google poll 11 to 20

http://www.primeronmoney.com/googlepoll11to20.html

August 01, 2004 / This is #11 of our Google Poll

Money Created “Out of Thin Air”
by Richard Benson

We hope this brief essay stimulates your thoughts with respect to how money is created - a secret all investors should know.

Money is created in two ways: First, money creation comes from borrowing it and spending it. (Money is literally borrowed and spent into existence.) Second, it can simply be printed up “out of thin air” by a central bank. The U.S. economy and other modern economies have central banks and fiat currencies. Central banks have two major powers. They can 1) “peg” the nominal level of short-term interest rates, and 2) purchase assets such as government debt, with newly printed money. When the central bank pegs short-term interest rates at a low level, it greatly encourages corporate and individual borrowing and spending.

For the past decade, most money has been created through private sector borrowing and spending. However, the day is fast approaching when the private sector’s new borrowing will not create enough new money to keep servicing the already massive level of old debt. Central banks will need to step up their efforts to “print money out of thin air”. Central bank printing of new money is accomplished by purchasing government debt or other assets.

The Broad Measure of Money: M3

(In Billions of Dollars)
Jan 2000 Jan 2001 Jan 2002 Jan 2003 Jan 2004 June 2004
6595 7223 8046 8546 8892 9293

Clearly, there has been substantial money growth since 2000. Moreover, neither the crash of the NASDAQ stock market, or the last recession, has slowed down money growth. The fact that the Fed cut interest rates 13 times since 2000 - reducing them to a 46 year low - has a lot to do with the massive amount of borrowing that has taken place in the United States.

Total Net Borrowing in the U.S.

(In Billions of Dollars)
2000 2001 2002 2003
1704 1974 2192 2638

The amount of net borrowing in the United States is quite impressive, particularly when you consider the old economic model when borrowing was limited to simply recycling savings. In 2003, the savings rate was 2 percent of GDP, while net credit market borrowing was well in excess of 20 percent of GDP. There has been a whole lot of borrowing and spending of new money going on!

Certain asset classes, such as financial assets and housing, have benefited the most by this credit and money creation. For instance, because the mortgage market has been willing to finance any and all mortgages, the credit creation process has allowed both new mortgage debt and the ability to pay for higher housing prices. These higher housing prices have, in turn, allowed for the funding of larger mortgages. Money creation in the private sector tends to concentrate in certain asset classes that facilitate the creation of new credit. This new credit lends itself to new spending, leaving behind new money as the residual, and a growing mountain of debt.

To say that this process has been left to run wild is an understatement.

Indeed, it’s time to think “Bubble” in stocks, bonds and housing. A rational investor understanding the credit creation process would have played the resulting upward momentum in asset prices for all they were worth!

However, the world is changing. The central banks are already printing vast quantities of new money, making 2004 a “watershed” year. In the general price level, due to the creation of new money borrowed into existence, inflation is starting to leak through.

If one examines individual incomes and corporate cash flows, you will realize the U.S. economic system can not service the mountain of private debt that has already been created at higher nominal interest rates. This watershed year could turn into a cliff side waterfall unless money growth keeps increasing to encourage the growth in personal and corporate incomes. Inflation is needed to push up cash flows to service old debt.

Without inflation, there remains a massive risk of deflation. If old debt is paid down, or forgiven in bankruptcy, money that has been previously created will vanish from whence it came. If the money and debt goes, asset prices will crumble. Many intellectual writers have logically concluded that rising interest rates will cause a “deflationary debt collapse” as interest rates rise. Certainly, a rise in interest rates to more normal levels will be painful and will cause some financial distress. Moreover, a rise in interest rates tends to slow the private money creation process. So, some questions remain unanswered. Where will enough money come from to keep the U.S. economy liquid and solvent? Where will the massive amounts of new money come from to service the debt mountain?

Let’s not forget that central banks can create new money with a few strokes at a computer keyboard to purchase whatever assets they wish. The Federal Reserve can create any volume of money it needs to keep the economy servicing both old and new debts. It seems virtually certain that the Fed, and other friendly central banks, will print as much new money as they need to because “inflation tomorrow is better than a collapse of the financial system today”.

Since the U.S. Treasury is running a $450 Billion deficit and a 5 percent trade deficit, central banks have actually begun the “Great Money Printing”. In the past 12 months, global central banks have created about $800 Billion worth of new money (as measured by the increase in world central bank reserves). This is what the Federal Reserve Governor, Ben S. Bernanke, lovingly calls “Helicopter Money”. US Fed Holdings of US Treasuries ($718 Billion ) / US Fed Holdings of US Treasuries for Foreign Central Banks ($1.24 Trillion) / Foreign Holdings of US Assets ($3.3 Trillion).

Foreigners already hold almost 40 percent of marketable U.S. Treasury debt. The Asian central banks have increased their holdings of U.S. assets to about $1 Trillion. In the relay race of money creation, 2004 is the year when the baton of money creation has already been handed from the private sector to the world’s central banks!

Wide open money spigots in the private economy have a habit of financing “asset price bubbles”. Since the prices of bubble assets (stocks, bonds and housing) are not included in the price indexes that measure inflation, the inflationary consequences of new money growth can be ignored. As central banks inject money growth directly into their respective economies by buying assets such as United States treasury bonds with Helicopter Money, it is impossible to totally conceal the fact that there is more money chasing the same number of goods. Inflation happens!

The massive trade and budget deficits in our country have acted as an “excuse” for friendly foreign central banks to do much of the needed money printing that would normally be done by the Federal Reserve. Our trade deficit gives companies in foreign countries dollars in exchange for their exports. Our treasury deficit gives foreigners the opportunity to buy our U.S. treasury debt with the dollars. Any foreign central bank can then swap their local currency with companies holding dollars and buy U.S. treasury debt! It’s all so simple! New money has been created, just not in our country!

