Overview
The lecture explains the origins and functions of modern banking and the Federal Reserve, highlighting how the creation of money and debt affects individuals and national economies.
The Banking System and Debt
- Banks accept deposits and lend out money, making profit by charging interest on loans.
- Loans (debt) create money in the economy; more loans mean more money in circulation.
- Banks can lend more than they actually have in cash (fractional reserve banking).
- Giving loans to people with bad credit or who don't need them increases risk in the system.
- Credit cards and easy loans increase overall debt and money supply.
The Federal Reserve and Money Creation
- The Federal Reserve (the Fed) is a private bank, not a government institution.
- Banks borrow money from the Fed and must pay it back with interest.
- The Fed creates money by having it printed at the U.S. Mint, then loans it out.
- The U.S. government borrows money from the Fed and pays interest through taxes.
- The authority to print U.S. money originally belonged to the Treasury, but now belongs to the Fed.
Gold Standard and Inflation
- Money was once backed by gold, with paper notes representing gold held in vaults.
- Fractional reserve banking allowed banks to issue more paper money than they had gold.
- If everyone demanded their gold at once, the bank would collapse (a "bank run").
- Printing too much paper money without gold backing leads to inflation, reducing money's value.
Central Banks and Historical Context
- Private bankers tried to control national money supplies to increase their power.
- Early attempts to establish central banks in America met resistance from leaders like Jefferson and Jackson.
- The Federal Reserve was secretly created in 1913, giving it control over money issuance.
- The creation of the IRS followed, with taxes paying interest on government debt to the Fed.
Effects on Individuals and Economy
- Inflation and taxes together reduce real wealth, causing a loss of purchasing power over time.
- Wealth created by working can be eroded by inflation and taxation.
- The central bank accumulates power while the general population loses economic ground.
Resistance to Central Banking
- Some presidents, like Andrew Jackson and John F. Kennedy, tried to oppose central banking power.
- Kennedy signed an executive order to allow the Treasury to issue money, but it was overturned after his death.
- No subsequent president has successfully challenged the Federal Reserve's authority.
Key Terms & Definitions
- Fractional Reserve Banking — A system where banks lend out more money than they have in actual reserves.
- Federal Reserve (Fed) — The central bank of the United States, a private entity that controls U.S. money supply.
- Inflation — The decrease in the purchasing power of money, usually due to printing more money.
- Gold Standard — A monetary system where paper money is backed by a fixed amount of gold.
- Bank Run — When many depositors withdraw cash at the same time, risking bank insolvency.
- Debt — Money borrowed that must be repaid, usually with interest.
Action Items / Next Steps
- Review notes on the history of banking and the Federal Reserve.
- Prepare questions for class discussion about central banks and inflation.
- Read assigned materials on monetary policy and economic history (as specified by instructor).