Show Me the Money: An Examination of Modern Banking and the Federal Reserve
By Reed Benson
Who could use more money? Practically all of us could, no doubt! Do you have some pesky financial obligations or debts you would like to shed? Do you have some repairs to your home that are overdue? Do some friends or family members have a pressing financial need that you could help alleviate with a gift if you had the funds? Is there a business opportunity of which you would love to take advantage if only you had some ready cash?
In truth, if you or I could wave a magic wand and make a pile of one hundred dollar bills instantly appear in our piggy bank, we would almost surely do it! After all, we would put it to one or more of the good uses mentioned above (or so we tell ourselves)!
Well, it so happens that there are a few people who have just that precise ability! No, my reference is not to great entrepreneurs like Bill Gates or Donald Trump, nor is it lucky sheiks whose barren desert lands happen to be soaked with oil. Neither is it Latin American cocaine lords who enrich themselves with illicit drug profits.
Indeed, there are real people who have the ability to create money out of nothing! It is all perfectly legal, without any stain of counterfeiting or other incriminating charges. Every day, they do what you and I can only daydream about. So who are they? How is this power displayed? How can this be?
Before that question is answered and you respond with indignation, be honest enough to consider whether you would be able to resist such a temptation if you had such power. Could you resist creating money? Really, you think you could?
Let us set aside such thoughts and consider some more basic issues. As a beginning point, what is money?
What Is Money?
Money is anything that is used as a medium of exchange. The simplest societies barter items that have true value. So, for example, a jug of milk might be exchanged for a dozen eggs, or a sack of potatoes could be swapped for a stack of firewood. But as a system of exchange, barter is potentially very cumbersome, especially if distance is involved. Thus, something transportable, nonperishable, and of universal value often develops as the standard of barter, hence "money." Sometimes odd items became "money." In the months immediately following World War II, cigarette cartons were used as money in Germany. On the American Western Frontier, beaver pelts were used as money. In the American Colonial South, tobacco was money.
Those unique illustrations notwithstanding, pieces of gold or silver have historically been the most reliable forms of money. They have best met the criteria of being transportable, nonperishable, and of universal value. Organized societies have established systems of weight and quality control to ensure that individuals using the pieces of metal can have confidence that what they are receiving is true and accurate. Wise governments, in order to promote trade, prosperity, and precise taxation, thus produced gold or silver coins of uniform value.
Biblical Precepts about Money
Scriptures contain a wealth of information about money and its uses. A rapid survey of several biblical thoughts will be of great value to understanding the present problems facing America and western civilization.
First, biblical money always retains some sort of intrinsic value. Abraham was one of the most pre-eminent men of Scripture, a tower of faith and impeccable personal character. Genesis 13:2 states that Abram "was very rich in cattle, silver, and in gold." Have livestock and precious metals ever been worth nothing? No. The value may vary over time and according to circumstance, but the price of these items has never been zero.
Second, biblical money can be exchanged for the most fundamental needs of life. Silver, gold, and livestock meet this dictum better than any other vehicle of exchange. Abraham’s cattle were a potentially appreciating asset that could be, in times of need, immediately slaughtered and transformed into food and clothing. And although they are not directly edible, the silver and gold could have been traded for other items of value. While Joseph was placed in charge of Egypt’s economy, stored grain could be purchased. The accepted currency during this period of extraordinary economic stress was silver (Genesis 45:22).
In times of outrageous famine and hardship, silver and gold lose some of their value, as in 2 Kings 6:24-25: "And it came to pass after this, that Benhadad king of Syria gathered all his host, and went up, and besieged Samaria. And there was a great famine in Samaria: and behold, they besieged it, until an ass’s head was sold for fourscore pieces of silver, and the fourth part of a cab of dove’s dung was five pieces of silver." Wow! Eighty pieces of silver to buy the head of a donkey to eat! And five pieces of silver to eat a pile of bird excrement! Yet, as soon as the siege was over, guess what? Prices stabilized at normal levels, and those holding silver could once again purchase quality food at modest prices: "Then Elisha said, Hear the word of the LORD; thus saith the LORD, Tomorrow about this time shall a measure of fine flour be sold for a shekel, and two measures of barley for a shekel, in the gate of Samaria . . . And it came to pass as the man of God had spoken to the king . . ." (2 Kings 7:1,18). If you have silver or gold, you can be confident that someone will be willing to exchange items of basic value like food for your precious metals.
