What about the operations of the Federal Reserve System? In this day and age, the actual notes and coins circulating in the economy represent only a tiny portion of the money in existence. In actual fact, majority of the money supply is created by private banks as loans that are payable back to the banks at interest. In other words, the majority of money in the economy is created not by a government printing press, but by the bank itself. It is created out of thin air as debt, owed back to the bank that created it at interest. This meant that new money simply come into existence and placed into your account. All thanks to the advancement of technology in the financial industry.

Aside from playing a part in the banking system, the Fed has another important role which is to take control of the Monetary Policy; to keep prices stable to avoid inflation. Since the Fed has the ability to create money, or make it disappear, the effects are felt throughout the economy anytime the supply of money is altered.

It is important to understand that the Fed is not a bank, but a system. This system oversees a form of banking called the fractional reserve banking in which banks are allowed to loan out more money than they have in reality. The problem was that it works most of the time but once in a while there are batches of people wanting to withdraw the money which technically the banks do not have the capacity to support.

The fractional reserve banking started back in Europe and as time goes on, it became a method to legalize dishonest accounting. The medium of exchange started as gold and silver. People would bring them to the banks to safe keep and in return, the banks would issue a receipt. With the issuance of the receipt, the depositors could get their gold and silver anytime they want. At this juncture, it is important to state that back then, security wasn’t anything we have today and thus, storing gold and silver at the banks were much safer than storing it at home.

Soon, people began exchanging receipts knowing that these receipts were worth of a value as it could be exchanged for gold and silver. And so these paper receipts were in fact the first examples of paper money to be circulated in the economy. Not long after, the banks realized that people weren’t withdrawing the deposited gold and silver anymore, very few of them perhaps less than ten percent would bring in the paper receipts in exchange for the metals.

Realizing that this was a potential profiting mean, the banks decided to create more receipts for gold than they actually had the gold. In the process, interests were collected as they loan the receipts out into the economy. And that was how fractional reserve banking started.

To date, the Federal Reserve System is made up of a Board of Governors, 12 regional banks and an open market committee known as the Federal Open Market Committee (FMOC). The FMOC is responsible for setting interest rates. Since most of the FMOC membership comprises of the presidents of the regional Federal Reserve Banks, the interests rates are not set by a public body but rather by private financial and corporate interests. In the words of Alan Greenspan: “The Federal Reserve is an independent agency and that means there is no other agency of government that can overrule actions that we take.”

On the other hand, these 12 regional banks hold shares that make up the Federal Reserve System making them the ultimate owners of the Federal Reserve. Although majority of the Fed’s profits are returned to the Treasury every year, the member banks’ holdings of the shares earned them a 6% dividend. But this isn’t how the banks make their money from the Fed. Instead, the Fed was used as a mean to bail out the bankers who own the Fed banks, an example of a manipulation of the market.

Think about it, in the case of a bailout, who actually lends the money, or brokers the public debt? The Fed will bail the financial institutions, leading up to a huge public debt in the range of trillions. And then they turn to the very same financial institutions and establish a new set of treasury bills and government bonds etc. which of course are sold to the public. Undoubtedly, these financial institutions will buy part of this public debt and thus as a matter of fact, what the government is doing is actually financing its own indebtedness through the bailouts. The process repeats and what you have is a circular process.

According to the 2011 Government Accountability Office report:

• Jeffrey Immelt, chief executive of General Electric who served as an director on the board of the Federal Reserve Bank of New York received $16 billion from the Fed to finance General Electric.
• JP Morgan Chase chief executive, Jamie Dimon, a member of the board of the New York Fed received $391 billion from the Fed directed to his own bank.

“They, who control the credit of a nation, direct the policy of Governments and hold in the hollow of their hands the destiny of the people.” – Reginald McKenna