For instance, the Central Bank of China is creating new money by buying U.S. treasuries with our trade deficit. This has helped to drive up their domestic inflation rate to 5 percent a year!

Until just recently, even the Japanese have been suffering from mild deflation and may not have the economic capacity to buy unlimited quantities of our treasuries. Japan is already flooding their economy with fresh Yen out of thin air, as they finance their own government deficit. Japan is currently running a 7-8 percent fiscal deficit and their savings rate has been dropping. Japan’s national debt is 140% of GDP and is rising rapidly. The Japanese bond market faces a serious risk of price collapse as their interest rates start to rise. Therefore, Japan can not be counted on to finance both their government deficit and our deficit for much longer.

Very soon it will be incumbent on our Federal Reserve to crank up the domestic U.S. printing press. It is one thing when your neighbor’s central bank floods their country with newly printed money buying U.S. Treasury debt. It is quite another when the Federal Reserve flood’s America with Helicopter Money by buying massive amounts of U.S. Treasuries.

As inflation comes, interest rates will be forced up. Rising interest rates certainly hurt the owners of old low-coupon bonds. Moreover, rising interest rates have never been the stock market’s friend. Rising interest rates are the declared enemy of housing prices. Indeed, rising inflation in the general price level is the enemy of all those wonderful bubble markets. Rising inflation and falling asset prices will turn the world of investing upside down!

Richard Benson / Benson’s Economic & Market Trends / Specialty Finance Group, LLC

Prior to founding the Specialty Finance Group in 1989, Mr. Benson acted as a trading desk economist for Chase Manhattan Bank in the early 1980’s and started in the securitization business in 1983 at Bear Stearns, and helped build the early securitization businesses at Citibank and E.F. Hutton.

Mr. Benson graduated from the University of Wisconsin in 1970 in the Honors Program in Math, and did his doctoral work in Economics at Harvard University. Mr. Benson is a member of the Harvard Club of New York and Palm Beach.

The Specialty Finance Group, LLC is a Florida Limited Liability Company and is registered with the NASD/SIPC as a Broker/Dealer. / Copyright © 2004-2009 Richard Benson
------------------------------------------------------------------------------
11. Safehaven | Money Created “Out of Thin Air” | Printer Friendly Version
Aug 1, 2004 ... As central banks inject money growth directly into their ... For instance, the Central Bank of China is creating new money by buying U.S. ...
http://www.safehaven.ca/showarticle.cfm?id=1819&pv=1

Analysis -- this is by Richard Benson who certainly seems to know what he is talking about. He says “ We hope this brief essay stimulates your thoughts with respect to how money is created - a secret all investors should know.

Money Created “Out of Thin Air” by Richard Benson / August 2004

We intend to copy this entire article and put it on our website so we can read it over a few times. Some of it is quite complicated -- I certainly do not understand all the complexities. (mrc)

This is #12

from: http://www.biblebelievers.org.au/jekyll.htm

The Creature from Jekyll Island / by G. Edward Griffin

Chapter 10
What is the Mandrake Mechanism?

It’s the most important financial lesson of your life!

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 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 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 [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 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. 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 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 . . .

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 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.

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. 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 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.

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. jekyll.htm

‘The Creature from Jekyll Island’ is available from: The Reality Zone
http://www.biblebelievers.org.au

12. Money Out of Thin Air
Nov 10, 2008 ... to see how criminals are creating money out of thin air to enslave Americans ... Banks create money by ‘monetizing’ the private debts of ...
http://www.scribd.com/doc/7872463/Money-Out-of-Thin-Air

Analysis -- This is 12 pages that is more or less of a well written -- but very a hard-to-follow rant that ends with “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”

I think the first sentence in that quotation is absolutely correct and very perceptive -- it took me years to come to that conclusion. The second sentence (the one in blue) is quite radical and hard to believe. The Fed tries to cause inflation!?. But, on second thought, that is logical.

Contrary to common opinion, when considering inflation as being a sharp and somewhat prolonged reduction in the value of money, inflation appears to hurt wealthy people more that common laborers because the wealthy among us have most of their wealth tied up in (a) money, (b) things that generate money and (c) things that can be easily converted to money (jewels, real estate, and the like). On the other hand laborers have only their muscles, backs and brains -- which can always and only be sold for market prices. When money loses its value -- it is the wealthy that, at first, appear to lose a step -- but they can always come back easily and quickly by cheaply buying up the small amout of wealth the laborers have cobbled together to rise above subsistence. So, in the long run, one could make a good argument that boom and bust cycles benefit the wealthy elite more that periodic inflation hurts them.

This report presents this interesting “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 primarily 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 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”

That summary gives a very shallow and mostly incorrect picture of what we have. There is far more than debt in this world. Much of the money that was ever created out of thin air left behind wealth of all sorts (bridges, homes buildings, roads and everything we have, including tons of money not beholding to debt). If the money were to vanish -- we might have a very good world left behind. maybe we’d figure out how to better use all that wealth we have.

This is #13 on the Google Poll

13. Money out of Thin Air
Foreign central banks are shifting into overdrive on their holdings of U.S. debt .... the Fed creating money out of thin air to buy up government bonds, ...
http://dailyreckoning.com/money-out-of-thin-air/

Analysis -- this artice is written by Mogambo Guru -- the pen name for Richard Daughty of the “Daily Reckoning”. He laughed himself silly while writing the article we are analyzing in 2003, when he warned that the Central Banks were going berserk and printing more money that could ever be absorbed by all the world’s economies. His claim is that all of the Nation’s banks-- had, at that time, 1 cent in reserves for every dollar in circulation and we are in for a terrible shock when all that money (a) finds its real value and declares it doesn’t want to work anymore for such stupid people and such a poor return on itself. (mrc)

Great reading. (mrc)
-------------------------------------------------------------------------------------------------------------------------------------
Money out of Thin Air

By The Mogambo Guru

12/15/03 The exponential explosion of dollar-denominated credit...through the “miracle of fractional banking”...