Third, biblical money cannot replace a personal relationship with Christ in repentance before God. As useful as silver can gold are for meeting tangible needs, they cannot bring true satisfaction to your mind and soul. James aptly reminds us of this: "Go to now, ye rich men, weep and howl for your miseries that shall come upon you. Your riches are corrupted and your garments are moth-eaten. Your silver and gold is cankered; and the rust of them shall be a witness against you . . ." (James 5:1-3). Thus, we are led to the final precept we need to consider for our purposes.
Fourth, the accumulation of money, even biblical money, should never be an end in itself, but is merely the means to a greater end. Jesus taught a parable regarding this: "The ground of a rich man brought forth plentifully: And he thought within himself saying, What shall I do, because I have no room where to bestow my fruits? And he said, this will I do: I will pull down my barns, and build greater; and there will I bestow all my fruits and my goods. And I will say to my soul, Soul, thou hast much goods laid up for many years: take thine ease, eat, drink, and be merry. But God said unto him, Thou fool, this night thy soul shall be required of thee: then whose shall those things be, which thou hast provided? So is he that layeth up treasure for himself, and is not rich toward God" (Luke 12:16-21). Without a vision of using the financial resources God has entrusted to us for something beyond ourselves that glorifies Him, even biblical money is ultimately of little value. Charles Wesley once offered this pithy advice about the management of money: "Earn all you can, save all you can, give all you can."
Fifth, whatever form of money is used must be consistent and true in its value over time. Intentionally devaluing the currency by any means is strictly forbidden. Sadly, in our times, this happens routinely. Our dollar is constantly being devalued, on purpose. "Ye shall do no unrighteousness in judgment, in meteyard, in weight, or in measures. Just balances, just weights, a just ephah, and a just hin, shall ye have . . ." (Leviticus 19:35-36; see also Deuteronomy 25:13-16).
We can thus far summarize as follows: silver and gold are the best forms of money known in Scripture and history for the nitty-gritty of daily life. And, while they offer no security toward eternal life, these metals are the best choice for a secure medium of exchange in the necessary financial transactions of a nation. Societies that maintain a foundation of precious metals as a basis for their currency will thus enjoy benefits otherwise unavailable.
The Rise of Banking
One of the common problems in financial transactions is the safe transportation of one’s money over large distances, especially when a substantial sum is involved. For example, the late Middle Ages witnessed a great deal of international traffic in commerce and religious tourism between Western Europe and the Middle East. Merchants wanted silk, spices, and other exotic goods available only in the Middle East and did not want to lose everything to pirates or brigands along the way. Similarly, large numbers of European pilgrims wished to make the rather expensive two-year journey to the Holy Land. How could they safely do this without lugging along a giant bag of gold or silver?
This problem stimulated the rise of modern banking concepts. One of the few international organizations that could help meet this need was the Knights Templar. Originally charged with the task of protecting the route to Jerusalem, they eventually grew into an organization with chapter houses in many European and Middle Eastern cities used to help raise funds and recruit new soldiers. In time, they had considerable financial resources. The problem for the merchant or pilgrim was thus easily solved. He could give perhaps to the London House a large quantity of silver for which he was given a receipt. After arriving in Jerusalem, he would present his receipt and for a small fee be given the same amount of silver. Meanwhile, a traveler going in the opposite direction would deposit his money in the Jerusalem House and get a similar receipt. In London, he could present the receipt and receive the appropriate amount of silver. Since the receipt was valid only if the depositor presented it, there was no real risk of theft along the way.
In time, this system became reliable, and the receipt was considered just as good as the silver or gold, but a lot easier to carry around. Receipts were soon being transferred to another person with a signature, thus allowing this new person to withdraw the silver instead of the original depositor. Often, the receipt might eventually be transferred from one person to another, and then to yet someone else, all by signature. Essentially, the receipt was then a check, endorsed multiple times, and was getting close to what we would call paper money.
By the fifteenth century, European banking institutions also offered the service of safeguarding precious metal so the owners would not have the burden of security issues in their home. Having thus obtained a collection of silver and gold safely stowed away in a secure vault, the bankers began to loan it out for a small fee. After all, why should it just sit there year after year when someone could gain a little extra profit? This was the medieval revival of banking practices that the ancient Babylonians, Persians, Egyptians, Greeks, Romans, and yes, even the Hebrews to a lesser extent, had utilized.
