The Federal Reserve holds tremendous power.
Some of the many important roles of the Federal Reserve include setting interest rates, regulating the value of the dollar, and monitoring inflation rates, all of which impact precious metal markets, including silver and gold bullion.
With an institution that has so much influence on our economy, it is important to have at least a basic understanding of what the Federal Reserve is and what its role is in the financial sector of our nation.
Here are 5 important facts about the Federal Reserve.
1. The FR is a private organization. When people think about it, many wrongly assume it to be a public institution-the financial branch of our federal government. However, the FR is actually owned by 12 corporate banks, each of which are owned by regional, commercial, and foreign banks, as well as miscellaneous individuals who have inherited a stake in the system (Rockefellers, Rothschilds, etc.).
2. The Federal Reserve has a monopoly on the currency flow in America. It does so by controlling the amount of loans made by commercial banks. When the amount of new loans increases, so does the money supply; when loans decrease, the money supply declines as well. The FR has the power to determine the amount of new loans (and ultimately the money supply) by doing one of three things:
- Changing the required reserve ratio
- Allowing banks to borrow from the FR at a discounted rate
- Buying and selling bonds
The implication of this essentially means that the Federal Reserve has the ability to borrow an infinite amount of money at 0% interest.
3. Inflation is caused by the Federal Reserve paying interest on debt using future money. If all money printed is being used to pay off the principal of debt, how does the interest on the debt ever get paid? The answer is money that will be printed in the future is applied to interest. Inflation is a natural byproduct of this system.
4. The potential money supply is infinite. Prior to 2008, commercial banks were required to hold at least 10% of deposits as reserves, which limited the amount of money creation possible to 9 times the deposit amount. However, a minor clause in the Emergency Economic Stabilization Act/TARP Act of September 2008 reduced the requirement to 0%, meaning there are no restrictions on the amount of money that can be created, and there is no longer any protection against runaway inflation.
5. There is a debate over the constitutionality of the Federal Reserve. Strict adherers to the U.S. Constitution argue that the federal government does not have the authority to establish a central bank, especially one with such magnanimous power as the FR. Defenders respond by saying that currency regulation is indeed authorized by the Founding Fathers, and it is simply a matter of interpretation.
Interestingly, if you look into the history of the Federal Reserve, you will find that this coalition of banks is actually the third institution in our nation’s history, and there was even an 80 year period where we went without a central bank altogether.