Foreign central banks are shifting into overdrive on their holdings of U.S. debt last week, as evidenced by their balances at the Fed increasing by $9 billion to a new record. Hahaha! Dorks!

Just to show those jerk foreigners that they haven’t cornered the market in stupidity, U.S. banks also bought up a nice $4 billion themselves!

But, and if you really want to see something scary, walk with me over to where the Treasury holds sway, and we will cling to each other in fear and whimper pitifully as we watch vile specters swirl around us, and we note that they issued another $17 billion of debt in the same short week!

The whole scene reminds me of the end of the movie “Raiders of the Lost Ark,” where our intrepid hero, Indiana Jones and his perky girlfriend are bound to a post, and the Nazis are opening the Lost Ark of the Covenant and all those angels are swirling around. At first the specters are beautiful and friendly, like what happens when you first start printing money and creating excess credit. Everything is wonderful and lovely! Then, right before our very eyes, the angels metamorphose into shrieking, devouring demons, and everyone is killed and the earth is swept bare, except our hero and his lovely sidekick.

Fractional Reserve Banking: $5.8 Billion in One Week

But getting back into something more attuned to reality as it really exists, we note that the Fed increased raw, fungible credit by $5.8 billion, too! In one week! And, I might add, to a new record, another new all-time new high, never before seen since the inception of the entire Federal Reserve System! A veritable avalanche of raw, naked credit, the original high-powered money if ever there were such a thing, the fabled Money Out Of Thin Air of story and song, money that can be multiplied by almost a hundred-fold, a thousand-fold, a million-fold, a zillion-fold, all through the miracle of fractional banking!

I say this even though people at the supermarket always look at me like I have lost my mind when I stand by the checkout counter and tell them about it, because taking a very, very rough estimate of the multiplier, I look at Required Reserves, $41.64 billion, and divide that by Savings/other Deposits of $4084.8 billion. And what happens when you do that?

Well, if you are like me, and you have my powerful skills with calculators, then you get some weird series of answers because you did something wrong with all those confusing buttons and then, in desperation, you finally ask someone who is just walking by to please use come over here and figure this damn thing out for me, then we get the surprising answer of 0.01.

This means that for every dollar of deposits, banks actually have only one cent of reserves in case people come looking for their money. Okay. Now, taking a look at Total Assets of the U.S. banking system, we find roughly $4,381 billion. And when we compare that to the reserves of $41 billion, it is, likewise, one puny cent of reserves against a dollar’s worth of some of those loans going bad.

Fractional Reserve Banking: A Dime Vs. A Penny

That one cent in reserves, that one measly penny, is backing up both a growing contingency of souring loans going bad, AND people wanting their money! Whew!

And now, as part of your homework for today, I want you to go and get a textbook, any textbook, on economics, and look up the authors’ example of fractional reserve banking. What is the standard amount of reserves that THEY use to illustrate the use of fractional reserves? Ten percent! They, meaning guys who write textbooks, would have an entire dime’s worth of reserves for every dollar of deposits! And we have, in real life, a lousy penny! A penny!

And if you spend any time reading that section, you will note that nowhere in the text do the authors of those textbooks ever imply that reserves would get down to one lousy penny! Does that imply something to you?

And why is this possible, anyway? Because we have a fiat currency, and a guy named Greenspan who will stoop to anything, and another guy named Bernanke and his printing press, and if the banks ever need any money, for anything, they can just let those two know, and they and their Federal Reserve will just - presto! - print up some credit, and buy the holdings of the banks, which also went up last week, as I noted above somewhere. In short, they commit monetary fraud on a grand scale.

They will even print up actual currency! Which I add with that hysterical arching of my eyebrows and high-decibel voice, arms flailing about like my arms were on fire, although without the leaping up and down because the old knees aren’t what they used to be, they did just that, last week! Again! They printed up $4.4 billion in cash! Dollar bills! And they have printed up, in the last year, $38 billion! Lovely stacks and stacks, pallet after pallet, of tens and twenties and fifties and hundreds! About $138 for every man, woman and child in the whole country.

Fractional Reserve Banking: A Decade’s Worth of $4.5 Billion Weeks

$4.5 billion in one week doesn’t sound like that much, I admit, but it is for one lousy week, and can’t you see where this is headed? Now imagine not just one week, but a month’s worth of $4.5 billion weeks, a year’s worth of $4.5 billion weeks, a decade’s worth of $4.5 billion weeks! It adds up!

And you think, and pardon me while I try and stifle this laughter, that the dollars that you are putting away today - tee hee! - into your retirement plan - giggle! - are going to maintain their - snort snort! - purchasing power when you - hahahaha! - retire? Pardon me, but hahahahahahaha! I can’t help myself! Hahahaha!

Wiping the tears away from my eyes, my ribs really hurting from all that laughing, I note that the Federal Reserve and the Treasury are debasing your money right in front of your eyes, and yet you think - hahahahaha! - that when you retire, every one of those dollars you are depositing today will be every bit as valuable years and years from now? Hahahaha! And you admit that you are watching the Fed and the Treasury debasing your money right in front of your own eyes, week after week after week, and yet you STILL believe that a dollar today is the same as a dollar tomorrow? Hahahahaha! Stop! Stop! You’re killing me! Hahahaha!

Now far be it from me, taking a long breath and trying to calm down and be serious for a minute because I am such a classy guy deep down, to suggest that there is any connection at all between the Fed creating money out of thin air to buy up government bonds, and thus effectively extinguishing the debt through that particular fraud, and the fact that the banks suddenly decided to acquire more government bonds. Must be a mere, umm, coincidence. (Hahahaha! Now I’m killing myself!)

So, in one stellar example, we have all had a good laugh, I have demonstrated the perils of a fiat currency, the danger of fractional banking, related it all to “Raiders” (which is a helluva good movie, a classic, really), and now I’ve predicted that we are all going to die, except for the PWOG, which is an acronym for People Who Own Gold, because you know what a sucker I am for acronyms, especially silly- sounding ones, because things are going to get really, really ugly one day real soon, and this may be the only bit of levity that we get out of it.

