THOUGH THE FOLLOWING EPISTLE WAS IN ANSWER TO A PREVIOUS STORY OF MINE UNDER THE SUBJECT "ARE OUR TAX POLICIES DETRIMENTAL ???"
I FELT IT TOO INPORTANT TO ALLOW THIS TO BE INCLUDED AS AN ADJUNCT TO MY ORIGINAL, I THOUGHT IT COULD AND SHOULD STAND ALONE.
THERE IS ENTIRELY TOO MUCH MEAT, DETAILED AND BACKED UP, TO DESERVE TO BE AN UNDERLING, SO I'M POSTING THE ARTICLE BY RONN IN IT'S ENTIRETY. HOPE THIS IS OK WITH EVERYONE, O.K. ???
Bob H.
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The following e-mail was sent to you via Rumor Mill News Reading Room Forum from Ronn (ronn@cognisurf.com)
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Re: ARE OUR TAX POLICIES DETRIMENTAL ???
WHAT IS THE MANDRAKE MECHANISM? IT'S THE MOST IMPORTANT FINANCIAL LESSON OF YOUR LIFE! WHY? IT'S NOT PART OF ANY CURRICULUM.....
From one of the Most Important books in the world: "The Creature
from Jekyll Island" I AGREE, I HAVE A COPY, TOO. Bob H.
March 9, 2003
From Chapter 10, "The Creature from Jekyll Island"
THE MANDRAKE MECHANISM...What is it? It is the method by which
the Federal Reserve creates money out of nothing; the concept of
usury as the payment of interest on pretended loans; the true
cause of the hidden tax called inflation; the way in which the
Fed creates boom-bust cycles.
In the 1940s, there was a comic strip character called Mandrake
the Magician. His specialty was creating things out of nothing
and, when appropriate, to make them disappear back into that same void. It is fitting, therefore, that the process to be described in this section should be named in his honor.
In the previous chapters, we examined the technique developed by
the political and monetary scientists to create money out of
nothing for the purpose of lending. This is not an entirely
accurate description because it implies that money is created
first and then waits for someone to borrow it.
On the other hand, textbooks on banking often state that money is created out of debt. This also is misleading because it implies that debt exists first and then is converted into money. In truth, money is not created until the instant it is borrowed. It is the act of borrowing which causes it to spring into existence. And, incidentally, it is the act of paying off the debt that causes it to vanish. There is no short phrase that perfectly describes that process. So, until one is invented along the way, we shall continue using the phrase "create money out of nothing" and occasionally add "for the purpose of lending" where necessary to further clarify the meaning.
So, let us now...see just how far this money/debt-creation
process has been carried -- and how it works.
The first fact that needs to be considered is that our money
today has no gold or silver behind it whatsoever. The fraction is not 54% nor 15%. It is 0%. It has traveled the path of all
previous fractional money in history and already has degenerated
into pure fiat money. The fact that most of it is in the form of
checkbook balances rather than paper currency is a mere
technicality; and the fact that bankers speak about "reserve
ratios" is eye wash. The so-called reserves to which they refer
are, in fact, Treasury bonds and other certificates of debt.
Our money is "pure fiat" through and through.
The second fact that needs to be clearly understood is that, in
spite of the technical jargon and seemingly complicated
procedures, the actual mechanism by which the Federal Reserve
creates money is quite simple. They do it exactly the same way
the goldsmiths of old did except, of course, the goldsmiths were
limited by the need to hold some precious metals in reserve,
whereas the Fed has no such restriction.
The federal reserve is candid.
The Federal Reserve itself is amazingly frank about this process.
A booklet published by the Federal Reserve Bank of New York tells us: "Currency cannot be redeemed, or exchanged, for Treasury gold or any other asset used as backing. The question of just what assets 'back' Federal Reserve notes has little but bookkeeping significance."
Elsewhere in the same publication we are told: "Banks are
creating money based on a borrower's promise to pay (the
IOU)...Banks create money by 'monetizing' the private debts of
businesses and individuals."
In a booklet entitled Modern Money Mechanics, the Federal Reserve Bank of Chicago says:
In the United States neither paper currency nor deposits have
value as commodities. Intrinsically, a dollar bill is just a
piece of paper. Deposits are merely book entries. Coins do have
some intrinsic value as metal, but generally far less than their
face amount.
