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What is The Mandrake Mechanism?

G. Edward Griffin November 25, 2011 (Editor's Note: The Federal Reserve Act was passed b ! (T"REE# bribed se$ators i$ a %$a$imo%s voice vote (all three o& them# o$ 2! 'ecember 1(1! ) while ever o$e else was home &or the holida s* +ome people thi$, o& the Federal Reserve -a$,s as .$ited +tates /over$me$t i$stit%tio$s* The are private mo$opolies which pre %po$ the people o& these .$ited +tates &or the be$e&it o& themselves a$d their &orei0$ c%stomers1 &orei0$ a$d domestic spec%lators a$d swi$dlers1 a$d rich a$d predator mo$e le$ders* The Fed has &ollowed a co$siste$t polic o& &loodi$0 the eco$om with eas mo$e , leadi$0 to a misallocatio$ o& reso%rces a$d a$ arti&icial 2boom2 &ollowed b a recessio$ or depressio$ whe$ the Fed)created b%bble b%rsts* From the /reat 'epressio$, to the sta0&latio$ o& the seve$ties, to the b%rst o& the dotcom b%bble, to the ho%si$0 mar,et crisis, ever eco$omic dow$t%r$ s%&&ered b the co%$tr over the last (3 ears ca$ be traced to Federal Reserve polic * 4$ the &ollowi$0 missive, /* Edward /ri&&i$ e5poses the most blata$t scam o& all histor * 4t's all here: the ca%se o& wars, boom)b%st c cles, i$&latio$, depressio$, prosperit * 4t's 6%st e5actl what ever America$ $eeds to ,$ow abo%t the power o& the ce$tral ba$,*2 7r* /ri&&i$ is a 0rad%ate o& the .$iversit o& 7ichi0a$ where he ma6ored i$ +peech 8omm%$icatio$* "e is the recipie$t o& the Tell Award &or E5celle$ce i$ T9 :rod%ctio$* "e is the &o%$der o& the 8a$cer 8%re Fo%$datio$ a$d has served o$ the board o& directors o& the Natio$al "ealth Federatio$ a$d the 4$ter$atio$al Associatio$ o& 8a$cer 9ictims a$d Frie$ds* "e is a co$trib%ti$0 editor &or the New America$ 7a0a;i$e a$d is :reside$t o& America$ 7edia, a p%blishi$0 a$d video prod%ctio$ compa$ i$ so%ther$ 8ali&or$ia*# It's the most important financial lesson of your life! The Mandrake Mechanism... What is it? It is the method by which the Federal Reserve creates money out of nothing; the concept of usury as the payment of interest on pretended loans; the true cause of the hidden tax called inflation; the way in which the Fed creates boom-bust cycles. In the !"#s$ there was a comic strip character called %andra&e the %agician. 'is specialty was creating things out of nothing and$ when appropriate$ to ma&e them disappear bac& 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 techni(ue developed by the political and monetary scientists to create money out of nothing for the purpose of lending. )his is not an entirely accurate description because it implies that money is created first and

then waits for someone to borrow it. *n the other hand$ textboo&s on ban&ing often state that money is created out of debt. )his 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. +nd$ incidentally$ it is the act of paying off the debt that causes it to vanish. )here is no short phrase that perfectly describes that process. ,o$ 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. ,o$ let us now... see .ust how far this money/debt-creation process has been carried and how it wor&s. )he first fact that needs to be considered is that our money today has no gold or silver behind it whatsoever. )he fraction is not 0"1 nor 01. It is #1. It has traveled the path of all previous fractional money in history and already has degenerated into pure fiat money. )he fact that most of it is in the form of chec&boo& balances rather than paper currency is a mere technicality; and the fact that ban&sters spea& about -reserve ratiosis hogwash. )he so-called reserves to which they refer are$ in fact$ )reasury bonds and other certificates of debt. *ur money is -pure fiat- through and through. )he second fact that needs to be clearly understood is that$ in spite of the technical .argon and seemingly complicated procedures$ the actual mechanism by which the Federal Reserve creates money is (uite simple. )hey 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 )he Federal Reserve itself is ama2ingly fran& about this process. + boo&let published by the Federal Reserve 3an& of 4ew 5or& tells us6 28%rre$c ca$$ot be redeemed, or e5cha$0ed, &or Treas%r 0old or a$ other asset %sed as bac,i$0* The <%estio$ o& 6%st what assets 'bac,' Federal Reserve $otes has little b%t boo,,eepi$0 si0$i&ica$ce*2 7lsewhere in the same publication we are told6 2-a$,s are creati$0 mo$e based o$ a borrower's promise to pa (the 4=.#*** -a$,s create mo$e b 'mo$eti;i$0' the private debts o& b%si$esses a$d i$divid%als*2

