The Fed Is Lifeblood to the Root of Evil


Central banking is perhaps the most brilliant scam ever perpetrated, and the U.S. Federal Reserve stands as the most successful of all central banks in history. The Fed is able to transfer wealth away from the people who earned it, and into the hands of the Federal Government and member banks, relentlessly, stealthily, year after year, and all the while maintaining the preposterous claim of social benefit in the form of 'managing the economy.' The method of this theft is sophisticated and disguised enough as to escape the attention of most, and when combined with propaganda, leads most people to the conclusion that we'd be in trouble without it. Yet I wish to show here that central banking can be well understood by most people for exactly what it is ' the fraudulent theft of trillions of dollars via the monopolization of money. In the companion article, 'The Origin of Money, and How It Was Stolen from You,' I will show that the usual justifications given for central banking are dubious.

Central banking makes possible the expansion of government power in all forms, most particularly the wicked godfather of all government programs: war. Without central banking, it is doubtful that any of the great wars of the 20th century, or the current debacle in Iraq , would have ever taken place, certainly not on the scale we have seen.

Kings and Presidents are an ambitious lot. They have long lusted to expand their power and prestige through military conquest and imperialism. But war is very costly, and since government does not produce anything, it must always extract wealth from its productive citizens. Citizens hate this. Raise taxes too high, and they might revolt.

Bankers are an ambitious lot as well. They have long lusted to enrich themselves through the expansion of bank credit (again see 'The Origin of Money, and How It Was Stolen from You'). This practice, known as 'Fractional Reserve Banking,' works pretty well until too many bank customers begin to smell a rat, and all demand their money at the same time. Expand credit too much, and people will make a run on the bank. This could lead to unpleasantries visited upon bankers.

Central banking is the stroke of evil genius that simultaneously solves the dilemmas of both the King and the Banker. The king gets an almost unlimited supply of financing for his war, and the banker gets the almost unlimited ability to expand credit without fear of a bank run. It is an unholy marriage consummated in the very depths of hell.

Every major industrialized nation has a central bank now. With the possible exception of the Napoleonic wars, every major war in modern times has been financed through central banking, on all sides. It is not a coincidence that the U.S. stayed out of foreign wars until the passage of the Federal Reserve Act in 1913, whereupon Woodrow Wilson broke his re-election campaign promise and plunged us headfirst into World War I.

How does it work? How does the creation of new money work to take wealth away from those who earned it and give to others?

The first thing to remember is this: Wealth is not money, and money is not wealth. Real wealth consists of real stuff ' houses, cars, food, clothing, etc. Money is simply a medium of exchange. Money is tremendously important, for without it we would be reduced to direct barter, which would present enough problems to prevent mankind from progressing beyond simple agriculture. But ultimately it is not the money we are after, it's the stuff. If you were stranded on a desert island, little pieces of paper with portraits of dead presidents wouldn't do you any good.

Suppose you had a printing press in your bedroom and you could create counterfeit $100 bills that were so realistic that not even a bank manager could tell they were bogus. And let's say that you cranked out a cool $1,000,000. You haven't built a house, or grown food, or made any clothes, or anything else that people actually need. So while you have created new and additional money, you have not created any new and additional wealth. The total amount of real wealth in the world is exactly the same as before you printed the money.

Now let's say you take the million bucks and buy yourself a nice little condo at the beach. At this point you have certainly increased your own personal wealth dramatically. Yet since there is no more wealth in total, then logically somebody, somewhere must be poorer as a result. But who? The guy you bought the condo from is O.K., he's happy with the $1,000,000 which he can turn around and spend on something new for himself.

At first glance it might appear that no one was hurt by your counterfeiting scheme. But this is not true. Because there is now more money being spent on the same amount of goods and services, the prices of those goods and services must go up. Which is another way of saying that every dollar is worth less now than it was before. Prices don't go up all at the same time, of course. Instead, price increases ripple through the economy in waves, affecting some people sooner than others. This is key to understanding who benefits and who is hurt by the creation of new money. The early receivers of the new money benefit, because they have a chance to spend it before prices go up. The late receivers of the new money get screwed. By the time they get their hands on the new money, it's too late, prices have already increased.

In the real world of central banking, the chief beneficiaries of the creation of new money are:

  1. The federal government itself

  2. The commercial banks

  3. Government contractors

The creation of new money 'out of thin air' takes many forms. One of the most common is that the Federal Reserve prints up pieces of paper called 'Federal Reserve Notes' while the Treasury Department prints up pieces of paper called 'Government Bonds.' The Fed then 'buys' the bonds with the new money, which the government then spends on whatever strikes its fancy, usually guns and missiles and warheads and submarines and jets and satellites. But use your imagination. It could be anything. $500 toilet seat? No problem! These wonderful things use resources that could have otherwise been put to different uses, and this lowers our standard of living. You have less stuff than you would have had if the government had not created any new money. How much less? The loss to our economy is truly incalculable, but I don't think it is unreasonable to guess that living standards would easily be double what they are now, if not for central banking.

Money creation can also take the form of bank credit expansion. Besides being an inherent fraud and theft, bank credit expansion is the best explanation for the dreaded 'business cycle,' the alternating periods of boom and bust we have experienced since around 1750, when fractional reserve banking first became widespread.

As you might guess, many very creative and complicated techniques have been devised for expanding the money supply, it isn't necessary to go into that here. The thing to keep in mind is that new money can be created, and that this is a powerful and devious method of wealth redistribution. This also explains why governments long wished to eradicate the gold standard, which had evolved over centuries on the free market. Digging gold out of the ground takes work, and is self-limiting. Gold mining, in a free market, ends up being no more profitable than any other business. Printing paper money or changing numbers in a computer file is essentially costless, and therefore unlimited.

I would also point out that most of the great empires in history collapsed, at least in part, because of the continued dilution and devaluation of government money. Money became worthless, and so the division of labor, which depends on money and which is the cause of prosperity, becomes impossible. The people have no choice but to revert to a subsistence economy.

If we want to strike at the root of evil, we must look long and hard at the practice of central banking. If we do, I think we will discover that central banking is the very lifeblood to the root.

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Alexander "Ace" Baker is a Film and TV composer currently working on a libertarian rock-opera. Formally educated in music, he is self-taught in the Austrian school of economic science. He lives in Valencia , California with his wife and two kids.