Creature From Jekyll Island by G. Edward

ered 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

'1

reclassified in the books and called ...

BANK RESERVES

Reserves for what? Are these for paying off depositors

should they want to close out 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

198

THE CREATURE FROM JEKYLL ISLAND

$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 avail-

able 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?

Isn't that a double claim against the same money? The

answer is that, when the new loans are made, they arc

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 deposi-

tors, requires them to pay out interest or perform serv-

ices 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 o f . . .

MORE COMMERCIAL BANK DEPOSITS

The process now repeats but with slightly smaller num-

bers 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 THE MANDRAKE MECHANISM 199

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