ThomasJ
11-27-2007, 02:38 AM
I have seen a couple of posts about this so I thought I would try and make a concise post that goes over the basics of the Fed.
Federal Reserve detailed info.
www.federalreserve.gov (http://www.federalreserve.gov/generalinfo/fract/)
wiki (http://en.wikipedia.org/wiki/Federal_Reserve_System)
For detailed info on the Gold Standard
Wiki (http://en.wikipedia.org/wiki/History_of_the_United_States_dollar)
I am no expert but have done a little research on the subject myself as of late.
The Fed was created in 1913 by the Federal Reserve Act. This was done in response to a run on banks that occurred in 1907. That was called the Bankers Panic.
First off before we get anywhere further you have to understand a couple of terms.
Fractional Reserve.
In the original gold standard this accounts for the fact that there is not enough gold in the known world to account for the actual amount of trade occurring.
In fractional reserve the Government can print a fraction out in reserve notes that all account for the same actual gold. So if you had 1 oz in the bank that was redeemable for say 20 dollars you could only print 1-20 dollar bill for that 1 oz in the 100% reserve. In fractional reserve you can print as many as your fraction allows. So for instance you could have 10-20 dollar bills to account for that 1 actual Oz of gold.
The problem with Fractional Reserve is that if a bank continues to print reserve notes for a set amount of gold and then has that fraction redeem that gold all of a sudden that reserve note becomes useless. That was the problem with "Bank Runs"
This is the current Fractional Reserve that is used. The worst part is that this fraction is not even redeemable for anything concrete.
"(A) Each depository institution shall maintain reserves against its transaction accounts as the Board may prescribe by regulation solely for the purpose of implementing monetary policy—
(i) in the ratio of 3 per centum for that portion of its total transaction accounts of $25,000,000 or less, subject to subparagraph (C); and*
(ii) in the ratio of 12 per centum, or in such other ratio as the Board may prescribe not greater than 14 per centum and not less than 8 per centum, for that portion of its total transaction accounts in excess of $25,000,000, subject to subparagraph (C).†"
This means that if you deposit 12,000.00 dollars in a savings account the bank in question only has to keep 3% of that or 360.00 in actual reserve. In other words they can loan out 97% of your money to other people to garner interest and make a profit. Normally this is a non-issue. Unless you get a bank run.
Bank Run
This is what occurs when investors or small savers loose confidence in the banking institution. They withdraw all their funds at the same time.
In Non-Fractional banking this is not a problem as all of those funds are there at all times.
In a fractional reserve bank your funds may not be available.
FDIC
Because of the fact that the fractional reserve system was integral in the Federal reserve overall "Business Plan", the fear of bank runs leaving no funds available for small investors or individuals the FDIC was created. This was a bribe for the smaller individuals to insure that the funds are always there up to 250,000 etc...
This is not necessarily to protect you from bank robbers though it does in turn protect the bank itself.
FIAT
This is money that is not backed by any concrete item. The value of it is determined by the production of the citizens in the country that issues the currency.
Here is the prime example of why the Fed is a problem.
CPI (http://en.wikipedia.org/wiki/Image:USACPI1800.png)
In a perfect world with FIAT currency the Fed would not be a problem. If the amount lent was in exact proportion to the amount of production in the country available for lending then the two would balance out and the inflation of goods and services would not be problematic. This at times in the US could result in 20% base interest rates which sounds really bad on the surface.
The housing market is a perfect example of excessive lending by the fed to branches to lenders to buyers. By allowing excessive amounts of credit available to lenders that allowed them to try for less and less sound buyers. Which in turn allowed sellers to increase prices to an untenable point.
This excessive lending began in 1914 when the first Fed banks opened for business. This excessive lending stems from the fractional reserve listed above. As you can see from the current Fractional amount it can become very easy for a bank to overextend itself with excessive lending.
This was one of the main contributors to the Great depression. The Fed had low interest rates for the first 15 years and then raised interest at quite possibly the worst time possible sending a recession in to a full blow depression.
This is quit possible for today also. With the credit crunch caused by the housing meltdown the fed lowered interest rates. This is very bad when you consider that inflation has been a problem for the last 10 years. This has precipitated the debasement of the currency to one of the worst points relatively since the 1970's if not 1930's. If inflation gets out of hand the Fed will be forced to raise interest rates even though the country is in the midst of a recession. If that occurs the Recession will once again turn into a depression.
