Part Two - 1 - Financial Crisis Watch

PART TWO: HOW AMERICA BECAME ENSNARED IN THE DEBT TRAP

ENSNARED THROUGH THE BANKING SYSTEM

Banking is not something that a lot of Americans take time to understand, and in fact, the mystery of banking can be intimidating. Most of us just want to know how much is in our account, and we do well to keep our checkbook balanced. But our founding fathers were well aware that banking practices could make or break a nation. Gold, silver or both have most commonly been used for money throughout history. Coins were actually minted out of gold or silver bullion. When precious metal is used this way it is called ‘commodity money’. That is, the currency has actual value because of the precious metal it contains.

In the middle ages, goldsmiths kept the commodity money in their vaults. They issued paper receipts to their depositors. Because these receipts could be exchanged for the precious metal at anytime, they were considered to be just as good as silver and gold, and were a whole lot easier to carry around. These receipts evolved into paper currency and came to be known as ‘convertible money’ (our dollars used to be marked as ‘silver’ or ‘gold certificates’)

While commodity money is precious metal, convertible money requires the government to hold actual gold and silver to back up its value.

Either commodity or convertible money can form the basis of a sound money system. However, bankers found a way to use their depositors’ money to a much greater advantage.

1. Fractional Banking – Hundreds of years ago, as bankers developed this receipt/paper-currency system, they realized that they could make loans for far more money than they actually had in their vaults. Because people don’t all come for their money at once, it sits there unused. Bankers learned that they could safely loan up to about nine times the amount they have on hand, and make interest on all of that. This is called fractional banking, a term nine out of ten Americans will not know, and yet it forms the heart of our banking system.

As long as the citizens have CONFIDENCE that their money is safe, this works fine, and makes bankers rich. But if doubts about a bank’s stability arise, people are prone to run to the bank in a panic. Because a bank keeps only a fraction of its loans in its reserves, it doesn’t have enough for everyone to get their money all at once. So the bank fails, and many people lose their money.

This is why the FDIC (Federal Deposit Insurance Corporation) was developed after the notorious bank failures of the Great Depression. A down-side of having the FDIC, however, is that government protection of people’s money creates what economists call a ‘moral hazard’. Individuals as well as commercial entities no longer pay attention to the soundness of banking practices because they don’t have to be concerned about losing any of their own money. This complacency rests on an assumption that deposits in the bank are ‘insured’ and are therefore safe. This is true for sporadic and rare bank failures, but the FDIC has only $33 billion in its account. Although it does have a $100 billion line of credit with the Treasury Department, the FDIC covers insurable deposits in an amount totaling over $10 trillion in our nation’s banks. It would not come close to being able to cover this amount in a complete collapse. In fact, the four largest U.S. banks each have deposits totaling nearly or over $1 trillion.

2. National Bank / Federal Reserve -- From our earliest days as a country, the question of having a national bank was a contentious issue. Some of our founding fathers, represented primarily by Alexander Hamilton, believed we needed a bank that could oversee and regulate all the banks in the country. This, they reasoned, would make for a strong financial system that would raise our credibility in the eyes of other nations. Others, such as Thomas Jefferson, James Madison, and later, Andrew Jackson were vehemently opposed to a national bank, believing it would make the nation vulnerable to control by wealthy bankers, as had proved to be the case in Europe’s banking history. We went back and forth on this issue, having a national bank twice, and ending it twice. But our early free-wheeling and disjointed banking system led to a lot of panics. There were 21 of these crises between 1870 and 1907 alone. The severe 1907 panic led to an increasing willingness to establish a central bank. Advocates of a central bank claimed that it could smooth out the boom-and-bust cycles, and help avoid such panics.

Amid questionable political maneuvering, the Federal Reserve Bank was chartered by congress in 1913. It was argued that a central bank would be powerful enough to enforce consistent banking practices throughout the nation and be able to intervene to rescue the economy in times of financial weakness. This might be the case with a true national bank run by the government, but what we got was a very different critter. It is often assumed that because of its name, the Federal Reserve Bank is a government agency. In fact, it is a private bank that has been given the power to issue U.S. currency. It is a for-profit corporation, making money for its owners through its operations which are not open to inspection by the government. A steady stream of voices from the time of its inception all the way to Rep. Ron Paul today are very convinced that the Federal Reserve holds grave dangers for our national well-being and that its veil of secrecy needs to be opened to public view. Perhaps the greatest and most complete expose of the Fed can be found in G. Edward Griffin's book, The Creature from Jekyll Island.

CONTINUE READING PART TWO >>