By David Petlansky
Thanks to a friend of mine, a high school economic teacher, I was able to receive inside information regarding an event hosted by the Federal Reserve Bank of Atlanta called: Evening With The Fed, Myths, Tall Tales & Urban Legends: Facts Behind The Fed.
This event was hosted for teachers and individuals involved with education to give them tools to encourage children under their supervision to not believe "myths" regarding the Federal Reserve circulation on the internet.
The purpose of this post is not simply to debunk their debunkings, but to let the truth be known. Thank you for reading.
To illustrate the kind of close-mindedness the meeting sought to promote, here is an example of one of the assessments given:
Thanks to a friend of mine, a high school economic teacher, I was able to receive inside information regarding an event hosted by the Federal Reserve Bank of Atlanta called: Evening With The Fed, Myths, Tall Tales & Urban Legends: Facts Behind The Fed.
This event was hosted for teachers and individuals involved with education to give them tools to encourage children under their supervision to not believe "myths" regarding the Federal Reserve circulation on the internet.
The purpose of this post is not simply to debunk their debunkings, but to let the truth be known. Thank you for reading.
To illustrate the kind of close-mindedness the meeting sought to promote, here is an example of one of the assessments given:
"24. Ask students to choose two of the four blog posts to write comments
correcting the inaccurate information in the posts. Tell students the blog
posts are common misrepresentations of the Federal Reserve System. Ask the
students to use primary source references from the Federal Reserve Act, Supreme
Court decisions, and/or additional acts of Congress to support their
comments.
Blog Post #1: The Federal Reserve System is an illegal
organization with no constitutional authority that has no involvement with the
lives of ordinary Americans. The Federal Reserve only serves the interests
of Wall Street financiers and the most powerful banks in the United
States.
Blog Post #2: A gang of the most powerful Wall Street
bankers held a clandestine gathering on Jekyll Island, Georgia, in 1910 to
protect their interests. As a result of this secret meeting, the Federal
Reserve System was created.
Blog Post #3: The Federal Reserve
System is owned and controlled by citizens of foreign
nations.
Blog Post #4: The United States has not experienced
bank panics since the Federal Reserve System was created in 1913. The
Federal Reserve System prevents bank panics from occurring."
The main portion of the evening was dedicated to the debunking of 10 "myths" regarding the Federal Reserve. Below, I will list each "myth" and "reality" directly from the handouts provided at the event, followed by the actual real reality, which I will explain in my own words along with resources to check for yourself.
MYTH 1: The Federal Reserve is unconstitutional.
REALITY: The constitutionality of central banking was established through a supreme court precedent. (A precedent is a legal principle that becomes an authority for judges to use in deciding future cases of similar issue.) The case, McCullough v. Maryland, 17 U.S. 316 (1819) was a landmark decision by the U.S. Supreme Court. The case established that the Constitution grants to Congress implied powers for the Constitution's expressed powers, and established that federal laws and treaties are supreme over state law. Therefore, when Congress enacted the law to incorporate the Second Bank of The United States, it was a valid exercise of its constitutional powers.
REAL REALITY:
Article 1 Section 10 of the Constitution states that "No state shall make anything but gold and silver coin a tender in payment of debts."
"We have in this country one of the most corrupt institutions the world has ever
known. I refer to the Federal Reserve Board and the Federal Reserve Banks. Some people think the Federal Reserve Banks are U.S. government institutions. They are not government institutions. They are private credit monopolies; domestic swindlers, rich and predatory money lenders which prey upon the people of the United States for the benefit of themselves and their foreign customers. The Federal Reserve Banks are the agents of the foreign central banks. The truth is the Federal Reserve Board has usurped the Government of the United States by the arrogant credit monopoly which operates the Federal Reserve Board." - Congressman Louis T. McFadden, Chairman of the House Banking & Currency Committee, speech on the floor of the House of Representatives, June 10, 1932
In Lewis v. United States, 680 F.2d 1239 (1982) the court ruled that the Federal Reserve Banks are "independent, privately owned and locally controlled corporations", and there is not sufficient "federal government control over 'detailed physical performance' and 'day to day operation'" of the Federal Reserve Bank for it to be considered a federal agency. To break that down: No government control = UNCONSTITUTIONAL.
The McCullough v. Maryland case did increase federalism by invoking "impled powers" paving the way for the creation of Federal Reserve within a grey area in the Consitution.
So, to summarize: the creation of the Federal Reserve is barely consitutional, and it's practices are far from constitutional. If you review any quotes from authors of the Constitution and forefathers of this country, you will quickly see where they stand as far as a central banking system:
“History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and its issuance.”
-James Madison
“The inability of the colonists to get power to issue their own money permanently out of the hands of George III and the international bankers was the PRIME reason for the Revolutionary War.”
-Benjamin Franklin
“I wish it were possible to obtain a single amendment to our Constitution - taking from the federal government their power of borrowing.”
-Thomas Jefferson
"The bold effort the present (central) bank had made to control the government ... are but premonitions of the fate that await the American people should they be deluded into a perpetuation of this institution or the establishment of another like it. I am one of those who do not believe that a national debt is a national blessing, but rather a curse to a republic; inasmuch as it is calculated to raise around the administration a moneyed aristocracy dangerous to the liberties of the country. Every man is equally entitled to protection by law; but when the laws undertake to add… artificial distinctions, to grant titles, gratuities, and exclusive privileges, to make the rich richer and the potent more powerful, the humble members of society -- the farmers, mechanics, and laborers -- who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their government. Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. If Congress has the right under the Constitution to issue paper money, it was given to be used by themselves, not to be delegated to individuals or corporations. It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes. You are a den of vipers and thieves. I intend to rout you out, and by the grace of the Eternal God, will rout you out."
-Andrew Jackson
" I have two great enemies, the southern army in front of me, and the financial institutions in the rear. Of the two, the one in my rear is my greatest foe."
-Abraham Lincoln
"All the perplexities, confusion and distress in America arise, not from defects of the Constitution or Confederation; not from any want of honor or virtue, as much as downright ignorance of the nature of coin, credit and circulation."
-John Adams
“If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them (around the banks), will deprive the people of
their property until their children will wake up homeless on the continent their fathers conquered.”
-Thomas Jefferson
Sources:
http://www.healthfreedom.info
http://wiki.answers.com
http://educatorssite.com
MYTH 2: The Federal Reserve was created by Wall Street bankers, in secret, on Jekyll Island, Georgia.
REALITY: Parts of a draft legislation known as the Aldrich plan after Senator Nelson W. Aldrich, one of the prominent financiers in attendance at a meeting on Jekyll Island in late November 1910, did make it into the statute that became the Federal Reserve Act signed into law by President Woodrow Wilson on December 23, 1913. In 1908, after the Panic of 1907, Congress created the National Monetary Commission to study and propose a solution to address future banking crises. Senator Nelson Aldrich of Rhode Island made recommendations based on his investigation and research about central banks of Europe. However, throughout December 1913 the Glass-Willis proposal, which was the product primarily of Representative Carter Glass of Virginia, was debated and revised until it became the Federal Reserve Act of 1913. The Federal Reserve System represents a compromise of ideals. It is a decentralized central bank that incorporated the contentious positions voiced by the populists and private banks of the era.
