Monday, January 10th, 2011 at 8:08pm

What’s wrong with the Fed?

Posted by admin

The Federal Reserve is not Federal and its “Reserve” is debt “purchased” ( by swapping your deposits for the so-called reserves) with newly created, worthless, Federal Reserve Notes (called “dollars”).   These new notes gain value by draining it from your dollars (by dilution of what all dollars represent in goods and services) when they are introduced into circulation by a loan, mortgage or credit card.  

It’s like mixing cold coffee (new valueless notes) with hot coffee (value of all notes in circulation).  The hot coffee loses it’s heat to warm the cold coffee.  The notes in circulation lose their value to give value to the new notes.  If enough cold coffee is mixed with the hot coffee all the coffee (notes in circulation) becomes cold (way less able to purchase good and services).  That is where we are now compared to 1913.  That is why it takes two wage earners to support a family where before one bread winner was sufficient.    

The FED is a a stealth confiscator of the value/capital, of the currency in your wallet, house, savings and other property. That loss of value appears to you as price inflation as prices adjust to the new lower value/Capital represented by the Fed Reserve Note. 

In a further outrage – if you own any assets such as a house or stocks whose prices rise to reflect the lesser value of the “dollar” note,  the government (IRS) considers that artificial price rise as a capital gain and TAXES you on it!  Theft on top of theft!  Tax upon tax! 

Less Weight


The Fed reduces the ‘weight’ of the dollar (think Coin) and you get less product for the dollar.  

Same Package (Dollar Bill)  Same Price (One Dollar) but you get Less Product (Value and purchasing power)

The FED is a consortium of Banks working together with government officials to centrally control the amount of purchasing power/value of your  dollar and all interest rates. It is a Government created Monopoly that disrupts the free market.  The Federal Reserve directly causes, or contributes to, economic boom/bust cycles, recession and  depression (see Appendix A below) by stealing the money from your savings and diverting it into loans, generating incentive or disincentive for loans, mortgages, credit cards and money to be invested in the Stock Market.

Monopoly Control of Capital is a Communist technique and giving preference to Big Business, a Fascist technique.  Neither belongs in our free market system which leverages the intelligence of everyone in the market and not just a few FED governors.  The result is a broken market and a chaotic economy. 

The Federal Reserve (FED), created in 1913, usurped the monetary role of  the Constitutionally sanctioned United States Treasury and replaced the coinage of Gold and Silver (or paper redeemable in coinage of Gold and Silver), required by the Constitution, with a Fiat (meaning “by decree”, not the car company 🙂 currency of non-redeemable Paper Money backed solely by the faith and credit of the US government (e.g. the amount of taxes the government can confiscate from you.  The 16th amendment, “coincidentally” also passed in 1913, went against the Constitution and allowed direct taxation of citizens.  This income tax, massively increased tax revenue to the government and tax burden on the people).

The FED also usurped the role of the Free Market in determining interest rates.  Ostensibly not under Political authority, the FED is nonetheless Politically influenced, since it’s director is appointed by the Federal Government.  The Influence can be seen for instance, in its keeping the interest rate low to facilitate unprecedented borrowing by the government and stock market investors at low payback rates.

The only legitimate function of the Federal Reserve System should be as a clearing house for checks and funds between banks, and as a safe repository of coin and paper currency.

Federal Reserve Notes that we use as currency are a note of debt from the government (Your taxes) to the FED.   These debt notes denoted in ‘dollars’ are created (out of thin air, so to speak) whenever borrowing occurs. There is no commodity backing this currency other than the taxes the government takes from you.  If all loans are paid back there would be no dollars.  Therefore the incentive is for the FED to ‘loan’ (an accounting swap of your deposits for government bonds they call ‘reserves’) more and more to the banks, which they loan to you (creating more Fed Notes) to keep dollar notes in circulation.  All might be well, if loans made and loans paid back were in balance.  But the government is under the false impression that low interest rates and easy lending are the way to juice the economy.  It actually stimulates the part of the economy that benefits from borrowing at the expense of the other parts.    

