This is America !

[Steven Gaal]

COLBY WROTE

Dr. Edward Flaherty, a professor of economics at the College of Charleston, thinks “Jaikaran's model contains two gaping holes which collapse his entire thesis”

http://inclusion.semitagui.gov.co/Subjects/MoneyBanking/FederalReserve/FRconspire/antidote.htm END COLBY QUOTE

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Mr Flaherty is easily debunked.

MEET EDWARD FLAHERTY, CONSPIRACY POO-POOIST

A response to a critic of The Creature from Jekyll Island

© 2004 by G. Edward Griffin

Edward Flaherty is a Ph.D. of Economics who has been critical of my book, The Creature from Jekyll Island: A Second look at the Federal Reserve. Periodically I receive inquiries from readers who have visited Flaherty's web site, and they want to know if I can rebut what he says. I put this off for a long time because, first, his critique is lengthy and loaded with minutia that requires considerable time to respond properly and, second, the number of inquiries has been so small as to place the importance of this task far down on my list of priorities. Nevertheless, whenever I get an inquiry, I dread that my reader may think that a lack of response is a sign of not being able to defend my work; so, at last, I decided to step up to the plate and swing at the ball that Flaherty has thrown in my direction.

The essence of Flaherty's critique is that anyone who opposes the Federal Reserve must be some kind of a kook, totally lacking in scholarship. He lumps all Fed critics together, those who bring scholarship to the topic as well as those who do not, and the mixture tends to discredit everyone. It is an old tactic of dumping garbage into the grocery bag so that it all smells like garbage and is rejected in total.

On September 5, 2004, I received an email from a reader who had compared comments made in my recorded lecture with what Flaherty's web site says and asked for clarification. What follows is his inquiry with my reply embedded at appropriate locations.

My reader begins by quoting from my recorded lecture, followed by a quote from Eustace Mullins:

My lecture: I came to the conclusion that the Federal Reserve needed to be abolished for seven reasons. I’d like to read them to you now just so that you get an idea of where I’m coming from, as they say. I put these into the most concise phrasing that I can to make them somewhat shocking so that, hopefully, you’ll remember them:

1. The Fed is incapable of accomplishing its stated objectives.

2. It is a cartel operating against the public interest.

3. It is the supreme instrument of usury.

4. It generates our most unfair tax through inflation and bailouts.

5. It encourages war.

6. It destabilizes the economy.

7. It discourages private capital formation.

Eustace Mullins, Secrets of the Federal Reserve: “...the increase in the assets of the Federal Reserve banks from 143 million dollars in 1913 to 45 BILLION dollars in 1949 went directly to the private stockholders of the [federal reserve] banks.”

My reply: I stand firmly behind my seven points but I do not agree with Mullins on this. Please do not lump my work with other writers. Flaherty does this a lot. Guilt by association is a ploy that must be challenged and rejected.

Flaherty: It would be a mistake to examine these conspiracy theories....

My reply: Stop right there. There is nothing about my work that merits being classified as a conspiracy theory. In modern context, it is customary to associate the phrase “conspiracy theory” with those who are intellectually handicapped or ill informed. Using emotionally loaded words and phrases to discredit the work of others is to be rejected. If I am to be called a conspiracy theorist, then Flaherty cannot object if I were to call him a conspiracy poo-pooist. The later group is a ridiculous bunch, indeed, in view of the fact that conspiracies are so common throughout history. Very few major events of the past have occurred in the absence of conspiracies. To think that our modern age must be an exception is not rational. Facts are either true or false. If we disagree with a fact, our job is to explain why, not to use emotionally-loaded labels to discredit those who disagree with us.

Flaherty continued: ... outside the context in which they were written.

My reply: I try hard not to present text outside its context. When searching through hundreds of documents and thousands of pages, it is inevitable that some subtleties of context may be missed, but so far I have not yet been advised of any instances of this. I welcome any corrections; but, until specifics are brought to my attention, I stand firm on everything I have written. Furthermore, I resent the implication that my work could not stand without taking text out of context.

Flaherty: All the conspiracy authors whose work I study here profess a belief in the alleged ‘New World Order’ conspiracy, or some variant thereof.

My reply: An informed reader would not waste time beyond this point. It is absurd to claim that a blueprint for a New World Order based on the model of collectivism is merely “alleged.” The evidence that this is a demonstrable fact of modern history abounds. Some of that evidence is presented in my work, The Future Is Calling, found in the Issues section of this web site.