In a boo&let entitled %odern %oney %echanics$ the Federal Reserve 3an& of 8hicago says6 4$ the .$ited +tates $either paper c%rre$c $or deposits have val%e as commodities* 4$tri$sicall , a FRN bill is 6%st a piece o& paper* 'eposits are merel boo, e$tries* 8oi$s do have some i$tri$sic val%e as metal, b%t 0e$erall &ar less tha$ their &ace amo%$t* 9hat$ then$ ma&es these instruments - chec&s$ paper money$ and coins - acceptable at face value in payment of all debts and for other monetary uses: %ainly$ 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. )his 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 3an& of ,t. ;ouis$ we find this surprisingly candid explanation6 7oder$ mo$etar s stems have a &iat base ) literall mo$e b decree ) with depositor i$stit%tio$s, acti$0 as &id%ciaries, creati$0 obli0atio$s a0ai$st themselves with the &iat base acti$0 i$ part as reserves* The decree appears o$ the c%rre$c $otes: "This note is legal tender for all debts, public and private." 9hile no individual could refuse to accept such money for debt repayment$ exchange contracts could easily be composed to thwart its use in everyday commerce. 'owever$ a forceful explanation as to why money is accepted is that the federal government re(uires it as payment for tax liabilities. +nticipation of the need to clear this debt creates a demand for the pure fiat FR4s. Money would vanish without debt. It is difficult for +mericans to come to grips with the fact that their total money-supply is bac&ed by nothing but debt$ and it is even more mind boggling to visuali2e that$ if everyone paid bac& all that was borrowed$ there would be no money left in existence. )hat's right$ there would not be one penny in circulation - all coins and all paper currency would be returned to ban& vaults - and there would be not one FR4 in any one's chec&ing account. In short$ all money would disappear. %ariner 7ccles was the <overnor of the Federal Reserve ,ystem in !" . *n ,eptember =# of that year$ 7ccles was as&ed to give testimony before the 'ouse 8ommittee on 3an&ing and 8urrency. )he 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 !=#s. 8ongressman Wright atman$ who was 8hairman of that committee$ as&ed how the Fed got the money to purchase two billion FR4s> worth of government bonds in !==.

)his is the exchange that followed. 7ccles6 >e created it* ?atman6 =%t o& what? 7ccles6 =%t o& the ri0ht to iss%e credit mo$e * ?atman6 A$d there is $othi$0 behi$d it, is there, e5cept o%r 0over$me$t's credit? 7ccles6 That is what o%r mo$e s stem is* 4& there were $o debts i$ o%r mo$e s stem, there wo%ld$'t be a$ mo$e * It must be reali2ed that$ 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. + man who borrows @ $### may thin& that he has increased his financial position by that amount but he has not. 'is @ $### cash asset is offset by his @ $### loan liability$ and his net position is 2ero. 3an& accounts are exactly the same on a larger scale. +dd up all the ban& 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. 5et$ every bit of this money is owed by someone. ,ome will owe nothing. *thers will owe many times what they possess. +ll added together$ the national balance is 2ero. 9hat we thin& is money is but a grand illusion. )he reality is debt. Robert 'emphill was the 8redit %anager of the Federal Reserve 3an& in +tlanta. In the foreword to a boo& by Irving Fisher$ entitled ##1 %oney$ 'emphill said this6 4& all the ba$, loa$s were paid, $o o$e co%ld have a ba$, deposit, a$d there wo%ld $ot be a dollar o& coi$ or c%rre$c i$ circ%latio$* This is a sta00eri$0 tho%0ht* >e are completel depe$de$t o$ the commercial ba$,s* +omeo$e has to borrow ever dollar we have i$ circ%latio$, cash, or credit* 4& the ba$,s create ample s $thetic mo$e we are prospero%s1 i& $ot, we starve* >e are absol%tel witho%t a perma$e$t mo$e s stem* >he$ o$e 0ets a complete 0rasp o& the pict%re, the tra0ic abs%rdit o& o%r hopeless sit%atio$ is almost i$credible ) b%t there it is* 9ith the &nowledge that money in +merica is based on debt$ it should not come as a surprise to learn that the Federal Reserve ,ystem is not the least interested in seeing a reduction in debt in this country$ regardless of public utterances to the contrary. 'ere is the bottom line from the ,ystem's own publications. )he Federal Reserve 3an& of ?hiladelphia says6 2A lar0e a$d 0rowi$0 $%mber o& a$al sts, o$ the other ha$d, $ow re0ard the $atio$al debt as somethi$0 %se&%l, i& $ot a$ act%al blessi$0*** @The believeA the $atio$al debt $eed $ot be red%ced at all*2

