This is an ongoing series of chapters in a book I'm writing. I advise that at a minimum you read the previous chapter about Freedom and Honest Trade before reading this one. 

In Chapter Six, I explained how our American system fails to follow the common law in its understanding of justice. I explained that justice is based on compelling the person committing a trespass to make compensation to the victim. In this chapter and the ones that follow, I want to show some other ways in which America failed to implement the common moral law. I also want to explain how this failure is being used to deceive us and destroy our freedom and rights of property.

Some of our Founding Fathers recognized what I am about to explain. For instance, John Adams, in a letter written to Thomas Jefferson in 1787, said, "All the perplexities, confusion, and distress in America arise, not from defects of the Constitution, not from want of honor or virtue, so much as from downright ignorance of the nature of coin, credit, and circulation."

In the last chapter, I discussed how a uniform standard of weights and measures is essential to free trade. I also talked about how governments of the past debased the value of gold and silver coins, which lead to inflation and in many cases the monetary collapse and downfall of civilizations. 

There’s a limit to how much you can debase a currency based on gold and silver, but there is virtually no limit to how much you can debase a medium of exchange that is nothing more than paper or numbers in a computer. Daniel Webster recognized this when he said; "Of all the contrivances devised for cheating the laboring classes of mankind, none has been more effective than that which deludes him with paper money." 

We often hear people praise capitalism and equate it with a free market or free enterprise system. However, I don’t agree that our current capitalistic society is a genuine system of free enterprise. It can’t be because, as I am about to point out, we do not have an honest money system and without an honest money system there is no such thing as completely free trade.

Those who criticize the capitalistic economic system do so claiming it makes the rich, richer, and the poor, poorer. They are absolutely correct but err in thinking this is caused by free markets and that government control of the free market is the solution. I’ve been to many foreign countries and what I see is that the opposite taking place. In countries where the government controls the economy, the division between rich and poor is even greater than it currently is in America. we first have to understand what the problem really is, which is what I want to do in this chapter. 

Bank Notes and Paper Money

Let’s begin by examining the origins of paper money. People have always had to guard their property against those who would steal it from them. Gold and silver coins are heavy and hard to store, let alone carry around in any large quantity. To solve this problem, people created vaults where people could place their gold and silver (and other valuables) for safekeeping. It makes perfect sense that people would be willing to pay someone who could help guard their valuables. 

A person depositing their gold or silver into the vault will need a receipt. The vault, which I’ll refer to hereafter as the bank, issues the receipt in the form of a note. A note is also known as a promissory note because it is a promise to pay something to someone. Legally a promissory note has four parts. It says who, will pay what, to whom and when.  So, when a person would deposit their gold and silver at the bank, the bank would give them a promissory note as a receipt. The bank note would say something to the effect that the bank (who) will pay to the bearer (to whom) 1, 5, 10, 30 or 100 dollars in silver or gold (what) on demand (when). The note is evidence that the bank owes the bearer a debt.

When a person wanted to redeem the note and collect the gold or silver, they took the note to the bank which was then obligated to give them the gold or silver. People found it much easier to trade these notes as payment for goods and services than gold or silver coins. Thus, the notes themselves were circulated as if they were money. People accepted the paper notes as money because they assumed they could take them to the bank and redeem them for the actual gold and silver coins.

Savings Accounts and Loans

None of this would be problematic if it weren’t for the next step taken by the bank. The bank didn’t just store the gold or silver, it used the gold and silver as a backing for more debts in the form of loans. This use of the deposited money for loans is part of our current capitalistic economic system. I’ll explain capital and the problems with charging interest on monetary loans (something traditionally called usury in the Bible) in the next chapter, but for now, let’s just concentrate on the nature of the loans.

Instead of having people pay the bank to store their gold and silver, the bank offered people interest on their money in exchange for the bank being able to loan it to other people. This seems like a good idea were it not for the idea that people didn’t fully understand that they were putting their money at risk. 