Regards,

The Mogambo Guru,
For the Daily Reckoning

Decemeber 15, 2003

14. Dorf on Law: Money Out of Thin Air
Jun 18, 2009 ... If the banks don’t lend out the money that they have in reserve ... fears about the Fed creating “money out of thin air” and thus ensuring a ...
http://www.dorfonlaw.org/2009/06/money-out-of-thin-air.html

Analysis -- Written by Neil H. Buchanan, evidently a smart guy who knows his way around an economics book and a law book. You can get a good idea of his prowess by his lead paragraph -- herewith reproduced “In a guest column on FindLaw appearing later today, I take on the questions of whether the Fed is printing money “out of thin air” and, if so, whether that is bad. (Answers: (1) Yes, because that is how money is always created. (2) No.) In that column, I pick up on an argument that I mentioned in passing in a Dorf on Law post back in April: Doesn’t the Fed cause inflation when it increases the money supply? In my FindLaw column, I set aside the intervening steps of the argument and simply point out that reality has been very unkind to the argument that inflation and money creation are directly related. In this post, I’ll discuss those intervening steps to show that the Fed’s current policy is both sensible and reversible.”

He is right on both answers.

--------------------------------------------------------------------------------------------------------------------------------------

Thursday, June 18, 2009

Money Out of Thin Air / Posted by Neil H. Buchanan

In a guest column on FindLaw appearing later today, I take on the questions of whether the Fed is printing money “out of thin air” and, if so, whether that is bad. (Answers: (1) Yes, because that is how money is always created. (2) No.) In that column, I pick up on an argument that I mentioned in passing in a Dorf on Law post back in April: Doesn’t the Fed cause inflation when it increases the money supply? In my FindLaw column, I set aside the intervening steps of the argument and simply point out that reality has been very unkind to the argument that inflation and money creation are directly related. In this post, I’ll discuss those intervening steps to show that the Fed’s current policy is both sensible and reversible.

Most people who took an undergraduate economics course will probably remember the equation MV=PQ. Like most of what we learn in college, however, the meaning of that equation has probably been lost in the mists of time. Known as the Quantity Equation, this is a mathematical identity that says that the number of dollars (M, or Money Supply) multiplied by the average number of times that each dollar is spent (V, or Velocity) equals the average price of a good produced in a given year (P, or price level) times the quantity of goods produced in a year (Q, real gross domestic product). There are a couple of variations on this equation, and some textbooks use a different letter for Q; but this is the most common form of the quantity equation.

Two steps of college-level math turn the equation into a linear approximation: money growth + velocity growth = inflation (price growth) + GDP growth. Moving from the Quantity Equation to a version of the Quantity Theory requires assuming that velocity growth and GDP growth are either fixed or predictably changing, which then means that money growth and inflation are directly related. Given the strong intuition that rampant and uncontrolled money growth must certainly be inflationary (see Germany in the 20’s, many South American countries in the 70’s and 80’s, etc.), it is easy to convince students that the theory can be used as an actual predictive tool for U.S. monetary policy. It cannot.

As it turns out, in this country velocity growth is anything but fixed or predictable, and the predictions that money growth is inevitably inflationary (or that increases in money growth must increase inflation) simply do not hold up to empirical testing. Sometimes the relationship holds up, but other times it doesn’t. In the current situation, we have the Fed creating large amounts of money (but see below), and real GDP has been falling (the definition of recession), which would result in inflation if velocity weren’t falling. But velocity growth is falling. Hence inflation has stayed in check. If the economy starts to grow, real GDP growth will soak up some of the upward pressure on prices, and the Fed can pull back on money growth.

Actually, there is an additional empirical difficulty with the “more money causes inflation” story. As Paul Krugman pointed out in his column on Monday of this week, there is a difference between the type of money that the Fed can control and the type of money that shows up in the equation above. The Fed controls the “monetary base,” which is the sum of currency and the (mostly electronic) money that banks have on reserve. We usually imagine that there is a nice linear relationship between the monetary base and the quantity of money that is ultimately available for spending; but again, that relationship is much more tenuous than many people thought. (Krugman points out that, in the Great Depression, the monetary base doubled while prices fell 19%.) If the banks don’t lend out the money that they have in reserve (which they currently are not), the monetary base does not ever become the kind of money that shows up in the MV=PQ equation, and any inflationary pressure from increasing the money supply cannot even get started because there really is not a big increase in the money supply.

Until President Obama took office, the quantity theory had faded in importance even among those who called themselves monetarists. Although Alan Greenspan completely missed the importance of financial regulation, he clearly understood that the mechanical inflation story is no guide for policy. Ben Bernanke, who we might recall was appointed Fed chair by George W. Bush, also understands this.

Of course, it is possible that inflation could return. One way for that to happen is for the variables that I described above all to turn in the wrong direction at once. Given that much of the “money” the Fed has created sits in bank reserves, and given that the Fed has nearly direct control over those reserves, it is well situated to pull the plug on any incipient inflation in a very timely way simply by shrinking the monetary base as much as necessary. I am not predicting that the Fed will respond perfectly, but this is not a situation where you have to wait months or years for the effect to be felt.

In short, the intuitive story driving the fears about the Fed creating “money out of thin air” and thus ensuring a future of ruinous hyperinflation breaks down completely in the face of both evidence and theory. I am usually not a “don’t worry, be happy” kind of guy, but this is really a case where the Fed is doing the right thing and can reverse course as the situation evolves.

-- Posted by Neil H. Buchanan

This is from The World Socialist Party /
http://theworldsocialist.blogspot.com/2008/12/banks-money-and-thin-air.html

15. The World Socialist: Banks, money and thin air
Dec 18, 2008 ... An urban myth is circulating on the internet that banks have been creating money out of thin air. Those who have seen the cult film ...
http://theworldsocialist.blogspot.com/2008/12/banks-money-and-thin-air.html

Thursday, December 18, 2008

This is #15 on our Google poll

Banks, money and thin air

An urban myth is circulating on the internet that banks have been creating money out of thin air.

