This is from << http://www.scribd.com/doc/7872463/Money-Out-of-Thin-Air >> of our Google Poll -- check out the following link to find all the articles The link immediately above tells about a poll we are doing using Google. We are reading all the first one hundred articles that appeared as a result of our Google search for those articles that were using the words "creating money out of thin air" on July 15, 2009 to see what the writing public thought about that phrase at that time. The "Mandrake Mechanism" referred to below showed up in a number of articles. It is, in our opinion, completely misleading. (see cell 3 below) |
| Money Out of Thin Air -- this is #12 on our list of 100 articles. 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 |
This is #12 of our Google Poll --- The original article is in "black type" -- my words are in "blue" (mrc) from: http://www.biblebelievers.org.au/jekyll.htm 12. Money Out of Thin Air This article is very interesting. A lot of what is written is (T) absolutely TRUE. and a lot of it is (F) just plain FALSE. Unfortunately it is hard to tell (T) and from (F). for the most part, we are putting the article in this booklet because it repeatedly brings up the subject of “creating money out of thin air” and it is the use of those words that our Google Poll was designed to examine. We will try to restrict our comments to the subject of our Poll -- except we will put a “T’ for “true” and an “F” for “false” wherever we think our opinion might be of interest to readers. We will also use “ ? ” when we are undecided or confused.(mrc) The Creature from Jekyll Island / by G. Edward Griffin Chapter 10 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 (T). 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. (T) There is no short phrase that perfectly describes that process (T). 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. (T) 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. I have to add a comment here --- my dictionary has the following definition of “fiat money”: “inconvertible paper money made legal tender by a government decree”. I think that definition is accurate except that “incontrovertible” must be understood to mean “not controvertible to a fixed amount of gold or silver -- but convertible to gold and silver and all other assets at market prices -- by Law”. The word “fiat” really means “by law” -- so it is incorrect to think “fiat money” is “degenerate money”. (mrc) 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. “T”, “T”, “T” 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 “T” and seemingly complicated procedures “T”, the actual mechanism by which the Federal Reserve creates money is quite simple. “T” 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. “T” 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. “T” 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. (absolutely “F” -- lots of money is created and spent -- not created and lent) 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. (absolutely “F” -- lots of money is created and spent -- not created and lent) 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. 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. “T” 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. (Not true -- when real wealth is produced by manufacturing, farming or other labor, the money it is sold for is real money for the most part. When the debts are paid back -- that does not destroy the real wealth that has been produced by the debt-money and the dollars for which the weaalth was traded) 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. “F” ( I believe the statement was made -- but it is not true) 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. (“ ? “) There is no doubt that debt plays an important part in our money and banking system -- but that is only beacause nobody has ever figured a safer way to get newly created money into our economic system. If the lending banks do their jobs properly and lend money based on good collateral and a reasonable plan to turn that money into wealth, there will be no problems. Once the debt is paid back -- the wealth will remain for the benefit of us all. 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.” “T” 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”. “T” & (“ ? “) 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? “T” & (“ ? “) This touches on a very important point. The banks do this because they can get away with it and that is because the banks are non-competitive. They obviously agree among themselves what interest rates to charge and that is a clear violation of anti-trust laws. Perhaps there are laws that you and I don’t know about that makes banks exempt from prosecution on these counts. That should certainly be stopped immediately. THIS IS THE MOST IMPORTANT THING PUT FORWARD IN THIS ARTICLE SO FAR. 