So far, so good with the banks, OK? They had a holiday, and 1200 of them never re-opened, which is as it should have been. They had loaned out depositors’ money, and the loans defaulted. Hard times. Turn the clock back close to 20 years before that, and see what happened. A central bank was formed, which is still known as the “Federal Reserve Bank.” It is in no way a “federal” system or bank, in the sense that the federal government owns it, or you can go up to a teller and make a deposit. It is privately owned. For a full treatise on the Federal Reserve, please buy, borrow, or in some way obtain access to, “The Creature From Jekyll island,” by Ed Griffin. This marvelous book will explain the fed from beginning to now. A must read, and a must own, in my opinion.
Without going into details, the Federal Reserve controls the money supply. Inflation is caused by, and actually is, as any dictionary will tell you, an increase in the money supply. The Federal Reserve central bank creates money out of nothing. (Alexander Hamilton was one of the first advocates of a central bank. He was shot dead in a duel, by Aaron Burr. Fortunately?) Creating money out of thin air, is a nice trick if you can get it. It’s even better than alchemy, which never existed anyway. The Federal Reserve bank, and now the rest of the banks, also can create money out of thin air. The Fed buys things, such as US notes or debt, and issues currency or bookkeeping entries for that amount. Presto! The money supply has been increased, and consequently, the value of it has decreased. Diluted, if you please. The banks loan money now, even if they have no deposits to cover them, because they can get all they want from the central bank. When a bank loans money today, the money supply is increased. The loaning bank only need have 10% on deposit of what it loans. When the Federal Reserve creates money out of nothing, the money supply increases.
When a solution of anything is diluted, it becomes weaker. It becomes weaker, because its volume has increased. A lot of people do not understand inflation as being caused by an increase in the money supply. Look at it this way, as an example. Take a Coca-Cola, and examine its contents. It contains a bit of syrup, and a lot of carbonated water. Or the growing in popularity “Chai” tea, which comes in a concentrate. The concentrated Chai tea, is mixed half and half with water or milk, and the Coke syrup is mixed many parts with carbonated water. Either, taken by themselves, would be distasteful. Diluted Chai tea concentrate, and diluted Coke syrup, makes a delightful beverage. Diluted money weakens it, just like diluting syrup and tea concentrate weakens it.
For something to be valuable, it must have several qualities. It must be useful, desirable, scarce, and difficult to counterfeit or duplicate. Take a Model A Ford, or a painting by Degas. Both can be duplicated, but the duplicates haven’t the value of the original. Both are desirable, at least to some, both are scarce, and both are useful, to a limited degree. Money is all of the above. It is useful, desirable, difficult to duplicate, as well as scarce. These qualities give it value. The money, before FDR and the Federal Reserve, was undiluted, and kept its value. As a further example, suppose some explorer discovered a huge warehouse which was full of Degas paintings, and untouched, brand new, Model A Fords. Impossible of course, but if such a discovery were made, the value of the Model A’s and Degas paintings would instantly decrease, because their supply had been DILUTED.
When dollars are created out of thin air, and are backed by nothing, or represent nothing but more dollars, they will become diluted, and lose their value, in direct proportion to their numbers. In various lands around the earth, this phenomenon has occurred over and over again. The classic example is in Germany in 1923-24, when the inflation rate became so bad, that the Reichsmarks were eventually worthless. One would go into a restaurant and get a cup of coffee for 5,000 marks, and a second cup may have cost 6,000, so bad was it, till it collapsed totally. The dollar, thanks to the central bank and cooperating member banks, which are all of them, has lost 98% of its value, thanks to dilution or “Inflation.”
Do banks have anything to offer us? Are they safe places to store our dollars? Are they respectable? The answer is an unqualified “yes,” to all of the above. Being a safe place to store dollars, is nice if you trust dollars. If you insist on having a lot of dollars, by all means place them in the care and trust of a bank. They are insured by the FDIC. The FDIC may only have a nickel or less for each $100 of deposited dollars, but one shouldn’t worry about that, because if ever there is a mass run on the banks, the presses will roll, and every single dollar owed, will be repaid to you, the depositor. They may not be worth much by the time and smoke clears and the press runs have been completed, but you will get your dollars back in full. Banks offer checking accounts, which are virtually impossible to do without, it seems, and are very convenient. Dollars can be borrowed from banks, with interest, even though the bank may not have the dollars on deposit, thanks to the Federal Reserve, and what has come to be known as the “Fractional Reserve Banking System.”
“Fractional Reserve,” means exactly as it reads, and that means a bank can loan you money, (create new money), without having much. This is why it is a very profitable business to be a banker. My local banker says it requires about a million dollars to start a bank. Think of the advantages of it. Loaning money you don’t have, charging for services, and paying teensy interest. A bank today will pay 1% taxable interest on savings, and loan dollars they don’t necessarily have, at maybe 9%. Bigger banks in large cities, now charge for the use of a teller, and use of an ATM. When that happens at my bank, I’ll move to another bank, but then I am in a small town, and things are friendly here.
Banks offer safe deposit boxes too, which I am against using, because they will be sealed if you get into a huge squabble with the IRS, or you die. Better to have a safe in your home, and a good supply of unregistered guns. Have the guns anyway. Banks issue credit cards, which are handy to have also, but at a huge rate of interest, if you carry a balance each month. The high interest rates are not as profitable for the banks as you might think, as the defaults on credit cards can be huge and costly to the issuers of them.
Banks today, are a far cry from the banks of yore, when I was younger. Then, banks were formidable structures, looking like castles or forts, with beautiful architecture, marble floors, fancy teller windows, vaulted ceilings, and guards. Today, they are friendly neighborhood outfits, and are as casual as a coffee shop. They used to be caretakers of valuable gold, silver, and dollars backed by such, as well as silver coinage. Today, it is all pieces of paper with ink on them, and huge numbers on the bills. A dollar no more commands respect, as it did when one would buy 5 gallons of gasoline or twenty Cokes. Today, most of us carry hundred dollar bills in our wallets, as a matter of course and habit, since inflation has caused prices to steadily rise, day after day, month after month, and year after year. Prices have gone up, but the things priced have not changed. Butter, at $1.25 per pound as of two years ago, is still the same butter at $3.98 or more. Prices have not gone up, the money has gone down.
Banks are a useful business, and a convenience we all need and use. The fact that they no longer deal in honest money is not their fault, but the fault of government and the privately owned Federal Reserve central bank. Government, which never has enough dollars to pay its bills, because its legislators don’t know how to control their spending, and the Federal Reserve, which produces the dollars out of nothing, to keep the government supplied. As this process continues, and prices continue to ’go up’ in increasingly worthless dollars, this process must have an eventual end. It will end, just like all things do, when confidence in them expires to such a degree, that masses of people get out of dollars, and purchase tangible things, as a hedge against inflation. If the dollars are needed at some future time, the tangibles will not have changed. Only the dollars used to buy them. Butter will work, as will other tangibles, but gold and silver, throughout history, have been true money, desirable, beautiful, useful, scarce, etc. as stated above. When the masses lose confidence in the dollar, and turn to tangibles as fast as they can, the prices of gold, silver, butter, Degas, and Model A’s will go skyward. A Degas or Model A, might be a bit difficult to convert back into dollars, but gold and silver won’t. Protect yourself.