I made some important changes to my article, "The Federal Reserve and the War on Health Freedom."
The Federal Reserve is a privately owned but partially government-controlled institution with the exclusive legal right to create money — an act called "counterfeiting" when anyone else does it and that would qualify anyone else for a prison sentence. In the original version of my article, however, I stated that the Fed "profits" from this activity. In actuality, it turns most of these profits back to the government. I have since revised that section to more accurately describe what happens — the creation of money transfers real wealth from the people who earned it to banks and politically favored corporations.
The new text of that section follows below.
Federal Reserve Inflation — Stealing From the Poor and Middle ClassCenturies ago, gold smiths began holding gold for people and giving them receipts of ownership so they could come back at any time and retrieve the gold. They found, however, that they could make far more profit if they gave out receipts for gold that did not exist. Only a few people at any given time would come back to redeem their receipts for gold, so no one would notice.
Any rational person would call this fraud. But this is what our banks do today, and we call it "fractional reserve banking." Only today our banks are holding reserves of cash instead of gold and lending out more digital money than they have. The Federal Reserve, for its part, simply creates electronic money credits on a computer. The money comes out of nowhere as if by magic, and leaks into the economy.
How does that affect you and me? Simple. The more dollars there are chasing the same number of goods and services, the less and less our dollar is worth.
So if we have less wealth, where does the wealth go? After all, money is not wealth; it just purchases wealth. So where does the actual wealth — goods and services and control over productive capital — go?
The wealth simply gets shifted from the people who earned it to certain politically favored industries.
While the Federal Reserve is able to generate digital money out of thin air, it is required to turn most of the profit back to the government. For example, Fortune reported that the Fed made $52 billion in profits in 2009 but returned $46 billion back to the government, using $4.6 billion to shore up its own capital and paying out only $1.4 billion as dividends to its private owners. So the Federal Reserve itself does not significantly profit from the system.
The first to rake in large profits are the banks, because when the Federal Reserve pumps newly created money into their accounts, they are allowed to create ten-fold more. Moreover, by acting as a "lender of last resort," the Fed stabilizes the entire institution of fractional-reserve banking. Ordinarily, it would not be safe for banks to lend out ten times more money than they have, but if the Fed can be counted on to prop up the system, banks can make huge profits without the natural risk such fraudulent business would otherwise entail.
The other major profiteers are the corporations favored by the government and the Federal Reserve who get to use the money first. If Congress borrows money from the Federal Reserve to pay for the cholesterol-lowering statin drugs included in the prescription drug plan passed a few years ago, then those pharmaceutical companies get to spend the money first while it still has all its present value. Then, as the money slowly trickles through the economy eventually making its way into your paycheck, it loses its value.
So wealth is transferred from people who earn it to banks, corporations with government contracts, and corporations that conduct transactions directly with the Federal Reserve.
Read more about the author, Chris Masterjohn, PhD, here.