REAL REALITY:
On November 22, 1910, a delegation of the nation's leading financiers left Hoboken, New Jersey for Jekyll Island, Georgia. This group included: Senator Nelson Aldrich (head of the National Monetary Commission), A. Piatt Andrew (Assistant Secretary of the Treasury & Special Assistant of the National Monetary Commission), Frank Vanderlip (president of the National City Bank of New York), Henry P. Davison (senior partner of J.P. Morgan Company, generally regarded as Morgan's personal emissary), Charles D. Norton (president of the Morgan-dominated First National Bank of New York), Benjamin Strong (also known as lieutenant of J.P. Morgan) and Paul Warbug (a recent immigrant from Germany who had joined the banking house of Kuhn, Loeb & Company as a partner).
So, a group of wealthy financiers met, in private, to discuss banking policy. Senator Aldrich was the delivery boy. The people of the United States would have never allowed the Federal Reserve act to be passed if they realized it was parented by the same industry it was supposed to control. Aldrich did take a three hundred thousand dollar trip through Europe to gather information for banking reform, but no report on the results of his trip were made available until after November 22nd when he met with representatives of the United States' and Europe's largest financial institutions.
In 1912, Woodrow Wilson was brought to Democratic Party headquarters by Bernard Baruch, a conspiring banking mogul. It was then that Wilson agreed to push the Federal Reserve Act through legislation in exchange for polital and financial support from the Rockefeller-Morgan bankers, both having personal interest in seeing the Federal Reserve Act passed. To pay for the debt the government would owe the Federal Reserve, Wilson also promised to push for the first ever progressive tax on American people. To ensure Wilson's presidency, J.P. Morgan and Rockefeller bankers poured money into the Progressive Party's candidate, Teddy Roosevelt, in order to divide the Republican vote.
So, everything the Federal Reserve claimed is actually true, but with a lot of side notes: Aldrich's legislation does make up much of the Federal Reserve Act and was following an investigative trip through Europe, however that legislation was agreed upon by banking moguls during their meeting in Jekyll Island. And Woodrow Wilson did sign the Federal Reserve Act into law in 1913, however, he agreed to do so in 1912 in exchange for a sure shot at becoming President by the very authors of the Act.
After signing the act, Woodrow Wilson expressed his regret candidly:
"I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world. No longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men."
Sources:
http://www.apfn.org
http://www.nowtheendbegins.com
http://www.theamericandreamfilm.com
MYTH 3: The Federal Reserve has little to do with the lives of ordinary people.
REALITY: People can take care of their day-to-day business because the Federal Reserve fosters a sound banking system by establishing regulations and acting as a supervisor for depository institutions. Commercial bank customers' demands for funds, electronic payments, direct deposit, and trust in their financial institution all supported through the efforts of the Federal Reserve System. Furthermore, the flow of money and credit in the economy is affected by the monetary policy actions of the Federal Reserve. These actions all contribute to a stable financial system in which people operate day to day.
REAL REALITY:
They worded this one in a very clever way. The Federal Reserve having little to do with the lives of ordinary people is definitely a myth, but not for the reasons they provide.
The Federal Reserve is a private corporation, and private corporations do not offer services for free. Congress was given the power to print money by the Constitution, for some reason, they gave it away to the Federal Reserve. Sketchy.
As long as the Federal Reserve System exists, U.S. government debt will continue to go up and up and up. This runs contrary to the conventional wisdom that Democrats and Republicans would have us believe, but unfortunately it is true. The way our system works, whenever more money is created more debt is created as well.
For example, whenever the U.S. government wants to spend more money than it takes in (which happens constantly), it has to go ask the Federal Reserve for it. The federal government gives U.S. Treasury bonds to the Federal Reserve, and the Federal Reserve gives the U.S. government "Federal Reserve Notes" in return. Usually this is just done electronically. So where does the Federal Reserve get the Federal Reserve Notes? It just creates them out of thin air.
The cost for printing a dollar note is about the same as for a $100 note: about .0206 cents. However, the government is charged their full face value PLUS interest.
Instead of issuing money directly, the U.S. government lets the Federal Reserve create it out of thin air and then the U.S. government borrows it. Talk about stupid. (Or genius, depending on what side you believe they are working for)
When this new debt is created, the amount of interest that the U.S. government will eventually pay on that debt is not also created. So where will that money come from?
Well, eventually the U.S. government will have to go back to the Federal Reserve to get even more money to finance the ever expanding debt that it has gotten itself trapped into.
It is a debt spiral that is designed to go on perpetually.
The reality is that the money supply is designed to constantly expand under the Federal Reserve system. That is why we have all become accustomed to thinking of inflation as "normal".
So what does the Federal Reserve do with the U.S. Treasury bonds that it gets from the U.S. government?
It sells them off to others. There are lots of people out there that have made a ton of money by holding U.S. government debt. In fiscal 2011, the U.S. government paid out 454 billion dollars just in interest on the national debt.
That is 454 billion dollars that was taken out of our pockets and put into the pockets of wealthy individuals and foreign governments around the globe.
The truth is that our current debt-based monetary system was designed by greedy bankers that wanted to make enormous profits by using the Federal Reserve as a tool to create money out of thin air and lend it to the U.S. government at interest.
And that plan is working quite well.
Thomas Edison was once quoted in the New York Times as saying the following:
"That is to say, under the old way any time we wish to add to the national wealth we are compelled to add to the national debt. Now, that is what Henry Ford wants to prevent. He thinks it is stupid, and so do I, that for the loan of $30,000,000 of their own money the people of the United States should be compelled to pay $66,000,000 — that is what it amounts to, with interest. People who will not turn a shovelful of dirt nor contribute a pound of material will collect more money from the United States than will the people who supply the material and do the work. That is the terrible thing about interest. In all our great bond issues the interest is always greater than the principal. All of the great public works cost more than twice the actual cost, on that account. Under the present system of doing business we simply add 120 to 150 per cent, to the stated cost. But here is the point: If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good."
So, American people are responsible for paying debts incurred by the government for a product they could produce themselves at no cost. Moreover, the product required to pay the debt, when created, creates more debt. There will always be more debt than existing money. Our children, and their children, and their children, and so on, will work to pay a bottomless debt.
I'd say that has a pretty strong effect on ordinary people.
Sources:
http://www.buildfreedom.com
http://theeconomiccollapseblog.com
http://www.thedailybeast.com
MYTH 4: The Federal Reserve is controlled by citizens of foreign nations.
REALITY: Member banks of the Federal Reserve hold stock in the Reserve Bank for their district. Individuals cannot hold stock. Member banks include all nationally chartered banks and any state-chartered banks that choose to become members. Based on provisions in the Federal Reserve Act, each Federal Reserve Bank issues shares of stock to its member banks. The Federal Reserve pays dividends to the member banks for their stock. Member banks cannot sell or trade their stock. More than 8,000 depository institutions representing approximately 38 percent of the nation's banks are members of the system. Although these banks are member owners, they have no control of monetary policy or supervisory authority and make no decisions in these areas.
REAL REALITY
The truth is that it is a privately owned central bank. It is owned by the banks that are members of the Federal Reserve system. We do not know how much of the system each bank owns, because that has never been disclosed to the American people.