What, then, makes these instruments -- checks, paper money, and
coins -- acceptable at face value in payment of all debts and for other monetary uses? Mainly, it is the confidence people have that they will be able to exchange such money for other financial assets and real goods and services whenever they choose to do so. This partly is a matter of law; currency has been designated "legal tender" by the government -- that is, it must be accepted.
In the fine print of a footnote in a bulletin of the Federal
Reserve Bank of St. Louis, we find this surprisingly candid
explanation:
Modern monetary systems have a fiat base -- literally money by
decree -- with depository institutions, acting as fiduciaries,
creating obligations against themselves with the fiat base acting in part as reserves. The decree appears on the currency notes: "This note is legal tender for all debts, public and private."
While no individual could refuse to accept such money for debt
repayment, exchange contracts could easily be composed to thwart
its use in everyday commerce. However, a forceful explanation as
to why money is accepted is that the federal government requires
it as payment for tax liabilities. Anticipation of the need to
clear this debt creates a demand for the pure fiat dollars.
Money would vanish without debt.
It is difficult for Americans to come to grips with the fact that their total money-supply is backed by nothing but debt, and it is even more mind boggling to visualize that, if everyone paid back all that was borrowed, there would be no money left in existence.
That's right, there would not be one penny in circulation -- all
coins and all paper currency would be returned to bank vaults --
and there would be not one dollar in any one's checking account.
In short, all money would disappear.
Marriner Eccles was the Governor of the Federal Reserve System in 1941. On September 30 of that year, Eccles was asked to give
testimony before the House Committee on Banking and Currency. The purpose of the hearing was to obtain information regarding the role of the Federal Reserve in creating conditions that led to the depression of the 1930s.
Congressman Wright Patman, who was Chairman of that committee, asked how the Fed got the money to purchase two billion dollars worth of government bonds in 1933.
This is the exchange that followed.
ECCLES: We created it.
PATMAN: Out of what?
ECCLES: Out of the right to issue credit money.
PATMAN: And there is nothing behind it, is there, except our
government's credit?
ECCLES: That is what our money system is. If there were no debts
in our money system, there wouldn't be any money.
It must be realized that, while money may represent an asset to
selected individuals, when it is considered as an aggregate of
the total money supply, it is not an asset at all. A man who
borrows $1,000 may think that he has increased his financial
position by that amount but he has not. His $1,000 cash asset is
offset by his $1,000 loan liability, and his net position is
zero. Bank accounts are exactly the same on a larger scale. Add
up all the bank accounts in the nation, and it would be easy to
assume that all that money represents a gigantic pool of assets
which support the economy. Yet, every bit of this money is owed
by someone. Some will owe nothing. Others will owe many times
what they possess. All added together, the national balance is
zero. What we think is money is but a grand illusion. The reality is debt.
Robert Hemphill was the Credit Manager of the Federal Reserve
Bank in Atlanta. In the foreword to a book by Irving Fisher,
entitled 100% Money, Hemphill said this:
If all the bank loans were paid, no one could have a bank
deposit, and there would not be a dollar of coin or currency in
circulation. This is a staggering thought. We are completely
dependent on the commercial banks. Someone has to borrow every
dollar we have in circulation, cash, or credit. If the banks
create ample synthetic money we are prosperous; if not, we
starve. We are absolutely without a permanent money system. When
one gets a complete grasp of the picture, the tragic absurdity of our hopeless situation is almost incredible -- but there it is.
With the knowledge that money in America is based on debt, it
should not come as a surprise to learn that the Federal Reserve
System is not the least interested in seeing a reduction in debt
in this country, regardless of public utterances to the contrary.
Here is the bottom line from the System's own publications. The
Federal Reserve Bank of Philadelphia says: "A large and growing
number of analysts, on the other hand, now regard the national
debt as something useful, if not an actual blessing....[They
believe] the national debt need not be reduced at all."
The Federal Reserve Bank of Chicago adds: "Debt -- public and
private -- is here to stay. It plays an essential role in
economic processes.... What is required is not the abolition of
debt, but its prudent use and intelligent management."
what's wrong with a little debt?
