The Fed has failed to help

In order to find a solution, we have to describe the problem accurately. In searching for the causes of inflation, a strange method of fighting inflation was noted. The Federal Reserve Bank, which was in charge of the economy, was raising interest rates and caused a recession. Instead of reducing inflation, it got worse. This was back in the 1970s and ’80s.

By happy coincidence, the Fed was making a bigger profit. This looked suspicious.

This caused me to read a lot on banking, back to the time when President Andrew Jackson refused to renew the charter of the Bank of the United States. This led to the growth of “wild cat” banks, and to a series of “panics” according to history. These panics were, according to the histories, caused by the depositors of the banks demanding their gold, causing the banks to collapse. It was fraud.

It has become clear the banks, in order to entice people to put their money in the banks, were offering to pay interest on the gold deposited in the banks. Everyone knows that, when you collect interest, there is more money in the account. When there was reason for people to need more money to pay their bills, they would go to the banks to withdraw their gold. The banks owed more money than was originally deposited and there was no way that they could get more because all deposits were also able to draw interest.

They couldn’t pay their depositors what they owed. Instead, the banks closed before they had paid out all the gold. It was fraud.

Simple arithmetic shows that the banking system was based on the kind of fraud that Bernie Madoff is spending two lifetimes in prison for.

This simple arithmetic was confirmed when FDR called a bank holiday and had the banks audited, but previous to this, in 1913, the Federal Reserve Bank was created to prevent these “panics.” The Fed was going to put together enough gold, thus the “Reserve,” to prevent runs on the banks from spreading. The Fed was another fraud. It did not prevent a collapse of the economy.

Practically right on schedule there was another run. It was clear the banks couldn’t operate under the gold standard. Paper currency was made legal tender and it was made against the law to own gold currency. This was a bailout of the banks and they were not charged with fraud. The system was too big to fail, and rightly so. The change had been huge. However, instead of reducing the ability of the Fed to damage the economy, it was put in charge of the economy with more power than the Congress.

What we got by giving this to a private bank that calls itself a non-profit has been a continuous inflation brought about by charging interest or raising interest. During the ’70s and ’80s, it caused recessions, unemployment and more government spending. When the Fed raised interest to unbelievable rates, it broke the usury laws that were used to protect consumers. It destroyed savings and loans and increased the national debt beyond the spending by Congress.

This is how it was done. Congress and the treasury print the money as specified in the Constitution, in Section 8, then gives it to the Fed, which lends it to the banks and to the national government at interest.

The interest the government pays is in the neighborhood of 3 percent. With the national debt at $17 trillion, with interest at 3 percent, the government would pay $510 billion on money that it gives to the Fed. This is the major part of the deficit. Without it, the budget could be balanced.

Former U.S. Rep. Dennis Kucinich introduced a bill to do it, but until it is done, we will have deficits and budget cuts or more taxes.

John Bender lives in Johnstown.