Thursday, December 23, 2010

Federal Reserve on Ice

I just submitted this column to the Lincoln Eagle, which is scheduled to go online within a few months. Mike Marnell's circulation, currently around 13,000, is close to the Kingston Freeman's daily circulation of around 16,000.  Of course, the Lincoln Eagle only comes out monthly.

Federal Reserve on Ice

Mitchell Langbert, Ph.D.*

Several readers have commented. No issue is more urgent or of greater importance to you.  It is more important than the price of your car insurance or your annual salary increase.  The issue is simple.  But people find it confusing because they can’t believe it. To use a high school vocabulary word, they are incredulous

The Wall Street-owned Democratic Party media, from NBC to MSNBC to CNN to the Kingston Freeman, do not discuss it.  Congressman Maurice Hinchey recently voted to bury information about it by preventing its audit.  But, yes Virginia, the Federal Reserve Bank (the Fed) is bigger and better than Santa Claus.  It creates money out of thin air. And no, the goods and services of the American economy DO NOT back the Fed-created money.  Nor do the full faith and credit of the American people.  The money you use is Fed-created money printed on paper and notated in banks. Your dollars are backed by…nothing. 

If the international community stops believing in the dollar, it will be worthless.  If the American public loses faith in it, it will be worthless.  The recent rise in the price of gold from $250 an ounce in 2000 to $1400 an ounce recently, nearly a 600 percent increase, is evidence that some investors anticipate a dollar collapse.  This could harm you. If it happens, it will be because of socialist big government, because of the Fed, because of the Democrats and because of the Republicans. The two party system is a one party system that responds in unison to the interests who benefit from the Fed.

In 2005 there were $1.4 trillion in US checking accounts and cash.  Today there are over $2 trillion in Fed-owned deposits.  The Fed increased its own deposits and cash from about $800 billion three years ago to over $2 trillion today.  It did this by creating the dollars it holds out of thin air. And the Fed announced that it is counterfeiting another $600 billion in the near future.

Commercial banks have the power to create still more money, also out of thin air, through lending.  Thus, the money supply might triple within a few years.  That could mean your pension and savings accounts will be worth less. A lot less. Their value will have been diverted to Wall Street and commercial banking interests.  Your congressman, Maurice Hinchey, voted to cover up the Fed’s operations by voting against Ron Paul’s Audit-the-Fed Bill.  No greater subsidy to the super-rich exists, and Congressman Hinchey is on board.  Special interests have no greater means of exploiting you, and Congressman Hinchey has voted to facilitate your exploitation.

The Wall Street-owned media, which is called “liberal” but is better called corporatist or Whig, pretends that the Fed is too complex for you to understand.  Nothing could be further from the truth.  In the 19th century the opposition to the "Fed" came from ordinary working Americans, just like you and me. 

The way the monetary system is set up is easy to understand.  The Federal Reserve Bank, the regulator of the banking system, is a private concern that the banks own.  It is empowered to create money out of thin air.  All greenback dollars, the dollars you hold, are artificial Fed reserves or derived from bank loans based on Fed reserves.  The gold in Fort Knox does not back them. The US public does not back them. The US economy does not back them.  The US government does not back them. Nothing backs them.  

Purchasing Treasury bonds from banks like Citibank, the Fed deposits dollars it creates out of thin air.  The assets it has traditionally chosen are Treasury bonds, but they could purchase other assets.  Dollars are called “Federal Reserve Notes”, which implies that they are debt, but the notes are only redeemable in other Fed Notes.  It is as though you had the right to pay for your house and car with loans that you had the right to repay with further loans and that people were legally required to accept your IOUs, which you only had to repay with further IOUs. If you could do that, you would have a holiday.  Since it is January, it would be a holiday on ice.  Wall Street has been having a holiday on ice since the winter of 1932, at your expense.

The Fed has no incentive to be even-handed or fair. Its owners, large commercial banks, have every incentive to expand the money supply because they benefit from more dollars, which they lend at interest, largely to Wall Street.  More accurately, for every dollar that the Fed creates, the banking system can lend up to $10.  It does this by using Fed-created dollars as loan reserves over and over.  The Fed creates a dollar by purchasing a Treasury bond from a New York City bank.  The bank uses the dollar by lending out 90 cents of the dollar to a borrower.  The borrower deposits the 90 cents in his bank. The borrower’s bank lends out 81 cents, using the same reserves a second time.  The second borrower deposits the 81 cents in his third bank. The third bank lends out 73 cents based on the same reserves to a fourth borrower, etc.  In the end, the banking system can create up to ten times the amount of money that the Fed creates.  In practice, the banking system approximately lends out less than double the Fed deposits.  Recently the Fed massively expanded reserves.  The expansion will not cause innovation, quality improvement or higher productivity.  Inflation will result as it has since the 1930s.

The people who get first dibs on the Fed’s fresh counterfeit benefit most.  These are the following: (1) commercial banks; (2) Wall Street and hedge funds; (3) managers of big business, which has easy credit access; (4) stock and bond holders (5) government (6) defense and other government suppliers; and (7) real estate-related interests.

The people whom the Fed hurts include those who are retired and are on pensions or other fixed incomes; private sector workers not in finance or real estate who live off wages; those who do not rely on welfare or other government programs; those who save; and those who aim to get ahead through innovation rather than asset manipulation or speculation.

The real hourly wage has hardly increased since 1971, when Richard Nixon abolished the gold standard.  In the 19th century and until 1971, when there were elements of the gold standard remaining, it used to increase two percent per year. Now it increases two percent in forty years.  Government’s massive expansion could not have occurred without the Fed.  Hence, greedy government officials, congressmen like Maurice Hinchey, the Wall Street-owned Democratic Party media, government employees and bankers have waxed rich on your dime.

*Mitchell Langbert is associate professor at Brooklyn College. He blogs at


Anonymous said...

Dr. Langbert:

I am ignorant and can you please explain:

The Federal Reserve Bank, the regulator of the banking system, is a private concern that the banks own.

Does this mean that the "banks" hold stock in the Federal Reserve Bank that they can trade and use as collateral?

Mitchell Langbert said...

Without my doing further reading on this I can only give you my best guess. The stock is probably like the stock in a housing co-op. Its sale is either prohibited or subject to numerous restrictions. Incidentally, Fed issues are not my specialty academically. I am just interested as a citizen, just like you. Some good books to read on this are by Murray Rothbard: the Mystery of Banking and What Has Government Done to Our Money.