There is a kind of fascinating appeal to this theory. It gives
those who expound it an aura of intellectualism, the appearance
of being able to grasp a complex economic principle that is
beyond the comprehension of mere mortals. And, for the less
academically minded, it offers the comfort of at least sounding
moderate. After all, what's wrong with a little debt, prudently
used and intelligently managed? The answer is nothing, provided
the debt is based on an honest transaction. There is plenty wrong with it if it is "based upon fraud".
An honest transaction is one in which a borrower pays an agreed
upon sum in return for the temporary use of a lender's asset.
That asset could be anything of tangible value. If it were an
automobile, for example, then the borrower would pay "rent." If
it is money, then the rent is called "interest." Either way, the
concept is the same.
When we go to a lender -- either a bank or a private party -- and receive a loan of money, we are willing to pay interest on the loan in recognition of the fact that the money we are borrowing is an asset which we want to use. It seems only fair to pay a rental fee for that asset to the person who owns it. It is not easy to acquire an automobile, and it is not easy to acquire money -- real money, that is. If the money we are borrowing was earned by someone's labor and talent, they are fully entitled to receive interest on it. But what are we to think of money that is created by the mere stroke of a pen or the click of a computer key? Why should anyone collect a rental fee on that?
When banks place credits into your checking account, they are
merely pretending to lend you money. In reality, they have
nothing to lend. Even the money that non-indebted depositors have placed with them was originally created out of nothing in
response to someone else's loan. So what entitles the banks to
collect rent on nothing? It is immaterial that men everywhere are forced by law to accept these nothing certificates in exchange for real goods and services. We are talking here, not about what is legal, but what is moral. As Thomas Jefferson observed at the time of his protracted battle against central banking in the United States, "No one has a natural right to the trade of money lender, but he who has money to lend."
Third reason to abolish the system.
Centuries ago, usury was defined as any interest charged for a
loan. Modern usage has redefined it as excessive interest.
Certainly, any amount of interest charged for a pretended loan is excessive. The dictionary, therefore, needs a new definition.
Usury: The charging of any interest on a loan of fiat money.
Let us, therefore, look at debt and interest in this light.
Thomas Edison summed up the immorality of the system when he
said: People who will not turn a shovel of dirt on the project nor contribute a pound of materials will collect more money...than will the people who will supply all the materials and do all the work.
Is that an exaggeration? Let us consider the purchase of a
$100,000 home in which $30,000 represents the cost of the land,
architect's fee, sales commissions, building permits, and that
sort of thing and $70,000 is the cost of labor and building
materials. If the home buyer puts up $30,000 as a down payment,
then $70,000 must be borrowed. If the loan is issued at 11% over
a 30-year period, the amount of interest paid will be $167,806.
That means the amount paid to those who loan the money is about 2 1/2 times greater than paid to those who provide all the labor
and all the materials. It is true that this figure represents the time-value of that money over thirty years and easily could be justified on the basis that a lender deserves to be compensated for surrendering the use of his capital for half a lifetime. But that assumes the lender actually had something to surrender, that he had earned the capital, saved it, and then loaned it for construction of someone else's house. What are we to think, however, about a lender who did nothing to earn the money, had not saved it, and, in fact, simply created it out of thin air?
What is the time-value of nothing?
As we have already shown, every dollar that exists today, either
in the form of currency, checkbook money, or even credit card
money -- in other words, our entire money supply -- exists only
because it was borrowed by someone; perhaps not you, but someone.
That means all the American dollars in the entire world are
earning daily and compounding interest for the banks which
created them. A portion of every business venture, every
investment, every profit, every transaction which involves
money -- and that even includes losses and the payment of
taxes -- a portion of all that is earmarked as payment to a bank.
And what did the banks do to earn this perpetually flowing river
of wealth? Did they lend out their own capital obtained through
investment of stockholders? Did they lend out the hard-earned
savings of their depositors? No, neither of these were their
major source of income. They simply waved the magic wand called
fiat money.
The flow of such unearned wealth under the guise of interest can
only be viewed as usury of the highest magnitude. Even if there
were no other reasons to abolish the Fed, the fact that it is the supreme instrument of usury would be more than sufficient by
itself.