Flaherty: Hypothesis: Each of the 12 Federal Reserve banks is a privately owned corporation. Like any firm, their main objective is to maximize profits. They do so by lending the government money and charging interest. They manipulate monetary policy for their own gain, not for the public good. Facts: Yes, the Federal Reserve banks are privately owned, but they are controlled by the publicly-appointed Board of Governors. The Federal Reserve banks merely execute the monetary policy choices made by the Board.

My reply: Basically, Flaherty is correct as far as he goes. But, as we shall see in so many of his statements, he stops short of the entire truth. A half-truth is just as much of a deception as an outright lie. Flaherty says that the Board of Governors is politically appointed. This is true and it is supposed to make us feel safe in the thought that the President responds to the will of the people and that he selects only those who have the public interest at heart. The part of the story omitted by Flaherty is that the President does not select these people from his own personal address book, nor does he ask the public to submit nominations. With few exceptions, he makes appointments from lists given to him by the staffs of banking committees of Congress and from private sources that have been influential in his election campaign. The most powerful of all these groups are the financial institutions (including prominent members of the Fed itself) and the media corporations over which they have effective control. One does not have to be a so-called conspiracy theorist to recognize the tremendous influence that these institutions have over the outcome of presidential campaigns, and anyone with knowledge of how our current political system works will understand why the President makes exactly the appointments that the banks want him to make. All one has to do to see the accuracy of this appraisal is to examine the backgrounds and attitudes of the men who receive the appointments. While there is an occasional token individual who appears to come from the consumer sector of society, the majority are bankers deeply committed to the perpetuation of the system that sustains them. Anyone who would seriously challenge the power of the banking cartel would never be appointed. So, while Flaherty is correct in what he says, the implication of what he says (that the Fed is subject to control of the people through the political process) is entirely false.

Flaherty: Nearly all the interest the Federal Reserve collects on government bonds is rebated to the Treasury each year, so the government does not pay any net interest to the Fed.

My reply: Here is another half-truth that is a whopper deception. It is true that most of the money paid by the government for interest on the national debt is returned to the government. That is because the Fed’s charter requires any interest payments in excess of the Fed’s actual operating expenses to be refunded. However, before we jump to the conclusion that this is a wonderful benefit, we must remember that the banking cartel is able to use tax dollars to pay 100% of its operating expenses with few questions asked about the nature of those expenses. After all of those expenses are paid, what is left over is rebated to the Treasury, as Flaherty says. There is no secret about this, and you will find an explanation of it in my book. Technically, there is no “profit” on this money. However, remember that creating money for the government is only one of the functions of the Fed. The real bonanza comes, not from money created out of nothing for the government, but from money created out of nothing by the commercial banks for loans to the private sector. That’s where the real action is. This is the famous slight-of-hand trick. Distract attention with one hand while the coin is retrieved by the other. By focusing on the supposed generosity of the Fed by returning unused interest to the Treasury, we are supposed to overlook the much larger river of gold flowing into the member banks in the form of interest on nothing as a result of consumer and commercial loans.

Flaherty: Hypothesis: Bankers and senators met in secret on Jekyll Island, Georgia in 1910 to design a central bank that would give New York City banks control over the nation’s money supply. Facts: The meeting did take place, but plans for a return to central banking were already widely known. Regardless, the proposal that came out of the Jekyll Island meeting never passed Congress. The one that did, the Federal Reserve Act, placed control over monetary policy with a public body, the Federal Reserve Board, not with commercial banks.

My reply: Here again we have a half-truth that functions as a deception. Plans for a return to central banking, indeed, were already known, but they were unpopular with the voters and large blocks of Congress. That was the very problem that led to the great secrecy. Frank Vanderlip, one of the participants at the Jekyll Island meeting, later confirmed that, if the public had known that the bankers were the ones creating legislation to supposedly “break the grip of the money trust,” the bill would never have been passed into law. The facts presented in my book, and fully documented by references from original sources, show that my version is historical fact. Flaherty attempts to minimize these facts by implying that the original, secret meeting was not important because the first draft of the legislation was rejected. What he does not say is that the second draft that was passed into law was essentially the same as the first. The primary difference was that Senator Aldrich’s name was removed from the title of the bill and replaced by the names of Carter Glass and Robert Owen. This was to remove the stigma of Aldrich as an icon for “big-business Republicans” and replace it with the more popular image of Democrats, “defenders of the working man.” It was a strategy advocated by Paul Warburg, one of the participants at the Jekyll Island meeting. The fact that Flaherty makes no mention of this suggests that he has not made an objective analysis but, instead, has presented a biased critique in the guise of scholarship. His statement that “the Federal Reserve Act, placed control over monetary policy with a public body, the Federal Reserve Board, not with commercial banks” cannot be taken seriously. The Federal Reserve is not a public body in any meaningful sense of the phrase.