They were still trading the notes that told them the money was still in the bank, but it wasn’t. Most of it had been used to back loans to other people. So, the people who had received the loan had the money, the people holding the banknotes for their deposits thought they still had the money.

For ease of discussion, let’s say that someone deposited $1,000 in gold coins in the bank. They receive $1,000 worth of banknotes promising to return the gold, which they start circulating as money. Now, let’s say the bank issues a loan for 90% of that amount. So, they issue a loan for $900. The person deposits the $900 in gold coins into the bank and receives $900 in banknotes. So, although the bank only has $1,000 in actual gold, there are now outstanding notes for $1,900 worth of gold being traded in the community. 

Of course, the loan is probably secured, meaning that some form of property was pledged as collateral, such as a home, car, or business. So, if the borrower defaults on payments the bank can seize the property and sell it to recover their money. However, the fact remains that only a fraction of the actual gold originally deposited in the bank is available to cover the notes. So, as long as neither the original depositor and the person who received the loan don’t actually try to redeem the notes, everything is fine. The borrower eventually pays back the loan, with interest, and the bank shares that interest with the depositor.

Nevertheless, the “money supply” has been artificially inflated by this process. One thousand actual dollars of gold has now become one thousand, nine hundred paper dollars. Thus, the banking process actually debases the money supply and creates inflation, particularly in the assets used to secure loans.

Leveraging Assets

The problem is much worse than what is described above. Why? Because the borrower deposits the loan he received back into the bank. Since the loan is often secured by some type of asset (such as a home or a business) these notes are now assets which the bank can leverage as the basis for more loans.

The assets used to secure the loans are called capital. Banks leverage their capital by issuing loans against it. A financially healthy bank is typically leveraged around ten or twelve to one. If we were still using a gold standard, what this actually means is that for every one dollar of gold the bank actually held, there would be banknotes outstanding (in the form of secured and unsecured loans) to the tune of ten to twelve dollars.

Thus, through trading notes (debt) as if it were money, the banking system could literally turn $1,000 of actual physical money (gold or silver) into $10,000 to $12,000 of banknotes. As long as they held enough capital reserves to redeem the notes that were actually turned in, the system continues to function and nobody would notice the debasement of the currency because they don’t recognize the source of the inflating prices of homes, cars and other assets the bank is leveraging to create loans. 

However, if people began to lose faith in the value of the notes, there would be a “run on the bank.” The bank can’t redeem the notes unless it seizes the leveraged assets, so it has to close its doors and perhaps declare bankruptcy. Thus, the people would lose all inflated value of the paper notes. This causes a drop in prices and a shortage of money, something known as a financial depression.

The Debasing of the American Money System

Claiming to “solve” the problem of banks going insolvent the Federal Reserve was incorporated as a privately held bank under the authorization of the United States government.  The Federal Reserve was given control over all the banks in the United States and paper notes became even more widely used as if they were money. However, the notes were still, theoretically at least, backed by gold and silver. For example, I still have an old silver certificate, which says “the United States Treasury (who) will pay to the bearer (to whom) one dollar silver (what) on-demand (when).”

Then, in 1933, the government acted to safeguard the banking system (which was over-leveraged and in danger of collapsing due to people wanting to redeem their notes for gold). They passed a law that gave the secretary of the Treasury the power to require all individuals and corporations to hand over all their gold coins, gold bullion, or gold certificates (gold banknotes) if it was necessary to protect the currency system in the United States.

Americans continued to have silver coins until 1965 when President Lyndon Johnson signed a bill removing silver coins from circulation. They were replaced with coins made from copper and nickel. The problem arose because the value of the paper dollar had declined so much that one dollar of silver was worth more than the paper dollar. 

In 1971 Richard Nixon completely removed the gold backing of any United States paper money. This was another milestone in the debasement of the American monetary system. Since the creation of the Federal Reserve, the American “dollar” has lost 96% of its value. Documentation of this information can easily be found on the internet. My focus here is to point out that this really means that 96% of the wealth of ordinary Americans has been stolen by this corrupt and immoral monetary system. 