The more Notes put into circulation, the more it dilutes the purchasing power that each note represents. That causes a re-evaluation of the amount of notes needed for purchases.  Prices for raw materials, good and services, taxes and wages rise.  Deflation of purchasing power, is misrepresented by the government as ‘inflation’ shifting the blame from the real culprit, the FED, to business as though they are gouging the consumer and not the government.  That is government propaganda, not reality. 

Because we use Debt notes as currency and not commodity backed notes (Gold or precious metal) The Federal Reserve has become an accounting scam and , in effect, a money skimming machine that, figuratively, cuts off pieces of your dollar for the government to spend and for the Banks to loan.  (that’s when Fed reserve notes, we call money, is created out of thin air) At first they take a sliver then another and eventually it’s you that is left with only a sliver of your dollar’s original value.  

The way Honest Banking should work:

Firstly, the currency must be honest and stable.  The US currency, before the Federal Reserve, consisted of Treasury Notes and Certificates – as per the Constitution, which were directly redeemable for coins (specifically for gold coins with a Gold Certificate or silver coins with a Silver Certificate), validated as to weight, deposited in the US treasury. 

When you deposit $100, the bank gives you a record of your deposit.  Either you pay a fee for the safe preservation of your money in a demand deposit account (where you can take the money out at any time) or the bank pays you a portion of the interest they charge, when they lend out your $100.   Like a CD you can not redeem the loaned out money without penalty.  The bank can only lend exactly what it possesses, and no more  (100% reserve requirement).   In this case, only the $100 on deposit. 

The larger the supply of deposited money for lending, and/or the demand for borrowing, the lower the interest rate the lender charges due to supply and demand.  Banks compete for your long term deposits by offering depositors a higher interest rate and better service than other banks and compete for borrowers by offering lower interest rates and better service than other banks.

To cover the risk of bad loans that are not paid back, the bank makes sure the borrowers put up some collateral and that they are likely to pay back the loans.  The bank purchases bad loan insurance in some fashion (or resells the loans) and charges a high enough interest rate to cover the risk. 

When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy’s stability and balanced growth.

When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one — so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the “easy money” country, inducing tighter credit standards and a return to competitively higher interest rates again. – Allan Greenspan. Gold and Economic Freedom 1966

However (there always is a but), if money is merely hoarded (taken out of circulation and not put back), the value of the money and the interest rates for borrowing goes up, due to scarcity of the currency not just market forces.  Both prices and interest rates are skewed.   

What the problem with Gold backed Currency?

Currency, backed by gold, is vulnerable to not having enough in circulation to sustain an economy.   As we became a net exporter outside the USA, (more Money flows out than comes back in) and people kept their gold coins and treasury notes “under their mattress” and not flowing back into the economy, less and less currency became available for loans or commerce, interest rates rose overly high and the economy slowed.

One method used to balance out the currency missing from circulation was to lower the reserve requirement for Banks, down to whatever percentage is missing from the economy.  At a 50% reserve the bank could lend out twice as much as the actual value of the gold or certificates they possessed.  At 10% they could lend out 10 times as much as they actually possessed.  Guess where the reserve is today.  Aside from not being honest and inflationary, when banks lend out more than the dollars they possess (called Fractional Banking), they become vulnerable to runs, where depositors redeem their bank receipts all at once.   The bank does not have enough to redeem all the bank receipts and either must borrow the money from another bank or go out of business.  With a large reserve, the risk of panic was low, but the incentive to make more profit led to lower reserve requirements.

It does not follow that a person who ‘can’, will yield to temptation.   Put that same person in a group, add power, and ‘can’ becomes ‘should’.    – Dr. Society.

How it works after 1913 following the creation of the Federal Reserve

To get people to put the “mattress” money back into circulation,  the government made Gold illegal for private individuals to possess or use.   The Treasury note was re-written to be redeemable for an unspecified amount of gold, equal to the “dollar” (not validated gold “coins” anymore) “according to Law”.  

“According to law”, effectively meant that the new dollar could no longer be redeemed for Gold by US citizens, because it was illegal to possess gold, keeping the supply somewhat more stable. 

