If the American people ever allow
private banks to control the issue of their money, first by inflation
and then by deflation, the banks and corporations that will grow
up around them, will deprive the people of their property until
their children will wake up homeless on the continent their fathers
-- Thomas Jefferson
The Mandrake Mechanism
Chapter 10 of The
Creature from Jekyll Island
- - - - - - - - - - - - -
© G. Edward Griffin
Posted at Bull Not Bull on February 9, 2006.
Editor's note: This is an excellent book,
one that I highly recommend. It is available for purchase from Mr.
Griffin's website: realityzone.com/
Watch a video presention by the author on the Mandrake Mechanism
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. 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
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 eyewash. 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
In a booklet entitled Modern Money Mechanics, the Federal
Reserve Bank of Chicago says:
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.
In the fine print of a footnote in a bulletin
of the Federal Reserve Bank of St. Louis, we find this surprisingly
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.
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
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:
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 (see the book
for all seven reasons)
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 [Muscle Shoals] 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 never ending 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 nine (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
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
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 . . .
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. 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 . . .
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 . . .
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 . . .
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 . . .
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 . . .
The word "excess" is a tip off 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 . . .
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 DEBT
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.
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
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. 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
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.
TAXES NOT EVEN NECESSARY
It is a soberting thought that the federal government
now could operate -- even at its current level of spending -- without
levying any taxes whatsoever. All it has to do is create the required
money through the Federal Reserve System by monetizing its own bonds.
In fact, most of the money it now spends is obtained in that way.
If the idea of eliminating the IRS sounds like good
news, remember that the inflation that results from monetizing the
debt is just as much a tax as any other; but because it is hidden,
and so few Americans understand how it works, it is more politically
popular than a tax that is out in the open.
Inflation can be likened to a game of Monopoly in
which the game’s banker has no limit to the amount of money
he can distribute. With each throw of the dice he reaches under
the table and brings up another stack of those paper tokens, which
all the players must use as money. If the banker is also one of
the players – and in our real world that is exactly the case
– obviously he is going to end up owning all the property.
But, in the meantime, the increasing flood of money swirls out from
the banker and engulfs the players. As the quantity of money becomes
greater, the relative worth of each token becomes less, and the
prices bid for the properties goes up. The game is called monopoly
for a reason. In the end, one person holds all the property and
everyone else is bankrupt. But what does it matter? It is only a
Unfortunately, it is not a game in the real world.
It is our livelihood, our food, and our shelter. It does make a
difference if there is only one winner, and it makes a big difference
if that winner obtained his monopoly simply by manufacturing everyone’s
FOURTH REASON TO ABOLISH THE SYSTEM
Make no mistake about it, inflation is a tax. Furthermore,
it is the most unfair tax of them all because it falls most heavily
upon those who are thrifty, those on fixed incomes, and those in
the middle and lower income tax brackets. The important point here
is that this hidden tax would be impossible without fiat money.
Fiat money in America is created solely as a result of the Federal
Reserve System. Therefore, it is totally accurate to say that the
Federal Reserve System guarantees the most unfair tax of all. Both
the tax and the System that makes it possible should be abolished.
The political scientists who authorize this process
of monetizing the national debt, and the monetary scientists who
carry it out, know that it is not true debt. It is not true debt,
because no one in Washington expects to repay it – ever. The
dual purpose of this magic show is simply to create free spending
money for the politicians, without the inconvenience of raising
direct taxes, and also to generate a perpetual river of gold flowing
into the banking cartel. The partnership is merely looking out for
Why, then, does the federal government bother with
taxes at all? Why not just operate on monetized debt? The answer
is twofold. First, if it did, people would begin to wonder about
the source of the money, and that might cause them to wake up to
the reality that inflation is a tax. Thus, open taxes at some level
serve to perpetuate public ignorance, which is essential to the
scheme. Thus, open taxes at some level serve to perpetuate public
ignorance, which is essential to the success of the scheme. The
second reason is that taxes, particularly progressive taxes, are
weapons by which elitist social planners can wage war on the middle
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 old 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.
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
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.
- - - - - - - - - - - - - - - - - - - - - - -
For more on this topic, read the entire book: The
Creature from Jekyll Island : A Second Look at the Federal Reserve
, by G. Edward Griffin
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