We're all living in a world that revolves around economics. That being said, we need to understand how the banking and monetary system work.
When I was in high school, I thought we only need to work and receive a paycheck. I had zero knowledge about the financial system including how inflation works. For some reason, the question of money we never asked or taught in school even though most people lives are dedicated to money. Over the last 6 years, I've been very interested in the financial world we're living in and it giving me the opportunities to explore and have a complete view of the world.
It is well enough that people of the nation do not understand our banking and monetory system, for if they did, I believe there would be a revolution before tomorrow morning. - Henry Ford
We all know you and I don't control the money nor do the employees or organizations control it. Then who controls it? Where does money even come from in the first place? Let me drop a bombshell, money doesn't come from the government either.
Histories
In the year 1694, England had just suffered through 50 years exhausted of war. The English government needed loans to fund their political means. William Paterson, a Scottish banker, he was decided to own a bank privately that could lend money to the government out of thin air was be the solution. This was the very first modern central banking system in the world. Bear in mind, central banking is more influential than laws, governments, and politicians but not the focus of the general public.
In the early 20th century, after 2 failed attempts, a group of bankers wanted to create a central bank in the United States of America. It was December of 1910, Senator Nelson Aldrich boarded a private train car in New York with Paul Warburg, Frank Vanderlip, Benjamin Strong, Henry Davidson, Charles Norton, and Abe Andrews headed to Jekyll Island, Georgia. After 9 days of meetings, they created the Federal Reserve System.
They did gather together including these 7 persons, head of banks, branches of government such as treasury, and some of the richest people on earth at the time. These people represented a quarter of the world's worth at the time, that's crazy wealth right there frankly. The bankers told the American public that the purpose of the system was to stabilize the economy and to stop the grip of the Wall Street banks over America. If they succeeded by persuading the public, it would give a small group of men to have the ability to create money from absolutely nothing but still be able to loan it to the American government with interest. They have done it secretly because back then the people didn't want a central bank. Unlike today, people understood them very well. Anywhere that has a central bank, there would be wealth inequality. Every time economic booms and busts, those in the top society came out richer mysteriously while everyone else got poorer.
The Federal Reserve was originally drafted as the 'Aldrich bill', but when it came into congress, the people recognized Senator Aldrich's name and smelled a rat. So the bankers want a better cover by decided to send two millionaire friends to carry the bill to avoid suspicions of congress and renamed it "The Federal Reserve Act". Moreover, these bankers intended to fool the American people through disinformation. The newspapers of the day showed the bankers screamed and protested against the new Federal Reserve bill. The average person in the general public read the protesting articles of the bankers and thought "If the bankers hate it, it must be good.". This is where the people ended up supporting manipulators. The bankers also fooled congress by putting clauses in the bill that limited their power. The bill was passed on 23rd December 1913, which means a small group of people had complete monopoly over the issuing and creation of American money.
Post World War II
Since the end of World War II, the US dollar has been the reserve currency of the world. This means all central banks in every nation hold US dollars in their reserves. In other words, all other currencies are backed by the US dollar. This directly links your country to the Federal Reserve's monetary policy in America.
Once the post-World War II monetary system called the "Bretton Woods" system was created. All US dollars were backed by and exchangeable for gold. Unfortunately, in 1971, due to the falling US dollar, international capital flows into gold and funding the Vietnam War. President Nixon took the US dollar off the gold standard whereas now the dollar is backed by nothing again.
Since the US dollar is backed by nothing but the world reserves are backed by the US dollar since 1971, so this means that all currencies are now backed by nothing tangible such as gold, silver, copper but only trust in the American government.
Fiat Currency
Money backed by nothing is known as fiat currency. "Fiat" in Latin means "let it be done". In a nutshell, if the government says it is money, so it is.
The Consequence of Fiat Currency
To have the money backed by nothing is that whenever the Federal Reserve creates money, it would dilute the currency supply of all other nations because all countries reserves are backed by the US dollar. All countries' reserves are worth lesser each time the money supply increased from the federal reserve in the US. As we can look at the QE graph below. QE = Quantitative Easing. Quantitative easing is the same thing as printing money but it's pleasant to hear.
Federal Reserve has printed trillions of dollars. Countries like Russia and China have noticed it, so they have been selling US dollar reserves and started buying gold over the same period as a strategy instead.
Every currency is backed by nothing, how am I able to spend it?
The whole economic system today is running because it is backed by "faith". Faith that you can exchange your currency for goods or services. A part of that faith comes from the fact that not many people actually know where the money comes from.
Places don't have central banks Andorra, Isle of Man, Kiribati, Marshall Islands, Micronesia, Monaco, Nauru, Palau, Tuvalu
Central Bank Role
Essentially, the central bank is the entity that manages a nation's money supply and is able to loan money to the government with interest. And this is how it works:-
When the government needs more money than they received from taxes, they would ask the Treasury Department for money.