Eventually the Treasury ceased even that pretense and only redemption for more notes was possible.   The Treasury stopped printing “Treasury” and “United States” Notes and Certificates and replaced them with “Federal Reserve” Notes.

You are Money

‘Fed’ Notes are only backed by the governments ability to collect taxes from you (and from future taxation of your descendants, if borrowing is larger than tax revenue).   You are now the asset backing the dollar.  

The Stealth Tax

When the profligate spending of the government gets to a point where raising taxes to cover printing new notes is blocked, the Fed obtains the capital for additional notes it spent by diluting all the dollars in circulation.  Like cold coffee, poured into hot coffee, the cold coffee (new notes) goes up in temperature and the hot coffee goes down in temperature until they equalize somewhere between the two initial temperatures. So too the newly printed, un-capitalized (cold) dollars go up in value and old (hot) dollars go down in value to equalize somewhere in between the initial values.   

The FED Note is only a Promise of money or value.  Government never keeps its promises.  The Government reneges a bit on their promise to you so they can make a promise with the new FED note.  Let’s say they make twice as many new Fed Notes as before.  To make a promise of 50 cents on the new notes, they renege on the promise of 100 cents on your Notes and will now only promise 50 cents of value on all notes.  
Or, think of the dollar as a balloon, filled with the hot air of politician’s promises.  The dollar balloon’s  purchasing power/value depends on how much hot air is in the balloon.  The government can print up as many balloons as they want but there is no air in them.  To fill up their newly printed balloons they let out some air from your dollar to fill up the newly printed ones.  If they let out half the air in your balloons to half fill their newly printed balloons, then you only have half the purchasing power as before.  Now you will need two balloons to get the same amount of hot air as one dollar used to have.  It is easy to see that it is not the price that has gone up but rather the hot air in the balloons has gone down.  It is easy to see the reduction in size in a balloon but not in a paper dollar, which looks the same, but is only half the promise it was before.  
The government quickly uses the new money to pays its bills with the 50 cent dollar as though it is still a 100 cent dollar, stealing from the merchants they buy from and the Treasury Bond holders they pay off.  
How quickly these notes go into circulation is manipulated through the Fed’s control of Interest rates.  The lower the rate the faster the newly printed notes are borrowed from the bank.
When the new dollars hit the market either from the government directly or through the banks which borrow the money from the FED, prices adjust at the same percentage that the money has been devalued. We then think there is price inflation, when really it is the reneged promise of the government to pay back yesterday’s dollar’s full value, reflected in the price.  
The clue that your wealth has been reduced, to cover the new “Money”, is price Inflation.  Although even that is masked by technology and improvements in production that lower prices and offset the rise. 
The government reduces the value of the dollar by half 
Here is a place where it is unmasked.  In the last few years the price of a power ball lottery ticket went up from 1 dollar to 2.  Did the value of the ticket change?  It’s actually just a slip of paper.  With all the efficiency of the computer network, the price could have come down and the States would still have made the same amount of profit.  So what happened?  During the prior years the Fed created twice as many notes as before.  To get air (capital/value) into those new notes, the Fed let out half the air in your balloon/dollar.  So it now takes two, half-filled, dollars to buy a power ball ticket, where before it took only one, fully filled, dollar.
The government gets to spend all those half-filled dollars that they didn’t have before and you lose half the value of yours.
It is effectively a flat percentage rate tax on every person’s dollar and the worth of every person’s property.

Banks magnify the dilution and devaluation through the fraudulent practice of Fractional Banking – loaning out more than the bank actually possesses.  In Fractional Banking your deposit is loaned out more than once.  When the bank lends out your same $10 deposit to 10 people, that is called keeping a 10% reserve.  (Guess what the reserve requirement is for Federal Reserve banks? )  The bank makes 10 times the interest by pretending to have $100 when they only really have $10.  Who’s going to know with the smokescreen of words the government puts up?  Did anyone ever understand a word of what Allan Greenspan said? lol

Since the total capital in the $100 they lend out is only $10, and all the banks in the Federal Reserve system lend out $100 for every $10 in reserve, at some point the market catches on and, the value/buying power of $100 shrinks to $10 to reflect reality.   What used to cost $10 will now cost $100.  Prices reflect actual value and capital, not the diluted bank promises we call Federal Reserve Notes.  Prices are the intelligence that allows people to make decisions in trade and business.  They need to be accurate.  When the FED through the banks, dilutes the dollar, by printing more dollars and/or lending out more dollars than actual deposits/reserves, – prices rise to reflect the original capital/value. 