Those who have seen the cult film Zeitgeist and its sequel Zeitgeist Addendum, popular amongst conspiracy theorists and others suspicious of governments and banks, will have heard recounted the argument that banks can somehow create money out of thin air by the stroke of a pen or, these days, by the touch of a computer keyboard.

In Zeitgeist Addendum this argument is based on what is stated in an educational booklet published by the Federal Reserve Bank of Chicago. Entitled Modern Money Mechanics it first came out in 1975 and has gone through several editions.

Zeitgeist Addendum begins by describing how it thinks the Federal Reserve Bank (the “Fed”) creates money. If, it says, the government wants more money then, through the Treasury, it creates Treasury bonds which it exchanges with the Fed for currency notes of the same face value; as the government has to pay interest on the bonds this adds to the National Debt and so is “debt money”. Both the Treasury bonds and the currency notes have been created out of thin air.

This is one way of putting it but it is misleading. It is rather the other way round in that the initiative to create more currency comes from the Federal Reserve Bank. Once it has decided that more notes are needed it asks the Treasury to print them (for which the Treasury charges). The normal way these get into circulation is by the commercial banks converting into currency some of the reserves they are obliged to lodge with the Fed. Modern Money Mechanics explains:

“Currency held in bank vaults may be counted as legal reserves as well as deposits (reserve balances) in the Federal Reserve Banks. Both are equally acceptable in satisfaction of reserve requirements. A bank can always obtain reserve balances by sending currency to its Reserve Bank and can obtain currency by drawing on its reserve balance” (p. 4).

In any event, both the Treasury and the Federal Reserve are part of government so we are talking about internal state accounting arrangements. It is, however, true that the new currency has been created out of nothing. Since it is not backed by gold and convertible on demand into a pre-fixed amount of gold, it is what in the US is called “fiat money”, that is, money created by a mere act of State.

Modern Money Mechanics does not in fact have much to say about currency creation but concentrates on what it calls “money creation”. It draws a distinction between “currency” and “money”. This is explained clearly enough on the first page of the booklet where money is defined as currency plus bank accounts with a cheque or debit card; which is M1 in the jargon (“In the remainder of this booklet, ‘money’ means M1”).

Congressman Ron Paul, from Texas, a critic of “fractional reserve banking” and advocate of a return to a gold-backed currency, has an even wider definition of “money”:

“”M3 is the best description of how quickly the Fed is creating new money and credit. Common sense tells us that a government central bank creating new money out of thin air depreciates the value of each dollar in circulation.” (27 April 2006, see http://www.lewrockwell.com/paul/paul319.html).

M3 includes other types of bank deposits and liabilities not included in M1. In claiming that all new money created by the Fed depreciates the dollar he is overstating his case. All the US currency (but, as we shall see, not bank deposits) is created “out of thin air” but an increase won’t lead to a depreciation of the dollar as long as it corresponds to an increase in the amount required by the economy for its various transactions (paying for goods and services, settling debts, paying taxes, etc). It is only currency issued in excess of this that will cause a decline in its value and so a rise in the general price level.

Everybody accepts that cash (currency, notes and coin) is money. Some might be prepared to include cash deposited in banks as well. But Modern Money Mechanics definition of bank deposits is wider than this. It doesn’t mean just deposits by people of the money they already possess but any account for which the holder has a cheque or debit card, i.e. including credit lines granted to those who banks have lent money to (so enabling Zeitgeist to go on talking about “debt money”):

“Checkable liabilities of banks are money. These liabilities are customers’ accounts. They increase when customers deposit currency and checks and when the proceeds of loans made by banks are credited to borrowers’ accounts” (p. 3, emphasis added).

So, when it talks about “money creation” it is not talking about currency creation but mainly about “bank deposit” (in the above sense) creation.

The Federal Reserve booklet goes on to explain what “fractional reserve banking” involves and how it can lead to the creation of more “money” in the sense of more bank deposits. Banks, it explains, have learned that when cash has been deposited with them they only need to keep a part (a “fraction”) of it as cash as a “reserve” to deal with likely cash withdrawals; the rest they can lend out. What this fraction is depends on the circumstances, but historically it has been around 10 percent.

On the booklet’s definition, in making a loan a bank is “creating money” as their loans will take the form of creating a new bank deposit as a credit line which the borrower can draw on as if they had made a deposit of their own money (except they will be paying interest on it). The booklet then asks “What Limits the Amount of Money Banks Can Create” and answers that this depends on the cash reserves it has decided to hold or is required by law to keep.

It is here that Modern Money Mechanics, by suddenly shifting from what an individual bank can do to what all banks together (“the banking system”) can, opens the way to the misinterpretation of people like Ron Paul and the makers of the Zeitgeist films that banks too can create “money” out of thin air. The booklet explains that US banks are required by law to keep a “fraction” of deposits as
“reserves” in its vaults and/or a balance with the Fed, and says:

“For example, if reserves of 20 percent were required, deposits could expand only until they were five times as large as reserves. Reserves of $10 million could support deposits of $50 million” (p. 4).

This is a very misleading way of putting as it could suggest that if banks receive total new deposits of $10 million they can immediately proceed to make loans of four times this. This is not so, and not really what the booklet meant to suggest. What it means is that the banks can immediately lend out only four-fifths of $10 million, or $8 million, and that this circulates throughout the banking system leading in theory to new loans totalling in the end $40 million, bringing total “bank deposits” up to $50 million.