Who creates the money to pay the interest?
One of the most perplexing questions associated with this process is "Where does the money come from to pay the interest?" If you borrow $10,000 from a bank at 9%, you owe $10,900. But the bank only manufactures $10,000 for the loan. It would seem, therefore, that there is no way that you -- and all others with similar loans -- can possibly pay off your indebtedness. The amount of money put into circulation just isn't enough to cover the total debt, including interest. This has led some to the conclusion that it is necessary for you to borrow the $900 for interest, and that, in turn, leads to still more interest. The assumption is that, the more we borrow, the more we have to borrow, and that debt based on fiat money is a neverending spiral leading inexorably to more and more debt.
This is a partial truth. It is true that there is not enough
money created to include the interest, but it is a fallacy that
the only way to pay it back is to borrow still more. The
assumption fails to take into account the exchange value of
labor. Let us assume that you pay back your $10,000 loan at the
rate of approximately $900 per month and that about $80 of that
represents interest. You realize you are hard pressed to make
your payments so you decide to take on a part-time job.
The bank, on the other hand, is now making $80 profit each month on your loan. Since this amount is classified as "interest," it is not extinguished as is the larger portion which is a return of the loan itself. So this remains as spendable money in the account of the bank. The decision then is made to have the bank's floors waxed once a week. You respond to the ad in the paper and are hired at $80 per month to do the job. The result is that you earn the money to pay the interest on your loan, and -- this is the point -- the money you receive is the same money which you previously had paid. As long as you perform labor for the bank each month, the same dollars go into the bank as interest, then out of the revolving door as your wages, and then back into the bank as loan repayment.
It is not necessary that you work directly for the bank. No
matter where you earn the money, its origin was a bank and its
ultimate destination is a bank. The loop through which it travels can be large or small, but the fact remains all interest is paid eventually by human effort. And the significance of that fact is even more startling than the assumption that not enough money is created to pay back the interest. It is that the total of this human effort ultimately is for the benefit of those who create fiat money.
It is a form of modern serfdom in which the great mass of society works as indentured servants to a ruling class of
financial nobility.
Understanding the illusion
That's really all one needs to know about the operation of the
banking cartel under the protection of the Federal Reserve. But
it would be a shame to stop here without taking a look at the
actual cogs, mirrors, and pulleys that make the magical mechanism work. It is a truly fascinating engine of mystery and deception.
Let us, therefore, turn our attention to the actual process by
which the magicians create the illusion of modern money.
First we shall stand back for a general view to see the overall action.
Then we shall move in closer and examine each component in
detail.
The mandrake mechanism: an overview
The entire function of this machine is to convert debt into
money. It's just that simple. First, the Fed takes all the
government bonds which the public does not buy and writes a check to Congress in exchange for them. (It acquires other debt
obligations as well, but government bonds comprise most of its
inventory.) There is no money to back up this check. These fiat
dollars are created on the spot for that purpose. By calling
those bonds "reserves," the Fed then uses them as the base for
creating 9 additional dollars for every dollar created for the
bonds themselves. The money created for the bonds is spent by the government, whereas the money created on top of those bonds is the source of all the bank loans made to the nation's businesses and individuals. The result of this process is the same as creating money on a printing press, but the illusion is based on an accounting trick rather than a printing trick.
The bottom line is that Congress and the banking cartel have entered into a partnership in which the cartel has the privilege of collecting interest on money which it creates out of nothing, a perpetual override on every American dollar that exists in the world.
Congress, on the other hand, has access to unlimited funding
without having to tell the voters their taxes are being raised
through the process of inflation. If you understand this
paragraph, you understand the Federal Reserve System.
Now for a more detailed view. There are three general ways in
which the Federal Reserve creates fiat money out of debt.
One is by making loans to the member banks through what is called the Discount Window.
The second is by purchasing Treasury bonds and other certificates of debt through what is called the Open Market Committee.
The third is by changing the so-called reserve ratio
that member banks are required to hold. Each method is merely a
different path to the same objective: taking IOUs and converting
them into spendable money.
