What is The Mandrake Mechanism?
G. Edward Griffin
(Editor's Note: The Federal Reserve Act was passed by 3 (THREE) bribed senators in a unanimous voice vote (all three of them) on 23 December 1913 - while everyone else was home for the holidays. Some people think of the Federal Reserve Banks as United States Government institutions. They are private monopolies which prey upon the people of these United States for the benefit of themselves and their foreign customers; foreign and domestic speculators and swindlers; and rich and predatory money lenders. The Fed has followed a consistent policy of flooding the economy with easy money, leading to a misallocation of resources and an artificial "boom" followed by a recession or depression when the Fed-created bubble bursts. From the Great Depression, to the stagflation of the seventies, to the burst of the dotcom bubble, to the housing market crisis, every economic downturn suffered by the country over the last 98 years can be traced to Federal Reserve policy.
In the following missive, G. Edward Griffin exposes the
most blatant scam of all history. It's all here: the cause of wars,
boom-bust cycles, inflation, depression, prosperity. It's just
exactly what every American needs to know about the power of the
central bank." Mr. Griffin is a graduate of the University of Michigan where he majored in Speech Communication. He is the recipient of the Telly Award for
Excellence in TV Production. He is the founder of the Cancer Cure
Foundation and has served on the board of directors of the National
Health Federation and the International Association of Cancer Victims
and Friends. He is a contributing editor for the New American
Magazine and is President of American Media, a publishing and video
production company in southern California.)
It's the most important financial lesson of your
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
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
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
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
Patman: And there is nothing behind it, is there, except our
Eccles: That is what our money system
is. If there were no debts in our money system, there wouldn't be
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
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
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
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
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
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
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
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
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
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
Since the banks are required to keep reserves of only about ten per
cent, they actually can loan up to nine dollars for each dollar
Let's take a look at the math. Assume the bank receives $1 million from
the Fed at a rate of 8%. The total annual cost, therefore, is $80,000
(.08 X $1,000,000). The bank treats the loan as a cash deposit, which
means it becomes the basis for manufacturing an additional $9 million to
be lent to its customers. If we assume that it lends that money at 11%
interest, its gross return would be $990,000 (.11 X $9,000,000). Subtract from this the bank's cost of
$80,000 plus an appropriate share of its overhead, and we have a net
return of about $900,000. In other words, the bank borrows a million and
can almost double it in one year. That's leverage! But don't forget the source of that
leverage: the manufacture of another $9 million which is added to the
nation's money supply.
THE OPEN MARKET OPERATION
The most important method used by the
Federal Reserve for the creation of fiat money is the purchase and sale
of securities on the open market. But, before jumping into this, a word
of warning. Don't expect what follows to make any sense. Just be
prepared to know that this is how they do it.
The trick lies in the use of words and phrases which have technical
meanings quite different from what they imply to the average citizen. So
keep your eye on the words. They are not meant to explain but to
deceive. In spite of first appearances, the process is not complicated.
It is just absurd.
MECHANISM - A DETAILED VIEW
The federal government adds ink to a piece of paper, creates impressive
designs around the edges, and calls it a bond or Treasury note. It is
merely a promise to pay a specified sum at a specified interest on a
specified date. As we shall see in the following steps, this
debt eventually becomes the foundation for almost the entire nation's
money supply. In reality, the government has created cash, but it
doesn't yet look like cash. To convert these IOUs into paper bills and
checkbook money is the function of the Federal Reserve System. To bring about that transformation, the bond
is given to the Fed where it is then classified as a...
An instrument of government debt is considered an asset because it is
assumed the government will keep its promise to pay. This is based upon
its ability to obtain whatever money it needs through taxation. Thus, the strength of this asset is the
power to take back that which it gives. So the Federal Reserve now has
an "asset" which can be used to offset a liability. It then creates this
liability by adding ink to yet another piece of paper and exchanging
that with the government in return for the asset. That second piece of paper is a...