Confusingly, the numerical examples the booklet goes on to give to illustrate this are based not on a 20 percent reserve fraction but on a 10 percent one (which is more or less what the law in the US requires for the kind of bank deposits in question). So, to take its example, if $10,000 is deposited in the banking system, initially say in one bank, that bank can make loans (create credit line bank deposits) of $9000. When it is spent this $9000 will be re-deposited in other banks which can then lend out 90 percent of this, or $8100; which in turn will be
re-deposited in banks, allowing a further $7290 to be lent out, and so on, until in the end and over the period, a total of $90,000 new loans will have been made.

This shows how the Fed can practice “fractional reserve banking” to control the amount of “money” (currency plus bank deposits) in the economy. This is done via “open market operations” as explained in a section headed “Bank Deposits – How They Expand or Contract”:

“Let us assume that expansion in the money stock is desired by the Federal Reserve to achieve its policy objectives . . . [T]he Federal Reserve System, through its trading desk at the Federal Reserve Bank of New York, buys $10,000 of Treasury bills from a dealer in US government securities. In today’s world of computerized financial transactions, the Federal Reserve Bank pays for the securities with an ‘electronic’ check drawn on itself . . . The Federal Reserve System has added $10,000 of securities to its assets, which it has paid for, in effect, by creating a liability on itself in the form of bank reserve balances” (p. 6).

The bank from which the Treasury bills were purchased now has reserves above the 10 percent limit and so can turn the $10,000 into loans, which starts the process described above rolling, leading to an extra $90,000 bank lending.

In theory the Fed could contract bank lending in the same way, but this has never happened. So M1 has gone up and up each year. But what about the currency in all this? It too has gone up but passively and almost automatically. With increased banking activity more currency notes are required, which banks get by converting their reserves into this and which, if it hasn’t enough notes, the Fed just asks the
Treasury to print more. But this has consequences – the depreciation of the dollar and the rise in the general price level Congressman Paul doesn’t like.

But has the banking system really created more “money”? Only if you regard “bank deposits” as money. If you don’t, all that has been shown is that currency has circulated in that the whole process depends on the initial deposit or injection of cash being recycled as further deposits by depositors (as opposed to by banks creating a credit line). So, neither an individual bank nor the whole banking system can lend more than has been deposited with it. By the end of the process, in the
example given, the first loan (out of the first deposit of $10,000) of $9000 has been used and used again for genuine deposits totaling $90,000. But all this assumes an expanding economy, since where is the money to repay the loans and the interest on them to come from without being assured of which the banks would not lend the money in the first place?

So the banking system does not create money to lend out of thin air but can only lend out money deposited with it and then only when economic conditions permit it.

Today, bank deposits are not the only source of what the banks lend. They also borrow on the money market (as has been highlighted by the present banking crisis). This means that their reserves are an even smaller percentage of their total loans, only about 3 percent in fact. This figure is mentioned in Zeitgeist Addendum as if this was now the “fractional reserve” and that therefore banks, or the banking system, can “create” loans of up to 33 times an initial deposit. Another silly mistake.

If currency cranks such as the makers of the Zeitgeist films have got the wrong end of the stick about “fractional reserve banking” and imagine that it means banks, whether singly or all together, can create money or credit out of thin air this is partly the fault of the way that booklets like the one produced by the Federal Reserve Bank of Chicago try to explain it. Of course the Fed does not believe the “thin air” claim, but to refute the currency cranks it would have not only to re-iterate that no single bank receiving an additional deposit of $10,000 can forthwith loan out $90,000, but also spell out that the expansion of credit line bank deposits still depends on people making real deposits of their own, unborrowed money (whether in cash or by cheque or by bank transfer). Which would restore a sense of reality and explode the myth that banks can create loans out of thin air.

ADAM BUICK

This is #16 of our Google Poll

16. How is Money Created? Debunking Some Myths About Recent Policies ...
Jun 18, 2009 ... The Fed – indeed, every central bank in the world – is ... of those who complain about the Fed’s creating money “out of thin air” is really ...
http://writ.news.findlaw.com/commentary/20090618_buchanan.html
--------------------------------------------------------------------------------------------------------------------------------------
How is Money Created? Debunking Some Myths About Recent Policies to Stabilize the Financial System and the Economy
By NEIL H. BUCHANAN
Thursday, June 18, 2009

The recent economic crisis in the United States has been so severe that we are now experiencing something that has happened only a few times in history: zero interest rates. In a phenomenon technically known as a “liquidity trap,” the monetary authorities have pushed the interest rate that they control essentially as low as it can go, yet the economy still needs more stimulus.

The usual kick that we would experience from low interest rates is not being felt, because people are simply unwilling to spend in these difficult economic times. That was part of the argument for the stimulus package that was enacted in April, in which Congress and the President agreed on a two-year program to directly increase spending in an effort at least to slow the downward slide of economic activity.

Whether the stimulus bill is or is not effective (and, although I think it was too small, it is likely to play at least an important role in turning around the economy), some people have turned their criticism toward the Federal Reserve – commonly called the Fed, this country’s central bank – saying that the Fed’s creation of money to fight the crisis is threatening the country with long-term inflation, even hyperinflation.

These claims are not only overstated, but they often are based on a profound misunderstanding of how the financial system works. The danger is currently that the government is doing too little to fight the recession, not that the Fed is putting in motion an inflationary spiral. Understanding why this is so requires some basic knowledge about how money is created.

Money Out of Thin Air? The Myth that the Fed is Currently Doing Something Unusual and Dangerous

Modern financial systems are all based on money that is, in a very profound sense, created out of nothing other than group psychology. No one has any practical use for printed pieces of paper carrying portraits of dead presidents, yet everyone works to receive those pieces of paper. Why? Because everyone knows that everyone else will accept those pieces of paper in exchange for the things that we wish to own.

The process of creating money is, however, more complicated than just printing pieces of paper that people will treat as money. Most of the financial system, after all, carries out transactions in money that exists only in electronic form. Direct deposits of paychecks into bank accounts allows people to pay their bills online, which in turn allows merchants to pay their employees with yet more direct deposits (and some checks and cash).

