Federal Reserve System

In addition to distorting the credit market by passing laws that favor certain types of loans and certain types of borrowers, government also influences the flow of credit in a more fundamental manner: through its control of interest rates. For almost 100 years, the Federal Reserve (in theory a private bank, but in practice an extension of the Treasury Department), has set the base level for interest rates upon which the entire rate structure rests.

By setting its "federal funds" rate higher or lower, the Fed (as the bank is known) does not dictate the particular rate any bank offers for every loan, but it does move the entire market up or down. Banks will always charge a higher rate to the public than they pay the Fed to borrow money. So when the Fed raises or lowers its rates, businesses and individuals will pay more, or less, to borrow.

The Fed was given this authority in order to keep the economy running smoothly in good times and bad. The theory goes that the collective wisdom of Fed economists could help keep the economy on track by determining the optimal interest rate for any particular moment in time.

For instance, the Fed could boost a struggling economy by lowering interest rates to the point where businesses and consumers would be more inclined to borrow. In very good times, when overconfidence often leads to foolishness, the Fed is supposed to do the opposite and raise rates so that people will think twice about taking out loans.

This system has two massive flaws.

First, it assumes that a small group of people at the Fed can make better decisions than millions of people making independent decisions (also known as "the marketplace") about the proper level of interest rates. But, the Fed has "no skin in the game," as the saying goes. It does not generate the savings and will not suffer if loans go bad. The people saved the money and the bank's profits depend on its wise stewardship. Without this connection, lending is inherently inefficient.

Second, the Fed's decisions are always determined by political, rather than economic, considerations. As low rates tend to make the economy appear better on the surface, push down the cost of servicing mortgages and other loans, and help financial firms make money, there are a great many people who want lower rates. Presidents seeking reelection will always bang the drum for lower rates, and they will pressure the Fed to help out. On their part, Fed policy makers naturally want to be seen as the good guys who help the economy, not the tight-fisted Scrooges who push it into recession.

The members of society who would favor high rates, most notably the savers, have no well-organized interest group. Their voices are never heard. As a result, there is a consistent bias toward holding rates too low, rather than too high. Remember, low rates encourage borrowing and discourage saving. Not surprisingly, the United States has been transformed from a nation of savers to a nation of borrowers.

— Peter Schiff; How an Economy Grows and Why It Crashes

The Fed, as the Federal Reserve is known, was originally given the mission of establishing an "elastic money supply." The idea would be that the Fed could expand or contract the amount of money in circulation to correspond with economic activity. It was thought that such movements could hold prices steady through good times and bad.

Even if such a mission were a good idea to begin with, it's easy to see that the Fed has utterly failed in accomplishing it.

Over the past 100 years, the dollar has lost more than 95 percent of its value. So much for price stability! The truth is that the Fed now exists for the sole purpose of providing the inflation necessary to allow the government to spend more than it collects in taxes.

— Peter Schiff; How an Economy Grows and Why It Crashes

Many of these dollars held by foreigners are typically deposited in American banks, where they can be borrowed by Americans. That way we can spend even if we don't save.

— Peter Schiff; How an Economy Grows and Why It Crashes

In 1913, the Federal Reserve was created, even though the founding fathers, creators of the U.S. Constitution, were very much against a national bank that controlled the money supply. Without proper financial education, few people know that the Federal Reserve is not federal or American, it has no reserves, and it is not a bank. Once the Fed was in place, there were two sets of rules when it came to money: One set of rules for people who work for money, and another set of rules for the rich who print money.

— Robert Kiyosaki; Rich Dad's Conspiracy of The Rich

In 1913, the creation of the Federal Reserve System granted the very rich of the world the power to control the money supply of the United States and fulfilled the spirit of Rothschild's sentiments. Many people don't know or understand that the Federal Reserve System is not a government institution or a bank, nor does it have any reserves. Rather, it is a banking cartel run by some of the most powerful men in the financial world. The creation of the Fed was basically a license to print money.

— Robert Kiyosaki; Rich Dad's Conspiracy of The Rich

Another reason the Federal Reserve System was created was to protect the biggest banks from failing by providing liquidity to those banks when they were in financial trouble, which protected the wealth of the rich, not of the taxpayers.

— Robert Kiyosaki; Rich Dad's Conspiracy of The Rich

The year 2013 will mark the 100th anniversary of the Federal Reserve System. For nearly one hundred years the Fed has pulled off the biggest cash heist in the world. This cash heist is a bank robbery where the robbers do not wear masks, but rather business suits with American flag pins in the jacket lapels. It is a robbery where the rich take from the poor via our banks and our government.

— Robert Kiyosaki; Rich Dad's Conspiracy of The Rich

The Federal Reserve System gave politicians the power to borrow money, rather than raise taxes. Debt, however, is a double-edged sword that results in either higher taxes or inflation. The U.S. government creates money, rather than raising taxes, by selling U.S. bonds, IOUs from the taxpayers of the country that eventually have to be paid for with higher taxes—or by printing more money, which creates inflation.

— Robert Kiyosaki; Rich Dad's Conspiracy of The Rich

Some people say the creation of the Federal Reserve was unconstitutional. They think the Fed's creation has harmed the world economy—and it has. There are others who say the Federal Reserve System is the best thing that has ever happened to the world. They say that it has helped bring wealth to the world like never before—and it has.

— Robert Kiyosaki; Rich Dad's Conspiracy of The Rich

1913: The Federal Reserve is formed. The Federal Reserve is not American, not federal, has no reserves, and is not a bank. It is controlled by some of the richest and politically influential families in the world. It has the power to create money out of thin air.

Institutions like the Federal Reserve have been staunchly opposed by designers of the Constitution, and by presidents such as George Washington and Thomas Jefferson.

— Robert Kiyosaki; Rich Dad's Conspiracy of The Rich