"Three counterfeiters are discovered. The first one is a
middle-class man who owns a cheap offset printing press.
He has printed 500 $20 bills and spent them into
circulation.
The second one is a U.S. government official. He
works for the Bureau of Engraving and Printing. He has
printed up a million $20 bills, and the government has
spent them into circulation.
The third is the Chairman of the Board of a multibillion-
dollar New York bank. His bank has loaned a
billion dollars of fractionally reserve bank money to
Mexico’s government-owned petroleum company,
Pemex. The price of oil has collapsed, so Pemex can’t
pay its bills.
What happens to the three counterfeiters? The first
man is convicted of counterfeiting and is sent to jail.
The second man works until age 65 and is given a
pension.
But what about the third man, the chairman? Here
is where it could get interesting. The third man goes to
the nation’s central bank, the Federal Reserve System,
which in turn calls the Mexican government, which
immediately prints a Mexican bond for $25 million,
which is then bought by the Federal Reserve System with
electronic money created out of nothing. This Mexican
bond then becomes part of the “legal reserve” which
supposedly undergirds the U.S. monetary system. (This
was made legal in the infamous Monetary Control Act
of 1980, against which only 13 congressmen voted.)
The Mexican government sends the money to Pemex,
which then remits $25 million to pay this quarter’s interest
payment to the New York bank. Three months from now,
another $25 million will fall due. The chairman of the
New York bank gets a round of applause from the bank’s
board of directors, and perhaps even a $100,000 bonus
for his brilliant delaying of the bank’s crisis for another
three months.
The $25 million then multiplies through the U.S.
fractional reserve banking system, creating millions of
new commercial dollars in a mini-wave of inflation.
This scenario could really take place, given United
States law. Is this system just? Would you say that the
law unduly respects neither the mighty nor the poor man?"