A revolution before breakfast.

Like many homeschooled students, my introduction to the concept of inflation came from Richard J. Maybury, better known as Uncle Eric. His explanation of inflation is that it is the result of the government increasing the amount of currency in circulation.

But while that may be a good introduction to the topic, it’s not a full view. Because even more than governments, another entity causes inflation. John Médaille explains:

Henry Ford once said that if the public understood how money was created, “there would be a revolution before breakfast.” And what is this process that Ford found so appalling? It is simply this: before you sign the mortgage to buy your home, the note to buy your car, or the credit slip to buy a hamburger, the money to buy the home, the car, the burger does not exist; it comes into existence by the very act of borrowing it. The bank does not lend out the money it receives in deposits; this it holds as a reserve against losses, in a process known as “fractional reserve banking.” The money you deposit is the “fractional reserve,” and against this reserve they lend 10 times as much which they create ex nihilo, by pressing a few buttons on a computer. A banker will never lend reserves. Indeed, a bankster is more likely to lend you his wife than the bank’s reserves: it is merely immoral to lend his wife; it is illegal to lend the reserves. And in banking, morality counts for little.

98% of the money supply is created by the banks as loans; the government creates only the coinage.

Now while I tend to side with Hamilton over Jefferson when it comes to the existence of banks, this is somewhat concerning. But what role, if any, should the Government play?

In his book In Fed We Trust, Wall Street Journal editor David Wessel gives a brief history of the federal reserve system: it was established to increase governmental oversight over the formerly private banking structure. Formerly, inflation rates were entirely determined by the most powerful banks acting with little to no oversight. In at least one instance, an economic meltdown was prevented entirely because of the goodwill of the largest banker--and Congress was wary of that much economic power in the hands of one person. Hence, the Fed.

But the question remains, what are we to do now? What about some sort of debt forgiveness? An economic reset, so to speak, freeing up huge amounts of resources currently tied up in paying off debts. After all, the debt of the general population is larger than the federal debt.

Or what about a targeted form of forgiveness. Student loan forgiveness was one of the demands (insofar as there were any organized demands) of the Occupy movement--but might there be something to that? After all, we’re seeing an entire generation of people starting out behind. And some think it may be the next financial bubble to burst. Not only has the Federal government borrowed more than we can ever pay back in one generation, but many of my generation, expected to do taxpaying, is entering the workforce with a significant negative net worth. How is that sustainable?