The Federal Reserve openly admits that it is privately owned. When it was defending itself against a Bloomberg request for information under the Freedom of Information Act, the Federal Reserve stated unequivocally in court that it was "not an agency" of the federal government and therefore not subject to the Freedom of Information Act.
In fact, if you want to find out that the Federal Reserve system is owned by the member banks, all you have to do is go to the Federal Reserve website:
The twelve regional Federal Reserve Banks, which were established by Congress as the operating arms of the nation's central banking system, are organized much like private corporations--possibly leading to some confusion about "ownership." For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.
Foreign governments and foreign banks do own significant ownership interests in the member banks that own the Federal Reserve system. So it would be accurate to say that the Federal Reserve is partially foreign-owned.
But until the exact ownership shares of the Federal Reserve are revealed, we will never know to what extent the Fed is foreign-owned.
Source:
http://theeconomiccollapseblog.com
MYTH 5: Bank panics are a thing of the past because of The Federal Reserve System.
REALITY: Quick responses by the Federal Reserve prevent bank panics from spreading. Bank panics can and still do occur. However, actions on the part of the Federal Reserve System to provide liquidity and lending facilities to troubled financial institutions ensure that such events are contained and minimized. The Federal Reserve works to limit threats to the financial system.
REAL REALITY:
They are right, bank panics being a thing of the past because of the Federal Reserve System is a huge myth.
The Federal Reserve creates meltdowns.
By allowing a centralized authority such as the Federal Reserve to dictate interest rates, it creates an environment where financial bubbles can be created very easily.
Over the past several decades, we have seen bubble after bubble. Most of these have been the result of the Federal Reserve keeping interest rates artificially low. If the free market had been setting interest rates all this time, things would have never gotten so far out of hand.
For example, the housing crash would have never been so horrific if the Federal Reserve had not created such ideal conditions for a housing bubble in the first place. But we allow the Fed to continue to make the same mistakes.
Right now, the Federal Reserve continues to set interest rates much, much lower than they should be. This is causing a tremendous misallocation of economic resources, and there will be massive consequences for that down the line.
Source:
http://theeconomiccollapseblog.com
MYTH 6: The Federal Reserve profits at taxpayer expense.
REALITY: The Federal Reserve rebates almost all of the interest earned on the securities in its portfolio each year to the U.S. Treasury. As a result of open market operations-the buying and selling of U.S. government securities-the Federal Reserve earns interest on the U.S. government securities in its portfolio. In addition, the Federal Reserve earns income from fees that depository institutions pay for check clearing, automatic clearinghouse operations, and funds transfers. It also earns interest income from loans it makes to depository institutions at the discount rate, which is the rate of interest depository institutions pay the Fed for overnight loans. Each year, the Federal Reserve returns to the U.S. Treasury the remains from its income after paying operating expenses. In 2010, the Federal Reserve returned 79.2 billion to the U.S. Treasury.
REAL REALITY: See the REAL REALITY of MYTH 3.
Furthermore, In 1910 the U.S. federal debt was $1,147,000,000 - $12 per citizen. State and local debts were practically non-existent, and government was small and not oppressive.
By 1920, after only six years of the Federal Reserve handling our currency, the federal debt had jumped to $24 billion - $228 per citizen. The Federal Government began to grow like an invisible cancer in its early stages.
By 1968 the federal debt had jumped to $347 billion - $1,717 per citizen. Ten years later, by 1978 it had doubled again to $763 billion - $3,500 per citizen. That is a debt of $17,500 for every family of five in America. Federal debt has been
growing faster and faster since. And the Federal Government has become a debilitating cancer rapidly sapping and weakening its victim.
In 1992 the federal debt was over $4 trillion. (And they "cook the books" on the low side to come up with that figure - see Chapter Nine.) The $4 trillion national debt amounts to $16,000 per citizen, or $80,000 per family of five. And
if that debt were calculated in terms of working or tax-paying families, it would be considerably higher. The Federal Government has become a bloated, out-of-control parasite, a terminal cancer. The economy seems so weak that even
after many months of blowing up the currency supply, signs of recovery have to be searched for. The entire system may be on the brink of complete collapse.
The above figures do not include state, municipal, school district, business, or personal debts, which total an additional $3 trillion as of 1990's. Total debt in America is thus over $7 trillion - $28,000 per citizen - $120,000 per family of five. This is more than twice the assessed value of all the land and buildings in America.
Effectively all of America has been signed over to the bankers. They can take America and we would still owe them another America! Of course, it is to their advantage not to take actual title to the property, so we will not realize that
we really own nothing. Instead they leave us with "ownership" so we will willingly continue to work and pay ever higher tributes to the bankers.
What we really have is national bankruptcy.
"I have never seen more senators express discontent with their jobs. ... I think the major cause is that, deep down in our hearts, we have been accomplices to doing something terrible and unforgivable to this wonderful country. Deep down in our hearts, we know that we have bankrupted America and that we have given our children a legacy of bankruptcy. ... We have defrauded our country to get ourselves elected."
-Senator John Danforth
Source:
http://www.buildfreedom.com
MYTH 7: The Federal Reserve sets interest rates at whatever level it pleases.
REALITY: The Fed, acting within the marketplace, indirectly influences interest rates. When the Fed buys and sells U.S. government securities through open market operations, it influences the money supply and short-term interest rates. Traditionally, buying securities from the primary dealers through the open market leads to lower nominal interest rates. Conversely, Fed sales of securities lead to rising nominal interest rates. The Federal Open Market Committee-or the FOMC-directs the New York Federal Reserve Bank to target the federal funds rate by buying or selling U.S. Treasuries in the secondary market to achieve a specific level of bank reserves. The FOMC bases this targeted rate on its reading of the economy and the economic outlook to achieve its dual mandate of price stability and full employment.
REAL REALITY:
Federal Reserve Chairman Ben Bernanke has the power to dramatically impact our economy at a drop of the hat. The central bank completely controls and determines the money supply. It is permitted to create as much money as it wants out of thin air with no restrictions. This is the antithetical to the principles that America was founded on. Our Founding Fathers would be outraged that one centralized institution has unchecked and unprecedented power to control the economy and thus our lives.
Source:
http://www.freedomworks.org
MYTH 8: U.S. money is backed by gold.
REALITY: U.S. money gets its value from its purchasing power. Money is what money does. In other words, the real value of money is determined by the goods and services it can buy. As long as people accept money during such transactions, money maintains its ability to purchase. Paper currency represented a claim on a certain amount of gold or silver during much of U.S. history. However, in 1933, President Franklin Delano Roosevelt removed the United States from the gold standard. The Federal Reserve Banks do hold collateral-U.S. government securities-equal to the value of Federal Reserve notes-that is, paper currency-in circulation. Hence, U.S. currency is backed by the full faith of the U.S. government. It is fiat money, established through government decree.
REAL REALITY:
This is perfectly explained by Frank Shostak, an adjunct scholar of the Mises Institute:
In an article in the New York Times on January 15, 2004, Berkeley professor of economics Hal Varian raises a fundamental question: why are the dollar bills in people's pockets worth anything? According to Varian, there are two possible explanations for this: the dollar bills carry value because the government in power says so or because people are willing to accept it as payment. He concludes that the value of a dollar comes not so much from government mandate as from social convention.
