An article which explains just how the Federal Reserve, which has no power to tax, does so!

[galtgulch]

Here is the link to the featured article at the Campaign For Liberty

http://www.campaignforliberty.com/article.php?view=141

<<<"Jerry Salcido [send him mail] is a trial and appellate lawyer in the San Francisco Bay Area and serves as the legal chair for the HomeSchool Association of California.

The Return of America’s Anathema

By Jerry Salcido

Published 07/18/09

Printer-friendly version

As most American school children know, one of the chief complaints that the American colonists had against the mother country was that they were taxed without their consent. "Taxation without representation is tyranny," a phrase often credited to the revolutionary James Otis, became an American maxim. Colonial Americans were anti-tax to begin with, but to be taxed by a parliament three thousand miles away without any say in the matter was intolerable.

The colonists revolted and after sacrificing their lives and treasure they defeated the pariah which is taxation without representation; and, consequently, the freest nation the world had ever seen was born. Victory, however, was short-lived, as taxation without representation was resurrected and transmogrified a little more than 100 years later, in 1913, in the form of the Federal Reserve System, America's third and most menacing iteration of a central bank.

Technically, the Federal Reserve has no power of taxation. In fact, it is not even a governmental entity or agency. It is a bank composed of unelected officials who answer to their shareholders... and who once in a while appear before Congress to discuss a whole lot about nothing. How then does the Federal Reserve effect taxation without representation? Through its manipulation of the money supply, that is, through varying degrees of continual inflation. As even Federal Reserve Chairman Ben Bernanke admitted, "Inflation is a tax."

The problem is that unlike those in 1776, Americans today—courtesy of the fractional reserve banking system led by the Federal Reserve—do not even realize they are being taxed without their consent. One reason for this general dearth of understanding concerning such vital subject matter is the perception that acquiring knowledge of the economics of central banking is equivalent to earning a PhD in quantum physics. Not so; and, if liberty is to return to America Americans must understand that the Federal Reserve is their new King George.

No Representation

To begin, calling it the "Federal Reserve" is a misnomer, because it is not "federal" (or a "reserve" for that matter, but that is not important for our purposes). Nonetheless, it does have loose, somewhat incestuous, ties to the federal government. As one federal circuit court explained it is "composed of both public and private elements." Committee for Monetary Reform v. Board of Governors of Federal Reserve System, 766 F.2d 538, 539 (D.C. Cir. 1985). The Federal Reserve System was created by Congress's 1913 Federal Reserve Act, and consequently derives its powers from the federal government. It consists of twelve districts each of which has one Federal Reserve Bank ("Fed Regional Banks") and more than 5,000 other privately owned banks, that is, your bank. The Federal Reserve System's powers are distributed primarily among three separate bodies, none of which are composed of elected officials: the Board of Governors ("Board"), the Federal Open Market Committee ("FOMC"), and the Federal Advisory Counsel ("FAC"). The Board governs the day-to-day business of the Federal Reserve and consists of seven members each of whom is appointed by the President with the advice and consent of the Senate. Board members serve fourteen year terms -- more than twice as long as U.S. Senators. While the original text of the Federal Reserve Act allowed the President to remove a Board member "for cause," that is no longer the case. Today Board members may only be removed through Congressional impeachment, a next to impossible process.

The FOMC consists of twelve members: the seven Board members and five additional members who are selected by the Fed Regional Banks and all of whom are either presidents or first vice presidents of the Fed Regional Banks.

The FAC, which advises the Board and the Fed Regional Banks, consists of one member from each Federal Reserve District and is selected by the board of the corresponding Regional Bank.

Likewise, members of the board of directors of each Fed Regional Bank are not elected officials. Instead, they are either selected by the commercial banks within the Federal Reserve District or are appointed by the Board.

Thus, within the Federal Reserve System there is not a single elected official who is accountable to the people. It is, for all intents and purposes, independent, and therefore, not representative, of the American electorate.

Inflation -- A Hidden Tax, but a Tax Nonetheless

According to the Federal Reserve Act, the purpose of the Federal Reserve System is "to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." (Hahaha. . . my apologies. . . that one always makes me laugh). According to a handy little calculator provided by the Federal Reserve Bank of Minneapolis, the Federal Reserve is not doing so well with its statutorily imposed obligation.

For example, a dollar today buys what $0.045 bought in 1913, when the Federal Reserve was created. In other words, a dollar earned in 1913 has been subjected to a 95.5% tax. Now granted, most people today never earned a dollar in 1913. So let's say a baby boomer began working in 1973 and immediately started saving for the future. Today each dollar he earned in 1973 is worth about 20 cents, that is, his dollar has been taxed 80%. This is an outrageous tax, but this taxation acts so subtly over time that it is scarcely noticed.

