10A065 Funny Money at 100 by Jim Davies, 11/6/2010

Today and yesterday, November 5th and 6th, important people are meeting there to mark the centenary of a conference held in a Georgia club. A hundred well-off members had founded it a quarter century earlier, and Jekyll Island was the place to bring rich friends for a private party. Such a group assembled in 1910, to work out how, despite the twice-delivered decision not to allow a government central bank in the United States, the Feds could spend money they didn't have.

The scheme they cooked up was and is unique: bankers formed an association (the "Federal Reserve") which was chartered by Congress in 1913 to have special powers. It can lend the US Treasury money it does not own, in exchange for an IOU (a "Treasury Bill") promising to repay with interest after future taxpayers have been duly plundered - with help from the "income tax", also enacted, kind-of, in 1913. Thus, the bankers earn interest on phantom money, and the government gets money without having to raise taxes at once. It made it much easier to wage war, for example, and that was first exercised just four years later. The most recent exercise was announced on Wednesday of this week; another $600 billion is to be created out of thin air, allegedly to "stimulate jobs." Color me skeptic.

The bankers get an extra goodie, as part of the deal: Fed members are also allowed to lend money they don't have. As soon as $100 is deposited, they can lend out $90 of it (currently) at interest; and when that $90 is deposited in the same or some other member bank, $81 of it can be lent out at interest, and so on. If borrowers wish it, a total of $900 can be loaned out as a result of that first $100 deposit; this sub-scheme is called "fractional reserve banking" and is the primary engine of inflation. The local banker does nicely; he earns (say) 5% on the $900, which is $45 a year, for each $100 he receives; that's a return of 45%. Nice work if you can get it; and thanks to the government's Federal Reserve Act of 1913, designed in Jekyll Island, they can get it.

The result has been that $1 today will purchase what about 1.5 cents would in 1910. The scheme created so much new "money" that 98.5% of the value of the US dollar has been destroyed. The Fed and the Feds have done nicely from it; everyone else has been ruined. Savers have been crippled, borrowers favored (because they can pay back loans with "dollars" of lower value) and in recent years, the whole economy was unhinged when the Fed-led housing bubble burst.

During the previous century, when currency was pegged to gold (whose supply government could not increase at will) inflation was mildly negative, which is exactly what one would expect from an industrious people constantly inventing new ways to work smart. When a zero government society begins, not many years hence, currency will again consist of something that cannot be printed at anybody's whim - probably, again, gold and silver; and again, prices will decline gradually as we all work ever smarter, and saving will again be rewarded. What a delightful change it will make.

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