This all goes back to inflation. Small incremental inflation of less than 1% per year can help an economy. This is only a help if salary's are increasing by 1% at least per year also. If this does not occur or if inflation is excessive think 4%-10% per year this will leach the savings and general wealth from the poor and transfer to the rich. This is very apparent also in the housing market. The housing price in my area for instance has gone up 200% in the last 5 years (up to about 6 months ago) yet the average salary for employees has not double. In many cases employees are receiving less now relative than before the housing boom.
There are some that made money during this time period. Contractors made a killing 3 years ago, same with real estate and developers. on the other hand your average worker did not. This cause a lag in the system as the people who buy things from the rich are usually employed by those rich. If the rich who are doing just fine are leeching every cent they can out of the bottom line then the people who actually buy the products they sell cannot afford to do so any more.
This will result in the very poor retail sales numbers this holiday season.
Solutions:
1. Return fully to the fractional gold standard with a set limit on the fraction. If all the dollars in distribution had to be back then the value would be close to 2800 dollars per 1 oz. If we shorten the supply of dollars achieved by buying back debt this number could be lowered to a more reasonable level.
2. Dual standards. (this is Ron Paul's solution)
Legalize gold backed currency and stop the taxation of gold coin used as money or currency. This would allow people to wean themselves off of the FIAT currency without throwing a severe monkey wrench into the system like suddenly returning to the Gold standard would initiate.
3. Keep the FIAT Fed system.
If we keep the current system but require certain requirements be meet for the FED discount rate etc...
If the FED was constantly required to deflate the currency to get the currency back to the net worth of say a 1913 dollar over a span of 30 or 40 years this may solve the problem of excessive lending practices. This would put a serious brake on the economy in the country.
Overall Ron Paul's plan is the best when it comes to keeping the economy going but at the same time allow the currency to wean itself off of worthless paper. Add the removal of the IRS to the equation and the US could see economic growth in the 15%-20% of actual growth for the first 10 years. After the first 10 years the growth would drop to 5%-8% but stay steady and remove the recession boom cycle.
Questions comments corrections? please feel free to post. I will try to adjust the original post to correct any inconsistency
For a more in-depth look at sound money check the "Sound Money" Sub forum here.
This post is mainly directed at persons looking at the grass-roots central who would like a general over-view.
Federal Reserve detailed info.
www.federalreserve.gov (http://www.federalreserve.gov/generalinfo/fract/)
wiki (http://en.wikipedia.org/wiki/Federal_Reserve_System)
For detailed info on the Gold Standard
Wiki (http://en.wikipedia.org/wiki/History_of_the_United_States_dollar)
I am no expert but have done a little research on the subject myself as of late.
The Fed was created in 1913 by the Federal Reserve Act. This was done in response to a run on banks that occurred in 1907. That was called the Bankers Panic.
First off before we get anywhere further you have to understand a couple of terms.
Fractional Reserve.
In the original gold standard this accounts for the fact that there is not enough gold in the known world to account for the actual amount of trade occurring.
In fractional reserve the Government can print a fraction out in reserve notes that all account for the same actual gold. So if you had 1 oz in the bank that was redeemable for say 20 dollars you could only print 1-20 dollar bill for that 1 oz in the 100% reserve. In fractional reserve you can print as many as your fraction allows. So for instance you could have 10-20 dollar bills to account for that 1 actual Oz of gold.
The problem with Fractional Reserve is that if a bank continues to print reserve notes for a set amount of gold and then has that fraction redeem that gold all of a sudden that reserve note becomes useless. That was the problem with "Bank Runs"
This is the current Fractional Reserve that is used. The worst part is that this fraction is not even redeemable for anything concrete.
"(A) Each depository institution shall maintain reserves against its transaction accounts as the Board may prescribe by regulation solely for the purpose of implementing monetary policy—
(i) in the ratio of 3 per centum for that portion of its total transaction accounts of $25,000,000 or less, subject to subparagraph (C); and*
(ii) in the ratio of 12 per centum, or in such other ratio as the Board may prescribe not greater than 14 per centum and not less than 8 per centum, for that portion of its total transaction accounts in excess of $25,000,000, subject to subparagraph (C).†"
This means that if you deposit 12,000.00 dollars in a savings account the bank in question only has to keep 3% of that or 360.00 in actual reserve. In other words they can loan out 97% of your money to other people to garner interest and make a profit. Normally this is a non-issue. Unless you get a bank run.