Flaherty: Hypothesis: Through fractional reserve banking and double-entry accounting, banks are able to create new money with the stroke of a pen (or a computer keystroke). The money they lend costs them nothing to produce, yet they charge interest on it. Facts: The banking system is indeed able to create money with a mere computer keystroke. However, a bank’s ability to create money is tied directly to the amount of reserves customers have deposited there. A bank must pay a competitive interest rate on those deposits to keep them from leaving to other banks. This interest expense alone is a substantial portion of a bank’s operating costs and is de facto proof a bank cannot costlessly create money.

My reply: Flaherty presents facts that in no way contradict what I said in my book. I speak of rotten apples, and he speaks of sweet oranges. My book makes it clear that the bank’s ability to create money is tied to its reserves. The current average ratio (it varies depending on the bank) is about ten-to-one. In other words, for every one dollar on deposit and held in reserve, the bank can create up to an additional nine dollars out of nothing for the purpose of lending. The statement that the banks must pay a competitive interest rate on those deposits is humorous when one considers the math. For example, let us assume for the sake of illustration that the bank pays 1.5% interest. Then it turns around and charges, let’s say 6.5% interest. That’s a spread of 5%. Although that’s a pretty good brokerage commission, it doesn’t sound exorbitant. But, here is another of those half-truths. Don’t forget that the bank uses each deposited dollar as a so-called reserve for creating up to an additional nine dollars in loans. It collects interest on these loans as well. Let us assume that the bank is not fully loaned up, as they call it, and has an average of only eight dollars in magic-money loans for every one dollar on deposit. In that case, it will collect 6.5% interest on all eight of those dollars. That means, based on each dollar placed on deposit, the bank will collect 52% in interest. After paying the original depositor the generous “competitive” amount of 1.5%, the bank actually receives a brokerage fee of approximately 50%. When Flaherty says that “This interest expense alone is a substantial portion of a bank’s operating costs and is de facto proof a bank cannot costlessly create money,” one can only wonder what banking system he is describing. It certainly is not the one in the United States.

Flaherty: Hypothesis: Supporters of the Federal Reserve Act knew they did not have the votes to win, so they waited to vote until its opponents left for Christmas vacation. Since a majority of senators were not present to vote on the bill, its passage is not constitutionally valid. Facts: The voting record clearly shows that a majority of the senate did vote on the bill. Although some senators had left Washington for the holiday, the Congressional Record shows their respective positions on the legislation. Even if all opponents had all been present to vote, the Federal Reserve Act still would have passed easily.

My reply: I agree with Flaherty on this issue and often have said so in the Q&A portions of my lectures. Please note that this is not contradictory to what I wrote in The Creature. What I said there is an accurate historical fact. There is little doubt in my mind that the vote would have passed eventually, but by slipping it through as they did, it circumvented the possibility of challenges and debate. I have never commented on the Constitutionality question, although I tend to think that a strict interpretation would have made this vote invalid. The problem here, however, has nothing to do with the Federal Reserve Act but with the rules of Congress.

Flaherty: Hypothesis: All money is created only when someone takes out a loan. Therefore, there can never be enough of this debt-money in circulation to repay all principal and interest. This imbalance causes inflation, financial crises, social maladies, and will eventually destroy the economy unless there is a massive injection of “debt-free” money. This idea is from Dr. Jacques Jaikaran’s book, The Debt Virus. Facts: The hypothesis shows an incomplete view of how the banking system interacts with the economy. The system necessarily creates an amount of “debt-free” money equal to the interest on its loans. It does this whenever it pays operating expenses, dividends, or purchases assets. As a result, there is more than enough money in circulation to retire all bank-related debt.

My reply: I object to being lumped together with other analysts on this issue. I did not write The Debt Virus, I wrote The Creature from Jekyll Island. On page 191, I explained why I consider the claim that there is not enough money to pay off interest to be a myth

Flaherty: Hypothesis: The Federal Reserve consistently resists attempts to audit its books. This is because any independent inspection would reveal the Fed’s treachery. Fact: Independent accounting firms conduct full financial audits of the Federal Reserve banks and the Board of Governors every year. The Fed is also subject to certain types of audits from the Government Accounting Office.

