Finally: I Have Some Idea on How All of This Works

With recent events and my current personal situation, there was a drive for me to figure out how our financial system really works.  The reason being is I keep seeing more and more stress put onto people and their families, as we face a financial dilemma that The United States has not really seen since The Great Depression.

And my intuition, even though I had no research to back this up, was that even during such a time the amount of stress and struggle that is being experienced does not have to be this way.  And if it could be different, why are the people making the decisions are insisting to make things this difficult for The American citizenship?  And so, I started an endeavor to try and get some idea as to what is going on.

The first real shocking revelation was how the banking system works.

It all really started with the first banks of America.  Back in those days, people attributed value to gold, and there was a demand for a more secure location to store everyone’s gold.  Thus the first banks were created, as they would issue certificates proving everybodys’ deposit of gold.  And so, if a citizen wanted to purchase something, they would have to first turn in their certificate to the bank in return for the appropriate amount of gold.  They then would use that gold to purchase whatever good or service, whereby the seller of that particular good or service would eventually deposit that same amount of gold back into the bank’s vault.  Soon, people realized they could be more efficient by only trading the certificate, and not necessarily the gold itself.  And that, was the infancy of our paper based currency.

But bank tellers probably had a good bit of time on their hands, and they started to make an observation that revolutionized how money is understood.  They observed that the entire vault of gold was never released at one time.  There was always a fraction of the gold in the vault.  And so, this whole idea of “Fractional Reserve Banking System” was established, whereby the banks would allocate a fraction of their total deposit of gold for the citizenship, and would use the remaining gold for the first loans.  The bank would issue loans with the paper currency of certificates expecting an interest after a certain period.  Once that interest is paid, essentially money is created and the overall money supply increases.

And so, that is essentially how today’s banks operate.  They use other peoples’ money to put more people in debt.  The Fed sets a standard that local banks have to set aside a certain percent of their deposits for transactions with the public.  The remaining percent of deposits can be used to make more money, by either putting the money in financial instruments or loaning the money back out to the public.  More and more money is paid back, and more and more money is created and thus increasing the overall money supply.  This in turn explains why there is always some form of inflation, even if it is slight.

At this point on my endeavor, I had an intellectual roadblock.  If the banks are creating money from interest on their loans, where are the people getting the money to pay all the interest?  Some people do fall into bankruptcy, which suggests that some people are just unable to pay the required interest because the money just isn’t there.  However, if money were to be added to the overall money supply by another source, people would therefore have the required funds to be able to pay off their interest.  This is where The Government and The Fed come in.

When The Government needs money, it goes to The Fed and sends a certain amount of bonds (that are able to appreciate/depreciate in value) to The Fed in exchange of currency.  That currency is then spent and put into the economy, increasing the overall money supply.

So what about inflation?  Banks are increasing the money supply and The Government is funneling more and more money into the economy.  This is where another purpose of taxes come into light.  Taxes of course help pay for Government programs, but in reality they are really used to satisfy the maturity requirement on The Treasury Bonds that was sent to The Fed.  When The Government needs to spend, money is therefore taken from The Fed.  Therefore, these taxes contract the overall money supply, curbing inflation.

Now, it is true that The Fed can “print” money, which really means they insert numbers on a balance sheet and click save, but The Fed more than likely operate at the same principles as the commercial banks.  They require a certain percentage of deposits from the commercial banks to be sent to their vaults.  A fraction of that money would be required by the banks.  Therefore, the remaining percentage could be used for purchasing of Treasury Bonds, or other financial instruments like the derivative market or foreign exchange.
This is why when there was a partial audit of The Fed done by Congress after the financial crisis, I believe that The Fed had the available funds for their worldwide 17.34 trillion dollar bailout of various institutions.

And so, after all this research, I was pretty disappointed.  Banks are continually creating money, making money, and yet were not satisfied and participated in poor lending practices to make even a larger profit.  To top that off, it is more obvious than ever that debt is used on the American people as a means of oppression.  Let me explain.

“There is no one more hopelessly enslaved, than those who falsely perceive they are free.”

With the amount of money that the commercial banks and central banks are accruing, compounded with wage history of workers vs. business owners, there really should be no reason for such a disparity of class.  Everything is kept the way it is because labor is required for various tasks around the economy.  Debt with interest is established to the populace as an incentive to work, and if working not so favorable jobs gets the bills paid, then so be it.  And, as John Adams put it, in the pursuit of happiness Man has to conquer the material world.  So economic growth, materialism, consumerism, and individual self-maximization are put in front of the well being of fellow citizens, as well as the planet.

It really doesn’t have to be this way.  Banks could still make large amounts of capital by just participating in the stock market, derivative and foreign exchange markets.  And in reality, the money used for loans is our money, not theirs.  They just know a certain fraction of their deposits will be withdrawn.

And frankly, I do not correlate my happiness with material things.  Sure, they are nice, but the most enjoyment I get out of life are foremost relationships that I have with people.  I enjoy intellectual endeavors.  I enjoy walks and nature.  But I do not love materialistic things if that means exploiting other people.  And that is where I differ from most capitalist and most Americans.  This is why I wish things were different; I just don’t see the purpose of creating more and more wealth for the sake of maximizing wealth.  It is sort of like a MMORPG video game.  Those games never end, as the monthly payments from players pay for development for new content.  Maximizing profits will never ever end, and it will only bring about exploitation of people and our planet.