THE DISCOUNT WINDOW
The Discount Window is merely bankers' language for the loan
window. When banks run short of money, the Federal Reserve stands ready as the "bankers' bank" to lend it. There are many reasons for them to need loans. Since they hold "reserves" of only about one or two per cent of their deposits in vault cash and eight or nine per cent in securities, their operating margin is extremely thin. It is common for them to experience temporary negative balances caused by unusual customer demand for cash or unusually large clusters of checks all clearing through other banks at the same time. Sometimes they make bad loans and, when these former "assets" are removed from their books, their "reserves" are also decreased and may, in fact, become negative. Finally, there is the profit motive. When banks borrow from the Federal Reserve at one interest rate and lend it out at a higher rate, there is an obvious advantage. But that is merely the beginning. When a bank borrows a dollar from the Fed, it becomes a one-dollar reserve.
Since the banks are required to keep reserves of only about ten
per cent, they actually can loan up to nine dollars for each
dollar borrowed.
Let's take a look at the math. Assume the bank receives $1
million from the Fed at a rate of 8%. The total annual cost,
therefore, is $80,000 (.08 X $1,000,000). The bank treats the
loan as a cash deposit, which means it becomes the basis for
manufacturing an additional $9 million to be lent to its
customers. If we assume that it lends that money at 11% interest, its gross return would be $990,000 (.11 X $9,000,000). Subtract from this the bank's cost of $80,000 plus an appropriate share of its overhead, and we have a net return of about $900,000. In other words, the bank borrows a million and can almost double it in one year. That's leverage! But don't forget the source of that leverage: the manufacture of another $9 million which is added to the nation's money supply.
THE OPEN MARKET OPERATION
The most important method used by the Federal Reserve for the
creation of fiat money is the purchase and sale of securities on
the open market. But, before jumping into this, a word of
warning. Don't expect what follows to make any sense. Just be
prepared to know that this is how they do it.
The trick lies in the use of words and phrases which have
technical meanings quite different from what they imply to the
average citizen. So keep your eye on the words. They are not
meant to explain but to deceive. In spite of first appearances,
the process is not complicated. It is just absurd.
THE MANDRAKE MECHANISM: A DETAILED VIEW
Start with...
GOVERNMENT DEBT
The federal government adds ink to a piece of paper, creates
impressive designs around the edges, and calls it a bond or
Treasury note. It is merely a promise to pay a specified sum at a specified interest on a specified date. As we shall see in the
following steps, this debt eventually becomes the foundation for
almost the entire nation's money supply.13 In reality, the
government has created cash, but it doesn't yet look like cash.
To convert these IOUs into paper bills and checkbook money is the function of the Federal Reserve System. To bring about that
transformation, the bond is given to the Fed where it is then
classified as a...
SECURITIES ASSET
An instrument of government debt is considered an asset because
it is assumed the government will keep its promise to pay. This
is based upon its ability to obtain whatever money it needs
through taxation. Thus, the strength of this asset is the power
to take back that which it gives. So the Federal Reserve now has
an "asset" which can be used to offset a liability. It then
creates this liability by adding ink to yet another piece of
paper and exchanging that with the government in return for the
asset. That second piece of paper is a...
FEDERAL RESERVE CHECK
There is no money in any account to cover this check. Anyone else doing that would be sent to prison. It is legal for the Fed, however, because Congress wants the money, and this is the
easiest way to get it. (To raise taxes would be political
suicide; to depend on the public to buy all the bonds would not
be realistic, especially if interest rates are set artificially
low; and to print very large quantities of currency would be
obvious and controversial.) This way, the process is mysteriously
wrapped up in the banking system. The end result, however, is the same as turning on government printing presses and simply
manufacturing fiat money (money created by the order of
government with nothing of tangible value backing it) to pay
government expenses. Yet, in accounting terms, the books are said to be "balanced" because the liability of the money is offset by the "asset" of the IOU. The Federal Reserve check received by the government then is endorsed and sent back to one of the Federal Reserve banks where it now becomes a...
GOVERNMENT DEPOSIT
Once the Federal Reserve check has been deposited into the
government's account, it is used to pay government expenses and,
thus, is transformed into many...
GOVERNMENT CHECKS
These checks become the means by which the first wave of fiat
money floods into the economy. Recipients now deposit them into
their own bank accounts where they become...
