“The Federal Reserve System is nothing more or less than a banking cartel” says G. Edward Griffin, author of The Creature From Jekyll Island, in this excellent clip from a recent Casey Research Conference.
Prior to the passing of the Federal Reserve Act in 1913, US banks still operated under the fraudulent system of fractional reserve lending, but did so with significantly greater potential pitfalls than today. The underlying profit mechanism was the same – collect interest on loans made with money that didn’t exist – but the con was harder to consistently pull off under a system of hard money (gold and silver). Within a single bank, it was easy to do as long as most people were content leave their gold on deposit and transact via receipts (bank notes). Things got a little trickier when a customer wanted to deposit notes of one bank in a different bank. The second bank understood that the note was only good for a small portion of the gold claimed, but it also knew that it couldn’t let on to that fact lest the customer lose faith in the system of bank notes. In effect, the entire banking system operated as a single bank, accepting each other’s notes in a sort of honor among thieves agreement.
But there was a problem. Since the amount of profit that could be made was proportional the total amount of bank notes issued against loans, there was always the temptation for a single bank to inflate – issue more notes – than the others. This in turn made the other banks more reluctant to accept these notes as there was an increased risk of a run on that bank leaving its notes worthless.
What was really needed was a way to coordinate the rate of inflation (bank note issuance) across all banks and to create a method to backstop any potential run on a bank. This is the real purpose of the Federal Reserve System. Instead of every single bank issuing its own notes, they could all standardize and use notes issued by the central bank – in this case Federal Reserve Notes. The rate of inflation could be centrally fixed via reserve requirements. As gold and silver were gradually de-monetized, and these central bank notes made the sole legal tender of the United States, the threat of a bank run was made null and void.
If depositors really wanted their Federal Reserve Notes in paper form, then they would have them. The Fed would simply print more. Without any sort of backing, a printed piece of paper is all that is owed against numbers in a bank account today. Instead of a bank going under, the losses would be socialized among all current holders of dollars.
The modern banking cartel is guaranteed risk free profits so as long as its Federal Reserve Notes are accepted as money substitutes. With that in mind, it’s not too hard to understand the constant stream of anti gold propaganda that emanates from the Wall St. banks.
19th Century US bank note.
The modern banking cartel’s standardized Federal Reserve Note.