Dear Daily Ration Reader,

With the dollar in another tailspin and likely headed even lower, I thought that it would be a good idea to dust off an old piece that I wrote a while ago on the creation of the Federal Reserve. Besides, the news has been so negative lately that it kind of speaks for itself.

The story, of course, is long one. In fact, when I wrote it, it turned out to be six-parter.

But I wrote it because the truth is that very few people understand where the Fed came from in the first place, why it exists, and what it ultimately means for the dollar.

In fact, I always thought that this was kind of strange considering that the Fed Chairman is often touted as being the second most powerful person on earth behind the President. And yet, I don't remember spending more than 30 minutes on it school.

So when I began to really read about the Fed, I found it all to be pretty eye-opening.

Which is exactly, I think, what John Adams may have had in mind when he wrote the following long before the Federal Reserve ever existed:

"All the perplexities, confusion and distresses in America arise not from defects in the constitution or confederation, nor from want of honor or virtue, as much from downright ignorance of the nature of coin, credit, and circulation."

--John Adams

And that I guess is why I've decided to run it again in this blog, even though by blog standards it is kind of long.

After all, the massive decline in the U. S. dollar hasn't happened in a vacuum. And neither has the inflation that has come along with it.

So here's the first part. It ran in Gold World on September 20, 2006, 16 months ago.

Folly, Fraud, Illusion, and the Fed

Author's Note: This story is the first in a series of articles about the creation, the workings, and the ramifications of the Federal Reserve Bank- one of the least understood but most powerful institutions ever created. We hang on its every word and our financial markets rise and fall on its every decision. Even the very value of the dollar itself is in its hands. Yet we know so little about it...

Baltimore, MD.-It's unlikely that Johnny Moon Sr. ever met Alan Greenspan. They didn't exactly travel in the same circles. Unlike the former Fed Chairman, Mr. Moon was dirt poor and homeless.

At the time of his death he left behind a watch, a flashlight and a wallet containing the grand sum of $1.00.

But despite his untenable financial situation and his lifelong mire of poverty and drug addiction, Mr. Moon died with startling secret: he had qualified for and received a total of 6 loans to purchase Florida real estate at a cost of over a half a million dollars.

Now how Mr. Moon was able to pull off such a feat is murky at best. Nobody seems to know for sure - not even his family.

But regardless of how he managed top pull it all off, one thing about his situation is crystal clear- homeless people are not exactly good candidates for home loans.

But in spite of this hurdle to borrow money and buy houses, Mr. Moon did just that. And as starling as his accomplishments were, he never could have pulled off this feat alone.

Because like the rest of the budding real estate moguls the bubble produced, Mr. Moon needed some serious help.

It is here, of course, where his path crossed that of the former Fed Chairman, a man he certainly never met, but whose credit loosening policies made Mr. Moon's real estate adventures possible.

But unfortunately, Mr. Moon was not alone. Millions happily joined him. In fact, his was simply only part of a greater but potentially tragic mosaic of borrowers that have marched headlong into the bubble that the Federal Reserve Bank helped to create.

But to be sure, it is only the latest example of the credit induced boom and bust cycles that have been delivered to us courtesy of the powerful central bank.

And sadly for those that followed this folly, all that is left is the prospect of a prosperity ending bust whose consequences may ultimately be ruinous.

But to be fair to Mr. Greenspan, he was a prisoner of his own hubris and acted accordingly. He fell for the logic as so many before and after him have--that the Fed can somehow create prosperity through the manipulation of consumer credit.

And while his money loosening efforts surely boosted the economy in the short term, the full wisdom of his rate reducing grind has yet to be seen. But with the country now awash and swollen with debt, the wisest of his decisions may well have been his last.

But as Mr. Greenspan now circles the globe delivering high priced speeches on his worldwide victory tour, the road that he paved with the best of intentions now carries with it an economy busting curve. In fact, the cracks themselves are more numerous everyday.

But it's not really all that surprising, because like all credit induced booms, it finally became unsustainable.

Needless to say, the contraction of the bubble is going to be a lot less fun than its creation.

But regardless of where this nasty contraction may lead us, one thing is certain- none of it would have ever happened if the Federal Reserve Bank hadn't reduced rates to the unheard of level of 1%.

But that is what happens when we let powerful institutions like the Fed control our money supply. And unfortunately for us and for the Fed, free markets cannot be "managed" to sustainable outcomes. Or "soft landings" for that matter either.

That's because in the end, money creation ultimately only skews to consumption. And when it does eventually end, it leaves consumers everywhere buried under heavier and heavier burdens of mounting debt.

It is a vicious cycle, and for some reason we allow it to continue, even though it inflates and weakens the dollar. And in doing so it threatens our very freedoms.

Regrettably however, Mr. Greenspan's replacement, Ben Bernanke, is as like minded as his predecessor in his fervent belief in twisted Fed truths.

In fact, just today the markets anxiously awaited the Feds latest decision.

And as was expected, the smartest guys in the room decided to leave well enough alone.

Naturally, it touched off a series of wild guesses and speculation by the media's talking heads. In fact, the divining of the resulting Fedspeak was reminiscent of the Kremlinologists that used to read intentions either real or imagined into the mouths of the former Soviet leaders.

And for their part the markets must have liked what they heard. They continued the rally that had begun just last July.

But it won't last. It simply can't because like those Soviet central planners of old, the Fed cannot create managed economic outcomes no matter how hard it tries. Mr. Market has a mind of his own.

So instead we live with booms and busts.

But we've been doing so since the Fed was created in 1913.

We only accept it because most of us don't even understand what the Fed does, how it came to be, or what role it truly plays in our lives.

It's a strange story to be sure and over the coming weeks I'm going to tell it to you.

I think that you're going to be surprised what you learn.

By the way, in case you were wondering, since the creation of the Federal Reserve a pre-Fed dollar is now worth only 5 cents.