It is the Federal Reserve that is to blame for the dollar's depreciation and it carries out this hidden tax through its manipulating of U.S. monetary policy. The Federal Reserve utilizes three primary instruments in formulating and executing monetary policy: "1) open market operations; 2) regulation of member bank borrowings from the Federal Reserve Banks; and 3) establishment of member bank reserve requirements." See Reuss v. Balles, 584 F.2d 461, 463 (D.C. Cir. 1978). The net result of every one of these tools, however, is an increase in the number of circulating dollars. "The most flexible, and perhaps the most important, of these monetary policy tools is the open market instrument." Id.

The open market operation ("OMO") is the Federal Reserve's power to purchase U.S. bonds, notes, or any other U.S. obligation, gold, certain types of commercial paper, and "cable transfers and bankers' acceptances and bills of exchange." The twelve-member FOMC has the exclusive power over OMOs. It is the OMO that results in what Ron Paul and other free market economists describe as creating money "out of thin air."

You see, more often than not the Federal Reserve makes its open market purchases through brokerage houses, like Goldman Sachs for example. Goldman will purchase, say, $100 million worth of U.S. government debt via Treasury Bills ("T-bills"), which the federal government issues to fund its deficit spending. The Federal Reserve will then purchase those T-bills from Goldman by crediting Goldman's Federal Reserve bank account (which it is required to have by law) with $100 million of newly created money—$100 million which did not exist until the Federal Reserve "purchased" the T-bills. Thus, every dollar which is in circulation is proportionately devalued by the newly created dollars. To be overly-simplistic, if there were $1 billion in circulation each dollar would have been devalued by 10%, that is, a 10% indirect tax rate. (Click here for an interactive example of the OMO process, courtesy of our beloved central bank.)

But that is just the beginning of the insidious tax created by the actions of the Federal Reserve. In our example, Goldman now has $100 million in its Federal Reserve bank account which it previously did not have. By federal statute, Goldman like nearly all banking institutions, need only keep between 3% and 12% of its total deposits in reserve. This is called fractional reserve banking. Again to make things simple, let us say that the reserve requirement is 10%. Of the newly created $100 million Goldman can lend $90,000,000 and keep $10,000,000 in reserve. Now, to demonstrate the real taxing mechanism, the $90,000,000 loaned by Goldman will eventually end up being deposited in other banking institutions, but for our purposes let us say the entire amount is deposited in Chase. Chase can keep 10% in reserve ($9,000,000) per the statutory requirement and lend the remaining 90% ($81,000,000). This process repeats itself and can ultimately result in a net increase of 900 million new dollars on top of the original $100 million that was created by the Federal Reserve when it "purchased" the T-bills from Goldman. Net increase -- $1 billion of "new" money.

Like our current "progressive" income tax structure, the inflation tax does not tax everyone equally; in fact, it benefits some and causes detriment to others. Whoever receives the newly created money first (in our example Goldman) derives a benefit, because the newly created money has the same purchasing power as every other existing dollar in circulation. As that money changes hands and makes its way down through the economy, the market adjusts its pricing structure in order to compensate for the influx of new money. By the time (some of) those dollars arrive in your hands and mine, their purchasing power has decreased to the fullest extent and we, as a result, can buy less with them than Goldman could.

The increase in the supply of money -- via government deficit spending, the FOMC's OMOs, and fractional reserve banking -- is one reason why prices "increase." It is not that the goods and services you want to buy are necessarily gaining value due to a fluctuation in the supply or demand of the goods and services, it is that the supply of dollars goes up causing those dollars' purchasing power to go down.

Accordingly, as the money creation process is typically initiated by the government issuing debt (T-Bills, bonds, etc.), increased government deficit spending will generally result in an increase in the supply of money, and consequently, a decreased standard of living. The federal government, therefore, is able to finance its welfare-warfare state with only minimal increases in direct income and other tax rates because it is able to tax us through the back end by way of the Federal Reserve System. The only winners in such a system is Big Government and Wall Street. The losers are Lady Liberty, you, and me.

King George must be spinning in his grave with envy. If only he and his parliament had been smart enough to implement a central banking system based on fiat currency, and the colonists had been dumb enough to accept such a system, he may have been able to avoid the whole "taxation without representation" fiasco and hold on to his cherished American colonies.

Taxation without representation truly is tyranny and anathema to everything that is (was) America, but the anathema is back, only in different form. We, like our eighteenth century predecessors, therefore, have an important question to answer. Are we willing to accept taxation without representation?">>>

www.campaignforliberty.com 18 Jul 8AM 183,837 members, 7PM 184,008;19Jul 5AM 184,114; HR1207 cosponsors 271; S 604 cosponsors 13

Edited July 19, 2009 by galtgulch