Imagine a criminal was counterfeiting money. However, instead of spending the money himself, he loans the money to someone else. He prints $100,000 and lends it to someone for a year, charging 6% interest. A year later, he collects $106,000. By coincidence, among the $106,000 is the same $100,000 he lent out a year ago. The counterfeiter burns the $100,000 he printed and keeps the $6,000. The police conduct an investigation. The counterfeiter says "The $100,000 I printed is gone. Since I destroyed the $100,000 I printed, I didn't really commit a crime. By the way, here's a $5,000 bribe so you ignore my crime." The police don't investigate further.
Did the counterfeiter commit a crime?
Imagine a banker receives a request for a $100,000 loan. He borrows $100,000 from the Federal Reserve at 5% interest, and issues the loan at 6% interest. The Federal Reserve printed the $100,000 it lent the bank. Actually, the Federal Reserve doesn't need to print physical currency; it just creates a credit and debit in the books. A year later, the banker collects $106,000, repays the Federal Reserve $105,000 and keeps $1,000 as his own profit.
What the banker and Federal Reserve did was perfectly legal. Is it morally any different from what the counterfeiter did?
Usually, the banker doesn't borrow from the Federal Reserve and just loans out money already on deposit. In that case, the banker keeps the full $6000, but he did have to pay interest to whoever deposited the money.
There's another significant point to be made here. The $5,000 that the Federal Reserve collected in interest is NOT realized by the government as income. I don't know where that money goes. If the government didn't outsource its money making authority to the Federal Reserve, a private corporation, this interest income would be enough to pay off the national debt and substantially reduce taxes.
The banker effectively printed new money when he made the fractional reserve loan. As above, the profit made due to printing new money went to the banker, and not to the government. Fractional reserve banking is a form of legalized counterfeiting.
Saturday, May 26, 2007
The Banker and the Counterfeiter
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3 comments:
Your first question: Did the counterfeiter commit a crime?
My answer: If crime is defined as doing something against the law then yes the counterfeiter definitely broke the law.
Your second question: What the banker and Federal Reserve did was perfectly legal. Is it morally any different from what the counterfeiter did?
My answer: Not an easy question to answer. The counterfeiter is a deceiver. If we say what the Fed did was no different morally from what the counterfeiter did then we are saying that the Federal Reserve is deceiving us when it lends the money.
Definitions are important. The counterfeiter's goal is to make money that seems "real". The intent is to deceive.
There is also the question of disclosure of the counterfeiter to the borrower. For the sake of brevity I am going to assume the counterfeiter does not disclose he/she is lending counterfeit money to the borrower. Deception.
My last point has to do with the lie itself. The counterfeiter is trying to convince everyone his money is no different than the money the Federal Reserve created.
I don't think they are morally the same. There is no deception by the Federal Reserve here.
Concerning "The $5,000 that the Federal Reserve collected in interest is NOT realized by the government as income." -- Do you have anything to back this up?
Your last point "Fractional reserve banking is a form of legalized counterfeiting."
Counterfeiting is deception. Is this deception? I think not because everyone who cares to be informed about how banks work is aware of this and the banks make no attempt to conceal this is how they work.
I guarantee you if you ask 100 people if they thought the money they just borrowed from a bank was in existence one second before they borrowed it, 99 of them would say yes. The fact that what bankers and counterfeiters do are de facto identical to each other is totally obfuscated everywhere but the internet. It is disingenuous to say otherwise, but that is beside the point. If you can defend what the banks do because you think everybody has the ability to know about it, then you would approve of what counterfeiters do as long as they tell their borrowers that the money is fake.
There is no difference. The net damage to the economy is totally identical.
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