Gold Investment

Zion, IL
By A.B. Dada
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Over at the LRC blog, Chris Brunner posted an article titled Top 8 Ways Hard Money Would Change Your Life that details 8 decent reasons why Ron Paul’s stance on a gold-backed dollar is a good one. But the Federal Reserve’s printing presses and liquidity injections are not the biggest problem we face today in the U.S. in terms of economic difficult and years of financial abuse by governments at all levels, in fact the Federal Reserve’s control over “real dollar” creation is not really that bad when you consider the real culprit: fractional reserve banking.

Inflation happens when more money is created than previously exists, and the Federal Reserve does have the ability to inject new cash into the system (digitally or printed). Recently the Fed injected tens of billions of dollars in cheap “overnight” loans to member banks. New cash doesn’t always cause inflation, though, because of the growth of population and goods to buy.

If we had a fixed population, say 100 people, and a fixed supply of goods, as 10 oranges and 10 horses, new currency pumped into the market would definitely have an inflationary effect on prices. If there was 100 dollars to start with, and the Fed pumped another 100 dollars into the economy, some prices would likely double or more. If the demand for oranges was greater than horses, you might even see horse prices fall and orange prices more than double. But if the population doubled, or the supply of goods doubled, the new currency may not have that doubling effect on prices — it might keep prices close to stable. This is not a good thing, though, because the new money would be VERY beneficial to those who received it first, and the markets would swing in terms of price and production until they reached a new equilibrium of prices, supply, demand and production. This is why printing new money (or creating new digital balances) is bad, but it doesn’t always cause price increases necessarily.

This is also the reason why fiat currency is not as bad as the other problem with all fiat currencies: fractional reserve banking. Fractional reserve banking is a government-regulated standard of how much banks need to actually have on hand versus what depositors have given them. If the government required 100% reserves, we would not have a fractional reserve standard but a full reserve standard (which is what we want and need). That means if you deposit $100 to a bank into a savings account, they need to put that $100 in the vault and sit on it. If the reserve was set to 10% (where it is today), the bank would just have to keep $10 of your money in the vault, and then they could loan out $90 of it to another individual. This is where banks make their money, on the fraud of fractional reserve banking. Your $100 becomes $190, and that has a definite effect on price inflation, market fluctuations, malinvestment and overinvestment. If the person who borrowed the $90 from the bank (based on your $100 deposit) decided to deposit the money with another bank, the new bank could then give them a receipt for $90 and then loan out $81 — creating even more inflation! This repeats itself until there is many, many times more “money” in the system, which has an almost immediate effect on prices. When prices skyrocket in an industry, producers of the goods that skyrocket may think the market needs more of those goods, so they make more, and this is where malinvestment occurs. Look at the overabundance of new homes in the market — created on the false demand that came from fractional reserve banking.

When the the Federal Reserve “injects liquidity,” it is actually just giving banks new money (printed or digital) to use. Let’s say the Federal Reserve lets Bank of Yummy-Yummy borrow $2 billion. Normally they let them borrow at an interest rate below their market rate — the bank borrows for 0.5% less than you can borrow from the bank. The bank deposits that $2 billion into their vaults, but because of fractional reserve banking, they can loan that $2 billion out 10 times, and at a 0.5% interest rate profit! So not only do they get the money early (before prices have gone up), and have the ability to pick and choose who gets the money (before prices have gone up), but they get 10 times the money at a discount rate, and only have to pay back the initial loan.

If you had the ability to print 10 times as many dollars as you previously had in the mattress, would you? What if you took those new dollars you just printed, and stuck some of them into your mattress, letting you print even more new dollars? Does this sound like theft and fraud to you? Does this sound like something a good and moral person would do?

This is your government in action — all your governments. Every country in the world loves the fractional reserve banking system, but the bankers love it the most. If you work for a bank, you’re working for a fraudulent entity. If you deposit in a bank, you’re letting your money be used to counterfeit new money and also depreciate the value of your money. If you invest in funds that deposit money in banks, your investment may not grow more than the true rate of inflation, but the people who are getting your investment money are cutting themselves huge bonuses just because their fund grows, even though the true rate of inflation may show that the investment didn’t really grow at all, it just kept up with inflating prices.

This is the fraud that we need to be aware of. Ending the Federal Reserve may NOT end fractional banking, which could be maintained as a law on the books of Congress. Tying the dollar to gold won’t end franctional reserve banking, as Congress may allow the banks to keep a reserve of only 10% of the gold out there.

The only solution that I see is to keep your dollars with you at all times — in the mattress, in your home vault, in a teddy bear, wherever. Spend it on what you need, but hoarding dollars, if done by a significant percent of the population, is the only moral response to a banking system that steals, lies, defrauds and deceives the public.