My reply: I never wrote or implied, as Flaherty says, that “any independent inspection would reveal the Fed’s treachery.” What I wrote is: (1) The Fed resists external audit; (2) If it were audited by an independent party, I suspect there would be nothing illegal found; (3) The problem is not that it steals from the American people illegally but that it does so legally; (4) Therefore, we do not need to audit the Fed, we need to abolish it.

Flaherty: Hypothesis: Major European banks and investment houses own the Federal Reserve. From across the Atlantic they dictate monetary policy for their own benefit. Facts: No foreigners own any part of the Fed. Each Federal Reserve bank is owned exclusively by the participating commercial banks and S&Ls operating within the Federal Reserve bank’s district. Individuals and non-bank firms, be they foreign or domestic, are not permitted by law to own any shares of a Federal Reserve bank. Moreover, monetary policy is controlled by the publicly-appointed Board of Governors, not by the Federal Reserve banks.

My reply: Flaherty is basically correct, and I have never claimed in my book or in my lectures that it was otherwise. I do not appreciate being lumped together with those who claim foreign control over the Fed. The real danger in this line of reasoning is that it is often coupled with the argument that, if we could only get control away from foreigners and put it into the hands of Congress or the Treasury, then everything would be all right. In truth, even if the Fed were in the hands of foreigners, placing it into the hands of American bankers and politician would make little difference. The Fed does not need to be converted into a government agency. It needs to be abolished.

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The Creature from Jekyll Island

A Second Look at the Federal Reserve

by G. Edward Griffin

Where does money come from? Where does it go? Who makes it? The money magicians' secrets are unveiled. We get a close look at their mirrors and smoke machines, their pulleys, cogs, and wheels that create the grand illusion called money. A dry and boring subject? Just wait! You'll be hooked in five minutes. Reads like a detective story — which it really is. But it's all true. This book is about the most blatant scam of all history. It's all here: the cause of wars, boom-bust cycles, inflation, depression, prosperity. The Creature from Jekyll Island is a "must read." Your world view will definitely change. You'll never trust a politician again — or a banker. The Creature from Jekyll Island

An address by G. Edward Griffin

This is Mr. Griffin's acclaimed lecture based on his book by the same title. Heard by over a million people around the world. Audio cassette or CD. 74 minutes. The Federal Reserve

A discource by G. Edward Griffin

Mr. Griffin, founder of Freedom Force International and author of The Creature from Jekyll Island addresses these issues.

What is the Federal Reserve System?

Who drafted the plan for the Fed

When and where did it occur?

How is money created?

What impact has this on the American dollar?

Should our currency be backed by gold or silver?

Where does Congress get most of its funding?

What is the solution to the problem of fiat money?

Why do bankers get away with it?

What might happen if we continue on our current path?

What might come from a return to constitutional money?

What can concerned citizens do to help?

DVD. 42 minutes.

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FSK

Saturday, June 14, 2008

The Compound Interest Paradox Revisited - Edward Flaherty is a xxxxx

Table of Contents

Overview

The Federal Reserve

Free Market Banking

A List of Monetary Systems

Examples

Edward Flaherty is a xxxxx

Summary

I read SO MANY people citing Edward Flaherty that I feel obligated to write a specific post refuting his false arguments.

This is the most frequently cited article by Edward Flaherty. Here is a shorter version of the same thing.

Here is a point-by-point debunking of Edward Flaherty's false debunking.

Myth #1: The Federal Reserve Act of 1913 was crafted by Wall Street bankers and a few senators in a secret meeting.

Hypothesis: Bankers and senators met in secret on Jekyll Island, Georgia in 1910 to design a central bank that would give New York City banks control over the nation's money supply.

Facts: The meeting did take place, but plans for a return to central banking were already widely known. Regardless, the proposal that came out of the Jekyll Island meeting never passed Congress. The one that did, the Federal Reserve Act, placed control over monetary policy with a public body, the Federal Reserve Board, not with commercial banks.

Based on the sources I read, there *WAS* a secret meeting regarding the creation of the Federal Reserve. It's impossible to go back in time and check, so there's no way to resolve this disagreement.

