Money plays a critical role in the economy, functioning as a medium of exchange and solving what economists call the “double coincidence of wants.” This refers to the challenge in a barter system where both parties must want what the other has, a significant limitation on market size and efficiency.  As far back as Goethe, the benefits of money were appreciated, particularly its ability to simplify trade and record-keeping.  “What advantage does he derive from the system of book-keeping by double entry?  It is among the finest inventions of the human mind,” Goethe observed.  The system of money not only facilitates trade but also expands the scope of economic activity.

In an ideal banking system, there are two types of deposits: demand and time.  A demand deposit allows you to withdraw your money whenever you wish without earning interest.  Time deposits, on the other hand, lock your money away for a specific period but reward you with interest in return.  Time deposits are the foundation of loans.  Banks lend out money based on these deposits, and the more time deposits there are, the lower interest rates tend to be.  In this scenario, banks charge a fee for maintaining your account, a small price compared to the hidden cost of inflation in today’s system.

However, our banking system doesn’t operate on these honest principles.  Instead, it runs on a mechanism known as “fractional reserve banking,” which is legalized fraud.  While this might sound extreme, the reality is that under this system, banks can lend out more money than they physically have in their vaults.  In a 100 percent reserve system, all deposits would be backed by actual reserves, but in fractional reserve banking, banks are only required to keep a small fraction of deposits in reserve, meaning multiple people can lay claim to the same money.  This sleight of hand would be considered fraud in any other industry, but it’s the backbone of modern banking.

Under fractional reserve banking, not only do banks lend out money that doesn’t exist, but they also create new money through practices like quantitative easing.  Although the terminology may sound complex, it’s simply a way to disguise what is counterfeiting.  Every time new money is created, the value of each existing unit of money decreases, eroding the purchasing power of your savings, retirement, and wages.  This gradual theft, known as inflation, disproportionately harms those on fixed incomes, such as retirees.  Politicians and bankers often point to rising prices as inflation, but that’s merely the symptom.  The real cause is the continuous creation of new money.

The Federal Reserve, which has the exclusive power to legally counterfeit, plays a central role in this process.  Unlike money that arises naturally on the free market as a commodity with intrinsic value, the Fed’s money is created out of thin air.  Historically, money had value because it was tied to something valuable, like gold or silver, which was used in the barter economy.  This principle is known as the “Regression Theorem,” which states that money must have originated as a commodity before it became widely accepted as a medium of exchange.

The hidden tax of inflation is far more insidious than any visible taxation.  While politicians debate tax cuts or increases, the real loss of wealth happens silently as inflation eats away at the value of money.  It’s time to recognize the true culprit behind the devaluation of our hard-earned savings: the system of fractional reserve banking and the unchecked power of the Federal Reserve.  If we want to protect the value of money, we must return to an honest banking system and a currency backed by real, tangible assets, not the whims of central bankers.