If you dilute a shot of whiskey with 9 shots of soda, then you need 10 shots to get the same amount of alcohol as before dilution.  Same thing when you dilute a dollar that has 100% capital with 9 newly printed dollars that have no capital.   The capital of the original dollar is spread across 10 dollars instead of one.  And now you need ten of them to get the same bang you used to get for a buck.   – Dr. Society

Like a skilled magician, the government diverts your attention away from the Federal Reserve to the so-called “greedy” capitalist Merchants and corporations, whom they use as scapegoats to blame for “inflation”.    

By this process, your wealth is being stolen, right out from under you.   Banks don’t need to pay you a high interest to motivate you to deposit money for them to lend because the FED can just steal your savings and give it to the banks.  To add insult to injury, you have to pay brokerage fees and interest on every FED note we now call a dollar.  

The Currency Fraud

What we call money is actually Debt to the Federal Reserve.   They can call back the “money” at any time and give you nothing.   You can’t redeem a “Dollar” for anything but more FED debt notes.  Our currency is not tied to Coins of Silver and Gold as the Constitution specifies, rather currency is created when a loan is made.  

But that new currency is an magician’s illusion.  No matter how many notes are printed, the net value of all the notes in circulation does not change.   The value in the currency is tied to the goods and services it can be exchanged for.  Printing more money does not increase the goods and services or provide more net capital.  More notes  just decreases how much goods and services can be exchanged for one Dollar.   The more the FED issues into circulation, the less your dollar is worth.  

Stealth Theft Redistribution of wealth

Effectively, The FED issues new notes to move capital from you, and every other holder of a dollar and assets denominated in dollars like your house, car, retirement fund and savings, to the government  and Banks who profit from loans to business and investors.  Although new goods are generated by loans, assuming a successful business is formed, and they provide jobs and such, you are the one whose capital funded the business.  The FED, a bunch of banks in collusion with the government, stole it from you to give to their cronies.     

The Mechanics of the Fraud

From the FED: “the Treasury redeems maturing debt held by the public and issues new debt held by the public”.    The Treasury is redeeming higher interest bonds with lower interest bonds to save money on interest payments and so be able to stay in debt long enough for the next administration to deal with the eventual monetary crisis.

Who buys the lower interest bonds, besides insurance companies, when anyone can get a better interest rate elsewhere?   I won’t.  You probably won’t.  Countries probably won’t.  So the FED “buys” the bonds.  The FED will exchange it’s debt instrument, the Federal Reserve note denominated in dollars, for a Federal Government debt instrument – A Treasury Bond.  The government spends the “money” to keep afloat.  The FED reserve Note is Debt not money.  Even though the FED is in debt it counts the Treasury Bond as an asset.  So the FED asks the Treasury to print up Federal Reserve Notes in the amount of the bonds purchased, and lends the notes to the banks at no interest, which the banks release as loans up to 10 times the amount of the original bond (Only required to keep a 10% reserve) which dilutes the value of our currency, effectively stealing cents from every dollar holder to fund the Fed’s purchase and garner interest on loans for the bank. Those cents add up to the amount you would have invested in savings accounts if interest rates were governed by the market.

The banks get a free loan of your savings to them, they pay you no interest and never give back the money. Theft.

The FDIC enabler of the Fraud

 Now the bank is collecting interest on $1000, $900 of which it doesn’t actually possess.  Since the bank is not paying any interest to a depositor for the $900 they lent out, the bank can afford to charge less interest on a loan or pay more interest on your deposits and attract more business.    No one is the wiser if all goes well and you leave your money in the bank.   But loans do go bad and the bank have to cover them with your deposit.  In this case, the bank  only has enough deposits to cover 10% of the loans.   When more than 10% of the loans go bad the bank fails and you lose your deposit.   Another way for the bank to fail is if you and the rest of the depositors come to collect your principal and the interest all at once and the bank does not have enough in reserve.