And yet that still doesn't tell us why the dollar bill in our pocket has value. To say that the value of money is on account of social convention is to say very little. In fact, what Varian has told us is that money has value because it is accepted, and why is it accepted? . . . because it is accepted! Obviously this is not a good explanation of why money has value.
To bolster his thesis Varian suggests that the value of the dollar is a result of the "network effect." According to him, "Just as a fax machine is valuable to you only if lots of other people you correspond with also have fax machines, a currency is valuable to you only if a lot of people you transact with are willing to accept it as payment."
The difference between money and other goods
Let us try another approach. Demand for a good arises from its perceived benefit. For instance, people demand food because of the nourishment it offers them. With regard to money, people demand it not for direct use in consumption, but in order to exchange it for other goods and services. Money is not useful in itself, but because it has an exchange value, it is exchangeable in terms of other goods and services. Money is demanded because the benefit it offers is its purchasing power, i.e., its price.
Consequently, for something to be accepted as money it must have a pre-existing purchasing power, a price. So how does a thing that the government proclaims will become the medium of exchange acquire such purchasing power, a price?
We know that the law of supply and demand explains the price of a good. Likewise it would appear that the same law should explain the price of money. But there is a problem with this way of thinking since the demand for money arises because money has purchasing power, i.e., money has a price. Yet if the demand for money depends on its pre-existent price, i.e. purchasing power, how can this price be explained by demand?
We are seemingly caught here in a circular trap, for the purchasing power of money is explained by the demand for money while the demand for money is explained by its purchasing power. This circularity seems to provide credence to the view that the acceptance of money is the result of a government decree and social convention.
Mises's explains how value of money is established
In his writings, Mises had shown how money becomes accepted. He began his analysis by noting that today's demand for money is determined by yesterday's purchasing power of money. Consequently for a given supply of money, today's purchasing power is established in turn. Yesterday's demand for money in turn was fixed by the prior day's purchasing power of money.
So, for a given supply of money, yesterday's price of money was set. The same procedure applies to past periods. By regressing through time we will eventually arrive at a point in time when money was just an ordinary commodity where demand and supply set its price. The commodity had an exchange value in terms of other commodities, i.e., its exchange value was established in barter. To put it simply, on the day a commodity becomes money it already has an established purchasing power or price in terms of other goods. This purchasing power enables us to set up the demand for this commodity as money.
This in turn, for a given supply, sets its purchasing power on the day the commodity starts to function as money. Once the price of money is fixed, it serves as input for the establishment of tomorrow's price of money. It follows then that without yesterday's information about the price of money, today's purchasing power of money cannot be established.
With regard to other goods and services, history is not required to ascertain present prices. A demand for these goods arises on account of the perceived benefits from consuming them. The benefit that money provides is that it can be exchanged for goods and services. Consequently, one needs to know the past purchasing power of money in order to establish today's demand for it.
Using the Mises framework of thought, also known as the regression theorem, we can infer that it is not possible that money could have emerged as a result of a government decree or government endorsement or social convention. The theorem shows that money must emerge as a commodity.
On this Rothbard wrote,
"In contrast to directly used consumers' or producers' goods, money must have pre-existing prices on which to ground a demand. But the only way this can happen is by beginning with a useful commodity under barter, and then adding
demand for a medium to the previous demand for direct use (e.g., for ornaments, in the case of gold). Thus government is powerless to create money for the economy; the process of the free market can only develop it."
But how does all that we have said so far relate to the paper dollar? Originally paper money was not regarded as money but merely as a representation of gold. Various paper certificates represented claims on gold stored with the banks. Holders of paper certificates could convert them into gold whenever they deemed necessary. Because people found it more convenient to use paper certificates to exchange for goods and services these certificates came to be regarded as money. In short, these certificates acquired purchasing power on account of the fact that these certificates were seen as representative of gold. Note that according to the regression theorem, once the purchasing power of a certificate is established it can function as money regardless of gold since now the demand for money can be established. Remember the demand for money is on account of its purchasing power.
Paper certificates that are accepted as the medium of exchange open the scope for fraudulent practice. Banks could now be tempted to boost their profits by lending certificates that were not covered by gold. However, in a free-market economy, a bank that over-issues paper certificates will quickly find out that the exchange value of its certificates in terms of goods and services will fall. To protect their purchasing power, holders of the over-issued certificates would most likely attempt to convert them back to gold.
If all of them were to demand gold back at the same time, this would bankrupt the bank. In a free market, then, the threat of bankruptcy would restrain banks from issuing paper certificates unbacked by gold.
The government can, however, bypass the free-market discipline. It can issue a decree that makes it legal for the over-issued bank not to redeem paper certificates into gold. Once banks are not obliged to redeem paper certificates into gold, opportunities for large profits are created that set incentives to pursue an unrestrained expansion of the supply of paper certificates. The uncurbed expansion of paper certificates raises the likelihood of setting off a galloping rise in the prices of goods and services that can lead to the breakdown of the market economy.
To prevent such a breakdown, the supply of paper money must be managed. The main purpose of managing the supply is to prevent various competing banks from over-issuing paper certificates and from bankrupting each other. This can be achieved by establishing a monopoly bank—i.e., a central bank—that manages the expansion of paper money.
To assert its authority, the central bank introduces its own paper certificates, which replace the certificates of various banks. The central bank money's purchasing power is established on account of the fact that various paper certificates, which carry purchasing power on account of their historical link to gold, are exchanged for the central bank money at a fixed rate. In short, the central bank's paper certificates are fully backed by bank certificates, which have the historical link to gold.
It follows then that it is only on account of the historical link to gold that the central bank's pieces of paper acquired purchasing power.
Conclusion
Contrary to the popular way of thinking that professor Hal Varian presents in his article, the value of a paper dollar originates from its historical link to commodity money—which happens to be gold—and not government decree or social convention. Fiat money of the sort we use today could not and would not come about in a market setting. What the market created—gold-based money—the government had to destroy before leaving us with paper money whose value as a currency depends on the management practices of the central bank.
Editor's Note: So, in black and white, the Federal Reserve's version of reality is true. But if you logically examine the history of the dollar, it gains its purchasing power by piggy backing off of the fact that it was, at one time, backed by gold; And we are simply creatures of habit.
Source:
http://mises.org
MYTH 9: Most money spent in the economy is transferred by check or cash.
REALITY: Most money spent in the economy is transferred electronically. Since the mid-1990s, check writing has declined while electronic payments have increased. Since 2003, electronic payments have surpassed checks as a form of payment.
REAL REALITY:
This is true.
MYTH 10: Unanticipated inflation hurts everyone in the economy.
REALITY: Some people from benefit from unanticipated inflation despite its generally harmful effects. For instance, debtors who are paying a fixed rate of interest are helped by unanticipated inflation because the rate they are paying does not provide their creditors a rate of return necessary to maintain future purchasing power. A common phrase associated with phenomenon is "using cheap dollars to pay back dear dollars." In other words, money debtors are paying to creditors will not buy today what it could have purchased at the time the borrower took the loan.