COMMERCIAL BANK DEPOSITS
Commercial bank deposits immediately take on a split personality.
On the one hand, they are liabilities to the bank because they
are owed back to the depositors. But, as long as they remain in
the bank, they also are considered as assets because they are on
hand. Once again, the books are balanced: the assets offset the
liabilities. But the process does not stop there. Through the
magic of fractional-reserve banking, the deposits are made to
serve an additional and more lucrative purpose. To accomplish
this, the on-hand deposits now become reclassified in the books
and called...
BANK RESERVES
Reserves for what? Are these for paying off depositors should
they want to close out of their accounts? No. That's the lowly
function they served when they were classified as mere assets.
Now that they have been given the name of "reserves," they become the magic wand to materialize even larger amounts of fiat money.
This is where the real action is: at the level of the commercial
banks. Here's how it works. The banks are permitted by the Fed to hold as little as 10% of their deposits in "reserve." That means, if they receive deposits of $1 million from the first wave of fiat money created by the Fed, they have $900,000 more than they are required to keep on hand ($1 million less 10% reserve). In bankers' language, that $900,000 is called...
EXCESS RESERVES
The word "excess" is a tipoff that these so-called reserves have
a special destiny. Now that they have been transmuted into an
excess, they are considered as available for lending. And so in
due course these excess reserves are converted into...
BANK LOANS
But wait a minute. How can this money be loaned out when it is
owned by the original depositors who are still free to write
checks and spend it any time they wish? The answer is that, when
the new loans are made, they are not made with the same money at
all. They are made with brand new money created out of thin air
for that purpose. The nation's money supply simply increases by
ninety per cent of the bank's deposits. Furthermore, this new
money is far more interesting to the banks than the old. The old
money, which they received from depositors, requires them to pay
out interest or perform services for the privilege of using it.
But, with the new money, the banks collect interest, instead,
which is not too bad considering it cost them nothing to make.
Nor is that the end of the process. When this second wave of fiat money moves into the economy, it comes right back into the
banking system, just as the first wave did, in the form of...
MORE COMMERCIAL BANK DEPOSITS
The process now repeats but with slightly smaller numbers each
time around. What was a "loan" on Friday comes back into the bank as a "deposit" on Monday. The deposit then is reclassified as a "reserve" and ninety per cent of that becomes an "excess" reserve which, once again, is available for a new "loan." Thus, the $1 million of first wave fiat money gives birth to $900,000 in the second wave, and that gives birth to $810,000 in the third wave ($900,000 less 10% reserve). It takes about twenty-eight times through the revolving door of deposits becoming loans becoming deposits becoming more loans until the process plays itself out to the maximum effect, which is...
BANK FIAT MONEY = UP TO 9 TIMES GOVERNMENT
The amount of fiat money created by the banking cartel is
approximately nine times the amount of the original government
debt which made the entire process possible. When the original
debt itself is added to that figure, we finally have...
TOTAL FIAT MONEY = UP TO 10 TIMES GOVERNMENT
The total amount of fiat money created by the Federal Reserve and the commercial banks together is approximately ten times the
amount of the underlying government debt. To the degree that this newly created money floods into the economy in excess of goods and services, it causes the purchasing power of all money, both old and new, to decline. Prices go up because the relative value of the money has gone down. The result is the same as if that purchasing power had been taken from us in taxes. The reality of this process, therefore, is that it is a...
HIDDEN TAX = UP TO 10 TIMES THE NATIONAL DEBT
Without realizing it, Americans have paid over the years, in
addition to their federal income taxes and excise taxes, a
completely hidden tax equal to many times the national debt! And
that still is not the end of the process. Since our money supply
is purely an arbitrary entity with nothing behind it except debt, its quantity can go down as well as up. When people are going deeper into debt, the nation's money supply expands and prices go up, but when they pay off their debts and refuse to renew, the money supply contracts and prices tumble. That is exactly what happens in times of economic or political uncertainty. This alternation between period of expansion and contraction of the money supply is the underlying cause of...
BOOMS, BUSTS, AND DEPRESSIONS
Who benefits from all of this? Certainly not the average citizen.
