As overindebted Americans and bankrupt cities and municipalities spend millions to celebrate America’s 234th birthday (and delighted by the fact that while the rest of the world is writing in austerity, we actually can still pretend we can afford such demonstrations of affluence) with brilliant if transitory firework displays, it behooves everyone to step away from the symbolic, and consider for a minute the circumstances surrounding this country’s declaration of independence. Since at the basis of every action there is always a monetary incentive, for a critical perspective of the economic conditions that led not only to the violent separation of the US from England, but to the subsequent creation of the Federal Reserve, the abolition of the gold standard, and all culminating with the imminent “end of the road” for the financial system as we know it, we present the following essay from reader Matthew Hinde.
I’m sure you know that the primary reason for the American War of Independence was to break from the English banking system of the time. The English Banks wanted the US government and corporations to borrow money from them in order to trade. This is really what the founding fathers of America fought against and won independence from. And so after the war had been won the US financial system was controlled, and all US Dollars were issued, by the US Government. The value of each Dollar was fixed (i.e. there was no inflation) and ALL the banks operated within the financial system. The most significant aspects were that the value of a dollar was FIXED and that the commercial banks were not empowered to create money. This is really what the English banks wanted to be in control of – the power to create money and lend it to the US entities at interest.
After the establishment of the Federal Reserve in 1913, however, the bankers finally got their way in the US. They took control of the US financial system and Fractional Reserve Banking became a reality in the US. What this means is that the financial system was essentially privatized and the commercial banks started to create money “out of thin air” by taking in deposits and then using these deposits to empower them to make loans significantly in excess of those deposits. I’m sure you can see how, through this scheme, the banks had shifted themselves out of a situation where they had primarily been an intermediary between savers and borrowers in the economy, to a situation where they had the authority to create and lend money into the economy.
Practically what this has meant to the American people is that as the banks have created additional units of currency, the value of their savings has been consistently undermined and devalued over time. One could argue that this has been compensated for by interest being paid on peoples’ savings, however the fact of the matter is that this rate has been manipulated down by the Federal Reserve over time, resulting in significant asset price inflation. In addition to this qualitative devaluation of money, as the capital and interest repayments of existing loans has been made, liquidity has been drained out of the economy thereby creating monetary shortages on “main street”. So I’m sure you can see from this that the American people have been hit on two sides, firstly the value of their money has been consistently devalued, and secondly the quantity of money in the real economy has also decreased relative to existing debt levels.