Bank Run
This is what occurs when investors or small savers loose confidence in the banking institution. They withdraw all their funds at the same time.
In Non-Fractional banking this is not a problem as all of those funds are there at all times.
In a fractional reserve bank your funds may not be available.
FDIC
Because of the fact that the fractional reserve system was integral in the Federal reserve overall "Business Plan", the fear of bank runs leaving no funds available for small investors or individuals the FDIC was created. This was a bribe for the smaller individuals to insure that the funds are always there up to 250,000 etc...
This is not necessarily to protect you from bank robbers though it does in turn protect the bank itself.
FIAT
This is money that is not backed by any concrete item. The value of it is determined by the production of the citizens in the country that issues the currency.
Here is the prime example of why the Fed is a problem.
CPI (http://en.wikipedia.org/wiki/Image:USACPI1800.png)
In a perfect world with FIAT currency the Fed would not be a problem. If the amount lent was in exact proportion to the amount of production in the country available for lending then the two would balance out and the inflation of goods and services would not be problematic. This at times in the US could result in 20% base interest rates which sounds really bad on the surface.
The housing market is a perfect example of excessive lending by the fed to branches to lenders to buyers. By allowing excessive amounts of credit available to lenders that allowed them to try for less and less sound buyers. Which in turn allowed sellers to increase prices to an untenable point.
This excessive lending began in 1914 when the first Fed banks opened for business. This excessive lending stems from the fractional reserve listed above. As you can see from the current Fractional amount it can become very easy for a bank to overextend itself with excessive lending.
This was one of the main contributors to the Great depression. The Fed had low interest rates for the first 15 years and then raised interest at quite possibly the worst time possible sending a recession in to a full blow depression.
This is quit possible for today also. With the credit crunch caused by the housing meltdown the fed lowered interest rates. This is very bad when you consider that inflation has been a problem for the last 10 years. This has precipitated the debasement of the currency to one of the worst points relatively since the 1970's if not 1930's. If inflation gets out of hand the Fed will be forced to raise interest rates even though the country is in the midst of a recession. If that occurs the Recession will once again turn into a depression.
This all goes back to inflation. Small incremental inflation of less than 1% per year can help an economy. This is only a help if salary's are increasing by 1% at least per year also. If this does not occur or if inflation is excessive think 4%-10% per year this will leach the savings and general wealth from the poor and transfer to the rich. This is very apparent also in the housing market. The housing price in my area for instance has gone up 200% in the last 5 years (up to about 6 months ago) yet the average salary for employees has not double. In many cases employees are receiving less now relative than before the housing boom.
There are some that made money during this time period. Contractors made a killing 3 years ago, same with real estate and developers. on the other hand your average worker did not. This cause a lag in the system as the people who buy things from the rich are usually employed by those rich. If the rich who are doing just fine are leeching every cent they can out of the bottom line then the people who actually buy the products they sell cannot afford to do so any more.
This will result in the very poor retail sales numbers this holiday season.
Solutions:
1. Return fully to the fractional gold standard with a set limit on the fraction. If all the dollars in distribution had to be back then the value would be close to 2800 dollars per 1 oz. If we shorten the supply of dollars achieved by buying back debt this number could be lowered to a more reasonable level.
2. Dual standards. (this is Ron Paul's solution)
Legalize gold backed currency and stop the taxation of gold coin used as money or currency. This would allow people to wean themselves off of the FIAT currency without throwing a severe monkey wrench into the system like suddenly returning to the Gold standard would initiate.
3. Keep the FIAT Fed system.
If we keep the current system but require certain requirements be meet for the FED discount rate etc...
If the FED was constantly required to deflate the currency to get the currency back to the net worth of say a 1913 dollar over a span of 30 or 40 years this may solve the problem of excessive lending practices. This would put a serious brake on the economy in the country.
Overall Ron Paul's plan is the best when it comes to keeping the economy going but at the same time allow the currency to wean itself off of worthless paper. Add the removal of the IRS to the equation and the US could see economic growth in the 15%-20% of actual growth for the first 10 years. After the first 10 years the growth would drop to 5%-8% but stay steady and remove the recession boom cycle.
Questions comments corrections? please feel free to post. I will try to adjust the original post to correct any inconsistency
For a more in-depth look at sound money check the "Sound Money" Sub forum here.
This post is mainly directed at persons looking at the grass-roots central who would like a general over-view.