The Federal Reserve (Fed) is an institution that has been shrouded in secrecy since its inception. Originally created by Congress under the guise of stabilizing the economy, it now dominates the economic life of the nation.

Most people assume it is a government agency controlled by the public and that it actually possesses reserves. With a name like Federal Reserve, who can blame them for this misperception? Unfortunately for America and its economy, the central bank is in fact a quasi-private institution that holds no reserves other than the “money” it creates from thin air.

The responsibilities and activities of the central bank are numerous and confusing to average people who have not taken the time to become educated about this most powerful of institutions. These include supplying the currency (Federal Reserve Notes) of the nation, supposedly fighting inflation and deflation, regulating certain institutions and setting interest rates, among others. In this piece we shall examine each of these responsibilities and take a closer look at the system as a whole.

The Fed has a government-sponsored monopoly on the creation of credit and what Americans know as “money.” So how does this money come into existence and how does it enter into circulation? The process is perhaps the most astounding fraud imaginable and has served the interests of a tiny elite since its origin in 1913.

All money is issued as debt. Let the implications of this sink in for a moment. Though money is created by commercial banks as well through a process known as fractional reserve lending (an article unto itself), all money truly originates under the authority of the Fed.

For simplicity’s sake, let us suppose the Fed creates one dollar. First, it orders the government printers to print its newly created dollar (for a fraction of the value) or it simply creates the Federal Reserve Note as an electronic book-keeping entry. To enter into circulation in the economy it must first be borrowed, either by government or a private entity, usually a commercial bank. (Note: The Federal Reserve occasionally spends money, meaning this money is issued interest-free, though the amount is relatively insignificant.)

Since the government cannot issue its own money under the Federal Reserve Act, it issues a Treasury bond (also known as a security) and borrows this dollar (originally created from thin air) by selling the bond to the Fed, pledging to pay back the money plus interest by taxing U.S. citizens in the future.

Essentially what exists today is a system of perpetual debt-slavery where more money must constantly be created and borrowed to avoid a systemic collapse. The result is that, according to Ronald Reagan’s Grace Commission, “100% of what is collected is absorbed solely by interest on the Federal Debt ... all individual income tax revenues are gone before one nickel is spent on the services taxpayers expect from government."

Not coincidentally, America was saddled with the income tax in 1913, the same year the Fed came into existence. It is a wonder that more people do not stop to reflect on how businesses, governments and individuals can all be so deeply in debt at the same time. Who is the money owed to?

The next responsibility of the Fed that we will focus on is its alleged fighting of inflation. The only reason this myth can be perpetuated is because of widespread misunderstandings about the nature of inflation in the first place. Many people falsely believe inflation means a rise in prices. In fact, a rise in prices is merely one of the symptoms of inflation: the increase in the supply of money. The law of supply and demand explains that when the supply of a good (debt-money in this case) increases, the value drops. The more money the Fed pumps into circulation, the less each dollar is worth.

The recent explosion in the supply of money courtesy of the Fed’s bailouts will be felt soon, and is already leading to a depreciating dollar on world currency markets.  As long as the Fed exists and operates the way it does, there will be perpetual inflation for the Fed to pretend to fight. In reality they will just create more inflation, further eroding any savings. The dollar has lost an astounding 96 percent of its purchasing power since the Fed came into existence. Some inflation fighters!

Another task of the Fed is to set certain rates, like interest rates on money it loans to banks and what is known as the Reserve Requirement Ratio. Setting aside the fact that central planning has already been proven a failure, why should an unaccountable bank determine interests rates arbitrarily as opposed to letting the market set rates based on the amount of savings available for loans? It allows the Fed to control the direction of the economy and it creates widespread malinvestment that must be liquidated later.

The reserve requirement is the ratio of Fed-created debt-money a commercial bank must have on hand versus how much it loans out. Typically this rate is set between 10 and 20 percent, meaning banks loan out and charge interest on far more money than they actually have.

America did quite well without a central bank for most of its history. The notion that the Fed stabilizes the economy is ludicrous — in fact it creates what economists know as the business cycle, a process whereby wealth is continuously transferred from the hard-working masses to their banker masters through inflation and deflation of the money supply.

When money is easy to obtain, the economy booms and people build and create businesses and wealth. Then, the money supply is reduced by the Fed — either through raising interest rates or selling government securities (part of the Fed’s Open Market Operations) — causing the economy to slow and businesses to fail.

At this point, the elite step in and buy everything up for a fraction of its original worth. Does the Great Depression ring a bell? Federal Reserve chief Ben Bernanke admitted it was caused by the Fed — he just didn’t tell the whole story.

The Fed should be promptly audited and then abolished. The future of America and even liberty may well depend on it. The next article in this series will focus on solutions to the crisis that is America’s monetary system, so stick around.

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