The only beneficiaries are the political scientists in Congress
who enjoy the effect of unlimited revenue to perpetuate their
power, and the monetary scientists within the banking cartel
called the Federal Reserve System who have been able to harness
the American people, without their knowing it, to the yoke of
modern feudalism.
Reserve Ratios
The previous figures are based on a "reserve" ratio of 10% (a
money-expansion ratio of 10-to-1). It must be remembered,
however, that this is purely arbitrary. Since the money is fiat
with no previous-metal backing, there is no real limitation
except what the politicians and money managers decide is
expedient for the moment. Altering this ratio is the third way in which the Federal Reserve can influence the nation's supply of money. The numbers, therefore, must be considered as transient.
At any time there is a "need" for more money, the ratio can be
increased to 20-to-1 or 50-to-1, or the pretense of a reserve can be dropped altogether. There is virtually no limit to the amount of fiat money that can be manufactured under the present system.
NATIONAL DEBT NOT NECESSARY FOR INFLATION
Because the Federal Reserve can be counted on to "monetize"
(convert into money) virtually any amount of government debt, and because this process of expanding the money supply is the primary cause of inflation, it is tempting to jump to the conclusion that federal debt and inflation are but two aspects of the same phenomenon. This, however, is not necessarily true. It is quite possible to have either one without the other.
The banking cartel holds a monopoly in the manufacture of money.
Consequently, money is created only when IOUs are "monetized" by
the Fed or by commercial banks. When private individuals,
corporations, or institutions purchase government bonds, they
must use money they have previously earned and saved. In other
words, no new money is created, because they are using funds that are already in existence. Therefore, the sale of government bonds to the banking system is inflationary, but when sold to the private sector, it is not. That is the primary reason the United States avoided massive inflation during the 1980s when the federal government was going into debt at a greater rate than ever before in its history. By keeping interest rates high, these bonds became attractive to private investors, including those in other countries.15 Very little new money was created, because most of the bonds were purchased with American dollars already in existence. This, of course, was a temporary fix at best.
Today, those bonds are continually maturing and are being replaced by still more bonds to include the original debt plus accumulated interest. Eventually this process must come to an end and, when it does, the Fed will have no choice but to literally buy back all the debt of the '80s -- that is, to replace all of the formerly invested private money with newly manufactured fiat money -- plus a great deal more to cover the interest. Then we will understand the meaning of inflation.
On the other side of the coin, the Federal Reserve has the option of manufacturing money even if the federal government does not go deeper into debt. For example, the huge expansion of the money supply leading up to the stock market crash in 1929 occurred at a time when the national debt was being paid off. In every year from 1920 through 1930, federal revenue exceeded expenses, and there were relatively few government bonds being offered. The massive inflation of the money supply was made possible by converting commercial bank loans into "reserves" at the Fed's discount window and by the Fed's purchase of banker's acceptances, which are commercial contracts for the purchase of goods.
Now the options are even greater. The Monetary Control Act of
1980 has made it possible for the Creature to monetize virtually
any debt instrument, including IOUs from foreign governments. The apparent purpose of this legislation is to make it possible to bail out those governments which are having trouble paying the interest on their loans from American banks. When the Fed creates fiat American dollars to give foreign governments in exchange for their worthless bonds, the money path is slightly longer and more
twisted, but the effect is similar to the purchase of U.S.
Treasury Bonds. The newly created dollars go to the foreign
governments, then to the American banks where they become cash
reserves. Finally, they flow back into the U.S money pool
(multiplied by nine) in the form of additional loans. The cost of the operation once again is born by the American citizen through the loss of purchasing power. Expansion of the money supply, therefore, and the inflation that follows, no longer even require federal deficits. As long as someone is willing to borrow American dollars, the cartel will have the option of creating those dollars specifically to purchase their bonds and, by so doing, continue to expand the money supply.
We must not forget, however, that one of the reasons the Fed was
created in the first place was to make it possible for Congress
to spend without the public knowing it was being taxed. Americans
have shown an amazing indifference to this fleecing, explained
undoubtedly by their lack of understanding of how the Mandrake
Mechanism works. Consequently, at the present time, this cozy
contract between the banking cartel and the politicians is in
little danger of being altered. As a practical matter, therefore,
even though the Fed may also create fiat money in exchange for
commercial debt and for bonds of foreign governments, its major
concern likely will be to continue supplying Congress.