Think of Zero Mostel, in “The Producers”, a Mel Brooks comedy, selling a 100% stake in a play over and over again. He hopes the play is a flop, so no one comes to redeem their shares.  When the play becomes a success and all the 100% shareholders come to take their profit, that’s a run on the bank.  

The Federal Depositors Insurance Corp (FDIC) was created to mitigate the risk of a run on the bank and continue fractional banking.  

This stealth thievery is used by every government in the world.  The Founders created a country that would not bow to corruption of currency.  Let’s end it here and set a better example for the world.  (after we pay back the almost twenty trillion in debt that the administration is counting on paying back with fraudulent valued dollars)

In Summary so far:

The “Fed” immorally and unconstitutionally benefits the banks and the government at your expense.   By replacing legitimate Treasury notes with Bank Notes under the control of the Federal Reserve and controlling interest rates they are able to steal your savings/wealth to provide capital for the banks to lend, borrow money for the government at artificially low interest rates, not determined by the free market, pay back government loans with devalued currency and allow government to spend even more of your wealth (on top of the taxes they already confiscate) on entitlements, Crony Capitalism and pork which buys votes.

Before the FED all our money was redeemable for Gold and silver coins deposited in the treasury.  The Treasury certificate we called the dollar was a promise to deliver gold which was “as good as gold”.  Your dollar was a receipt for Gold deposited in, and guaranteed by, the Treasury of the United States and the security of Fort Knox.  The Fed, created in the early 20th Century, is a bunch of banks that the administration allowed to usurp control of the US Treasury.  No Gold can be redeemed for the FED Reserve note we now call a dollar. In fact, nothing can be redeemed except more Fed Notes.  A Federal Reserve dollar, is not real money, it is not even a promise of real money. It is a promise of potential capital that the government can extract from the people via taxes (the 16th amendment creating income tax) and borrowing against later taxation.  It is potential Capital, wholly dependent on whether the government will keep its promise.  It gives the government and the banks the ability to break that promise by decreasing the amount of capital that the government will exchange for every Fed note and using that capital to back up newly printed FED notes that the government spends and gives to the banks to lend out.

The Politicians and Banks get away with the fraud because the benefits of ” free” money, artificially low interest rates and government welfare are felt right away but the terrible cost is hidden far enough down the road not to be associated.

The Fed acts as an unlimited credit card for Government over-spending and waste.

  1. Federal Reserve Notes denoted in Dollars have replaced real Dollars (United States Treasury Notes backed by Gold and Silver bullion and coinage made of gold and silver).
  2. We are forced by the government to use this non-asset as money.  (“This note is legal tender for all debts public and private”)
  3. The Fed manipulates the supply and value of Federal Reserve Notes (paper and electronic).
  4. Federal Reserve Notes are based on debt the government owes (Treasury Notes) and deposits of Federal Reserve Notes.
  5. The Fed controls interest rates.
  6. The Governor of the Fed is a Political appointee.
  7. There is minimal oversight or supervision and their books are closed to us.

In fact, the FED is a Communist Nationalization of all Capital.

The FED controls your capital, allowing you to use whatever percentage it determines by it’s Central Planning committee.   Outside of taxes, which the government spends, it funnels your capital through the banks to the rich and large corporations so that only they have enough Capital to invest.  This is causing the same problem that Communism was supposed to address.  The government acts as though your wealth belongs to them, because it actually does.  Ownership is not guaranteed, there is no private property except in name only. 

The Fed exerts central planning and control over credit, interest rates, the money supply and affects the pricing of goods and services.  Central Planning by a few governors is unintelligent compared to the Free Market intelligence of millions of people.   Central planning screws up the market and often skews the market in favor of those closest to power at the expense of the rest of society.    Government elimination of risk skews the profit-loss incentives of the free market.



