by Gene Denardo

Created on: April 18, 2009   Last Updated: April 21, 2009

The Federal Reserve controls the monetary policy and the actual money supply of the economy. Since money is the "medium of exchange", that which we use to complete the majority of transactions within the economy, control of the money supply is at the very least "virtual" if not outright control of the economy. It is the most powerful "outside" force affecting the economy.

I use the word "outside" because the Federal Reserve itself is an "artificial" institution that would not take shape in a "natural" economy. Banks themselves, are simply storehouses for the surplus that is produced by a thriving economy and certainly have a necessary and "natural" function but the formation of a "central" bank such as the Federal Reserve is antithetical to a "free" economy.

In a truly free market economy, banks would compete with each other and prevent the formation of one central bank that has dominance over all others and the money supply itself. Banks essentially compete for "capital" which is produced by the actual real economy, the workers and factories. In a free economy, banks would constantly be choosing between profit created by paying less for this capital [lower interest rates to depositors and creditors] and better inflow of funds by paying greater interest. The outflow of funds in the form of loans to debtors and interest payment to creditors would likewise be constantly monitored to balance the bank's account and place them in proper standing with other banks.

This system would tend to "increase" rather than decrease the number of banking institutions, dependent on the production of capital by the economy. The greater production of capital, the greater need for banking and the greater competition that ensues. Any attempt to gain control of the industry by one bank would most likely result in insolvency. If large profits were attempted by taking great risks, the chances of success would be slim to zero. If profits were enabled by paying poor interest rates, then the depositors would simply abandon the bank for a higher return, leaving the bank without funds. It is a system of natural balance.

There is one foolproof method used to upset this balance: allow a bank to "manufacture" and control the money supply. This is exactly what the Federal government did in 1913 when it created the Federal Reserve. The bank of all banks was created and given the power of money creation and distribution.

What this did, and continues to do to this day, is turn the economic system on

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