In one debate, Congressman Charles Lindbergh was quoted as saying, “Our financial system is a false one and a huge burden on the people. I have alleged that there is a Money Trust. The Aldrich Plan is a scheme plainly in the interest of the Trust. Why does the Money Trust press so hard for the Aldrich Plan now, before the people know what the Money Trust has been doing?”
But the Aldrich Plan never came to a vote in Congress, because it was a Republican-backed bill and the Republicans lost control of the House in 1910, and the Senate in 1912.
Not accepting defeat, the bankers essentially took the Aldrich Plan and changed a few details. In 1913 a nearly identical bill, called the Federal Reserve Act, was presented to Congress.
Again the debates raged. Many saw this bill for what it was: a prettied-up version of the Aldrich Plan. But on December 22, 1913, Congress gave up its right to coin money and regulate the value thereof, which was given it by the Constitution, and passed that right to a private corporation, the Federal Reserve.
The Fed and the Death of the Dollar—Fractional Reserve Banking
Since the Fed opened for business in 1914, the currency of the United States (the U.S. dollar) has been borrowed into existence from a private bank (the Fed). The reason I say “borrowed” into existence is because every single dollar the Fed has ever created is owed back to that bank, with interest. The Fed creates all currency, not the U.S. government, and lends it out to the U.S. government and private institutions—with interest. Now you may be asking yourself, “If we pay back all the currency that was borrowed into existence, but we still owe the interest, where do we get the currency to pay the interest?” Answer: We have to borrow it into existence. This is one reason why the national debt keeps expanding. It can never be paid off. It is mathematically impossible.
But even more disconcerting is the way the Federal Reserve creates currency:
1. It makes loans to the government or banking system by writing a bad check.
2. It buys something with a bad check.
In the Fed’s own words, published in a 1977 paper called Putting It Simply, “When you or I write a check there must be sufficient funds in our account to cover the check, but when the Federal Reserve writes a check there is no bank deposit on which that check is drawn. When the Federal Reserve writes a check, it is creating money” Of course, as you know by now, I would beg to differ. They are creating currency, not money.
And once those newly created dollars are deposited in the banks, the banks get to employ the miracle of fractional reserve banking.
Here is fractional reserve banking in a nutshell. All banks have a reserve requirement, meaning they must keep a certain amount of currency on hand for withdrawals and such. If the reserve requirement set by the Fed is 10 percent the bank must keep 10 percent of the currency deposited on hand just in case someone wants to make a withdrawal; however, they are allowed to loan out the other 90 percent of those deposits.
Here’s the kicker. They don’t actually loan out the currency that’s in the accounts. Instead they create new fiat dollars out of nothing and then loan them out, which means they too are “borrowed” into existence. In other words, when you deposit $1,000, the bank can create 900 brand-new credit dollars with nothing but a book entry, and then loan them out with interest.
Then, if those brand-new loaned dollars are deposited in a checking account, the bank is allowed to create another 90 percent of the value of those deposits, and then another 90 percent of that. Then the process is repeated, and round and round it goes.
Coincidentally, the same year that the Federal Reserve Act was passed, there was also an amendment added to the Constitution: the Sixteenth, which created the dreaded income tax.
Before 1913 there was no income tax. The entire government was paid for by tariffs (duties on imports) and excise tax (taxes on things like alcohol, cigarettes, and gas). These taxes, and only these taxes, generated enough income for the government to operate. However, because it didn’t generate enough income to pay the interest due to the Federal Reserve, the income tax was created.
To review:
• Since 1914, we’ve borrowed every dollar into existence.
• We pay interest on every dollar in existence.
• That interest is paid to a private bank, the Federal Reserve.
• The world’s largest banks, not the government, own the Federal Reserve.
• The United States can’t pay off its debt . . . it can only borrow more to pay the interest.
• Our government created income tax so we can pay this interest.
Welcome to the rabbit hole. Welcome to your new context.
Greed, War, and the Dollar’s Demise
With the outbreak of World War I, as with all the historical examples we’ve already covered in this book, the combatants halted redemption in gold, increased taxes, borrowed heavily, and created additional currency. However, because the United States did not enter the war for almost three years, it became the major supplier to the world during that time. Gold flowed into the U.S. at an astounding rate, increasing its gold stocks by more than 60 percent. When the European Allies could no longer pay in gold, the U.S. extended them credit. Once the U.S. entered the war, however, it too spent at a rate far in excess of its income. The U.S. national debt went from $1 billion in 1916 to $25 billion by war’s end.
The world currency supply was exploding.
After the war, the world longed for the robust trade and economic stability of the international gold standard that had worked so well before the war. Thus, throughout the 1920s most of the world governments returned to a form of the gold standard. But the standard employed wasn’t the classical gold standard of the prewar period. Instead, it was a pseudo—gold standard called the gold exchange standard.
Governments never seem to learn that you can’t cheat gold. During the war, many countries inflated their currency supplies drastically. Yet when they tried to return to gold, they didn’t want to devalue their currency against that gold by making the number of units of currency (gold certificates, or claim checks on gold) match the number of units of gold that backed that currency. So here’s their “solution”:
Building Pyramids
After the war, the United States had most of the world’s gold. Conversely, many European countries had large supplies of U.S. dollars (and depleted gold reserves) because of the many war loans the U.S. had made to the Allies. Thus was decided that under the gold exchange standard, the dollar and the British pound, along with gold, would be used as currency reserves by the world’s central banks and that the U.S. dollar and the pound would be redeemable in gold.
In the meantime, the U.S. had created a central bank (the Federal Reserve) and given it the power to create currency out of thin air. How can you create currency out of thin air and still back it with gold, you ask? You impose a reserve requirement on the central bank (the Federal Reserve), limiting the amount of currency it creates to a certain multiple of the units of gold it has in the vaults. In the Federal Reserve Act of 1913, it specified that the Fed was to keep a 40 percent reserve of “lawful money” (gold, or currency that could be redeemed for gold) at the U.S. Treasury.
Fractional reserve banking is like an inverted pyramid. Under a 10 percent reserve, one dollar at the bottom can be expanded, by layer upon layer of book entries, until it becomes $10 at the top. Adding a fractional reserve central bank, underneath fractional reserve commercial banks, was akin to placing an