These profitable loans were accomplished by issuing pieces of paper to the lender that gave him the right to withdraw the silver or gold he was borrowing. Of course, that was usually not necessary since others in the business community knew that the paper receipt was as good as the metal coins themselves, but easier and safer to handle. These receipts given out to borrowers became bank issued currency. This was paper money.
Unfortunately, human nature often got in the way, and the bankers quickly discovered they could loan out more than what was deposited because most depositors never wanted to actually hold their coins in their hands. Bankers got in the habit of the deposited amount representing only a fraction of what they ended up loaning out (which were claims against their deposits). This has since been known as fractional reserve banking. Such a practice posed no real problem until depositors and lenders discovered that both had a claim to the same silver and gold coins on deposit. This fear sometimes created a "run" on the bank and resulted in disaster for both the bank and its depositors.
As the centuries passed, a general cycle developed among private banks and those dependent upon them. Banks issued their own paper currencies, succumbed to the highly profitable temptation of loaning out too much, eventually went bankrupt, and destroyed their depositors businesses. This became a fixed feature of business in Europe and the United States. As can be seen, the "fractional reserve" banking system needed fixing.
Enter the Central Bank and the Federal Reserve
In an effort to avoid the booms, busts, and panics associated with the banking industry, bankers collaborated with one another to form a new plan. But rather than abandoning the dishonest and lucrative practice of fractional reserve banking, they decided greater control over the money supply was the solution. By the nineteenth century, their plans were well underway. Essentially, large bankers would work in tandem with the government of a given country. The government would give a select company of bankers the sole right to issue paper currency, usually stamped with symbols of nationhood to make it look official. To protect this cartel of bankers (now dubbed a "central bank") from runs if depositors felt insecure, the banks would have their deposits guaranteed by the national government. In today’s parlance, the banks would be "bailed out."
This stimulates a question. Why would governments want to guarantee a bank’s deposits? What would the government get out of this deal?
The answer is simple, particularly if one remembers that human nature can usually be relied upon to seek the easiest pathway available. The government would have, at least in theory, a nearly endless stream of money! If and when the government needed funds and raising taxes seemed unpalatable, the funds could be borrowed from the central bank, which would issue currency, and then make it available for the government to spend.
One might ask why the government could not simply issue its own currency and spend that. Actually, many governments had already tried that, but discovered that when their currency was not exchangeable for silver or gold upon demand, no one wanted the government-issued paper money! So, in England, France, and several other European nations, this cartel of private bankers would help the government make the process of issuing paper currency a little more complicated so that average citizens would not realize what was really going on. In that way, the common man would accept the paper money in exchange for tangible goods, thinking all was well and secure, when in fact it might not be!
In the United States, this scheme was not legalized until 1913, well after the European nations. Called the Federal Reserve System, Congress delegated to a cartel of private bankers its constitutional responsibility to coin money. Again, the excuse for doing this was that the nation would escape the economic panics that were stimulated when private banks were allowed to issue currency. While many legislators no doubt believed the aggravating boom-bust business cycles could be curbed with this arrangement, it is now clear that such fluctuations in the economy have continued without abatement. Indeed, since 1913, the United States has suffered numerous recessions and the greatest of all economic panics, the Great Depression. How have things improved? This corrupt bargain between our national government and a cartel of private bankers has not borne good fruit.
Money created by the Federal Reserve has the backing of the United States government. This actually once meant something. Once upon a time, the federal government owned large reserves of gold and silver; paper currency issued by the Federal Reserve could be exchanged for such. But in 1933, the United States abandoned the gold standard, and then silver in 1964.
What this means is that neither the United States government nor a Federal Reserve Bank will exchange paper currency for gold, silver, cattle, food, or anything else of tangible value. They cannot, because the vault is empty! There is nothing of tangible value on deposit in any Federal Reserve vault or any U.S. Treasury vault. Thus, the paper currency we use is technically of no more value than Monopoly money.
Yet, as long as everyone believes it may be of value, people are willing to accept it in exchange for real assets. Since virtually no one really wants the entire currency and banking system to collapse, the game continues! For how long will it go on?
That depends on how much fiat money is created. The word "fiat" means "out of nothing." That is exactly what the Federal Reserve now uses to create money. Indeed, in the electronic age, it is often not even necessary to print bills or paper currency at all. Merely a few clicks and electronic credits are created, someone goes into debt (often the federal government), and new money comes into existence.
