The Federal Reserve System is the focus of criticism and conspiracy theories. Some critics say that the name was intentionally chosen to deceive and fool the U.S. citizens into acceptance. There are a variety of conspiracy theories about the Federal Reserve, some alleging that Reserve employees conspire against the government, some alleging that the government conspires with the reserve, or that banks conspire with the reserve against the government. The most popular theories are:

• to make a profit by "skimming" a small percent of the $11 trillion U.S. economy. Although the Federal Reserve does charge member banks for its services, it claims to give the proceeds back in the form of dividends to the banks and the government. Various conspiracy theories claim that either reserve employees or secret persons steal this money. ([1])
• to redistribute wealth through the sales and purchase of the U.S. national debt (currently about $7 trillion). ([2])
• to fix currency exchange rates with other country central banks throughout the world to generate $1 billion a day in profits
• to cartelize the banking industry
• to monopolize the creation of new money
• to redistribute wealth through the process of inflation.

Some of these critics say that the U.S. Congress was tricked by the world elite into creating the Federal Reserve System in 1913 for the purpose of money control through inflation (invisible taxation of the masses), extremely high and profitable interest rates, and outright taxation through the creation of liens and bonds paid for by U.S. citizens. These critics argue that, through unconstitutional changes in law, the words income (corporations) and wage (people's paychecks) were redefined. Taxation enforcement (Internal Revenue Service) could now force U.S. citizens to pay taxes, and fees and fines under penalty of law, possible arrest and imprisonment.

Other critics, e.g. Austrian School economists, conclude that the Federal Reserve and the federal government partner to confiscate wealth from those who earned it. Newly created money can be spent by the government purchasing real goods and services, thus diverting resources away from those who would have otherwise consumed them, and devaluing existing money. This, according to the Austrians, amounts to a "hidden tax ". Newly created money can also be loaned by banks, who are then owed interest payments, money which can then be spent on real goods, again consuming resources which would have otherwise been consumed by others. Because paper money is intrinsically worthless, printing new money can only redistribute existing wealth rather than actually creating new wealth, according to this branch of economics.

Another presentation of the "hidden tax" idea is that if a government borrows 1 million dollars, it can allow inflation so that when its time to repay that money a million dollars is worth far less. Economic policy is generally to fight inflation, although certain critics believe that the government and fed do not fully attempt to fight inflation for this reason.

Fractional reserve banking

Main article: fractional reserve banking

According to critics, "fractional reserve banking" amounts to fraud and theft, and central banking is the method by which this fraud and theft are cartel-ized and institutionalized.

Originally, a bank was a warehouse, a safe place to store valuables, especially gold and silver money. A fee was charged for the service, and warehouse receipts were issued as a claim ticket on the valuables stored. Because everyone knew that these receipts were "as good as gold", the receipts themselves began to be traded as money.

Bankers noticed that on any given day, only a small fraction of the warehouse receipts were redeemed for money, so the unscrupulous among them began printing counterfeit receipts, i.e. receipts that were not matched by an actual deposit of gold or silver. The bankers were then able to either spend the counterfeit receipts themselves, or loan them out and charge interest. Thus the total supply of money could be enlarged very easily, and was an obvious method to enrich the unscrupulous bankers, say critics. The cost of this enrichment was saddled on everyone else, who now found their existing money to be worth less and less as the overall supply of money grew greater and greater.

The more counterfeit receipts that were printed and circulated, the more people would show up to redeem them in gold or silver, the more the actual bank reserves would be depleted until, at some point, the bank would be bankrupt and legitimate depositors would be left holding receipts that were irredeemable. A situation where depositors showed up to the bank in large groups to demand their money became known as a “bank run” or a “run on the bank”. Clearly, the legitimate depositors were victims of fraud and theft, while whoever printed counterfeit reciepts was guilty, assuming the story to be true.

Critics of central banking, sometimes dismissed as "conspiracy theorists", enlarge the story to include several competing banks. Each bank begins issuing its own warehouse receipts, now known as “paper money”. Paper money is called "fractional money" when only a fraction of the total supply of money is backed by a precious commodity. Bank owners have a strong incentive to create as much fractional paper money as possible, because it is an effective method of self-enrichment. However, if bank #1 creates significantly more paper money than bank #2, then bank #2 will end up holding a large amount of bank #1’s paper money. Eventually it will wish to redeem this for real gold or silver, thus bankrupting bank #1.

The problem then, as bankers saw it, was to design a system where all competing banks could expand their money supplies in unison. As long as bank #1 has claims against bank #2 that are equal to the claims that bank #2 has against bank #1, then the claims simply cancel each other out. That way, with equal amounts of outstanding debt, in principle all the bankers could enjoy spending an endless source of new and additional paper money, without having to redeem much of anything.

As critics and conspiracy theorists tell it, many attempts at banking cartels were implemented, where supposedly competing bankers conspired with one another to print equal amounts of paper money. These cartels were ultimately in vain, because of the ever-present counter-incentive to break the cartel, print less paper money than the competing bank, and end up with the ability to withdraw real gold or silver from the competitors vault, possibly bankrupting them in the process.

The only way to orchestrate the expansion and contraction of credit and money on a large scale is to make it a matter of law. Private citizens must be forced to accept a single type of paper money in payment of debt or contract, and paper money must be irredeemable for anything of real value. When paper money has been completely separated from any commodity, it is known as "fiat money" (money by decree). Central governments in all industrialized nations have now achieved just such a situation, in partnership with the large commercial banks. Skeptics point out that government leaders would also have a strong incentive to bring about pure fiat money, because it would enable those leaders to spend additional revenue without having to raise taxes directly.

Proponents of the Austrian school of economics conclude that manipulation of the money and credit supply is the cause of the boom-bust business cycle. Some even go so far as to claim that major wars would be impossible without central banking, because citizens are unlikely to support such costly endeavors when they are made to pay for them up front.

New money is created by the issuance of new debt, and injected into the banking system from a single central location, thus ensuring precisely the symmetrical, uniform expansion of the money supply long desired by the bankers. Critics, skeptics and conspiracy theorists argue that the monopolistic power to create new money costlessly, “out of thin air”, is in fact the power to transfer real wealth away from consumers, and place it squarely in the hands of those with the money monopoly, i.e. the central government itself, the large commercial banks, and government contractors.

See also

• Gold standard
• Monetary policy