The value of the US dollar
A summary of how money works in the US:
- Congress needs money.
- The money it collects from taxes does not cover the money it needs so it borrows money.
- Much of the money congress borrows is from a private bank called the Federal Reserve.
- Congress is then in debt to the Federal Reserve for the amount borrowed, plus interest.
The Federal Reserve (again, a private, non-governmental bank) creates money it lends to the US Government out of thin air. The money has no real value since the Federal Reserve does not have assets (gold, land, etc.) to back the money. The money is printed or electronically created out of nothing.
This type of money–paper money with no backing in physical assets, is called Fiat Money or Fiat Currency–it only has value because the government says it has value.
One of the effects of a currency that is printed upon will is inflation. When the Federal Reserve inflates the amount of money in circulation, the value of money that is already in circulation goes down. This means that if you have $100 dollars in the bank, the purchasing-power of that $100 goes down every time congress borrows and puts into circulation money from the Federal Reserve.
“It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
–Henry Ford
“I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a monied aristocracy that has set the government at defiance. The issuing power should be taken from the banks and restored to the people to whom it properly belongs.”
—Thomas Jefferson
What can be done about this? One solution is that Federal Reserve could be eliminated over time and the US Government could begin to print its own money. In this case there would be some backing behind the money since the US Government has real assets – the ability to tax, sell Federal lands, gold etc.
I started thinking about this here. I found another good documentary on it here. You can find an opposing point of view (a weak argument if you ask me) here.
Technorati Tags: currency, federal reserve, fiat money, money
Filed under: Knowledge, Research | 3 Comments
If the money is “fiat,” does this mean that the Federal Reserve is considered “fiduciary?” Does/has the Congress repay/repaid its debts to the Federal Reserve? If the Federal Reserve does not hold Congress to its side of the contract, doesn’t that make the Federal Reserve non-fiduciary, and the money non-fiat? I don’t know, I’m asking.
Good question. I was also researching that. I’m not sure how exactly the US Govt. repays the Fed but the fact that we have a “National Debt” indicates that the US Govt does pay them back.
Here’s a quote from Wikipedia that indicates that the US Govt pays back the Federal Reserve by “selling” it debt.
Regarding whether the Federal Reserve is fiduciary–it seems to me that if it is fiduciary then the money it issues would be fiat, right? Fiduciary would mean that the money was only backed by reputation, not gold or any other asset–I could be wrong though, I’m not used to using the word in that context.
To summarize (for the sake of me clearing it up in my own mind):
The US Govt borrows money from the Fed that the Fed creates with no backing–it’s printed and created on demand. The US Govt is now in debt to the Fed and pays back the debt plus interest owed to the Fed by selling debt owed to the US Govt by the public/other countries etc. to the Fed upon which the Fed can then collect.
Does that sound right to you?
Thanks for the comment, nice to see someone actually reads this
Good post. It makes you miss the days of the gold standard (if I had been alive then).
As long as our creditors have faith in the ability of the US Govn’t to pay its debts the current system is sustainable. If that ever changes you become Argentina.