A number of years ago, the central bank of the United States, the Fedral Reserve (FED), produced a document entitled “Modern Money Mechanics”. This publication detailed the institutionalized practice of money creation as utilized by the Federal Reserve and the web of global commercial banks it supports. On the opening page the document states its objective. The purpose of this booklet is to describe the basic process of money creation in a fractional reserve banking system. It then precedes to describe this fractional reserve process through various banking terminology. A translation of which goes something like this: **The United States government (Treasury) decides it needs some money. **So it calls up the federal reserve and requests say 10 billion dollars. **The FED replies saying: “sure, we’ll buy 10 billion in government bonds from you”. **So the U.S. government takes some pieces of paper, paints some official looking designs on them, and calls them treasury bonds. **Then it puts a value on these bonds to the sum of 10 billion dollars and sends them over to the FED. **In turn the people of the FED draw up a bunch of impressive pieces of paper themselves, only this time calling them federal reserve notes, also designating a value of 10 billion dollars to the set. **The FED than takes these notes and trades them for the bonds. **Once this exchange is complete, the government than takes the ten billion in federal reserve notes, and deposits it into an bank account. **And, upon this deposit the paper notes officially become legal tender money. **Adding ten billion to the US money supply. And there it is!! 10 billion in new money has been created. Of course, this example is a generalization. For, in reality, this transaction would occur electronically, with no paper used at all. In fact, only three percent (3%) of US money supply exists in physical currency. The other 97 percent (97%) essentially exists in computers alone. Now, government bonds are by design instruments of debt. And when the FED purchases these bonds with money it essentially created out of thin air, the government is actually promising to pay back that money to the FED. In other words, the money was created out of debt. This mind numbing paradox, of how money or value can be created out of debt, or a liability, will become more clear as we further along. So, the exchange has been made. And now, 10 billion dollars sits in a commercial bank account. Here is where it gets really interesting. For, as based on the fractional reserve practice, that 10 billion dollar deposit instantly becomes part of the banks reserves. Just as all deposits do. And, regarding reserve requirements as stated in “Modern Money Mechanics”: “A bank must maintain legally required reserves equal to a prescribed percentage of its deposits”. It then quantifies this by stating: “Under current regulations, the reserve requirement against most transaction accounts is ten percent”. This means that with a 10 billion dollar deposit, 10 percent (10%), or 1 billion, is held as the required reserve. While the other 9 billion is considered an excessive reserve, and can be used as the basis for new loans. Now, it is logical to assume, that this 9 billion is literally coming out of the existing 10 billion dollar deposit. However, this is actually not the case. What really happens, is that the 9 billion is simply created out of thin air on top of the existing 10 billion dollar deposit. This is how the money supply is expanded. As stated in “Modern Money Mechanics”: “Of course they” (the banks) “do not really pay out loans for the money, they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes” (loan contracts) “in exchange for credits” (money) “to the borrowers transaction accounts.” In other words, the 9 billion can be created out of nothing. Simply because there is a demand for such a loan, and that there is a 10 billion dollar deposit to satisfy the reserve requirements. Now let’s assume that somebody walks into this bank and borrows the newly available 9 billion dollars. They will then most likely take that money and deposit it into their own bank account. The process then repeats. For that deposit becomes part of the banks reserves. 10 percent(10%) is isolated and in turn 90 percent (90%) of the 9 billion, or 8.1 billion is now available as newly created money for more loans. And, of course, that 8.1 can be loaned out and redeposited creating an additional 7.2 billion to 6.5 billion… to 5.9 billion… etc… This deposit money creation loan cycle can technically go on to infinity. The average mathematical result is that about 90 billion dollars can be created on top of the original 10 billion. In other words: For every deposit that ever occurs in the banking system, about 9 times that amount can be created out of thin air... So, now that we understand how money is created by this fractional reserve banking system. A logical yet illusive question might come to mind: What is actually giving this newly created money value? The answer: the money that already exists. The new money essentially steals value from the existing money supply. For the total pool of money is being increased irrespective to demand for goods and services. And, as supply and demand defines equilibrium, prices rise, diminishing the purchasing power of each individual dollar. This is generally referred to as inflation. AND INFLATION IS ESSENTIALLY A HIDDEN TAX ON THE PUBLIC. ****“What is the advice that you generally get? And that is, inflate the currency. They don’t say: debase the currency. They don’t say: devalue the currency. They don’t say: cheat the people who are safe. They say: lower the interest rates. The real deception is when we distort the value of money. When we create money out of thin air, we have no savings. Yet there is so called “capital”. So, my question boils down to this: How in the world can we expect to solve the problems of inflation… That is: increase in the supply of money, with more inflation?” – Rep. of Texas, Congressman Ron Paul to the FED Board Members. How in the world can we expect to solve the problems of inflation… That is: increase in the supply of money, with more inflation? Of course it can’t. The fractional reserve system of monetary expansion is inherently inflationary. For the act of expanding the money supply, without there being a proportional expansion of goods and services in the economy, will always debase a currency. In fact, the quick glance of the historical values of the US dollar, versus the money supply, reflects this point of definitively. For inverse relationship is obvious. 1 dollar in 1913 required $21.60 in 2007 to match value. That is a 96 percent (96%) devaluation since the Federal Reserve came into existence. Now, if this reality of inherent and perpetual inflation seems absurd and economically self defeating… Hold that thought… For absurdity is an understatement in regard to how our financial system really operates. For in our financial system money is debt, and debt is money. If you were to look at a chart of the US money supply from 1950 to 2006 and a chart of the US national debt from 1950 to 2006, you would find it interesting that the trends are virtually the same. For the more money there is the more debt there is. The more debt there is the more money there is. To put it a different way. Every single dollar in your wallet is owed to somebody by somebody. For remember: the only way the money can come in to existence is from loans. Therefore, if everyone in the country were able to pay off all debts including the government, there would not be one dollar in circulation...
Posted on: Tue, 20 Aug 2013 19:14:16 +0000
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