The Treasury then receives an IOU or bond from the government, through the banks, gives the IOU to the Federal Reserve.
The Fed then writes a check for this IOU and hands it to the banks.
At this exchange at the banks, the money is created and it can be used to pay government bills.
Where The Money Come From?
The money comes from nowhere. They literally just fabricate it.
When you or I write a check, there must be sufficient funds in our account to cover the check, but when the Federal Reserve writes a check there is no bank deposit on which that check is drawn. When the Federal Reserve writes a check, it is creating money - Boston Federal Reserve, "Putting It Simply" (1984)
Basically, they're writing a check and creating money from an account with no money in it. The money from the Federal Reserve creates can be used as legal tender to buy things and eventually it will flow into the economy per se. People would ask "Why they can create the money out of nowhere and we can't?" Well, because they invented.
Commercial Bank
The part of money creation also happens at the commercial bank. Every time you take out a loan to buy a house, car or furniture, branks create money out of nowhere to give you this loan and you still require to pay back with interest on it.
Each and every time a bank makes a loan, new bank credit is created. New deposits. Brand new money - Graham F. Towers, Governor of the CBC
Banks extend credit by simply increasing the borrowing customer's current account. - Paul Tucker, Deputy Governor of the BoE
Each time bank makes a loan, it creates new money. The bank doesn't use other people's deposited money and give it to you. In the present day, what banks need to do is simply typing digits into a computer. 97% of all money is digitally created like this, only 3% is the physical cash and coins that we carrying.
Another mad thing that commercial banks can do is lend out 10 times more money than they actually have in the reserves. This is called fractional reserve lending. This ridiculous system is written into law, to was part of the Federal Reserve System drafted in 1913 as mentioned earlier. This is the same system using throughout the world.
Issues Generated
When more loans are given out means more money is created. Then the rest of the money in the economic circulation is worth lesser and lesser as years go on. This is known as "Monetary Inflation". Basically, inflation is the tax that we all pay for fraud of money printing. Printing money is easy but in exchange for tax on our future generations. Inflation will keep things always more expensive such as houses, cars, food as long as this system is in place.
"Debt" and "Money" Isn't What You Think It Is
We've seen how mad the system is but still can get even crazier. Now we know how central banks and commercial banks can create money out of nothing. This procedure actually does create something which is debt.
Just hear this out. When you take out a loan, it's written down as an asset in the bank as a negative form, is like a negative value of money, or otherwise known as "debt". Under the system, debt is actually money and money is debt.
If there were no debts in our money system, there wouldn't be any money. - Marriner Eccles, Governor of the Federal Reserve
Instead of gold being the backbone of our economy, it's debt. As long as we need money, it requires debt to grow. The system is sometimes referred to as the "Debt Based Monetary System". Countries and people must become deeper into debt to generate more money in the system because debt is money. If people and governments stopped borrowing money which means the debt doesn't grow, the money supply would shrink and the system would fail. This is the kind of system we're living in each and every day.
Central Banks Controls
The federal reserve and other central banks control money by adjusting its supply and interest rate. Sometimes central bank also messing with the economy. We can look at a case study for that. In the year 2000, Federal Reserve Chairman Alan Greenspan reduced interest rates to 1%, he decided to fight off the recession from the dot-com bubble and encourage people to borrow money. With 1% interest rate, people borrowed the money would save them a lot on their mortgage repayment. His idea was to create a wealth effect. People would start to buy houses, the prices would go up and the people would feel wealthier and spend more money which led to a stimulated economy. His idea succeeded in getting people to borrow money to buy houses but the people borrowed too much which caused the 2008 housing bubble in result. At the time corrupt bankers were also involved in the 2008 crisis but fed has a bigger long-term impact on its economy.
In 2016, Japan central bank is buying so many stocks and they were no.1 buyer of Japanese stocks. They have part of the ownership of those companies with money that they created from nothing.
Central Bank vs Commercial Bank
The central bank that controls our economy. Central and commercial banking systems together control all of our money. The difference is the central bank can create money at will while the commercial bank needs loans to create money.
Ultimately, most people are dissatisfied with the current system we're living in. There are some who would argue that central banks are not inherently a bad thing, they just need to be a part of the government and not privately owned.
In my opinion, the government should solve the problem of those who avoid taxes and fix the loophole of the system first then money laundering. At least the legitimate taxpayers can pay lesser tax and the government is still able to cover the repayment interests to the central bank. For the whole monetary system itself, I would say it is what it is. The system was implemented a century and I do not think average people like us have the ability to alter anything about it, but what we can change is ourselves and the knowledge we can gain to avoid the traps of its monetary system.
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