Fluctuations in prices, or the value of any currency, are always a function of these factors: a change in the supply of, or demand for, goods and services or currency; a change in the money supply relative to the goods or services you can purchase with it; or some combination of these. The picture becomes somewhat more complex when stocks, bonds, derivatives, credit default swaps, etc., are introduced, however, the essential dynamic remains the same. Changes in supply and demand are relatively self-explanatory, but to understand how changes in the money supply are affected, we need to introduce ourselves to the Federal Reserve.
The Federal Reserve system was created by the Federal Reserve Act of 1913 and was ostensibly a response to the Bank Panic of 1907 in which some of the large banks in New York called in loans and refused to make new loans, causing a chain reaction of bank runs and severe economic turmoil in the financial sector that then rippled out to the rest of the economy. But what, exactly, is the Federal Reserve System and why do we need it?
Technically speaking, the Federal Reserve System is a banking cartel formed by twelve central banks in partnership with the government for the purpose of regulating the money supply, interest rates, and credit – a cartel being any group of individuals, institutions, and/or businesses that join together in order to fix prices, limit competition, and regulate production of goods by the members (“cartel,” def. 2); OPEC, for example, is an oil cartel. The member banks own the Federal Reserve but are not allowed to sell their shares, nor vote for their board of governors, and are limited to a 6% dividend per year (Federal Reserve Bank of San Francisco, FAQ). The US government’s role is to protect these large member banks from competition and to appoint the board of governors, who then select bankers and other business leaders to serve on the boards of directors of the member banks.
Some politicians and critical observers see this set-up as an unconstitutional, government sanctioned monopoly of currency by a cadre of independent banks. Others – generally the central banks themselves – argue that a system of central banks is necessary to prevent, or at least soften the blow of, the busts of the business cycle that inevitably follow the booms, because “money doesn’t manage itself” (The Federal Reserve Bank of San Francisco par 3). While it is true that federal statutes do not permit the use of anything other than Federal Reserve notes to pay debts or taxes, does that really constitute a monopoly on currency issuance? Congress may have abdicated its constitutionally mandated responsibility of creating the nations money supply to private central banks, but does that really mean the Federal Reserve System is unconstitutional? The answer to these questions, in a word, is yes.
Article I, Section 8, Clause 5 of the Constitution states: “The Congress shall have Power…To coin Money, regulate the Value thereof, and of foreign Coin...” The Constitution does not give Congress the power or authority to transfer any powers granted under the Constitution to a private corporation and specifically states that "all powers not delegated to the United States, by the Constitution, nor prohibited by it to the States, are reserved to the States or to the people”(12th amendment). It is as if an FBI agent asked a private citizen – someone not sworn in or hired by the Bureau – to take her gun and badge and do her job for her while she goes shopping. Instead of controlling the currency, as it is stated in the Constitution, Congress has handed over the power to create money to a cadre of private banking corporations. But how does the Federal Reserve “create” money? Doesn’t the US Mint issue our currency?
It all begins with Congress. Politicians pass legislation to spend money in their district or state because it helps get them re-elected. They generally don't like to raise taxes because that often gets them un-elected, so they borrow the budgetary shortfall from the Federal Reserve and this is mostly where the national debt comes from (Griffin 78). Borrowing money, however, doesn’t necessarily create money; if you borrow from someone that has money, the money supply hasn't grown, you have just moved money around from one person to another. So the Federal Reserve creates the money out of thin air by simply entering the transaction into a ledger sheet and “lending” it to the federal government, or other banks, plus interest (Griffin 95).
Now, if you or I did this it would be called counterfeiting or check fraud, but the Federal Reserve has an agreement with the US government to provide this service for a price; the price is interest and the result is the national debt. Each Federal Reserve note is essentially an I.O.U. – a promise to pay. Imagine that the bank loans you money by writing you a check made out to Cash for $20,000 but post-dated by one year. Instead of waiting a year to cash it, you buy a car with it, the dealership accepting it because it is a check from a reputable bank that “verifies” the funds are legitimate. The dealership can then take that check to the bank and get a series of checks for lesser amounts totaling $20,000, but also post-dated by a year, in order to pay their employees. This can go on and on so long as no one actually cashes in their checks, at which point it would become evident that the funds were never really there to begin with – a phenomenon that is presently occurring in our economy on a massive scale.
"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."
