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The Fed: Uncle Sam's Magic Banker

Written By Brian Hicks

Posted March 8, 2008


 magic hat

Have you ever wondered how Uncle Sam manages to get his hands on so much more money after he has managed to blow every penny of our tax dollars?

Well, here’s the answer.  

It’s part 4 in my Federal Reserve series.

It ran in Gold World on October 11th, 2006


Uncle Sam’s Magic Banker

Author’s Note: This story is the fourth 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. The very value of the dollar itself is in its hands. Yet we know so little about it. . .  

BALTIMORE, MD — When the Knickerbocker Trust collapsed in 1907 it set into motion a series of events that led to one the greatest money panics in US history. And in the wake of those tumultuous times, one thing became very clear-our banking system was in need of some serious liquidity.

After all, it was the lack of liquidity that created those runs on the banks in the first place. And it was liquidity, in the form of the cash and credit provided by famed financier J.P. Morgan, that ultimately ended the panic.

But while the need for liquidity was fairly obvious, it raised this question: who would provide it?

The answer, of course, was the Federal Reserve Bank.

And, since its creation in 1913, the Fed has become the instrument that has provided the cash necessary to keep the banking system working.

They do it, of course, by writing checks that increase the money supply and by being able to manage the flow of capital between the banks that need money and banks that have money.

The net result of this is that banks have become perpetually liquid, since there is no real limit to their ability to access and transfer capital.

But how could there be?

After all, the Fed is completely unrestrained by that pesky gold standard and can create money out of thin air as a result.

And because of this the Fed works something like a platinum card without a limit-other than its money tightening or loosening policies.

Naturally, though, the spigot is always open.

And so, in essence, the Fed and its magic checkbook has come to be the practically limitless bank for bankers-which would be ominous enough if it all ended there. But it doesn’t.

Because, unfortunately, the Fed also has another liquidity-craving customer–a monster really–called the US Government.

That’s because the Fed not only provides liquidity to the banking system, but it also provides “financial services” to Uncle Sam himself. It was part of the original deal and has been the delight of every congressman ever since.

And believe me when I tell you that when it comes to providing liquidity to the government, only a magic checkbook will do the trick.

That’s because our government is just like the rest of us. It spends way more than it brings in.

But instead of relying on credit cards and the like to spend more than he has, Uncle Sam uses bankers to borrow the money he needs to keep himself going. And while the government is increasingly reliant on foreign investors, its bank of choice is none other than the Federal Reserve.

It works like this.

As you know, to fund the various activities of the federal government, our tax dollars–high as they may be–are never enough to cover the bill.

That’s because when it comes to an appetite for spending, our Congress knows no equal.

In fact, the folks in Congress manage to spend all of our hard earned tax dollars long before the fiscal year ends. And when they do, they don’t simply fall on hard times.

They call up their friends at the Fed. There, they get what they need and then some.

It’s what called “monetizing the debt” and it’s the Fed’s specialty.

It works by using that magic checkbook, because they can simply write the government any number of checks in any amount that it asks for.

In doing so, the Fed gives the government the liquidity it needs by providing the “financial services” that put it further in debt.

All of which Congressmen naturally love, since they don’t ever have to go to the public with proposals for the tax increases that would provide the real amount of money that they needed.

It is how off-the-charts government spending continues to happen. And it’s the reason why Congress spends your money so carelessly.

After all, with the Fed willing to provide a limitless source of funds, the price of the goods and services that the government purchases is just part of the pesky details.

Naturally, these same Congressmen use those Fed-provided dollars to help themselves get re-elected by buying the support of their voters.

It’s a neat little arrangement that no one really seems to complain about, because it’s–well–good for the economy.(As we’ll find out next week.)

But the truth is that the Fed has provided the means to run us deeper and deeper into debt-by providing a blank check of liquidity to the US government.

In fact, in the years before the Fed was created, total US debt stood at a paltry $1 billion dollars. Since then it has ballooned to an astounding $8.5 trillion dollars. That will someday need to be paid back by the taxpayers. That’s you and me.

At present, some 40% of this debt is owed to the Federal Reserve-because they wrote the checks that funded it all.

It’s just that simple.

It’s really not hard to do, especially since the creation of dollars was divorced from the gold standard.

It’s what they mean when they say that the dollar is “fiat money.” That is, it is backed up only by the “full faith and credit of the US Government.”

That’s how you get a magic checkbook in the first place.

And oh, by the way, that “full faith and credit” is none other than you, the taxpayer.

After all, somebody’s got to foot the bill, don’t they?

– Steve Christ