The US Government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U. S. dollars as it wishes at essentially no cost.  By increasing the number of U. S. dollars in circulation, or even by credibly threatening to do so, the U. S. government can also reduce the value of a dollar in terms of good and services, which is equivalent to raising the prices in dollars of those goods and services”
–  Federal Reserve Governor Ben Bernanke in remarks before the National Economists Club November 21, 2002

Rising prices are the result of the government inflating the amount of Federal Reserve Notes in circulation, which decreases the amount of capital that each note represents.   What is mislabeled as inflation is an adjustment to the amount of Notes needed to buy something after the capital that can be redeemed by the Note is decreased.  It’s really the amount of Capital that your dollar Note represents that’s changed, not the price. Today’s ‘inflated’ price buys the same amount of goods and services as the prior price, just translated into the new amount of Capital that the currency represents.

According to the Federal Reserve Bank of St. Louis, the goods and services you could buy in 1913 for $1 would cost $21 in 2008 (which just happens to track the price of silver).   Another way of looking at it is the purchasing power (amount of Capital that the Note Represents) of the dollar had fallen to 5 cents.

However, price comparisons alone does not show the TRUE devaluation of the dollar.   Since 1913, unit prices have continually decreased due to technological innovations and huge increases in productivity.  This downward pressure on prices balanced out a good deal of the upward pressure, of the increase in Dollar Notes, so that people only saw a very gradual increase, which they accept as normal.  How much more productive are we today?  Ten times?  A hundred times?  That’s how much more the dollar has been devalued and how much more of your wealth has been stolen directly from your pocket without you knowing it.  If you are mathematically inclined, this study proves that production, across industries, doubles every 3 years with Information Technology running at an even faster rate.

Since 2008 (the figures quoted above) the Fed has stolen another 40% – 60% of our wealth to pay Bank and Political Cronies for their financial support which the Politicians called TARP, bailouts and stimulus.

The Government can use the Fed to spend recklessly like an unlimited credit card that you pay for.  The Politicians rack up crippling debt, spend on welfare to buy votes and creates a dependent lower class, and some would argue – enable wars, which would not be approved and could not be financed otherwise.  All the while the Banks collect interest.

How they do it

 Every Treasury Bond (a debt to future taxpayers) “sold” (from the secondary market) to the Federal Reserve is counted as an asset on the Fed’s books.   The Fed counts this faux “asset” as a reserve.   Banks are allowed to lend out more than they actually have in reserve (called Fractional Banking) so the Fed then asks the Treasury to print up to 10 times the reserve amount of Federal Reserve Notes that we call dollars to pass on to the banks for lending.  This increases the money supply (currency in circulation).  Increasing the total amount of dollars, similar to increasing the amount of shares in a company, dilutes the value of what you already have.    Prices are pegged to the amount of Capital each note represents.  When total dollars increase and their redeemable Capital gets diluted, prices also increase to balance out to the new value of the Notes (inflation).   This hidden tax is akin to counterfeiting and should be prohibited.

Printing money, that reduces the nation’s consumer capital, and redistributing it to the banks, together with lowering interest rates not based on market demand, causes a false boom for the stock market and business.   Loans are taken out to ramp up production, create new businesses, buy real estate and speculate in  stocks which pushes up prices due to the artificial demand that would not exist in a free market.    International money may prolong the boom but, in the end, this Socialist re-distribution from consumer to bank means the consumer does not have capital available to purchase the goods, stock or house.  Businesses fail, loans are foreclosed and people bail out of their investments – causing a bust.

Paying the yearly 6% interest the Fed charges on every Federal Reserve Note in circulation was the excuse used to pass the 16th amendment allowing Congress to directly confiscate your income.

The Constitution only authorizes congress with the power to coin money [of silver and gold which have intrinsic value].   States are prohibited from making “any thing but gold and silver coin a tender in payment of debts”  in Article 1 Section 10 of the Constitution.   Money is a good that can be exchanged for any other good because it  is portable and has a known and reliable value .  Paper or electronic “money”  is only a promise of money.   The old silver and gold certificates were redeemable in lawful money (gold and silver coins deposited in the US Treasury).   Federal Reserve Notes are not even a promise of money.  They are not redeemable for money, just more debt.  They were made “lawful” by Supreme Court usurpation of power and interpreting the meaning of “legal”.  We are forced by the government to accept an unsound currency as tender.

