In 1994, as I was wrapping up my MBA, I was discussing with my economics professor the money creation process currently employed by the Federal Reserve, and how that process has a severe flaw! A flaw that will ultimately cause the system, and the dollar, to fail.
The Professor indicated that he hadn’t considered the problem previously, was very intrigued, and suggested I use it as the basis for a thesis on a PhD in economics. I declined, as I was “burnt out” on school, and never did return to earn a PhD.
Nonetheless, the flaw in the Federal Reserve System remains, and we may be at the verge of the inevitable dollar collapse I described 24 years ago.
Contrary to its name, the Federal Reserve is neither “federal”, nor does it have “reserves”! The Federal Reserve is in fact a PRIVATE corporation, which pays its stockholders a 6% dividend. Their fiduciary goal is to first serve their stockholders.
The core flaw in the Federal Reserve system is that when dollars are created, they are not “issued” into circulation. Instead, all dollars are created by “lending” them into circulation.
Suppose for a moment that I want to create $100 and get it into circulation among you, the people. Let’s also say that I “lend” the money into circulation, at perhaps a 5% interest rate. This $100 I lend is the ONLY legal tender for all debts, public and private.
At the end of one year, if you the society wanted to “pay off the debt”, you would owe me, the central bank, $105. It is easy to return the principle of $100 because you have it in hand, but where do you get the $5 bill to pay the interest? After all, I didn’t print that!
There is only one place you can get that $5 of interest you owe me. You must come back to me, and borrow even more money!
Over time, the principle will build and build, but the interest which accumulates in a compounded manner will grow at an ever rapid rate until eventually the interest goes “vertical” on the chart.
Without some mechanism to pay that interest from something other than more borrowed money, every boom and bust cycle will be greater than the last, as more and more dollars are borrowed into circulation. The ever increasing rate of borrowing will increase the supply of dollars until eventually a hyper-inflation results, and the dollar becomes worthless.
DOLLARS ISSUED INTO CIRCULATION
Prior to the Federal Reserve system, dollars were “mined” and spent into circulation. We were on a gold standard.
During the civil war, President Lincoln began issuing paper money into circulation, mostly to help pay for the war. The Treasury Department simply printed bills, called them money, and spent them. While also inflationary, these printed dollars, known as United States Notes, were spent or issued into circulation, not lent into circulation. United States Notes had a reverse side that was green in color, and hence were also called “greenbacks”.
United States Notes, or greenbacks, continued to be issued until the final issuance took place in 1968.
These issued notes camouflaged the flaw in the Federal Reserve system because they could be used to pay the interest on the debt lent into circulation by the Federal Reserve. Since 1968, every boom and bust cycle has been greater than the prior.
The Federal Reserve System is a flawed system. Its very name is lie, and it will ultimately cause an inflationary recession of such magnitude that it destroys the value of the dollar, which has steadily lost nearly all its value since 1968, and more so since 1971 when President Nixon officially ended the dollar’s ties to gold.
To learn more about this process, and understand the flawed nature of the Federal Reserve System, the following YouTube video offers a fantastic overview for the layman: The Hidden Secrets of Money: The Biggest Scam In The History Of Mankind.