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. “T” 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. “T” & (“ ? “) 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. “T” 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? THIS IS ALL ABSOUTELY TRUE . IT COULD BE STOPPED IMMEDIATELY IF WE THE PEOPLE WOULD INSIST (1) BANKS SHOULD NOT BE EXEMPT FROM ANTI-TRUST LAWS AND (2) ANY PERSON CAN OPEN A BANK. THE COMPETITION FROM NEW BANKERS WOULD SOLVE THE PROBLEM (mrc) What is the time-value of nothing? From here on, most of this article is either repetitive, misleading, wrong or worthless. It is not worth analyzing. The authors take a misleading system made up by the Fed and make it worse by weaving it into a fantasy that is much more complex If you want to waste your time on it, go to This “Mandrake Mechanism” report presents this over-simplified “SUMMARY” SUMMARY The American dollar has no intrinsic value. (This is absolutely not true -- mrc) 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. (This may be true -- but as we explained previously, fiat money means lawful money and that is not bad.-- mrc) 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. (This is absolutely not true, we have covered that previously -- mrc) Under the present System, therefore, our leaders cannot allow a serious reduction in either the national or consumer debt. (We must reject this conclusion -- because we just rejected the previous three assumptions on which it is built -- mrc) Charging interest on pretended loans is usury, and that has become institutionalized under the Federal Reserve System. (We can more-or-less buy this position and agree it should be stopped -- mrc) 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. (We can more-or-less, but not completely agrees to this -- mrc) 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. (We can’t agree to this -- the writer has never shown that it is the lawful fiat money that is to blame for any of our problems -- mrc) We wll now skip seven pages to our Analysis Analysis -- This is 12 pages that is more or less of a well written -- but very a hard-to-follow rant that ends with a SUMMARY that includes this sentence“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. ... “ We can buy that. Almost every aspect of the system is way more complicated than it has to be. -- “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 our money and banking system. 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 when it ws paid back (bridges, homes buildings, roads and everything we have, including tons of money not beholding to debt). If the debt-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 would have left. Here is my anectdotal argument against what I think is the ridiculous basic idea in the summary of this article -- that all wealth would vanish if debts were paid back. Debt and interest do far more good than this summary gives them credit for. I bought my first custom built house near Red Bank, New Jersey -- Paid $12,000 / 1956 / $9,000 mortgage debt. Sold it and moved. Purchased a second custom built house at Lake Mohawk, N.J. for about $15,000 / 1962 -- had a mortgage around $12,000. Sold it and moved to California. Bought an old house on one acre just South of Santa Barbara / 1965 / $32,000 -- mortgage was around $26,000. Divorced and remarried. Bought a one bedroom house in Santa Barbara for $75,000 / had $35,000 loan from the manufacturing company I worked for / 1980. Remarried. Sold that house for about $90,000 in 1982. Moved and bought two houses on one lot in Santa Barbara for $135,000 with a loan of about $100,000 / 1982 Sold those houses in 1986 or so for $300,000 or so. My wife and I held the mortgage of about $300,000 and collected interest payments. Bought a 95-year old house in downtown Santa Barbara for $375,000 / 1986 -- had a mortgage of about $300,000. Retired in 1994 at 62 years of age. Sold the old house in downtown Santa Barbara for $1,000,000 / 2001? / and collected on the $300,000 mortgage we were holding. Wound up with about $700,000 cash. Moved to San Marcos, CA in 2001 -- bought two houses with the $700,000 -- rented one out to our Daughter. Sold both houses in 2005. Bought a small piece of property and a mobile home in San Marcos in 2004 for around $300,000. Spent some money and put the rest in Government bonds The point of all this? This story covered 10 homes -- all of which were covered by a debt (mortgage) in one way or another. All of those debts have been paid off and we have a significant amount of interest bearing money left in government insured accounts. All of those homes are still in existence and have a total maket value of at least $5,000,000 -- perhaps $7,000,000 I offer this as EMPERICAL, REAL-LIFE PROOF that debts (loans) can lead to wealth and the payment of those debts does not destroy the wealth that was generated by the related loans. This is not to say that our money and banking system can’t be improved enormously and loans could not be way more fair to the borrower. But I am saying that most of the claims made in the Mandrake Mechanism are exaggerated falsehoods and are not worth serious consideration. I believe much time and effort are wasted on consideration of writing like the Mandrake Mechanism when we could be focused on our real problems of how to solve our real problems of poverty and the inefficient management of our country’s fabulous wealth. Martin R. Carbone -- martycarbone@yahoo.com
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