Indeed, when we read about a company buying another company “with cash,” that does not mean that millions or billions of dollars worth of greenbacks change hands. Typically, such a transaction is carried out in government IOU’s known as Treasury Bills that, in fact, also never exist in printed form. Both sides to a transaction treat those securities as “cash” because they know that they can use them to buy things or trade them in for cash at some point.

The essential point to remember is that all of this is done with money that has been created out of nothing more than the common belief that the electronic transactions involved are meaningful.

The role of the Fed is to set up rules by which it can limit the amount of money (including both cash and non-cash forms of money) that is in existence. The Fed’s methods of doing so are too technical to be of interest here, but the key point is that the Fed can create or destroy money by engaging in policy actions that are well-known and completely uncontroversial. The Fed – indeed, every central bank in the world – is constantly adjusting the amount of money that exists, generally as part of a strategy to set interest rates at a level that is projected to maximize growth with a low, stable rate of inflation.

All of the money that exists today was, therefore, created by the Fed out of nothing at all. Even so, we are now hearing and reading urgent cries that the Fed is creating money “out of thin air,” as if this is something horrible and dangerous. Just within the last six months, for example, the New York Times has carried nine articles which raise this specter.

Even setting aside the two Times articles that were op-eds, regular Times news articles such as one from May 22 of this year have said quite bluntly: “The Federal Reserve is printing money from thin air.” This is anything but objective language, and it is misleading at best. It is true that creating too much money can be dangerous, but the issue is not that money is being created from nothing, but rather that too much money can end up chasing too few goods. That is clearly not the problem that we currently face.

What About Gold? Why the Fed’s Actions Would Be No Different if We Returned to the Gold Standard

Some readers might respond to the description above by saying that the problem is a different one: The Fed must be prevented from creating “fake money.” What is “real money,” then? Gold, of course!

This point, however, misunderstands the psychological nature of money, and it also mischaracterizes the true difference it would make if we were to take the radical (and completely unwise) step of returning to some kind of gold standard. Most people do not have any practical need for bars of gold, any more than they have a practical need for pieces of paper covered with numbers and the faces of long-dead politicians. Thus, the sole reason to hold gold (other than to use it for certain industrial and decorative purposes) is that other people want it – just as is the case with paper money.

Moreover, even if we were to shift to a gold standard, the electronic nature of the current financial system would still require that we allow transactions to occur without the actual physical trading of gold, with “gold certificates” being created in print or electronic form, or both. Once we did that, however, we would then need a Fed-like agency to regulate the non-gold representations of money -- which would put us right back where we are now, with money not tied to gold or any other commodity.

If we wanted to limit the Fed’s ability to manipulate the amount of such money that exists, we could simply link the amount of non-gold money to gold by some fixed multiple. However, doing so would have many undesirable consequences -- the most obvious being that our money supply would respond only to changes in the amount of gold in the world. The two countries with the largest known stocks of gold in the ground are Russia and South Africa, which means that those two countries could then increase or decrease the amount of our money by flooding the gold market or hoarding their stocks.

In other words, even for those who yearn for a system in which the government has no ability to manipulate the amount of money that exists, the reality is that there is no such system. Moreover, the systems that purport to limit the Fed’s discretion either do not actually do so, or do so at too great a cost to the health of the economy (as well as national security).

The Real Issue: How Should the Fed Decide How Much Money to Create?

Perhaps the core concern of those who complain about the Fed’s creating money “out of thin air” is really that the Fed is creating too much money too fast, not that it is creating money in an illegitimate way. The question, then, is how we would know when enough is enough.

Attempts to find an answer to that question have filled economics journals for as long as there have been economics journals, but the key issue is that there is a tradeoff: Merchants want their customers to have enough cash to buy their goods, but no one wants there to be so much money that inflation ensues.

One formulation of the issue is based on the assertion that there is a reliable, direct mathematical relationship between the amount of money that the Fed creates and the inflation rate that we experience in subsequent months and years. That assertion has, however, not held up at all well to empirical testing, with inflation not reliably tracking the amount of money being created. The reason for this is that people do not always spend all of the money that they could spend, meaning that money can be created but not result in inflation.

That is not to say that there is no limit to how much money the Fed could or should create. Everyone agrees that if the Fed were to order the Government Printing Office to print up $100 trillion in new currency and distribute it to the public tomorrow, there would be massive hyperinflation. Raising that specter as a reason to criticize the Fed today, however, is like saying that the possibility of drowning means that one should never drink water, or swim, or bathe. That it is possible to create too much money does not mean that we should create none.

If there is no reliable relationship between the amount of money that the Fed creates, within broad boundaries, and inflation, then what should the Fed do? Essentially, it should do exactly what it is doing right now.

As noted above, the Fed has pushed its policy-sensitive interest rate as low as possible, in an effort to stimulate economic activity. This was completely sensible, given the extreme nature of the current crisis. We knew that it was rare that rates could go to zero, but that has happened before. If those rates cuts had been enough, that would be fine.

Unfortunately, the economy needed more stimulus. That is where the Fed’s further actions came in, supplementing and enabling the actions by Congress and the President to try to create more economic activity directly. When the federal government needed money to finance various bailouts and the stimulus spending, the money had to come from somewhere. The alternative to continued borrowing from abroad was to have the Fed buy the federal debt that is being created, directly injecting new money into the system in an effort to stimulate spending.

This strategy has its limits, of which the Fed is well aware. The current concern, however, has not been inflation but deflation, a decline in prices that can itself be a disastrous part of a decline into economic depression. The Fed wisely concluded, in short, that we should not worry about drowning when our most pressing problem is a severe drought.

When the situation turns around, policy can and will change: We can create less money than we have been creating lately. That does not mean that the Fed will stop creating money out of thin air, but only that it is responding appropriately to changed circumstances.

Neil H. Buchanan, J.D. Ph. D. (economics), is an Associate Professor at The George Washington University Law School, where he teaches tax law and policy.

