Everyone knows that the dollar bills we are using nowadays are issued by The Federal Reserve. Although it is called “Federal”, it is actually a private bank, which is out of the U.S. government bank system. The currency is not issued by the U.S. government but the Federal Reserve. They issued the currency and lend to the U.S. government and the banks and earn interest from them. You might ask then, “Even if we payback all the currency to the Reserve, we still got interest unpaid, where do we have extra money to pay for that?” The answer is you have to borrow more from the Reserve in order to pay the interest. That is the reason why our national debt keeps increasing and can never payback. If you do the math, you can find out this is ridiculous. And what makes people more confuse is the way how Federal Reserve creates currency - they are creating currency from nothing and allow you to buy things using the currency. This is the reason why I am using the term “currency” but not “money”.
Here I have to introduce a term “Monetary base” - which is related to the money supply in the economy. When currency is issued, they will be deposit in a bank. If the monetary base is set to 10%, that means that the bank need to keep the 10% of the total amount of deposit and lend the rest to other banks. Here is the trick! Other banks who borrowed the money only need to keep 10% of it and can lend the rest of the 90% to another bank. This is how our currency is created. That is why we always heard a bank will go bankruptcy when everyone tried to get their money back from the bank because they only have 10% of the money deposit In this case you will ask. “Doesn’t that mean the Federal Reserve can create infinity amount of money to satisfy our needs?” The answer is yes and no. The Federal Reserve can indeed do so but it will bring a disaster which I will discuss it in my next blog post. .Around the time of WWI, most developed countries were using the gold standard system. The gold standard system is a monetary system in which the standard economic unit of account is a fixed weight. When the system still existed, there is not a term called “inflation” because the currency is linked to a fixed amount of gold. But since this system no more exists, the Federal Reserve suddenly becomes a powerful giant system which no one can control it. In my next post, I will talk about the potential disaster that our currency is no more controlled by the gold standard system.