REAL REALITY:
Our hard-earned money is essentially stolen through a hidden inflation tax. Inflation is the increase in the supply of money and credit. It is often wrongly defined as the general rise in the price of goods and services. But higher
prices are actually a direct consequence of inflation since increasing the supply of money decreases the purchasing power of the dollar. Inflation hurts the poor most since they have less disposable income. Consumers with low
disposable incomes will be negatively impacted by higher prices for food and clothing.
Source:
http://www.freedomworks.org
MYTH 1: The Federal Reserve is unconstitutional.
REALITY: The constitutionality of central banking was established through a supreme court precedent. (A precedent is a legal principle that becomes an authority for judges to use in deciding future cases of similar issue.) The case, McCullough v. Maryland, 17 U.S. 316 (1819) was a landmark decision by the U.S. Supreme Court. The case established that the Constitution grants to Congress implied powers for the Constitution's expressed powers, and established that federal laws and treaties are supreme over state law. Therefore, when Congress enacted the law to incorporate the Second Bank of The United States, it was a valid exercise of its constitutional powers.
REAL REALITY:
Article 1 Section 10 of the Constitution states that "No state shall make anything but gold and silver coin a tender in payment of debts."
"We have in this country one of the most corrupt institutions the world has ever
known. I refer to the Federal Reserve Board and the Federal Reserve Banks. Some people think the Federal Reserve Banks are U.S. government institutions. They are not government institutions. They are private credit monopolies; domestic swindlers, rich and predatory money lenders which prey upon the people of the United States for the benefit of themselves and their foreign customers. The Federal Reserve Banks are the agents of the foreign central banks. The truth is the Federal Reserve Board has usurped the Government of the United States by the arrogant credit monopoly which operates the Federal Reserve Board." - Congressman Louis T. McFadden, Chairman of the House Banking & Currency Committee, speech on the floor of the House of Representatives, June 10, 1932
In Lewis v. United States, 680 F.2d 1239 (1982) the court ruled that the Federal Reserve Banks are "independent, privately owned and locally controlled corporations", and there is not sufficient "federal government control over 'detailed physical performance' and 'day to day operation'" of the Federal Reserve Bank for it to be considered a federal agency. To break that down: No government control = UNCONSTITUTIONAL.
The McCullough v. Maryland case did increase federalism by invoking "impled powers" paving the way for the creation of Federal Reserve within a grey area in the Consitution.
So, to summarize: the creation of the Federal Reserve is barely consitutional, and it's practices are far from constitutional. If you review any quotes from authors of the Constitution and forefathers of this country, you will quickly see where they stand as far as a central banking system:
“History records that the money changers have used every form of abuse, intrigue, deceit, and violent means possible to maintain their control over governments by controlling money and its issuance.”
-James Madison
“The inability of the colonists to get power to issue their own money permanently out of the hands of George III and the international bankers was the PRIME reason for the Revolutionary War.”
-Benjamin Franklin
“I wish it were possible to obtain a single amendment to our Constitution - taking from the federal government their power of borrowing.”
-Thomas Jefferson
"The bold effort the present (central) bank had made to control the government ... are but premonitions of the fate that await the American people should they be deluded into a perpetuation of this institution or the establishment of another like it. I am one of those who do not believe that a national debt is a national blessing, but rather a curse to a republic; inasmuch as it is calculated to raise around the administration a moneyed aristocracy dangerous to the liberties of the country. Every man is equally entitled to protection by law; but when the laws undertake to add… artificial distinctions, to grant titles, gratuities, and exclusive privileges, to make the rich richer and the potent more powerful, the humble members of society -- the farmers, mechanics, and laborers -- who have neither the time nor the means of securing like favors to themselves, have a right to complain of the injustice of their government. Gentlemen, I have had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves. If Congress has the right under the Constitution to issue paper money, it was given to be used by themselves, not to be delegated to individuals or corporations. It is to be regretted that the rich and powerful too often bend the acts of government to their selfish purposes. You are a den of vipers and thieves. I intend to rout you out, and by the grace of the Eternal God, will rout you out."
-Andrew Jackson
" I have two great enemies, the southern army in front of me, and the financial institutions in the rear. Of the two, the one in my rear is my greatest foe."
-Abraham Lincoln
"All the perplexities, confusion and distress in America arise, not from defects of the Constitution or Confederation; not from any want of honor or virtue, as much as downright ignorance of the nature of coin, credit and circulation."
-John Adams
“If the American people ever allow private banks to control the issue of their money, first by inflation and then by deflation, the banks and corporations that will grow up around them (around the banks), will deprive the people of
their property until their children will wake up homeless on the continent their fathers conquered.”
-Thomas Jefferson
Sources:
http://www.healthfreedom.info
http://wiki.answers.com
http://educatorssite.com
MYTH 2: The Federal Reserve was created by Wall Street bankers, in secret, on Jekyll Island, Georgia.
REALITY: Parts of a draft legislation known as the Aldrich plan after Senator Nelson W. Aldrich, one of the prominent financiers in attendance at a meeting on Jekyll Island in late November 1910, did make it into the statute that became the Federal Reserve Act signed into law by President Woodrow Wilson on December 23, 1913. In 1908, after the Panic of 1907, Congress created the National Monetary Commission to study and propose a solution to address future banking crises. Senator Nelson Aldrich of Rhode Island made recommendations based on his investigation and research about central banks of Europe. However, throughout December 1913 the Glass-Willis proposal, which was the product primarily of Representative Carter Glass of Virginia, was debated and revised until it became the Federal Reserve Act of 1913. The Federal Reserve System represents a compromise of ideals. It is a decentralized central bank that incorporated the contentious positions voiced by the populists and private banks of the era.
REAL REALITY:
On November 22, 1910, a delegation of the nation's leading financiers left Hoboken, New Jersey for Jekyll Island, Georgia. This group included: Senator Nelson Aldrich (head of the National Monetary Commission), A. Piatt Andrew (Assistant Secretary of the Treasury & Special Assistant of the National Monetary Commission), Frank Vanderlip (president of the National City Bank of New York), Henry P. Davison (senior partner of J.P. Morgan Company, generally regarded as Morgan's personal emissary), Charles D. Norton (president of the Morgan-dominated First National Bank of New York), Benjamin Strong (also known as lieutenant of J.P. Morgan) and Paul Warbug (a recent immigrant from Germany who had joined the banking house of Kuhn, Loeb & Company as a partner).
So, a group of wealthy financiers met, in private, to discuss banking policy. Senator Aldrich was the delivery boy. The people of the United States would have never allowed the Federal Reserve act to be passed if they realized it was parented by the same industry it was supposed to control. Aldrich did take a three hundred thousand dollar trip through Europe to gather information for banking reform, but no report on the results of his trip were made available until after November 22nd when he met with representatives of the United States' and Europe's largest financial institutions.
In 1912, Woodrow Wilson was brought to Democratic Party headquarters by Bernard Baruch, a conspiring banking mogul. It was then that Wilson agreed to push the Federal Reserve Act through legislation in exchange for polital and financial support from the Rockefeller-Morgan bankers, both having personal interest in seeing the Federal Reserve Act passed. To pay for the debt the government would owe the Federal Reserve, Wilson also promised to push for the first ever progressive tax on American people. To ensure Wilson's presidency, J.P. Morgan and Rockefeller bankers poured money into the Progressive Party's candidate, Teddy Roosevelt, in order to divide the Republican vote.