)he Federal Reserve 3an& of 8hicago adds6 2'ebt ) p%blic a$d private ) is here to sta * 4t pla s a$ esse$tial role i$ eco$omic processes*** >hat is re<%ired is $ot the abolitio$ o& debt, b%t its pr%de$t %se a$d i$telli0e$t ma$a0eme$t*2 What!s wrong with a little debt? )here is a &ind 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. +nd$ for the less academically minded$ it offers the comfort of at least sounding moderate. +fter all$ what's wrong with a little debt$ prudently used and intelligently managed: )he answer is nothing$ provided the debt is based on an honest transaction. )here is plenty wrong with it if it is -based upon fraud-. +n honest transaction is one in which a borrower pays an agreed upon sum in return for the temporary use of a lender's asset. )hat 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.- 7ither way$ the concept is the same. 9hen we go to a lender - either a ban& 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 ac(uire an automobile$ and it is not easy to ac(uire 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. 3ut what are we to thin& of money that is created by the mere stro&e of a pen or the clic& of a computer &ey: 9hy should anyone collect a rental fee on that: 9hen ban&s place credits into your chec&ing account$ they are merely pretending to lend you money. In reality$ they have nothing to lend. 7ven the money that non-indebted depositors have placed with them was originally created out of nothing in response to someone else's loan. ,o what entitles the ban&s 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. 9e are tal&ing here$ not about what is legal$ but what is lawful. +s )homas Aefferson observed at the time of his protracted battle against central ban&ing in the Bnited ,tates$ 2No o$e has a $at%ral ri0ht to the trade o& mo$e le$der, b%t he who has mo$e to le$d*2

Third reason to abolish the system 8enturies ago$ usury was defined as any interest charged for a loan. %odern usage has redefined it as excessive interest. 8ertainly$ any amount of interest charged for a "retended loan is excessive. )he dictionary$ therefore$ needs a new definition. Usury: The char0i$0 o& a$ i$terest o$ a loa$ o& &iat c%rre$c * ;et us$ therefore$ loo& at debt and interest in this light. )homas 7dison summed up the immorality of the system when he said6 B:eople who will $ot t%r$ a shovel o& dirt o$ the pro6ect @7%scle +hoalsA $or co$trib%te a po%$d o& materials will collect more mo$e *** tha$ will the people who will s%ppl all the materials a$d do all the wor,*C Is that an exaggeration: ;et us consider the purchase of a @ ##$### home in which @=#$### represents the cost of the land$ architect's fee$ sales commissions$ building permits$ and that sort of thing and @C#$### is the cost of labor and building materials. If the home buyer puts up @=#$### as a down payment$ then @C#$### must be borrowed. If the loan is issued at 1 over a =#-year period$ the amount of interest paid will be @ DC$E#D. )hat means the amount paid to those who loan the money is about F /F times greater than paid to those who provide all the labor and all the materials. It is true that this figure represents the time-value of that money over thirty years and easily could be .ustified on the basis that a lender deserves to be compensated for surrendering the use of his capital for half a lifetime. 3ut that assumes the lender actually had something to surrender$ that he had earned the capital$ saved it$ and then loaned it for construction of someone else's house. 9hat are we to thin&$ 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? +s we have already shown$ every FR4 that exists today$ either in the form of currency$ chec&boo& 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. )hat means all the FR4s in the entire world are earning daily and compounding interest for the ban&sters which created them. + portion of every business venture$ every investment$ every profit$ every transaction which involves their private fiat scrip - and that even includes losses and the payment of taxes - a portion of all that is earmar&ed as payment to the ban&sters. +nd what did the ban&sters do to earn this perpetually flowing river of wealth: Gid they lend out their own capital obtained through investment of stoc&holders: Gid they lend out the hard-earned savings of their depositors: 4o$ neither of these were their ma.or