The implications of this fact are mind boggling. Since our money
supply, at present at least, is tied to the national debt, to pay
off that debt would cause money to disappear. Even to seriously
reduce it would cripple the economy. Therefore, as long as the
Federal Reserve exists, America will be, must be, in debt.
The purchase of bonds from other governments is accelerating in
the present political climate of internationalism. Our own money
supply increasingly is based upon their debt as well as ours, and
they, too, will not be allowed to pay it off even if they are
able.
EXPANSION LEADS TO CONTRACTION
While it is true that the Mandrake Mechanism is responsible for
the expansion of the money supply, the process also works in
reverse. Just as money is created when the Federal Reserve
purchases bonds or other debt instruments, it is extinguished by
the sale of those same items. When they are sold, the money is
given back to the System and disappears into the inkwell or
computer chip from which it came. Then, the same secondary ripple
effect that created money through the commercial banking system
causes it to be withdrawn from the economy. Furthermore, even if
the Federal Reserve does not deliberately contract the money
supply, the same result can and often does occur when the public
decides to resist the availability of credit and reduce its debt.
A man can only be tempted to borrow, he cannot be forced to do
so.
There are many psychological factors involved in a decision to go
into debt that can offset the easy availability of money and a
low interest rate: A downturn in the economy, the threat of civil
disorder, the fear of pending war, an uncertain political
climate, to name just a few. Even though the Fed may try to pump
money into the economy by making it abundantly available, the
public can thwart that move simply by saying no, thank you. When
this happens, the olds debts that are being paid off are not
replaced by new ones to take their place, and the entire amount
of consumer and business debt will shrink. That means the money
supply also will shrink, because, in modern America, debt is
money. And it is this very expansion and contraction of the
monetary pool -- a phenomenon that could not occur if based upon
the laws of supply and demand -- that is at the very core of
practically every boom and bust that has plagued mankind
throughout history.
In conclusion, it can be said that modern money is a grand
illusion conjured by the magicians of finance in politics. We are
living in an age of fiat money, and it is sobering to realize
that every previous nation in history that has adopted such money
eventually was economically destroyed by it. Furthermore, there
is nothing in our present monetary structure that offers any
assurances that we may be exempted from that morbid roll call.
Correction. There is one. It is still within the power of
Congress to abolish the Federal Reserve System.
Summary
The American dollar has no intrinsic value. It is a classic
example of fiat money with no limit to the quantity that can be
produced. Its primary value lies in the willingness of people to
accept it and, to that end, legal tender laws require them to do
so.
It is true that our money is created out of nothing, but it is
more accurate to say that it is based upon debt. In one sense,
therefore, our money is created out of less than nothing. The
entire money supply would vanish into the bank vaults and
computer chips if all debts were repaid.
Under the present System, therefore, our leaders cannot allow a
serious reduction in either the national or consumer debt.
Charging interest on pretended loans is usury, and that has
become institutionalized under the Federal Reserve System.
The Mandrake Mechanism by which the Fed converts debt into money
may seem complicated at first, but it is simple if one remembers
that the process is not intended to be logical but to confuse and
deceive. The end product of the Mechanism is artificial expansion
of the money supply, which is the root cause of the hidden tax
called inflation.
This expansion then leads to contraction and, together, they
produce the destructive boom-bust cycle that has plagued mankind
throughout history wherever fiat money has existed.
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WOW DID RONN LET IT ALL HANG OUT, OR WHAT ???
SEE WHY I THOUGHT THIS OUGHT TO STAND ALONE ??? tHIS IS A CLASS IN INDEBTEDNESS AS WELL AS A CLASS IN "WHAT WE SHOULD DO ABOUT IT --- NAMELY START ALL OVER WITH A CLEAN SLATE. WE SHOULD DECLARE A JUBILEE, OR SUMPIN ??? NO WONDER JESUS OVERTHREW THE "MONEY CHANGERS" OF HIS TIME. Bob H.
Serving Freedom
and Liberty