So, everything the Federal Reserve claimed is actually true, but with a lot of side notes: Aldrich's legislation does make up much of the Federal Reserve Act and was following an investigative trip through Europe, however that legislation was agreed upon by banking moguls during their meeting in Jekyll Island. And Woodrow Wilson did sign the Federal Reserve Act into law in 1913, however, he agreed to do so in 1912 in exchange for a sure shot at becoming President by the very authors of the Act.
After signing the act, Woodrow Wilson expressed his regret candidly:
"I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world. No longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men."
Sources:
http://www.apfn.org
http://www.nowtheendbegins.com
http://www.theamericandreamfilm.com
MYTH 3: The Federal Reserve has little to do with the lives of ordinary people.
REALITY: People can take care of their day-to-day business because the Federal Reserve fosters a sound banking system by establishing regulations and acting as a supervisor for depository institutions. Commercial bank customers' demands for funds, electronic payments, direct deposit, and trust in their financial institution all supported through the efforts of the Federal Reserve System. Furthermore, the flow of money and credit in the economy is affected by the monetary policy actions of the Federal Reserve. These actions all contribute to a stable financial system in which people operate day to day.
REAL REALITY:
They worded this one in a very clever way. The Federal Reserve having little to do with the lives of ordinary people is definitely a myth, but not for the reasons they provide.
The Federal Reserve is a private corporation, and private corporations do not offer services for free. Congress was given the power to print money by the Constitution, for some reason, they gave it away to the Federal Reserve. Sketchy.
As long as the Federal Reserve System exists, U.S. government debt will continue to go up and up and up. This runs contrary to the conventional wisdom that Democrats and Republicans would have us believe, but unfortunately it is true. The way our system works, whenever more money is created more debt is created as well.
For example, whenever the U.S. government wants to spend more money than it takes in (which happens constantly), it has to go ask the Federal Reserve for it. The federal government gives U.S. Treasury bonds to the Federal Reserve, and the Federal Reserve gives the U.S. government "Federal Reserve Notes" in return. Usually this is just done electronically. So where does the Federal Reserve get the Federal Reserve Notes? It just creates them out of thin air.
The cost for printing a dollar note is about the same as for a $100 note: about .0206 cents. However, the government is charged their full face value PLUS interest.
Instead of issuing money directly, the U.S. government lets the Federal Reserve create it out of thin air and then the U.S. government borrows it. Talk about stupid. (Or genius, depending on what side you believe they are working for)
When this new debt is created, the amount of interest that the U.S. government will eventually pay on that debt is not also created. So where will that money come from?
Well, eventually the U.S. government will have to go back to the Federal Reserve to get even more money to finance the ever expanding debt that it has gotten itself trapped into.
It is a debt spiral that is designed to go on perpetually.
The reality is that the money supply is designed to constantly expand under the Federal Reserve system. That is why we have all become accustomed to thinking of inflation as "normal".
So what does the Federal Reserve do with the U.S. Treasury bonds that it gets from the U.S. government?
It sells them off to others. There are lots of people out there that have made a ton of money by holding U.S. government debt. In fiscal 2011, the U.S. government paid out 454 billion dollars just in interest on the national debt.
That is 454 billion dollars that was taken out of our pockets and put into the pockets of wealthy individuals and foreign governments around the globe.
The truth is that our current debt-based monetary system was designed by greedy bankers that wanted to make enormous profits by using the Federal Reserve as a tool to create money out of thin air and lend it to the U.S. government at interest.
And that plan is working quite well.
Thomas Edison was once quoted in the New York Times as saying the following:
"That is to say, under the old way any time we wish to add to the national wealth we are compelled to add to the national debt. Now, that is what Henry Ford wants to prevent. He thinks it is stupid, and so do I, that for the loan of $30,000,000 of their own money the people of the United States should be compelled to pay $66,000,000 — that is what it amounts to, with interest. People who will not turn a shovelful of dirt nor contribute a pound of material will collect more money from the United States than will the people who supply the material and do the work. That is the terrible thing about interest. In all our great bond issues the interest is always greater than the principal. All of the great public works cost more than twice the actual cost, on that account. Under the present system of doing business we simply add 120 to 150 per cent, to the stated cost. But here is the point: If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good."
So, American people are responsible for paying debts incurred by the government for a product they could produce themselves at no cost. Moreover, the product required to pay the debt, when created, creates more debt. There will always be more debt than existing money. Our children, and their children, and their children, and so on, will work to pay a bottomless debt.
I'd say that has a pretty strong effect on ordinary people.
Sources:
http://www.buildfreedom.com
http://theeconomiccollapseblog.com
http://www.thedailybeast.com
MYTH 4: The Federal Reserve is controlled by citizens of foreign nations.
REALITY: Member banks of the Federal Reserve hold stock in the Reserve Bank for their district. Individuals cannot hold stock. Member banks include all nationally chartered banks and any state-chartered banks that choose to become members. Based on provisions in the Federal Reserve Act, each Federal Reserve Bank issues shares of stock to its member banks. The Federal Reserve pays dividends to the member banks for their stock. Member banks cannot sell or trade their stock. More than 8,000 depository institutions representing approximately 38 percent of the nation's banks are members of the system. Although these banks are member owners, they have no control of monetary policy or supervisory authority and make no decisions in these areas.
REAL REALITY
The truth is that it is a privately owned central bank. It is owned by the banks that are members of the Federal Reserve system. We do not know how much of the system each bank owns, because that has never been disclosed to the American people.
The Federal Reserve openly admits that it is privately owned. When it was defending itself against a Bloomberg request for information under the Freedom of Information Act, the Federal Reserve stated unequivocally in court that it was "not an agency" of the federal government and therefore not subject to the Freedom of Information Act.
In fact, if you want to find out that the Federal Reserve system is owned by the member banks, all you have to do is go to the Federal Reserve website:
The twelve regional Federal Reserve Banks, which were established by Congress as the operating arms of the nation's central banking system, are organized much like private corporations--possibly leading to some confusion about "ownership." For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.
Foreign governments and foreign banks do own significant ownership interests in the member banks that own the Federal Reserve system. So it would be accurate to say that the Federal Reserve is partially foreign-owned.
But until the exact ownership shares of the Federal Reserve are revealed, we will never know to what extent the Fed is foreign-owned.
Source:
http://theeconomiccollapseblog.com
MYTH 5: Bank panics are a thing of the past because of The Federal Reserve System.
REALITY: Quick responses by the Federal Reserve prevent bank panics from spreading. Bank panics can and still do occur. However, actions on the part of the Federal Reserve System to provide liquidity and lending facilities to troubled financial institutions ensure that such events are contained and minimized. The Federal Reserve works to limit threats to the financial system.
REAL REALITY:
They are right, bank panics being a thing of the past because of the Federal Reserve System is a huge myth.
The Federal Reserve creates meltdowns.
By allowing a centralized authority such as the Federal Reserve to dictate interest rates, it creates an environment where financial bubbles can be created very easily.
Over the past several decades, we have seen bubble after bubble. Most of these have been the result of the Federal Reserve keeping interest rates artificially low. If the free market had been setting interest rates all this time, things would have never gotten so far out of hand.
For example, the housing crash would have never been so horrific if the Federal Reserve had not created such ideal conditions for a housing bubble in the first place. But we allow the Fed to continue to make the same mistakes.