17. Gold Buying will continue as money is created out of ‘thin air ...
... this type of “creating money out of thin air” will lead investors to continue ... He told the news provider: “The fact that major investment banks like ...
http://goldnews.bullionvault.com/Goldbug/gold_buying/gold_buying_will_continue_as_money_is_created_out_of_thin_air_19062594

This article was not on point -- plus it could not be copied (mrc)

18. The ACTivist magazine - Money from Nothing: Supplying Money Should ...
Commercial banks would, without doubt, resist this change. If they lose the privilege of creating money out of thin air, they’ll be competing on the same ...
http://activistmagazine.com/index.php?option=content&task=view&id=1043&Itemid=143

Could not copy this article -- you will have to go to the URL and read it there.

The article suggets some interesting changes in the way we create money -- but none of the suggestions are anything we haven't seen before -- except, (1) they write "Commercial banks would resist losing the right to get their stock-in-trade (money) as a free gift.

They also point out (2) that getting a shot at new money before anyone else in the economy favors investing in land and housing with ready collateral instead of investing in needed goods and services. That is an interesting point -- but it may be built on a false premise. I would have to study that idea more before I decided if it made sense or not.

There is no #19

20.
Best Defense of the Federal Reserve: Not “Out of Thin Air”
Jul 13, 2009 ... go on about the Federal Reserve “creating money out of thin air” as ... 3) Issuing the bank’s IOUs in exchange for IOUs from Farmer John ...
http://majorityrights.com/index.php/weblog/comments/best_defense_of_the_federal_reserve_not_out_of_thin_air/

majorityrights.com

Best Defense of the Federal Reserve: Not “Out of Thin Air”

Intellectual honesty requires that one address the strongest, not weakest, arguments of one’s opponent. It is called “Devil’s Advocacy” or “Giving the Devil his Due” but it is not really advocacy, nor really even viewing one’s opponent as “the Devil”. It is simple intellectual honesty. Now, admittedly, we live in a very intellectually dishonest world—a world in which we are routinely demonized by a theocratic supremacy utterly uninterested in the truth or freedom—so there is very little reciprocation earned from us. That is the strongest position of those who would not give the Devil his Due: Why bother with intellectual honesty?

The answer is simply, that we seek the truth.

With that preliminary out of the way, let me address something that has been bothering me for some time about those who continually go on about the Federal Reserve “creating money out of thin air” as though they are counterfieting. First, the money they create is backed by the threat of punishment—if you don’t obtain their money for payment of taxes, the government will throw you in prisons to experience “sexual awakening”—hence not “out of thin air”. Now, everyone who uses the phrase “out of thin air” will more or less agree that this “backing” by a promise not to punish you if you present the Federal Reserve tokens is real but, they will object, there is no point in discussing such fine distinctions.

Yes there is.

There is a relatively strong argument from the supporters of fiat money and fractional reserve banking that gets trotted out for the favored few journalists, economics majors and politicians who are trained to ignore the rest of us. We, the “Paranoid”—We, the “Kooks”—We, the “Extremists”—We, the People, are not exposed to it—until now.

Imagine a world in which people have taken a step up from barter to issuing IOUs for their goods or services—IOUs which can circulate. Farmer John issues IOUs that say: “I, Farmer John, owe the bearer of this note 1 dozen eggs.” Tailor James issues IOUs that say: “I, Tailor James, owe the bearer of this note 1 fitted suit.” These IOUs are traded around the community and a monetary system is established where the currencies have backing that is as real as the credibility of their issuers. They are “debt money” in the sense that the issuer has made a promise to the bearer but they do not bear interest to anyone in particular.

Now comes the Banker:

The typical argument you hear from the opponents of Fractional Reserve Banking is that the Banker will have a store of gold that he represents with gold certificates that circulate in the community, and that he issues more certificates than he has gold in a blatant act of fraud. But let’s go back to Farmer John and his eggs for a moment: Farmer John doesn’t have the eggs. He has chickens who lay eggs on a regular basis. If Farmer John has a “run on the henhouse” by the holders of his IOUs, he’ll be accused of having “created IOUs out of thin air” because he won’t be able to service all the demands for his eggs in a timely manner.

Now is it true that the Banker’s main monetary service is the storage of gold for people, hence issuing tokens for more gold than he has in storage is fraud?

No. That is not the Banker’s main monetary service.

The Banker’s main monetary service is to simplify the monetary system by accepting the IOUs from others and performing 3 services:

1) Evaluate the credibility of the barter tokens issued by Farmer John and Tailor James, etc.
2) Evaluate the liquid value of the goods and/or services offered by Farmer John and Tailor James, etc.
3) Issuing the bank’s IOUs in exchange for IOUs from Farmer John and Tailor James, etc. so that the community has a single currency.

It’s that simple?

Now, one may ask, where does the banker legitimately charge interest here?

Simply: Sometimes Farmer John fails to provide eggs. Sometimes Tailor James fails to fit suits. The banker needs to charge what amounts to an insurance premium based on the credibility of Farmer John’s promises and another premium based on the credibility of Tailor James’s promises, etc. Hence, the Banker is merely attempting to do what any honest insurance man does: Cover his, and your, risks in participating in the monetary system under his responsibility. No Gold need be involved at all.

Now that we better understand the legitimacy of a “central bank”, let us focus on the real problem:

When the bank links up with the tax collecting agencies, as happened in 1913 with the simultaneous passage of the Federal Reserve Act and the 16th Amendment to the US Constitution, it has acquired the government as collection thugs—thugs who will “break your kneecaps” if you don’t pay up. At some point—and it isn’t well defined exactly when this occurs -- the promises for delivery of goods and services cease to be the primary backing for the banker’s notes and the threat of punishment becomes the primary backing.

That’s the real problem with the Federal Reserve.

Posted by James Bowery on Monday, July 13, 2009 at 12:42 PM in Economics & Finance
Comments (42) | Tell a friend

---------- end ----------