 Getting around the Constitution:

1819 – Supreme court usurps the power to decide constitutionality – Marbury V Madison

1819 – Supreme court grants Implied powers to Congress.  The 10th Amendment to the Constitution states that the Federal government can exercise only the powers explicitly granted to it by the Constitution (the rest being reserved for the States and the people).   Despite this the Supreme Court in 1819 (McCulloch_v._Maryland) usurped the Constitution by interpreting article 1, section 8 enumerated_powers  necessary and proper clause to effectively grant the US government all powers except those explicitly denied to it by the Constitution.

Unconstitutional paper money called Greenbacks were issued to pay for the Civil War by Congress based on this precedence.

To finance the Civil War, the federal government under President Lincoln in 1862 passed the Legal Tender Act, authorizing the creation of paper money not redeemable in gold or silver. About $430 million worth of “greenbacks” were put in circulation, and this money by law had to be accepted for all taxes, debts, and other obligations—even those contracted prior to the passage of the act.

 In Hepburn v. Griswold (1870), the Supreme court, in a 5–3 vote, struck down the Legal Tender Act as unconstitutional.    Immediately, President Grant appointed two progressive Justices to the Supreme Court who ruled on the remaining legal Tender cases, Knox v. Lee and Parker v. Davis  together and overturned the ruling of Hepburn v. Griswold. –  More Detail

Only Coinage of Silver and Gold is authorized by the Constitution as lawful money.
State Banks issued notes redeemable in Silver and Gold as a receipt to each depositor.    These notes were “as good as gold” and used as currency.   Banks accepted each others notes.  Rather than carrying gold or silver back and forth to banks to settle accounts at the end of the day, a central clearing house would keep accounts of the notes and settle against other bank’s notes.   Gold and silver moved only if absolutely necessary.  Depositors paid a fee for storage if they wanted on demand redemption of their notes back into gold or silver.  If the bank was allowed to lend the deposit,  the depositor would receive a Certificate of Deposit (CD) and would only be able to withdraw their deposit after a contracted time period.  In return the depositor would receive a portion of the interest that the bank charged the borrower.

At least that is the way an honest bank would operate.   There were none and there are none today.  Banks lend out paper notes based only on a fraction of assets they hold.   Banks could lend out 1000 dollars worth of notes backed only by 100 dollars worth of gold.

As long as everybody didn’t redeem their notes at once the banks could get away with this fraud and squeeze out spectacular profits.  Banks would gage the likelihood of a run and adjust their reserve percentage accordingly.  There is no such thing as a run on the bank with an Honest bank (100% reserve).  Ever wonder why bank safes and vaults were kept open to display their gold?   It’s the confidence builder essential to a “con”.   Keeping a full reserve of gold necessitated Theft Insurance which cut into bank profits.

But that dang competition on interest rates still motivated depositors to move their money from one bank to another.  This risk forced banks to keep reserves higher and competition kept interest rates favorable to the public.   So the banks had incentive to be reasonably honest and reasonable safe and secure.  Risk was assessed before making  loans.  Credit could not easily be obtained.

The Federal Reserve and Government Regulation eliminated all competition in interest rates and later risk in housing loans.  Depositor Insurance pacified the public and prevented runs on the bank.   Since 1971 when the government took us off the Gold Standard, a run on the bank is useless because depositors can only redeem their Federal Reserve Notes for more of the same, which can be printed to cover any demand.

Further Reading:

The Creature from Jekyll-Island- A Second look at the Federal-Reserve –  G. Edward Griffin

End The Fed –  Ron Paul



Appendix A:

How the Federal Reserve “helping” Great Britain caused the Great Depression.

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve’s attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain’s gold loss and avoid the political embarrassment of having to raise interest rates. The “Fed” succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process.

The excess credit which the Fed pumped into the economy spilled over into the stock market, triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930’s.” –  Allan Greenspan. Gold and Economic Freedom 1966