Right now, the Federal Reserve continues to set interest rates much, much lower than they should be. This is causing a tremendous misallocation of economic resources, and there will be massive consequences for that down the line.
Source:
http://theeconomiccollapseblog.com
MYTH 6: The Federal Reserve profits at taxpayer expense.
REALITY: The Federal Reserve rebates almost all of the interest earned on the securities in its portfolio each year to the U.S. Treasury. As a result of open market operations-the buying and selling of U.S. government securities-the Federal Reserve earns interest on the U.S. government securities in its portfolio. In addition, the Federal Reserve earns income from fees that depository institutions pay for check clearing, automatic clearinghouse operations, and funds transfers. It also earns interest income from loans it makes to depository institutions at the discount rate, which is the rate of interest depository institutions pay the Fed for overnight loans. Each year, the Federal Reserve returns to the U.S. Treasury the remains from its income after paying operating expenses. In 2010, the Federal Reserve returned 79.2 billion to the U.S. Treasury.
REAL REALITY: See the REAL REALITY of MYTH 3.
Furthermore, In 1910 the U.S. federal debt was $1,147,000,000 - $12 per citizen. State and local debts were practically non-existent, and government was small and not oppressive.
By 1920, after only six years of the Federal Reserve handling our currency, the federal debt had jumped to $24 billion - $228 per citizen. The Federal Government began to grow like an invisible cancer in its early stages.
By 1968 the federal debt had jumped to $347 billion - $1,717 per citizen. Ten years later, by 1978 it had doubled again to $763 billion - $3,500 per citizen. That is a debt of $17,500 for every family of five in America. Federal debt has been
growing faster and faster since. And the Federal Government has become a debilitating cancer rapidly sapping and weakening its victim.
In 1992 the federal debt was over $4 trillion. (And they "cook the books" on the low side to come up with that figure - see Chapter Nine.) The $4 trillion national debt amounts to $16,000 per citizen, or $80,000 per family of five. And
if that debt were calculated in terms of working or tax-paying families, it would be considerably higher. The Federal Government has become a bloated, out-of-control parasite, a terminal cancer. The economy seems so weak that even
after many months of blowing up the currency supply, signs of recovery have to be searched for. The entire system may be on the brink of complete collapse.
The above figures do not include state, municipal, school district, business, or personal debts, which total an additional $3 trillion as of 1990's. Total debt in America is thus over $7 trillion - $28,000 per citizen - $120,000 per family of five. This is more than twice the assessed value of all the land and buildings in America.
Effectively all of America has been signed over to the bankers. They can take America and we would still owe them another America! Of course, it is to their advantage not to take actual title to the property, so we will not realize that
we really own nothing. Instead they leave us with "ownership" so we will willingly continue to work and pay ever higher tributes to the bankers.
What we really have is national bankruptcy.
"I have never seen more senators express discontent with their jobs. ... I think the major cause is that, deep down in our hearts, we have been accomplices to doing something terrible and unforgivable to this wonderful country. Deep down in our hearts, we know that we have bankrupted America and that we have given our children a legacy of bankruptcy. ... We have defrauded our country to get ourselves elected."
-Senator John Danforth
Source:
http://www.buildfreedom.com
MYTH 7: The Federal Reserve sets interest rates at whatever level it pleases.
REALITY: The Fed, acting within the marketplace, indirectly influences interest rates. When the Fed buys and sells U.S. government securities through open market operations, it influences the money supply and short-term interest rates. Traditionally, buying securities from the primary dealers through the open market leads to lower nominal interest rates. Conversely, Fed sales of securities lead to rising nominal interest rates. The Federal Open Market Committee-or the FOMC-directs the New York Federal Reserve Bank to target the federal funds rate by buying or selling U.S. Treasuries in the secondary market to achieve a specific level of bank reserves. The FOMC bases this targeted rate on its reading of the economy and the economic outlook to achieve its dual mandate of price stability and full employment.
REAL REALITY:
Federal Reserve Chairman Ben Bernanke has the power to dramatically impact our economy at a drop of the hat. The central bank completely controls and determines the money supply. It is permitted to create as much money as it wants out of thin air with no restrictions. This is the antithetical to the principles that America was founded on. Our Founding Fathers would be outraged that one centralized institution has unchecked and unprecedented power to control the economy and thus our lives.
Source:
http://www.freedomworks.org
MYTH 8: U.S. money is backed by gold.
REALITY: U.S. money gets its value from its purchasing power. Money is what money does. In other words, the real value of money is determined by the goods and services it can buy. As long as people accept money during such transactions, money maintains its ability to purchase. Paper currency represented a claim on a certain amount of gold or silver during much of U.S. history. However, in 1933, President Franklin Delano Roosevelt removed the United States from the gold standard. The Federal Reserve Banks do hold collateral-U.S. government securities-equal to the value of Federal Reserve notes-that is, paper currency-in circulation. Hence, U.S. currency is backed by the full faith of the U.S. government. It is fiat money, established through government decree.
REAL REALITY:
This is perfectly explained by Frank Shostak, an adjunct scholar of the Mises Institute:
In an article in the New York Times on January 15, 2004, Berkeley professor of economics Hal Varian raises a fundamental question: why are the dollar bills in people's pockets worth anything? According to Varian, there are two possible explanations for this: the dollar bills carry value because the government in power says so or because people are willing to accept it as payment. He concludes that the value of a dollar comes not so much from government mandate as from social convention.
And yet that still doesn't tell us why the dollar bill in our pocket has value. To say that the value of money is on account of social convention is to say very little. In fact, what Varian has told us is that money has value because it is accepted, and why is it accepted? . . . because it is accepted! Obviously this is not a good explanation of why money has value.
To bolster his thesis Varian suggests that the value of the dollar is a result of the "network effect." According to him, "Just as a fax machine is valuable to you only if lots of other people you correspond with also have fax machines, a currency is valuable to you only if a lot of people you transact with are willing to accept it as payment."
The difference between money and other goods
Let us try another approach. Demand for a good arises from its perceived benefit. For instance, people demand food because of the nourishment it offers them. With regard to money, people demand it not for direct use in consumption, but in order to exchange it for other goods and services. Money is not useful in itself, but because it has an exchange value, it is exchangeable in terms of other goods and services. Money is demanded because the benefit it offers is its purchasing power, i.e., its price.
Consequently, for something to be accepted as money it must have a pre-existing purchasing power, a price. So how does a thing that the government proclaims will become the medium of exchange acquire such purchasing power, a price?
We know that the law of supply and demand explains the price of a good. Likewise it would appear that the same law should explain the price of money. But there is a problem with this way of thinking since the demand for money arises because money has purchasing power, i.e., money has a price. Yet if the demand for money depends on its pre-existent price, i.e. purchasing power, how can this price be explained by demand?
We are seemingly caught here in a circular trap, for the purchasing power of money is explained by the demand for money while the demand for money is explained by its purchasing power. This circularity seems to provide credence to the view that the acceptance of money is the result of a government decree and social convention.
Mises's explains how value of money is established
In his writings, Mises had shown how money becomes accepted. He began his analysis by noting that today's demand for money is determined by yesterday's purchasing power of money. Consequently for a given supply of money, today's purchasing power is established in turn. Yesterday's demand for money in turn was fixed by the prior day's purchasing power of money.