Under the Federal Reserve, the New York City branch is firmly in control of the US monetary system. The regional banks are a decoy. The "open market operations" are performed by the New York branch of the Federal Reserve. This is where the real power of the Federal Reserve lies. On the "Open Market Committee", which sets the Fed Funds Rate target, there are 12 total members. There are the 7 members of the Board of Governors, appointed by the President for 14 year terms, and 5 presidents of the district banks, with the New York branch *ALWAYS GETTING A SEAT* (the other 4 positions rotate).

The Federal Reserve Banks are privately owned. Executives must be approved by the Board of Governors, but the executives are always appointed by the private investors who own the Federal Reserve. The Board of Governors is chosen by the President and confirmed by the Senate. However, the President *ALWAYS* chooses the nominee from a short list of candidates chosen by financial industry insiders. Someone who isn't part of the "in crowd" of the financial industry has NO CHANCE of being nominated. A President who disobeyed the financial industry would probably be unable to get his nominee confirmed by the Senate. Further, the Federal Reserve can cause recessions at will. A President that is hostile to the Federal Reserve will be unable to get reelected (or even survive long without being assassinated).

Besides, the argument against the Federal Reserve is unrelated to the means by which it was created. It's obvious that the Federal Reserve is immoral. Whether it was created as part of a conspiracy or not is irrelevant.

Myth #2: The Federal Reserve Act never actually passed Congress. The Senate voted on the bill without a quorum, therefore the Act is null and void.

Hypothesis: Supporters of the Federal Reserve Act knew they did not have the votes to win, so they waited to vote until its opponents left for Christmas vacation. Since a majority of senators were not present to vote on the bill, its passage is not constitutionally valid.

Facts: The voting record clearly shows that a majority of the senate did vote on the bill. Although some senators had left Washington for the holiday, the Congressional Record shows their respective positions on the legislation. Even if all opponents had all been present to vote, the Federal Reserve Act still would have passed easily.

I don't recognize any government laws as having legitimacy. The legitimacy of the Federal Reserve is the same as all other aspects of the government: ZERO. If you want a full technical analysis of the Federal Reserve's legality, there are several aspects.

First, the Federal Reserve Act was passed immediately before Christmas. Several influential Congressmen who were opposed to the Federal Reserve had already left for holiday. Congress had a tradition that says important legislation is not passed immediately before Christmas. Of course, government is arbitrary and can do whatever it chooses.

Second, the Constitution grants control over money to Congress. Congress does not have the right to delegate this power to a private corporation, the Federal Reserve. Similarly, it would be just as unconstitutional to turn over control of the US military to a private corporation. (Has that happened also? Is Blackwater effectively the US military now?)

Third, the Constitution says that states may only declare gold or silver as money. This ban does not extend to the Federal government. However, the intent is obvious. Further, states have been disallowed from issuing their own metal-based money that competes with the Federal Reserve. The false reasoning the Supreme Court used is that usurps Congress' money-printing authority.

Arguing the legality or Constitutionality of the Federal Reserve is pointless. At this point, the Supreme Court isn't going to declare that the government has been operating illegitimately for 100 years. Government has no legitimacy, so arguing the legitimacy of the Federal Reserve is pointless in comparison.

The *MORAL* argument against the Federal Reserve is much more important than the legal argument.

Myth #3: The Federal Reserve Act and paper money are unconstitutional.

Hypothesis: The constitution does not specifically grant Congress the power to create a central bank, therefore it cannot legally do so. The constitution also forbids paper money and requires all money to be either gold or silver coin. Therefore, both the Federal Reserve and its paper money currency are unconstitutional.

Opinion: A central bank is a reasonable use of the constitution's 'necessary and proper' clause, according to many federal court and Supreme Court rulings. Although the constitution forbids States from making anything but gold or silver a legal tender, it places no such restriction on Congress.

I addressed this point immediately above.

The framers of the US Constitution forbade states from declaring anything other than gold or silver as money. They did not put this restriction on the Federal government, but I consider that to be a technicality. The intent is obviously that only gold or silver were to be money.

Arguing the legality or Constitutionality of the Federal Reserve is pointless.

Remember: Just because the Supreme Court or a Federal appeals court says something is acceptable, doesn't automatically mean it's true. Just like Congress and the President were subverted, the court system was also subverted.

The *MORAL* argument against the Federal Reserve is much more important than the legal argument.

Myth #4: The Federal Reserve is a privately owned bank out to make a profit at the taxpayers' expense.

Hypothesis: Each of the 12 Federal Reserve banks is a privately owned corporation. Like any firm, their main objective is to maximize profits. They do so by lending the government money and charging interest. They manipulate monetary policy for their own gain, not for the public good.