- Putting it Simply, Boston Federal Reserve Bank
But it doesn’t end there; if someone, say a federal employee, deposits a $1000 paycheck in a commercial bank, banking regulations dictated by the Federal Reserve stipulate that said bank can then loan out $9000, based on that $1000 dollars as reserves, in a process dubbed fractional reserve banking. Thus, $8000 dollars has just come into being as if out of a magician’s hat. When money is created in this way at a faster rate than the expansion of production and services in the economy, the result is inflation.
Inflation is effectively a reduction in purchasing power. When prices rise across the economy it is generally not because the intrinsic values of goods and services have increased, but rather that the value of the dollar has decreased. When there are more dollars in circulation, it requires more of them to buy the same number of things. That loss of purchasing power is value the consumer should have but it has been taken from them without their consent or even their knowing how, why, or by whom. Inflation therefore is a hidden tax, with no exemptions or deductions, that disproportionately and adversely affects the poor and the middle class; it is a direct result of having the power to create money out of nothing.
To the average person, with a relatively healthy dose of common sense but only a modest understanding of economics, creating money out of thin air may sound not only unsustainable, but like a scam of unimaginable scale and consequence. From the point of view of those receiving a dividend based on the amount of money generated in this way – the owners of the central banks – it is more likely viewed as the most lucrative and desirable business model possible. If the present System is actually unconstitutional, one might ask, how was Federal Reserve Act ever passed in the first place?
Historically, centralized banking has been extremely unpopular with many politicians because it concentrates so much power in the hands of bankers – people who are not elected officials and are therefore not beholden to act in a manner consistent with the public good. After the previously mentioned Bank Panic of 1907, however, a general consensus formed among most politicians that some kind of regulation of the banking system was necessary. As head of the commission set up to examine the issue, Senate Republican leader Nelson Aldrich helped author the Federal Reserve Act and ushered it through the legislature. Aldrich’s objectivity, however, was somewhat suspect because of his daughter's marriage to John D. Rockefeller, Jr., and Aldrich’s close association with J.P. Morgan, two of the most powerful and wealthy bankers in the world. The bill was passed December 22, 1913, after its staunchest opponents had already left Washington for the Christmas holiday thinking that it wouldn’t come up for a vote until the next years session (Griffin 67). One of those opponents was Senator Robert LaFollette, who once stated publicly that fifty men, comprising what many called the “money trust,” controlled the United States. When asked by reporters if this was true, a partner of J.P. Morgan, George F. Baker, replied that LaFollette was “absolutely in error. I know from personal knowledge that not more than eight men run this country” (Griffin 74).
Having understood this situation, many people have spoke out, decrying the unconstitutionality and seemingly criminal nature of the whole system. Louis T. McFadden, a Congressman from the early part of the 20th century who was Chairman of the Committee on Banking and Currency for twelve years from 1920 -1931, stated:
Some people think the Federal Reserve Banks are the United States government's institutions. They are not... They are private credit monopolies which prey upon the people of the United States for the benefit of themselves and their foreign swindlers... The Federal Reserve banks are one of the most corrupt institutions the world has ever seen... Every effort has been made by the Federal Reserve Board to conceal its powers, but the truth is that the Federal Reserve System has usurped the government. It controls everything in congress and it controls all our foreign relations. It makes and breaks governments at will. (Congressional Record, 12595-12603)
If these were merely the musings of a lone, over-zealous Congressman, his scathing indictment could be more easily dismissed as the ravings of a rabid conspiracy theorist. When taken together with the testimony and opinion of some of the most brilliant and sober political and business leaders of the last hundred years, however, the picture becomes somewhat more disturbing. Indeed, some of the most vocal critics have been U.S. Presidents, among them Woodrow Wilson, who was duped into signing the Federal Reserve Act into law by representatives of the bankers behind the creation of the Federal Reserve. He remarked:
“I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. The growth of the nation, therefore, and all our activities are in the hands of a few men... no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men.”
James Garfield, 20th President of the United States put it thusly: “Whoever controls the volume of money in our country is absolute master of all industry and commerce... when you realize that the entire system is very easily controlled, one way or another, by a few powerful men at the top, you will not have to be told how periods of inflation and depression originate.”
Not long after saying this in 1881, President Garfield was assassinated.
And President Franklin D. Roosevelt, in a letter written Nov. 21, 1933 to Colonel E. Mandell House commented: "The real truth of the matter is, as you and I know, that a financial element in the large centers has owned the government of the U.S. since the days of Andrew Jackson.”
