Creature From Jekyll Island by G. Edward

The business of banking began in Europe in the fourteenth century. Its function was to evaluate, exchange, and safeguard people's coins. In the beginning, there were notable examples of totally honest banks which operated with remarkable efficiency considering the vast variety of coinage they handled. They also issued paper receipts which were so dependable they freely circulated as money and cheated no one in the process. But there was a great demand for more money and more loans, and the temptation soon caused the bankers to seek easier paths. They began lending out pieces of paper that said they were receipts, but which in fact were counterfeit. The public could not tell one from the other and accepted both of them as money. From that point forward, the receipts in circulation exceeded the gold held in reserve, and the age of fractional-reserve banking had dawned.

This led immediately to what would become an almost unbroken record from then to the present: a record of inflation, booms and busts, suspension of payments, bank failures, repudiation of currencies, and recurring spasms of economic chaos.

The Bank of England was formed in 1694 to institutionalize fractional-reserve banking. As the world's first central bank, it introduced the concept of a partnership between bankers and politicians. The politicians would receive spendable money (created out of nothing by the bankers) without having to raise taxes. In return, the bankers would receive a commission on the transaction—deceptively called interest—which would continue in perpetuity. Since it all seemed to be wrapped up in the mysterious rituals 184

THE CREATURE FROM JEKYLL ISLAND

of banking, which the common man was not expected to understand, there was practically no opposition to the scheme. The arrangement proved so profitable to the participants that it soon spread to many other countries in Europe and, eventually, to the United States.

Chapter Ten

THE MANDRAKE

MECHANISM

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.1 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.

i- Printed Federal Reserve Notes that sit in the Treasury's vault do not become money until they are released into circulation in exchange for checkbook money that was created by a bank loan. As long as the bills are in the vault with no debt-based money to replace them, they technically are just paper, not money.

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So, let us now leave the historical figures of the past and jump into their 'future,' in other words, into our present, and 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 travelled 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 metal 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.'1

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.'2

In a booklet entitled Modern Money Mechanics, the Federal Reserve Bank of Chicago says:

In the United States neither paper currency nor deposits have