Facts: Yes, the Federal Reserve banks are privately owned, but they are controlled by the publically-appointed Board of Governors. The Federal Reserve banks merely execute the monetary policy choices made by the Board. In addition, nearly all the interest the Federal Reserve collects on government bonds is rebated to the Treasury each year, so the government does not pay any net interest to the Fed.

This is entirely missing the point. The point of the Federal Reserve is not profits to the Federal Reserve banks themselves. The point is the massive subsidy to the financial industry and large corporations in the form of negative real interest rates.

I address interest on the national debt it "The National Debt - Who is the Creditor?"

Myth #5: The Federal Reserve is owned and controlled by foreigners.

Hypothesis: Major European banks and investment houses own the Federal Reserve. From across the Atlantic they dictate monetary policy for their own benefit.

Facts: No foreigners own any part of the Fed. Each Federal Reserve bank is owned exclusively by the participating commercial banks and S&Ls operating within the Federal Reserve bank's district. Individuals and non-bank firms, be they foreign or domestic, are not permitted by law to own any shares of a Federal Reserve bank. Moreover, monetary policy is controlled by the publically-appointed Board of Governors, not by the Federal Reserve banks.

It is unknown who actually owns the Federal Reserve.

The Federal Reserve is probably mostly owned by US corporations. However, with anonymous corporate ownership, how could you tell who are the true owners of the Federal Reserve?

For example, Citigroup could own shares in the Federal Reserve, and foreigners could own a controlling interest in Citigroup.

Unless you provide a full list of which corporations own the Federal Reserve *AND* a full list of the shareholders of each such corporation, you DON'T KNOW who really owns the Federal Reserve.

Myth #6: The Federal Reserve has never been audited.

Hypothesis: The Federal Reserve consistently resists attempts to audit its books. This is because any independent inspection would reveal the Fed's treachery.

Fact: Independent accounting firms conduct full financial audits of the Federal Reserve banks and the Board of Governors every year. The Fed is also subject to certain types of audits from the Government Accounting Office.

The Federal Reserve's open market operations have never been audited. The full details are carefully kept secret.

Myth #7: The Federal Reserve charges interest on the currency we use.

Hypothesis: Federal Reserve Notes, the currency we use in the United States, are evidence of the debt of the U.S. government to the Federal Reserve. The central bank charges the government interest for this currency, thereby diverting billions of dollars from the Treasury that could be used for other things. The government could print its own money and avoid the Fed's interest.

Facts: The Federal Reserve rebates its net earnings to the Treasury every year. Consequently, the interest the Treasury pays to the Fed is returned, so the money borrowed from the Fed has no net interest obligation for the Treasury. The government could print its own currency independent of the Fed, but there would be no effective safeguards against abuse of this power for political gain.

This is entirely the whole point of the Compound Interest Paradox. Every dollar in circulation only exists due to a loan. The principal is created but not the interest.

The interest the Federal Reserve receives on Treasuries it owns is only a small slice of the massive subsidy the financial industry receives.

The Federal Reserve is not a check against abuse of the monetary system. The 12 people on the Federal Reserve Open Market Committee wield more economic power than the Politburo in the Soviet Union. Anyone who knows in advance what the Federal Reserve is going to do has the opportunity to profit immensely. In January 2008, the Federal Reserve announced a surprise 0.75% decrease in the Fed Funds Rate. People who knew in advance profited immensely.

Similarly, government directly printing and spending its own money is also abusable. However, free-market interest rates would be far preferable to the Federal Reserve negative interest rate subsidy.

The only fair monetary system is to completely remove all government regulation of money and banking. This would effectively mean a return to a gold standard or a gold/silver standard. Of course, this will not happen until the government collapses completely.

Myth #8: If it were not for the Federal Reserve charging the government interest, the budget would be balanced and we would have no national debt.

Hypothesis: When the government runs a budget deficit, it borrows the money from the Fed at interest. If the Fed did not charge interest or if the government simply printed its own interest-free currency, then we would have a balanced budget and no national debt.

Facts: The Federal Reserve banks have only a small share of the total national debt (about 7%). Therefore, only a small share of the interest on the debt goes to the Fed. Regardless, the Fed rebates that interest to the Treasury every year, so the debt held by the Fed carries no net interest obligation for the government. In addition, it is Congress, not the Federal Reserve, who is responsible for the federal budget and the national debt.

