Who controls all your money- you may think it is you but you are sadly mistaken. You don’t control, the company that you work for doesn’t, and not even the govt. The system is so opaque and crazy that you will be surprised.
Most of our lives we are running after money, all our efforts are somehow connected with money. We go to school and colleges to gain knowledge and we then use that knowledge to get a job and trade our knowledge with money.
In 1694 England had just gone through the 50 year war. The govt needed money. The Scottish banker William Paterson proposed the idea of a private bank that would issue money to the govt. Where would that money come from – out of thin air. This was the first central bank.
In 1910 a group of richest people of America wanted to make a central bank. A Senator called 6 of the richest bankers of America to a secret meeting and after a deliberation of 9 days they came up with the proposal of a Federal reserve system. To get an idea about the richness of these 6 people, well they controlled a quarter of the world’s worth. If this proposal was accepted by the Congress then it would give this small group to create money out of nothing. Then they would loan it to the American govt for interest. This powerful lobby succeeded in passing the bill in the Congress in Dec 1913 when maximum members were on holiday. Today it is the most powerful entity of USA. This model followed by England and America is now followed by most countries except a few like Cuba and North Korea.
Since the end of the Second World War the USD has become the reserve currency of the world economy. It means all countries hold USD as reserves which also mean that all other currencies are backed by the USD. After the Second World War all US currency was backed by gold and so currencies were quite stable in relation to each other. But in 1971 Nixon removed this USD from the gold standard. So, practically now, the USD is backed by nothing, and so the reserves of other countries are also backed by nothing. It is only the trust now on the USD. This is what fiat currency is- money backed by nothing. The govt says it is money therefore it is money, nothing else.
When the Federal Reserve creates money it means it is diluting the currency supply of the world. When more money is created it means that the value of the currency is worth less. The Federal Reserve created trillions of dollars in the last few years. For this reason other countries keep buying USD to counter this value erosion. Some bigger countries like China and Russia also sell USD to buy gold instead.
You may ask if my money is worth nothing then how am I using it. It is just because of faith on the govt that told you that it is money. That’s why you are able to exchange it for goods and services.
So how does the central bank works? When to govt is in need of more money, it asks the treasury department. The govt gives an IOU to the treasury department. The treasury department gives it to the Central bank. The central bank issues a check to that amount and so money is created. When you give a check it has to be based on the money you have in bank, but when the Central bank issues a check it doesn’t need any backing. It creates out of thin air. It means more money comes into circulation. So from thin air it becomes real money when it reaches your pocket. With more money in circulation the value of that money decreases and that is what we call inflation.
Even commercial banks can invent money. Depending on the country’s law commercial banks can give 10 times more loan that it has as reserves. This also adds to inflation. Then in 2008 came the Lehman’s banking crisis. They were giving housing loan and when people failed to pay back the bank failed causing a global banking crisis.
Things get even bizarre. When we take a loan then for the bank it is a debt. It is also called as debt based economy. The debt should always grow that means more loans for the person or industry or the govt. The more the debt, the more money is in circulation. Debt is a form of money. If people and industry and the govts stopped borrowing money then the money supply will shrink and the system will fail. So it is the central bank in conjunction with the commercial banks control all the money. The central banks have the power to create the boom and the bust just by tweaking the interest rate at which it offers the invisible money.
All the wars and the revolutions of the world are somewhere linked to the control of this money. So now there is a slow and silent movement to come out of this by rejecting the debt based economy. Things like gold, silver and crypto currency have the power to come out of this system of the unholy nexus of the central banks and commercial banks and the government. But will the govt be ready to lose its power over money?
Thank you Telesfor sir.