A few educated and courageous members of the present Congress have even offered legislation, such as the Federal Reserve Abolition Act, (H.R. 2755, 2007), that would begin to transition our nation away from a fiat currency based on nothing but faith in the government and controlled by a monopoly of private banking interests, to an open market system in which currencies backed by precious metals, commodities, or any other unit of actual productivity that could compete for consumer confidence and utility. As it stands, Article I, Section 10, Clause 1 of the Constitution states that: “No State shall…coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debt.” This article has never been changed and is still the law of the land, so using currencies backed by gold and silver should still be allowed, yet our unconstitutional central bank monopoly will not permit it.
It may be reasonably asked, “What could I possibly do about this situation? I am only one person.” It is often true that, acting alone, we as individuals are powerless to affect meaningful change in a system so enormous that beneath it we are dwarfed into irrelevance; yet if we become an educated and motivated population unified in opposition to a shared destiny of modern serfdom, we can accomplish this monumental task. Paul Grignon, producer of the film “Money as Debt,” suggests that asking these four questions is pivotal to resolving this issue:
- “Why do governments choose to borrow money from private banks at interest when governments could create all the interest-free money they need themselves?
- Why create money as debt at all? Why not create money that circulates permanently and doesn't have to be perpetually re-borrowed in interest?
- How can a money system, dependent on perpetual growth, be used to build a sustainable economy? Perpetual growth and sustainability are fundamentally incompatible.
- What is it about our current system that makes it totally dependent on perpetual growth? What needs to be changed to allow the creation of a sustainable economy?”
Thus, we should educate ourselves and each other about these issues, demanding change from our representatives in government, and not electing those that do not share our outrage and concern. We can also begin to use gold, silver and other commodities in trade and business amongst ourselves, in this way subverting the Federal Reserves stranglehold on real money. The control of money belongs in the hands of the people and if we do not take responsibility for it, we will continue to get the economy and the government we deserve.
Quotes About the Federal Reserve and Banking
“...if you want to remain slaves of the bankers and pay for the costs of your own slavery, let them continue to create money and control the nation’s credit.”
- Sir Josiah Stamp
"Give me control of a nation's money and I care not who makes it's laws."
-Mayer Amschel Bauer Rothschild
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”- Henry Ford
"We are completely dependant on the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit... We are absolutely without a permanent money system.... It is the most important subject intelligent persons can investigate and reflect upon... our present civilization may collapse unless it becomes widely understood and the defects remedied very soon."
- Robert H. Hamphill,
Atlanta Federal Reserve Bank
Atlanta Federal Reserve Bank
"Paper is poverty,... it is only the ghost of money, and not money itself."
-Thomas Jefferson to Edward Carrington, 1788
"From now on, depressions will be scientifically created."- Congressman Charles A. Lindbergh Sr.,
1913, upon learning of the passage of the Federal Reserve Act.
1913, upon learning of the passage of the Federal Reserve Act.
Works Cited
Fiat Empire. Dir. James Jaeger. 2006. Online:
Griffin, G. Edward. The Creature from Jekyll Island. American Media, 1998.
Jefferson’s Opinion on the Constitutionality of a National Bank:1791. Yale Law School. 2008.
Mad Money. U.S. Representative Paul, Ron. Television, CNBC. Dec. 14, 2007.
"cartel." Merriam-Webster Online Dictionary. 2008. Merriam-Webster Online. 20 October 2008
The Federal Reserve. Wikiprotest, July 24, 2007.
The Federal Reserve Bank of San Francisco. The Federal Reserve Bank of San Francisco website, 2008. <>
More Quotes
"The Federal Reserve bank buys government bonds without one penny..."
- Congressman Wright Patman,
Congressional Record, Sept 30, 1941
“I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.“Congressional Record, Sept 30, 1941
- Thomas Jefferson, 1802
"Most Americans have no real understanding of the operation of the international money lenders. The accounts of the Federal Reserve System have never been audited. It operates outside the control of Congress and manipulates the credit of the United States."- United States Senator Barry Goldwater
“The financial system has been turned over to the Federal Reserve Board. That board administers a finance system by authority of a purely profiteering group. That system is private, conducted for the sole purpose of obtaining the greatest possible profits from the use of other people's money. This (Federal Reserve) Act establishes the most gigantic trust on Earth. When the president signs this bill, the invisible governments by the monetary power will be legalized. The people may not know it immediately but the day of reckoning is only a few years removed, the worst legislatives crime of the ages perpetrated by this banking bill.”- Charles A. Lindbergh, Representative, MN