How Money Is Created
The wizardry by which money is created has developed into a sophisticated process over the last two centuries. But the consequences are simple, which we shall soon examine. Meanwhile, how does this occur? The following steps give a brief overview of the process.
Step 1: The government issues bonds and goes into debt. The federal government decides that more funds are needed than tariffs and income taxes have provided. Of course, this has been the standard situation for decades. So, Congress authorizes the Treasury Department to issue Treasury Bonds. These are merely attractive pieces of paper that promise that the government will promise to pay the holder a specified amount at some future date.
Step 2: The Federal Reserve purchases the U.S. Treasury Bonds. Not all bonds are purchased by the Federal Reserve. You could buy one if you want. Many ordinary Americans do. Even more foreigners do, including foreign governments like China. But the real kicker is when the Federal Reserve chooses to buy these bonds. To accomplish this from an accounting point of view, the bonds have to be classified as "assets." It is assumed the government will surely be true to its word and pay these bonds off some day. This assumption means the Federal Reserve now has an "asset" that can used to offset the coming liability. And here is that liability: a check is written against the bonds. Bingo! Money comes into existence! In truth, there is no money anywhere to cover this check: no paper currency, no silver, gold, cattle, or anything at all. If you or I did this, we would go to prison. But the Federal Reserve does it on a routine basis, and the federal government wants it to do this so that it can get its hands on this new money without having to raise anyone’s taxes.
Step 3: The Federal Reserve deposits the check into the government’s account in a Federal Reserve Bank. Oh, boy! Now the federal government has money it can spend! Checks are written to people like you and me for college tuition grants, farm subsidies, Social Security, and Medicare, or perhaps to big corporations to build military hardware.
Step 4: The new money is deposited in commercial banks. People like you and me will spend some of this immediately, which "stimulates the economy." But one way or another, most of it will probably end up as deposits in some commercial bank. Your corner bank is pleased to receive these fresh infusions of cash because now it can lend it out, using it as the fractional basis for making more loans. If, say, they receive $1 million in deposits, they can, according to the rules regulated by the Federal Reserve, loan out $900,000, keeping only 10% as a fractional reserve.
Step 5: The new loans return to the bank to be loaned out again. This is where the gravy train starts to roll! The $900,000 of loans that goes out into the economy gets spent and ends up mostly back in some commercial bank as a deposit of someone new. Now it can be loaned out again, keeping back only 10%. So out goes another $810,000 in fresh loans. Then that comes back yet again as deposits, and all of it (except 10%) can be loaned out—another $729,000 in brand new loans.
Step 6: The economy is injected with a theoretical total of ten times the original amount of fiat money created by the Federal Reserve. By the time all of the money circulates around, limited only by the 10% fractional reserve rule, up to ten times the amount originally spent by the government has been created through new loans. That original government bond has indebted the taxpayer directly, but it has also indebted many, many people who decided to take out bank loans against this circulating fiat money!
What is the Result? Inflation.
The foremost hidden consequence of the Federal Reserve creating fiat money and providing it to the federal government to spend is this: the amount of money circulating in the economy is increased dramatically, up to ten times the amount originally created. This creates inflationary pressure, as surely as fire creates heat. Since there is more money floating around without a proportional increase in material things to buy and sell, the value of the money goes down. As consumers, we see it as prices going up. Has anyone noticed prices going up in recent decades? Now you know why.
In essence, when the Federal Reserve creates money, a hidden tax is imposed upon everyone holding dollars. The federal government spends this fiat money; simultaneously, the value of dollars declines.
What if the Federal Reserve Is the Only Buyer of Government Bonds?
Until now, that has not been the case. Indeed, many American citizens, many private foreign investors, and a number of foreign governments have been buying U.S. Treasury Bonds along with the Federal Reserve. When private investors or foreign governments buy the bonds, they have to take money out of circulation to buy the bond, giving our government the ability to then spend that money. It does not damage the economy overall except that it increases the indebtedness of the U.S. government. Inflation does not necessarily follow, for no fiat money has been created.
In theory, the Federal Reserve has the responsibility for managing the money supply. If they think more money is needed, they buy U.S. bonds with fiat money. And occasionally, they even sell bonds to private investors in order to suck money out of the system and reduce the chance of inflation. That is the theory—a professionally managed money supply—all carefully regulated by monetary experts for the general welfare of all citizens of the United States!