I address this in "The National Debt - Who is the Creditor?"

The national debt is a legal fiction. The US government is the issuer for dollars. You can have unlimited debt is the money you issue, without being forced into bankruptcy. Deficit spending by the Federal government is inflationary. However, more money is printed by the Federal Reserve and financial industry than is printed by Federal deficit spending.

Most of the benefit of printing new money accrues to the financial industry, and not the Federal government. Without the Federal Reserve, the government could directly print and spend money into circulation. Whenever Congress wants to, it could pass a law allowing it to directly print and spend money to pay down the national debt. The only problem with this method is fractional reserve banking. If Congress directly printed and spent $10 trillion, this would lead to $100 trillion in new money after the effect of fractional reserve banking.

The correct solution is a complete repeal of the Federal Reserve and all regulation of the banking industry. All the taxes and regulations that prevent people from using gold or silver as money also should be repealed. That is never going to happen.

Myth #9: President Kennedy was assassinated because he tried to usurp the Federal Reserve's power. Executive Order 11,110 proves it.

Hypothesis: In the months before Dallas, President Kennedy signed E.O. 11,110 which instructed the Treasury to issue about $4 billion of interest-free 'silver certificate' currency, thereby circumventing the Federal Reserve and the interest it charges. The Federal Reserve, fearful of further encroachments on its powers, had Kennedy killed.

Facts: Kennedy wrote E.O. 11,110 to phase out silver certificate currency, not to issue more of it. Records show Kennedy and the Federal Reserve were almost always in agreement on policy matters. He even signed legislation to give the Fed more authority to issue currency.

I have no idea why President Kennedy was killed. The people who organized it aren't going to come forward and admit it, now are they?

The motivations for killing Kennedy are independent of whether or not the Federal Reserve is evil.

E.O. 11,110 was an attempt to abolish/compete with the Federal Reserve. By issuing "United States Notes" directly into circulation, this runs contrary to the Federal Reserve's policy of negative real interest rates and economic debt enslavement.

When President Kennedy issued extra money, that caused interest rates to fall. Fractional reserve banking multiplies this extra money by 10x. With surplus bank reserves, the Fed Funds Rate falls. Normally, when the Federal Reserve "monetizes the debt", it makes a guaranteed riskless profit and subsidizes negative real interest rates at the same time. With extra money in circulation, the Federal Reserve would have to do the opposite to raise interest rates. It would have to sell Treasuries it had in reserve, losing money.

If the Federal government directly issues and spends money, without repealing or amending the Federal Reserve, the Federal Reserve could be bankrupted. The Federal Reserve would lose its ability to manipulate interest rates. Money directly printed and spent by the government prevents the Compound Interest Paradox from enslaving everyone.

Myth #10: Congressman Louis T. McFadden exposed the Federal Reserve scam in the Congressional Record.

Hypothesis: On the floor of the House in 1932, McFadden accused the Federal Reserve of costing the government enough money to repay the national debt several times over, of causing the Great Depression, and of many other terrible things.

Facts: McFadden was incorrect regarding the Fed costing the government money. However, later economic analysis agrees with him that Federal Reserve policy blunders had a substantial role in causing the Depression. However, his implication that this was done deliberately has no basis in fact. Moreover, for a dozen years prior to his rant, McFadden had been the chairman of the House subcommittee that oversaw the Federal Reserve. Why didn't he do anything to reform or abolish the Fed while he had the chance?

The Federal Reserve does cost the Federal government money. The profit gained by printing new money accrues primarily to the financial industry and large corporations, and not to the Federal government. Everyone pays the cost of inflation, but only a handful of people are the beneficiaries of inflation.

I read that Congressman McFadden *DID WANT* to reform or abolish the Federal Reserve. As only one vote, he was powerless to do anything. That's like asking "Why doesn't Ron Paul abolish or reform the Federal Reserve? He's on the House Banking Committee!"

There is evidence that insiders intentionally used the Federal Reserve to line their own pockets. A ton of people lost their homes and businesses during the Great Depression. A handful of insiders profited immensely. Insiders knew that interest rates would be jacked up in 1929, causing the Depression. Some large banks stopped issuing loans and converted their holdings to cash before the crash.

Myth #11: The Antidote to the Debt Virus

Hypothesis: All money is created only when someone takes out a loan. Therefore, there can never be enough of this debt-money in circulation to repay all principal and interest. This imbalance causes inflation, financial crises, social maladies, and will eventually destroy the economy unless there is a massive injection of "debt-free" money. This idea is from Dr. Jacques Jaikaran's book, The Debt Virus.