So, for a given supply of money, yesterday's price of money was set. The same procedure applies to past periods. By regressing through time we will eventually arrive at a point in time when money was just an ordinary commodity where demand and supply set its price. The commodity had an exchange value in terms of other commodities, i.e., its exchange value was established in barter. To put it simply, on the day a commodity becomes money it already has an established purchasing power or price in terms of other goods. This purchasing power enables us to set up the demand for this commodity as money.
This in turn, for a given supply, sets its purchasing power on the day the commodity starts to function as money. Once the price of money is fixed, it serves as input for the establishment of tomorrow's price of money. It follows then that without yesterday's information about the price of money, today's purchasing power of money cannot be established.
With regard to other goods and services, history is not required to ascertain present prices. A demand for these goods arises on account of the perceived benefits from consuming them. The benefit that money provides is that it can be exchanged for goods and services. Consequently, one needs to know the past purchasing power of money in order to establish today's demand for it.
Using the Mises framework of thought, also known as the regression theorem, we can infer that it is not possible that money could have emerged as a result of a government decree or government endorsement or social convention. The theorem shows that money must emerge as a commodity.
On this Rothbard wrote,
"In contrast to directly used consumers' or producers' goods, money must have pre-existing prices on which to ground a demand. But the only way this can happen is by beginning with a useful commodity under barter, and then adding
demand for a medium to the previous demand for direct use (e.g., for ornaments, in the case of gold). Thus government is powerless to create money for the economy; the process of the free market can only develop it."
But how does all that we have said so far relate to the paper dollar? Originally paper money was not regarded as money but merely as a representation of gold. Various paper certificates represented claims on gold stored with the banks. Holders of paper certificates could convert them into gold whenever they deemed necessary. Because people found it more convenient to use paper certificates to exchange for goods and services these certificates came to be regarded as money. In short, these certificates acquired purchasing power on account of the fact that these certificates were seen as representative of gold. Note that according to the regression theorem, once the purchasing power of a certificate is established it can function as money regardless of gold since now the demand for money can be established. Remember the demand for money is on account of its purchasing power.
Paper certificates that are accepted as the medium of exchange open the scope for fraudulent practice. Banks could now be tempted to boost their profits by lending certificates that were not covered by gold. However, in a free-market economy, a bank that over-issues paper certificates will quickly find out that the exchange value of its certificates in terms of goods and services will fall. To protect their purchasing power, holders of the over-issued certificates would most likely attempt to convert them back to gold.
If all of them were to demand gold back at the same time, this would bankrupt the bank. In a free market, then, the threat of bankruptcy would restrain banks from issuing paper certificates unbacked by gold.
The government can, however, bypass the free-market discipline. It can issue a decree that makes it legal for the over-issued bank not to redeem paper certificates into gold. Once banks are not obliged to redeem paper certificates into gold, opportunities for large profits are created that set incentives to pursue an unrestrained expansion of the supply of paper certificates. The uncurbed expansion of paper certificates raises the likelihood of setting off a galloping rise in the prices of goods and services that can lead to the breakdown of the market economy.
To prevent such a breakdown, the supply of paper money must be managed. The main purpose of managing the supply is to prevent various competing banks from over-issuing paper certificates and from bankrupting each other. This can be achieved by establishing a monopoly bank—i.e., a central bank—that manages the expansion of paper money.
To assert its authority, the central bank introduces its own paper certificates, which replace the certificates of various banks. The central bank money's purchasing power is established on account of the fact that various paper certificates, which carry purchasing power on account of their historical link to gold, are exchanged for the central bank money at a fixed rate. In short, the central bank's paper certificates are fully backed by bank certificates, which have the historical link to gold.
It follows then that it is only on account of the historical link to gold that the central bank's pieces of paper acquired purchasing power.
Conclusion
Contrary to the popular way of thinking that professor Hal Varian presents in his article, the value of a paper dollar originates from its historical link to commodity money—which happens to be gold—and not government decree or social convention. Fiat money of the sort we use today could not and would not come about in a market setting. What the market created—gold-based money—the government had to destroy before leaving us with paper money whose value as a currency depends on the management practices of the central bank.
Editor's Note: So, in black and white, the Federal Reserve's version of reality is true. But if you logically examine the history of the dollar, it gains its purchasing power by piggy backing off of the fact that it was, at one time, backed by gold; And we are simply creatures of habit.
Source:
http://mises.org
MYTH 9: Most money spent in the economy is transferred by check or cash.
REALITY: Most money spent in the economy is transferred electronically. Since the mid-1990s, check writing has declined while electronic payments have increased. Since 2003, electronic payments have surpassed checks as a form of payment.
REAL REALITY:
This is true.
MYTH 10: Unanticipated inflation hurts everyone in the economy.
REALITY: Some people from benefit from unanticipated inflation despite its generally harmful effects. For instance, debtors who are paying a fixed rate of interest are helped by unanticipated inflation because the rate they are paying does not provide their creditors a rate of return necessary to maintain future purchasing power. A common phrase associated with phenomenon is "using cheap dollars to pay back dear dollars." In other words, money debtors are paying to creditors will not buy today what it could have purchased at the time the borrower took the loan.
REAL REALITY:
Our hard-earned money is essentially stolen through a hidden inflation tax. Inflation is the increase in the supply of money and credit. It is often wrongly defined as the general rise in the price of goods and services. But higher
prices are actually a direct consequence of inflation since increasing the supply of money decreases the purchasing power of the dollar. Inflation hurts the poor most since they have less disposable income. Consumers with low
disposable incomes will be negatively impacted by higher prices for food and clothing.
Source:
http://www.freedomworks.org
Final Thoughts:
This information was given in packets to Economy teachers to "educate" their students with. Are you okay with this misinformation being forced into the brains of the children who will grow up to run this country?
The Federal Reserve has obviously recognized a growing movement of information freely flowing on the internet against their favor. In the beginning, they only had to worry about mainstream media, who have always been in there back pocket, so information could always be controlled in their favor. Since the dawn of social media, the age of information has come upon us, and they are already taking action to close the minds of young people to the truths that can set us all free.
They are unable to control the spread of information with the tools we have today working against them, so the next best thing is to control the minds so the information is useless.
Take action. Call your school board and demand that open-mindedness prevail for the students of today and the adults of tomorrow. This has to be stopped or the uphill battle we are already fighting will take a drastic incline ahead.
Thank you for reading.
This information was given in packets to Economy teachers to "educate" their students with. Are you okay with this misinformation being forced into the brains of the children who will grow up to run this country?
The Federal Reserve has obviously recognized a growing movement of information freely flowing on the internet against their favor. In the beginning, they only had to worry about mainstream media, who have always been in there back pocket, so information could always be controlled in their favor. Since the dawn of social media, the age of information has come upon us, and they are already taking action to close the minds of young people to the truths that can set us all free.
They are unable to control the spread of information with the tools we have today working against them, so the next best thing is to control the minds so the information is useless.
Take action. Call your school board and demand that open-mindedness prevail for the students of today and the adults of tomorrow. This has to be stopped or the uphill battle we are already fighting will take a drastic incline ahead.
Thank you for reading.