Reality is more sinister. Whether you choose to describe the situation as a tight cabal of conspirators who manipulate the money markets using their inside information or merely enterprising men who have succumbed to temptation and manipulate the money markets using their inside information, the result is the same: a relatively small cadre of individuals are the heads of the major private banking and investment firms in the United States. From this tiny pool of the rich and powerful are selected men to run the U. S. Treasury Department and manage the Federal Reserve. It would be somewhat comparable to asking a fox to guard the henhouse against all other foxes. He will probably try to keep the other foxes out, that is true; but who will prevent him from regularly pilfering hens to satisfy his own appetites?
Of even more grave concern than internal graft is a problem that is truly catastrophic in its potential. In recent years the Federal Reserve has been buying an ever-greater proportion of U. S. Treasury Bonds, and the only money the Federal Reserve has is fiat money. You see, private investors and foreign governments have bought all they want. The market has been glutted with U.S. Treasury Bonds. Normally to entice buyers, Treasury Bonds would be offered at a higher rate of interest, making it more profitable to own bonds than it was in the past. But of course, that would only mean the rate at which our government is becoming indebted would dramatically increase. So, like a snowball rolling down a hill, the U. S. government debt would increase exponentially. To keep this from happening, the Treasury Department and the Federal Reserve have agreed to keep interest rates on bonds artificially low. This is supposed to keep government debt from running away.
But that gives very little incentive for private investors to buy these bonds. So most do not. Additionally, they are worried that perhaps the U. S. government will not be able to pay off its bonds as they mature. After all, that has happened in other countries. What if that should happen to the United States?
Ah, do not worry! If no one else will buy the bonds, the Federal Reserve will! And that is the frightening new trend! The Federal Reserve is now purchasing over eighty percent of U. S. bonds because no one else wants them!
Now remember, when the Federal Reserve buys bonds, it does so with fiat money, which drives the value of the dollar down. Since U. S. Treasury bonds are denominated in dollars, the more the Federal Reserve buys, the less everyone’s dollars are worth! The value if the dollar is diminishing. It will continue in this trend and quite probably result in extreme inflation. Prices will rise dramatically.
So What Should I Be Doing?
First, prepare for hyperinflation. Federal government debt is fifteen trillion, a virtually unimaginable number! A thousand million make one billion. A thousand billion make one trillion. Our national debt is fifteen trillion! President Obama’s currently proposed budget adds an additional two trillion! Who really believes that these titanic sums will be paid off? No one. Thus, private buyers will continue the growing trend of avoiding U. S. Treasury bonds, and the Federal Reserve will be the only buyer. When that happens, high levels of inflation are unavoidable.
Second, prepare for checks from the government to be worth less and less. Government checks will not stop. Governments never really declare bankruptcy the way you, I, or businesses are required to do. They just keep on functioning until they cave in. And as far as the United States Federal government is concerned, that moment may still be far off despite its dismal financial management. When our government has the power to conduct several wars on the far side of the planet, it is not about to collapse at home. So the checks will keep on coming. But what they cannot avoid is the steady decline in the value of the dollars in which those checks are denominated. If you are dependent on government checks for your only income, you will find yourself in a bind. Develop a backup plan as soon as possible.
Third, convert a large portion of your assets into tangible things. Buy gold, silver, cattle, land, machinery, tools, and other tangible items that will not rapidly depreciate. Gold and silver are high. But they will almost surely go up even more. And if they do not continue to rise, remember, they will never be worth nothing.
Fourth, build a vision for your financial resources to do some real good for the Kingdom of God. Accumulating and preserving financial assets is never an end in itself. How can you be useful to God? What can your financial resources do to bring glory to God? Soon enough, you will die, and someone else will end up with your assets. What are you doing now that will count for something beyond your own selfish desires?
Fifth, get your relationships with family and friends in order. You may have an acute need for other people to help you. Do you have family or friends that will take you in? Are your relationships strong enough for that? Have you invested in their lives so that they would be willing to invest in yours?
Sixth, get away from the large cities. Non-whites will riot when the government checks do not buy what they are accustomed to receiving. In truth, it does not take much to set them off. Find a rural enclave with others who think and believe like you.
Seventh, build your dependency on God. There is no complete security except in Jehovah! Nothing that has been written here is of any value if your relationship with Jesus Christ is not right. Repent of the sin in your life. Seek God’s face as you restore broken friendships, and do good to those whom God has placed in your life. Walk a life of repentance, and trust in God!