenses and dividends back to the Treasury department.
  3. Many people forget that inflation makes all money worth less over time and thus requires some interest just to maintain value.
  4. In theory, since the Fed can’t make money on it’s own (acting like a monopoly) and all other banks are in a competitive environment
    the interest rates available on the (loan) open market should be as low as possible – just enough to cover the expenses of running bank operations.
    Presumably you would deposit with banks who offer higher rates of return and loan from banks who offer lower rates of interest.

  5. I must admit that any profit a bank makes (and they do) will lead to more and more ownership of private assets by banks.
    A majority of houses and businesses are owned by banks and the ratio is getting worse (or appears to be).
    Even though I believe the system is stable, I have a hard time backing that belief with an ironclad proof.

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