Facts: The hypothesis shows an incomplete view of how the banking system interacts with the economy. The system necessarily creates an amount of "debt-free" money equal to the interest on its loans. It does this whenever it pays operating expenses, dividends, or purchases assets. As a result, there is more than enough money in circulation to retire all bank-related debt.

This is entirely the Compound Interest Paradox. If you don't understand the Compound Interest Paradox, work out an example. Edward Flaherty says "The balance sheet of each individual bank balances. Therefore, there is no Compound Interest Paradox or Debt Virus." If you look at the books of society as a whole, the Paradox is obvious.

Whenever someone cites Edward Flaherty saying there is no Debt Virus, show them my page of examples. I have not seen any evidence that my examples are incorrect.

The reason the economy does not collapse immediately due the Compound Interest Paradox is that there is continuous inflation. There is always a shortfall of money to pay the interest, but new money is always being created. The people who get first dibs on this new money are the recipients of a massive government subsidy.

Myth #12: Exposing the Debt Virus fallacies

This article is a much more detailed critique of The Debt Virus than the previous article. The file is in PDF, so you will need to download your free copy of Adobe Acrobat Reader to view it.

I didn't bother reading this article. Let me know if you're interested in a detailed analysis of this nonsense.

Myth #13: Banks charge interest on money they costlessly create out of thin air.

Hypothesis: Through fractional reserve banking and double-entry accounting, banks are able to create new money with the stroke of a pen (or a computer keystroke). The money they lend costs them nothing to produce, yet they charge interest on it.

Facts: The banking system is indeed able to create money with a mere computer keystroke. However, a bank's ability to create money is tied directly to the amount of reserves customers have deposited there. A bank must pay a competitive interest rate on those deposits to keep them from leaving to other banks. This interest expense alone is a substantial portion of a bank's operating costs and is de facto proof a bank cannot costlessly create money.

A bank's ability to create money is completely decoupled from customer deposits. Banks with surplus reserves lend them to other banks. Banks with a shortage of reserves can borrow from other banks. The rate large banks charge each other for reserves is called the "Fed Funds Rate". Practically every day, the Federal Reserve repurchases Treasury Notes to increase the supply of bank reserves. The Federal Reserve will always create enough new bank reserves so that the Fed Funds Rate equals its target rate.

All a bank accomplishes by taking customer deposits is that it can lend them to other banks at the Fed Funds Rate, or it avoids having to borrow at the Fed Funds Rate.

A bank is restricted by its "net capital requirement". Suppose a bank is allowed to use a leverage ratio of 20x. This means that for every $1M in book value a bank has, it is allowed to issue $20M in loans. Leverage ratios are typically in the range of 10x-100x, depending on the type of debt. Bank regulations determine how much leverage banks are allowed to use for each type of asset. Since money is ONLY created by banks, this means that a certain % of the economy's capital is GUARANTEED to be owned by banks; otherwise, that money could not be created.

Myth #14: "Lawful money" is only gold or silver coin as prescribed by the constitution.

Hypothesis: The constitution specifies that only gold or silver coin may be used as money, also known as 'lawful money.' All other forms of money, particularly paper money, are illegal.

Fact: The term 'lawful money' does not refer to gold or silver coin, but to types of money which the government would permit banks to use when tabulating their reserves. These types of money included, but were not limited to, gold and silver coin.

This is a legal technicality. I don't recognize the US Constitution as having legitimacy, so why should I care if it allows unbacked fiat money or not.

The requirement that only gold and silver are money applies to states. The Constitution does not say what the Federal government is allowed to use as money. It's implied that the Federal government is also restricted to only allowing gold or silver as money, but a corrupt Congress, President, and Supreme Court think otherwise. A Constitution is useless when the people who make laws and sit in courts are corrupted.

Arguing the Constitutionality of unbacked fiat debt-based money is missing the point. The current monetary system is immoral, which is sufficient reason to boycott Federal Reserve Points.

When arguing against the Federal Reserve and the income tax, a "Constitutional" argument is missing the real point. The Federal Reserve and income tax are *IMMORAL*. The Constitutional argument is much less important than the morality argument.

I've also seen this article by Edward Griffin frequently cited. Surprisingly, Edward Griffin says "There's no such thing as the Debt Virus." Edward Griffin is wrong.

June 15, 2008 10:27 AM

Contact Information FSK

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