How our currency became an instrument of debt

The effects of our financial house-of-cards collapsing are everywhere: home foreclosures, unemployment, stock values cut in half, retirement savings lost. The cause, however, is a bit harder to discern as we are distracted by false leads (Fannie Mae and mortgage brokers) and side shows (Bernie Madoff and AIG bonuses).

To solve this case, we must remember to always ask the next question: What enables all of these sideshows? What economic force allowed for the housing bubble, too-big-to-fail financial firms, the trillions of bailout dollars and endless government deficit spending?

If the boom-bust cycle is ever to be stopped, we must walk past the sideshows, go inside the big-top and observe the main event. That event is a magic show called money creation, where, like pulling a rabbit out of a hat, the Federal Reserve creates money out of thin air.

Contrary to what some of our congressmen still believe, our money is not backed by gold or any other commodity. The U.S. dollar is a pure fiat currency. It is ink on paper redeemable for ink on paper.

This is why, in Washington, fiscal discipline is just a quaint notion of the Founding Fathers that doesn’t apply to our sophisticated financial markets.

The Fed doesn’t have any “reserves” to speak of. They have something far better – a printing press – and they’re not afraid to use it!

Ever since President Nixon severed the last connection between the dollar and gold reserves, the Fed has had no restrictions on the amount of money it can create. Inflation has skyrocketed since this action in 1971.

By inflation, I mean the expansion of our money supply. This, of course, always leads to price inflation – the hidden tax that allows unfettered deficit spending without the messy business of raising our income tax.

All politicians know that raising taxes is a career-ender, but more handouts for their constituents is a career-extender. As legislators become addicted to spending, they know the money well will never run dry. Can’t balance the budget? Need a monetary fix? No problem, the Fed is a licensed counterfeiter always ready to deliver the goods.

This is why Congress allows the Fed to carry on in secret with its unfettered expansion of the money supply. Congress is a money addict and the Fed is its enabler.

Injecting liquidity into the market would be one thing if this credit were backed by capital, but just the opposite is true.

With no gold reserves, all of our money is created out of debt. This is why every bill in your wallet says “Federal Reserve Note,” not “silver certificate” or “gold certificate.”

Modern dollar bills are instruments of debt, not of capital. Ben Bernanke is unquestionably a learned individual, but he must have been absent the day his professor discussed the definition of capital. Capital is the result of hard work and savings. Capital is money readily available to purchase the goods and services that are created from the borrowing and investing of entrepreneurs.

This was the real problem with our latest economic bubble. After the Fed was done inflating our economy with liquidity through 2.5 percent interest rates, the bubble finally burst because no real capital (savings) was available to buy all those artificially created goods and services.

Now, the government is trying to re-inflate those values using more debt. How does it do this with a bankrupt Treasury? The Fed simply creates more debt, either by selling bonds, or simply printing more money.

Without the Federal Reserve and its ability print money at will, there would be no $800 billion Wall Street bailout. Of course, one could argue that without the revolving door between the Fed, Wall Street and the Treasury Department, our house-of-cards would have been made of some stronger materials – perhaps even on a foundation of sound assets like gold and silver, as was the intention of our founders.

Beyond the questions of Fed policy there is the issue of who controls this private entity we call the “Federal Reserve.”

The Fed’s specific ownership is confidential but we know that member banks are always shareholders in their respective Fed districts.

This makes our largest banks, the Wall Street banks, shareholders in the most powerful Fed branch. When the New York Fed decides to give, say, $30 billion to Citicorp, it is simply the executives of Citicorp and the rest of the boys club (Goldman Sachs, J.P. Morgan, etc.) bailing themselves out with our money.

One might expect that a private company with the power to print the reserve currency of the Free World might be subjected to close congressional scrutiny. But in the bizarre world of finance, the Fed is above the law. Congress has had no authority to audit the Federal Reserve since the 1950s.

When Chairman Bernanke testifies before Congress, he answers only those questions that he chooses. When asked recently which banks the Fed loaned $2 trillion to, Bernanke simply refused to answer. The Federal Reserve has become our fourth, and most powerful, branch of government, yet is accountable to no one.

Today, Nov. 22, thousands of concerned citizens with gather at Federal Reserve offices nationwide to support H.R. 1207, a congressional bill that would require a comprehensive audit of the Federal Reserve by the General Accounting Office.

The bill currently has 310 co-sponsors but is being held back by the House Financial Services Committee, as the Wall Street banks and the Fed have unleashed their lobbyists on key committee members.

The time has come for accountability. We the People have a right to know what our servants in Washington have allowed to become of our wealth. Congress has unconstitutionally delegated its power to coin money to a cartel of private bankers.

This has created a government of the bankers, by the bankers and for the bankers. The Fed has created a no-lose casino where bankers can gamble with impunity – their winnings to keep and their losses to be absorbed by the taxpayer.

We must demand that Congress pull back the curtain and show us who is really pulling the strings. It is time for congress to pass H.R. 1207 and finally audit the Fed.

Visit www.endthefed.us for more information about H.R. 1207.

Jim Summers is a resident of Amherst and an organizer for End the Fed.