FEDERAL RESERVE CHECK
There is no money in any account to cover this check. Anyone else doing
that would be sent to prison. It is legal for the Fed, however, because
Congress wants the money, and this is the easiest way to get it. (To raise taxes would be political suicide;
to depend on the public to buy all the bonds would not be realistic,
especially if interest rates are set artificially low; and to print very
large quantities of currency would be obvious and controversial.) This way, the process is mysteriously
wrapped up in the banking system. The end result, however, is the same
as turning on government printing presses and simply manufacturing fiat
money (money created by the order of government with nothing of tangible
value backing it) to pay government expenses. Yet, in accounting terms,
the books are said to be "balanced" because the liability of the money
is offset by the "asset" of the IOU. The Federal Reserve check received by the
government then is endorsed and sent back to one of the Federal Reserve
banks where it now becomes a...
Once the Federal Reserve check has been deposited into the government's
account, it is used to pay government expenses and, thus, is transformed
These checks become the means by which the first wave of fiat money
floods into the economy. Recipients now deposit them into their own bank
accounts where they become...
COMMERCIAL BANK DEPOSITS
Commercial bank deposits immediately take on a split personality.
On the one hand, they are liabilities to the bank because they are owed
back to the depositors. But, as long as they remain in the bank, they
also are considered as assets because they are on hand. Once again, the books are balanced: the
assets offset the liabilities. But the process does not stop there.
Through the magic of fractional-reserve banking, the deposits are made
to serve an additional and more lucrative purpose. To accomplish this, the on-hand deposits now
become reclassified in the books and called...
Reserves for what? Are these for
paying off depositors should they want to close out of their accounts?
No. That's the lowly function they served when
they were classified as mere assets. Now that they have been given the
name of "reserves," they become the magic wand to materialize even
larger amounts of fiat money. This is where the real action is: at the
level of the commercial banks. Here's how it works. The banks are
permitted by the Fed to hold as little as 10% of their deposits in
"reserve." That means, if they receive deposits of $1 million from the
first wave of fiat money created by the Fed, they have $900,000 more
than they are required to keep on hand ($1 million less 10% reserve). In bankers' language, that $900,000 is
The word "excess" is a tip off that these so-called reserves have a
special destiny. Now that they have been transmuted into an excess, they
are considered as available for lending. And so in due course these excess reserves
are converted into...
But wait a minute. How can this
money be loaned out when it is owned by the original depositors who are
still free to write checks and spend it any time they wish? The answer
is that, when the new loans are made, they are not made with the same
money at all. They are made with brand new money created out of thin air
for that purpose. The nation's money supply simply increases
by ninety per cent of the bank's deposits. Furthermore, this new money
is far more interesting to the banks than the old. The old money, which
they received from depositors, requires them to pay out interest or
perform services for the privilege of using it. But, with the new money,
the banks collect interest, instead, which is not too bad considering it
cost them nothing to make. Nor is that the end of the process. When this second wave of fiat money moves
into the economy, it comes right back into the banking system, just as
the first wave did, in the form of...
MORE COMMERCIAL BANK DEPOSITS
The process now repeats but with slightly smaller numbers each time
around. What was a "loan" on Friday comes back into the bank as a
"deposit" on Monday. The deposit then is reclassified as a
"reserve" and ninety per cent of that becomes an "excess" reserve which,
once again, is available for a new "loan." Thus, the $1 million of first
wave fiat money gives birth to $900,000 in the second wave, and that
gives birth to $810,000 in the third wave ($900,000 less 10% reserve). It takes about twenty-eight times through
the revolving door of deposits becoming loans becoming deposits becoming
more loans until the process plays itself out to the maximum effect,
BANK FIAT MONEY = UP TO 9 TIMES GOVERNMENT
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
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
Without realizing it, Americans
have paid over the years, in addition to their federal income taxes and
excise taxes, a completely hidden tax equal to many times the national
debt! And that still is not the end of the process. Since our money supply is purely an
arbitrary entity with nothing behind it except debt, its quantity can go
down as well as up. When people are going deeper into debt, the nation's
money supply expands and prices go up, but when they pay off their debts
and refuse to renew, the money supply contracts and prices tumble. That
is exactly what happens in times of economic or political uncertainty. This alternation between period of expansion
and contraction of the money supply is the underlying cause of...