Federal Reserve Notes

If one examines a Federal Reserve Note, one will quickly be able to see that all the traditional characteristics of a promissory note have been removed. Instead of saying who will pay what to whom and when, it simply says, “This note is legal tender for all debts public and private.” The understanding of the dollar as a unit of measurement is gone.

To see how ridiculous this is, let’s suppose that I give you a “note” that says, Steven Horne agrees to pay the holder of this note, on-demand, one gallon. The question would rapidly arise, a gallon of what? Water, gasoline, oil, milk? The term gallon is meaningless if we don’t know what substance I’m offering you a gallon of. 

The same is true for the term dollar. The illusion of money which has been fostered on just about the entire populous is that a piece of printed paper has some kind of inherent value. Since a dollar is a measurement, we need to know what we have a dollar of—gold, silver, copper, nickel, tin? It makes a difference. 

However, in reality, we have a dollar of nothing. In fact, when one dissects what the dollar is, we’re actually trading debt. We’re actually giving someone a debt, owed to the Federal Reserve, in exchange for goods and services. 

In unpacking this, I first need to explain what a tender is. Referring back to the example of barter I made earlier, let’s suppose I offered you five bushels of wheat in exchange for one sheep. The bushels of wheat are the tender I’m making for the exchange. In other countries, you often haggle with merchants over the price. They ask for an overly inflated price and you make a lower tender. They counter with a lower price and you negotiate until you tender a price they accept.

In other words, a tender is an offer of payment. If we translate what the Federal Reserve Note is saying, it literally means, “this promise to pay (note) is a legal offer of payment.” It isn’t a payment, it’s an offer of payment and the payment is a note, which is a promise to pay. Confusing? It’s intended to be because it’s a deception and it gets worse because Federal Reserve Notes are not put into circulation, they are loaned into circulation. 

Debt Slavery

What this means is that every dollar you have is not a note, it is actually a bill. When you get a bill in the mail are you getting a promise to receive something or a notice that you need to pay something? We all know that a bill is a paper that says you owe something, right? So, that’s why they are called dollar bills. 

You have to realize that the Federal Reserve Notes you hold aren’t your property. They belong to the Federal Reserve. They were loaned into circulation, which means they are owed back to the Federal Reserve. What’s worse, they were loaned with interest. 

This means that all the money in circulation is owed to the Federal Reserve with interest. The problem is, that if everyone returned all the paper money to the Federal Reserve, they would still owe the interest to the Federal Reserve. But how could the debt ever be repaid, then? It can’t because the total amount of debt owed to the Federal Reserve exceeds the total amount of Federal Reserve Notes in circulation. As I was writing this a quick internet search revealed that there are about 1.5 billion in Federal Reserve Notes in circulation and 55 trillion dollars in public and private debt. 

This means that there simply isn’t enough paper money in the entire country to even begin to pay all the debt. Thus, the only way to keep the economy afloat is to continue to inflate the money supply and loan more money into existence creating more debt and higher prices. This has been called debt slavery. 

Once you understand this, you will readily see why the rich get richer and the poor get poorer. You can also readily see why the entire system is an immoral scam. 

The Capitalistic Banking System is Immoral

Just think about it. If you had $100 in gold coins and were able to issue promissory notes as loans for $1,000 worth of loans based on your $100 worth of gold coins, you’d really have a racket going, wouldn’t you? Let’s also imagine that at some point your racket starts to be exposed because you can’t redeem all the notes. So, with the force of government backing you, you’re able to say, nobody has a right to your gold, they just need to accept your notes as money. Now, you can create money out of thin air and put it into circulation as much as you like (maybe with a little government oversight, but that’s not a big problem since the government borrows from you, too). 

When put in this light, we can readily see that the entire system is immoral and unfair. It completely violates the principle of honest weights and measures and a free market where people can honestly exchange goods and services. Just on that basis alone the entire system could be taken down and replaced with an honest one anytime the people woke up and realized what was being done to them. I believe the real solutions lie in a return to Old Testament principles of common law, which I discuss in the next chapter. 

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