Welcome to the second part of the blog series. Read the first part for a better understanding. The focus of the last blog was on how money came into power. Now we know that gold is actually what counts for money but since the time Fed has come into power, things have changed.
The Great Depression of 1929 had a profound effect on monetary policy worldwide. The Fed had printed nearly all the money it could, against the gold it held to pump life back into the economy. So, it needed gold to fire up the mint. Seizing the metal would enable the government to print and buy more dollars in the international markets to shore up the exchange rate, hence stimulating the economy.
In 1933 President Roosevelt issued an order forcing all U.S citizens to sell their gold to the Fed at a fixed price or go to prison. The Fed offered far more cash to foreign governments for their gold. Many jumped at the offer. Gold flowed in and dollars spread across the globe.
World war II devastated nearly every major economy except the U.S. The dollar had become the world's most stable and trusted currency. Other countries pegged their currency to the dollar which could still be redeemed for gold. In fact, the U.S owned almost 2/3rd of the world's gold reserves.
U. S’s military expenditures rose from a few hundred million in 1941 to $91 billion in 1944. The plan was to fund the wars through taxation and domestic borrowing. But by 1966 foreign nations had enough of the U.S collecting gold and printing cash. They demanded gold in return for their paper dollars. Arguments about the value of the dollar versus their currency ensued.
In 1971, President Nixon settled the matter. He severed the dollar from the gold standard i.e. he suspended the convertibility of the dollar in the gold or other reserve assets conditions determined to be in the interest of monetary stability. In the best interest of the U.S, never again could anyone legally demand the U.S government's gold in exchange for paper dollars.
Before Nixon’s announcement, 1 ounce of gold was worth $35 and after his words, it rose to $850 in less than 2 years. The dollar was now backed solely by the full faith and credit of the U.S government. The wealthiest nation the world had ever known would bet its future on a single word- trust.
The wealth of the nation is a gigantic hole of money that we owe to the rest of the world that is never going to be paid back. The monetary and fiscal policies have created a nation of debtors and not just personal or corporate debt but government debt. Today the U.S pays more than $ 400 billion [That's 30 lakh crore rupees. Try counting the zeroes :) ] in interest to its creditors every year.
When a government spends more money than it collects in taxes, it simply borrows or creates more. At one time every piece of paper money was backed by gold i.e. for every twenty-dollar bill there was twenty dollars worth of gold in the government vault but not anymore.
Today governments create currency by first creating bonds or treasury bills. These bonds are sold in the market, generating funds for the government that issued them. Large banks buy U.S. bonds and sell them to the Fed at a profit.
The Fed is America's central bank but it doesn't have any money. The precise mechanisms of these bond purchases have remained a secret and here's where it gets really interesting. The Fed is not a government agency, it's a private entity and its shareholders are banks that earn a dividend of as much as $80 billion per year.
Also, these are the same banks that sell the government debt to the Fed. Which banks? Don't even bother asking, that's also a secret. In other words, the magic money machine answers no one.
The Fed hurts the economy and it's bound to make mistakes even with the best of intentions. It is also supposed to boost employment with low-interest rates encouraging people and businesses to buy more goods and services. But moving the money supply up and down has short and long term consequences.
Central banks aim to create new money carefully, strategically, and very very slowly, releasing more money into the economy causes prices to rise ideally by 2% every year. That's supposed to foster economic growth, but 2% inflation means the buying power of $1 in your pocket today will be 98 cents next year and less nearly every year to come.
Since 1913 when the Fed took over the dollar, we've seen that dollar has decreased in value. If you earned a dollar in 1913 you could buy 16 loaves of bread but today a dollar barely buys you one. That's not a quaint notion of how cheap things used to be. It's proof that the value of your cash is slowly withering away. It's a direct result of government control.
Governments don't create money from thin air all alone. It's not the central banks that are the problem. They're just a part. The real problem is that we've given the power to create money to the same banks that caused the financial crisis. We put our paychecks and savings into a bank account and draw from it as we need it. The banks are custodians of our money, right? Wrong.
It is now the property of the bank on their balance sheets. They can do just about anything they want with it. For example, create new money. Say, your bank account shows a balance of $100 but it only holds $3 and loans $97 to Mr. X to buy something. On the bank's computers, you still have $100 in your account.
But now Mr. X has $97 of new virtual money in his account that is just digits on a computer screen. There's no cash no gold or anything else backing up the new numbers in X's account, just his promise to pay it back. This is new money created as debt.
When those 97 are spent in a shop, the shop owner deposits into another bank and it is let out again and again and each of these people has numbers in their accounts showing that they own this money. So your original $100 has multiplied. Now there are over $3333 in the system.
This process of loaning out far more money than a bank has as cash on hand is called Fractional Reserve Banking. Banks earn untold billions in interest every year by creating and lending virtual money.
People talk about bitcoin as it's the first digital currency but we use digital currency every time we make a transaction through internet banking or bank card. All new money is debt and is part of money creation.
The entire system is based on trust in the bank's solvency and trust in the debtor's ability to repay their debt. If all bank customers demanded just 3% of their deposits right now, it will reveal the truth. Almost none of that paper currency you think is in your bank account exists. It never did.
The financial crisis had everything to do with virtual dollars. Too many people with very little income borrowed a lot of money they could never repay but the banks didn't care. They didn't have to. They quickly made and sold shaky loans to someone else for a profit and got them all approved. Selling bad loans was a good business until the whole thing blew up in a global financial crisis.
The magic money machine destroyed 30 million real jobs. The U.S alone lost $16 trillion in household wealth. Selling subprime loans and betting they will fail may not be sacred but it is lucrative. When you give control over massive amounts of money to a few individuals they will take advantage of that control.
Banks today are tied into a system that is completely rigged to harvest money from the entire global economy and pump it into the hands of very few. The existing banking system is cozy. It extracts enormous value from society without delivering anything in return and it is parasitic.
In medieval Europe, a banker who couldn't repay depositors was hanged. Today that same banker would get bailed out, paid bonuses, and enjoy some tax benefits too. Do you not think a better system is needed for the economy? The next blog would focus on the same question. Stay tuned :)
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