BOOMS, BUSTS, AND DEPRESSIONS
Who benefits from all of this? Certainly not the average citizen.
The only beneficiaries are the political scientists in Congress who
enjoy the effect of unlimited revenue to perpetuate their power, and the
monetary scientists within the banking cartel called the Federal Reserve
System who have been able to harness the American people, without their
knowing it, to the yoke of modern feudalism.
The previous figures are based on
a "reserve" ratio of 10% (a money-expansion ratio of 10-to-1). It must
be remembered, however, that this is purely arbitrary. Since the money
is fiat with no previous-metal backing, there is no real limitation
except what the politicians and money managers decide is expedient for
the moment. Altering this ratio is the third way in
which the Federal Reserve can influence the nation's supply of money.
The numbers, therefore, must be considered 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
There is virtually no limit to the amount of
fiat money that can be manufactured under the present system.
NATIONAL DEBT NOT
NECESSARY FOR INFLATION
Because the Federal Reserve can be counted on to "monetize" (convert into
money) virtually any amount of government debt, and because this process of
expanding the money supply is the primary cause of inflation, it is tempting
to jump to the conclusion that federal debt and inflation are but two
aspects of the same phenomenon. This, however, is not necessarily true. It is
quite possible to have either one without the other.
The banking cartel holds a monopoly in the manufacture of money.
Consequently, money is created only when IOUs are "monetized" by the Fed or
by commercial banks. When private individuals, corporations, or institutions
purchase government bonds, they must use money they have previously earned
and saved. In other words, no new money is created, because they are using
funds that are already in existence. Therefore, the sale of government bonds to the
banking system is inflationary, but when sold to the private sector, it is
not. That is the primary reason the United States avoided massive inflation
during the 1980s when the federal government was going into debt at a
greater rate than ever before in its history. By keeping interest rates
high, these bonds became attractive to private investors, including those in
other countries. Very little new money was created, because most of the
bonds were purchased with American dollars already in existence. This, of course, was a temporary fix at best.
Today, those bonds are continually maturing and are being replaced by still
more bonds to include the original debt plus accumulated interest.
Eventually this process must come to an end and, when it does, the Fed will
have no choice but to literally buy back all the debt of the '80s - that is,
to replace all of the formerly invested private money with newly
manufactured fiat money - plus a great deal more to cover the interest. Then
we will understand the meaning of inflation.
On the other side of the coin, the Federal Reserve has the option of
manufacturing money even if the federal government does not go deeper into
debt. For example, the huge expansion of the money supply leading up to the
stock market crash in 1929 occurred at a time when the national debt was
being paid off. In every year from 1920 through 1930, federal revenue
exceeded expenses, and there were relatively few government bonds being
offered. The massive inflation of the money supply was
made possible by converting commercial bank loans into "reserves" at the
Fed's discount window and by the Fed's purchase of banker's acceptances,
which are commercial contracts for the purchase of goods.
Now the options are even greater. The Monetary Control Act of 1980 has made it
possible for the Creature to monetize virtually any debt instrument,
including IOUs from foreign governments. The apparent purpose of this
legislation is to make it possible to bail out those governments which are
having trouble paying the interest on their loans from American banks. When
the Fed creates fiat American dollars to give foreign governments in
exchange for their worthless bonds, the money path is slightly longer and
more twisted, but the effect is similar to the purchase of U.S. Treasury
Bonds. The newly created dollars go to the foreign
governments, then to the American banks where they become cash reserves.
