Wednesday, January 9, 2013

Central Banking Quicksand

Barbarous Relic
“In 1903, a lawyer in Germany took out an insurance policy and made payments on it faithfully.  When the policy came due in 20 years he cashed it in and bought a single loaf of bread with the proceeds. He was fortunate.  If he had waited a few days longer, the money he received would have bought no more than a few crumbs.”
The root cause of all hyperinflations is fractional reserve banking, the practice of creating money out of thin air by expanding credit beyond what a bank has in cash holdings. It is the modern method of inflation. Fractional reserve banking is perpetually shaky because there are always more liabilities than assets, more notes or deposits outstanding than can be redeemed in cash.
Creating money out of nothing is tempting for governments in need of revenue. Banks and governments worked out a deal: government gave banks the laws they wanted; in exchange, banks would buy government debt with money created from nothing. Thus the central bank system was born.
America’s central bank is the Federal Reserve; its major function is to monetize government deficits, thus avoiding raising taxes or reducing spending. Because of the Fed, the US has had the funds necessary to participate in various wars and to manipulate the markets. Since its inception in 1914, it has ripped away 95% of the value of the dollar.
Most people think the Fed promotes a stable economy and fights the curse of inflation. The truth is the exact opposite. The Fed is solely responsible for inflation and has caused economic havoc since its inception. It has created what Rothbard describes as a “chronic, permanent inflation problem, a problem which, if unchecked, is bound to accelerate eventually into the fearful destruction of the currency known as runaway inflation.”

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