How the Federal Reserve Steals Your Wealth – Eccentric Economics


In my column last week, I expounded upon capital structures and the outcomes of a central bank injecting new credit into the economy, thus artificially lowering the market rate of interest and inciting a period of boom and bust. It is relevant to explain the nature of the fractional reserve banking system of the Federal Reserve, and how its operations insidiously robs the citizenry of their wealth.

During election time, politicians win votes by promising their supporters a plethora of policies that will ostensibly ease the financial burden that plagues their communities. It is in their nature to make many promises they simply cannot deliver within their budget so they are forced to engage in deficit spending.

Though Congress may appear polarized at times due to differing opinions on many issues, they are in agreement when spending money that isn’t theirs is on the agenda. After the bipartisan government agrees upon a given budget, they borrow money from the Treasury in order to fund the programs that exceeded tax revenue. The US Treasury issues bonds, and essentially borrows money from powerful multinational banks. These banking institutions in turn sell these bonds to the Federal Reserve, and then the Federal Reserve later pays for the debt through collected tax revenue. But what happens to our money before it is collected by the IRS?

As soon as the money is dispersed from our politicians’ spending programs and spread through personal transactions, the cash is traded and eventually lands in a commercial bank. The cash is devalued from commercial banks through a system known as fractional reserve banking. Fractional reserve banking, in essence, is when people deposit money in their commercial bank, and their bank only reserves a fraction of the deposit, known as vault cash, and the rest is used by the bank to grant loans, invest in stock market, and various other banking investments. In other words, only a small percentage of your money is held at the bank while the rest ventures into an oblivion. This process is consistently repeated, and as one may have noticed, this is inflationary in nature.

In addition to this system of commercial fractional reserve banking, the Federal Reserve purchases assets on the market to spur consumption and speed up economic growth, known as open market operations, and the money used is deposited in commercial banks. This creates new money, and the increase in the money supply lowers the market rate of interest, and supplements the boom phase of the business cycle. Many believe the expansion of the money supply distributes wealth amongst all the citizenry. This is erroneous, and only the initial recipients of the newly generated money benefit from this system, as the increase in the money supply is inflationary, causing a decrease in value by the time it reaches everyday consumers.

The money that was once entering and exiting transactions and the additional money created from open market purchases are then paid back to the government through taxation, which pays for the initial debt we inherited from the politician’s promises. That money is then paid back to the investor banks and its shareholders make money from interest rates, and annual dividends. Who are the shareholders? Many are led to believe it is the heads of the multinational banks who originally lend the treasury the money. Doesn’t that sound like a textbook Ponzi scheme?

Although I did not elaborate on the workings of fractional reserve banking elegantly, I hope the reader grasps the nature of the system. It robs the value of everyday Americans savings, and is essentially a hidden tax. This central banking system we abide by was apparently designed to keep a particular set of individuals wealthy at the expense of commoners, and has proven to be a system of financial slavery. It is in my personal opinion, if Americans seek financial sovereignty and wish to retain the value of their hard earned wealth, the Federal Reserve and the fractional reserve banking system must be abolished.

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Logan Davies

Logan Davies is a Regional Manager in the Banking Services industry, and the director of the non-profit organization, Voluntaryism in Action. He graduated from Middle Georgia State University with a degree in Business Administration. He is the father of a loving son, an avid outdoorsman, firearm enthusiast, and unwavering supporter of liberty.