Finally, they flow back into the U.S money pool (multiplied by nine) in the
form of additional loans. The cost of the operation once again is born by
the American citizen through the loss of purchasing power. Expansion of the
money supply, therefore, and the inflation that follows, no longer even
require federal deficits. As long as someone is willing to borrow American
dollars, the cartel will have the option of creating those dollars
specifically to purchase their bonds and, by so doing, continue to expand
the money supply.
We must not forget, however, that one of the reasons the Fed was created in
the first place was to make it possible for Congress to spend without the
public knowing it was being taxed. Americans have shown an amazing
indifference to this fleecing, explained undoubtedly by their lack of
understanding of how the Mandrake Mechanism works. Consequently, at the
present time, this cozy contract between the banking cartel and the
politicians is in little danger of being altered. As a practical matter, therefore, even though
the Fed may also create fiat money in exchange for commercial debt and for
bonds of foreign governments, its major concern likely will be to continue
The implications of this fact are mind boggling. Since our money supply, at
present at least, is tied to the national debt, to pay off that debt would
cause money to disappear. Even to seriously reduce it would cripple the
economy. Therefore, as long as the Federal Reserve exists, America will be,
must be, in debt.
The purchase of bonds from other governments is accelerating in the present
political climate of internationalism. Our own money supply increasingly is based upon
their debt as well as ours, and they, too, will not be allowed to pay it off
even if they are able.
Expansion Leads to Contraction
While it is true that the Mandrake Mechanism is responsible for the
expansion of the money supply, the process also works in reverse. Just as
money is created when the Federal Reserve purchases bonds or other debt
instruments, it is extinguished by the sale of those same items. When they
are sold, the money is given back to the System and disappears into the
inkwell or computer chip from which it came. Then, the same secondary ripple effect that
created money through the commercial banking system causes it to be
withdrawn from the economy. Furthermore, even if the Federal Reserve does
not deliberately contract the money supply, the same result can and often
does occur when the public decides to resist the availability of credit and
reduce its debt. A man can only be tempted to borrow, he cannot
be forced to do so.
There are many psychological factors involved in a decision to go into debt
that can offset the easy availability of money and a low interest rate: A
downturn in the economy, the threat of civil disorder, the fear of pending
war, an uncertain political climate, to name just a few. Even though the Fed
may try to pump money into the economy by making it abundantly available,
the public can thwart that move simply by saying no, thank you. When this
happens, the old debts that are being paid off are not replaced by new ones
to take their place, and the entire amount of consumer and business debt
will shrink. That means the money supply also will shrink,
because, in modern America, debt is money. And it is this very expansion and
contraction of the monetary pool - a phenomenon that could not occur if
based upon the laws of supply and demand - that is at the very core of
practically every boom and bust that has plagued mankind throughout history.
In conclusion, it can be said that modern money is a grand illusion conjured
by the magicians of finance in politics. We are living in an age of fiat
money, and it is sobering to realize that every previous nation in history
that has adopted such money eventually was economically destroyed by it.
Furthermore, there is nothing in our present monetary structure that offers
any assurances that we may be exempted from that morbid roll call. Correction. There is one. It is still within the power of Congress to
abolish the Federal Reserve System.
The American dollar has no intrinsic value. It is a classic example of fiat
money with no limit to the quantity that can be produced. Its primary value
lies in the willingness of people to accept it and, to that end, legal
tender laws require them to do so.
It is true that our money is created out of nothing, but it is more accurate
to say that it is based upon debt. In one sense, therefore, our money is
created out of less than nothing. The entire money supply would vanish into
the bank vaults and computer chips if all debts were repaid.
Under the present System, therefore, our leaders cannot allow a serious
reduction in either the national or consumer debt. Charging interest on
pretended loans is usury, and that has become institutionalized under the
Federal Reserve System.
The Mandrake Mechanism by which the Fed converts debt into money may seem
complicated at first, but it is simple if one remembers that the process is
not intended to be logical but to confuse and deceive. The end product of
the Mechanism is artificial expansion of the money supply, which is the root
cause of the hidden tax called 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.