source of income. )hey simply waved the magic wand called fiat money. )he flow of such unearned wealth under the guise of interest can only be viewed as usury of the highest magnitude. 7ven 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 "ay the interest? *ne of the most perplexing (uestions associated with this process is -9here does the money come from to pay the interest:- If you borrow @ #$### from a ban& at !1$ you owe @ #$!##. 3ut the ban& only manufactures @ #$### 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. )he amount of money put into circulation .ust isn't enough to cover the total debt$ including interest. )his has led some to the conclusion that it is necessary for you to borrow the @!## for interest$ and that$ in turn$ leads to still more interest. )he 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. )his 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 bac& is to borrow still more. )he assumption fails to ta&e into account the exchange value of labor. ;et us assume that you pay bac& your @ #$### loan at the rate of approximately @!## per month and that about @E# of that represents interest. 5ou reali2e you are hard pressed to ma&e your payments so you decide to ta&e on a part-time .ob. )he ban&$ on the other hand$ is now ma&ing @E# profit each month on your loan. ,ince this amount is classified as -interest$- it is not extinguished as is the larger portion which is a return of the loan itself. ,o this remains as spendable money in the account of the ban&. )he decision then is made to have the ban&'s floors waxed once a wee&. 5ou respond to the ad in the paper and are hired at @E# per month to do the .ob. )he result is that you earn the money to pay the interest on your loan$ and - this is the point - the money you receive is the same money which you previously had paid. +s long as you perform labor for the ban& each month$ the same FR4s go into the ban& as interest$ then out of the revolving door as your wages$ and then bac& into the ban& as loan repayment. It is not necessary that you wor& directly for the ban&. 4o matter where you earn the money$ its origin was a ban& and its ultimate destination is a ban&. )he loop through which it travels can be large or small$ but the fact remains all interest is paid eventually by human effort. +nd the significance of that fact is even more startling than the assumption that not enough money is created to pay bac& 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 wor&s as indentured servants to a ruling class of financial nobility.

$nderstanding the %llusion... )hat's really all one needs to &now about the operation of the ban&ing cartel under the protection of the Federal Reserve. 3ut it would be a shame to stop here without ta&ing a loo& at the actual cogs$ mirrors$ and pulleys that ma&e the magical mechanism wor&. It is a truly fascinating engine of mystery and deception. ;et us$ therefore$ turn our attention to the actual process by which the magicians create the illusion of modern money. First we shall stand bac& for a general view to see the overall action. )hen we shall move in closer and examine each component in detail. The Mandrake Mechanism # &n 'verview )he entire function of this machine is to convert debt into money. It's .ust that simple. First$ the Fed ta&es all the government bonds which the public does not buy and writes a chec& to 8ongress in exchange for them. HIt ac(uires other debt obligations as well$ but government bonds comprise most of its inventory.I )here is no money to bac& up this chec&. )hese fiat FR4s are created on the spot for that purpose. 3y calling those bonds -reserves$- the Fed then uses them as the base for creating nine H!I additional FR4s for every FR4 created for the bonds themselves. )he money created for the bonds is spent by the government$ whereas the money created on top of those bonds is the source of all the ban& loans made to the nation's businesses and individuals. )he result of this process is the same as creating money on a printing press$ but the illusion is based on an accounting tric& rather than a printing tric&. )he bottom line is that 8ongress and the ban&ing 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 FR4 that exists in the world. 8ongress$ 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 ,ystem. 4ow for a more detailed view. )here are three general ways in which the Federal Reserve creates fiat money out of debt.

*ne is by ma&ing loans to the member ban&s through what is called the Giscount 9indow. )he second is by purchasing )reasury bonds and other certificates of debt through what is called the *pen %ar&et 8ommittee.

)he third is by changing the so-called reserve ratio that member ban&s are re(uired to hold. 7ach method is merely a different path to the same ob.ective6 ta&ing I*Bs and converting them into spendable money.

T(E )%*+'$,T W%,)'W )he Giscount 9indow is merely ban&sters' language for the loan window. 9hen ban&s run short of money$ the Federal Reserve stands ready as the -ban&sters' ban&- to lend it. )here are many reasons for them to need loans. ,ince 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 chec&s all clearing through other ban&s at the same time. ,ometimes they ma&e bad loans and$ when these former -assets- are removed from their boo&s$ their -reserves- are also decreased and may$ in fact$ become negative. Finally$ there is the profit motive. 9hen ban&s borrow from the Federal Reserve at one interest rate and lend it out at a higher rate$ there is an obvious advantage. 3ut that is merely the beginning. 9hen a ban& borrows a FR4 from the Fed$ it becomes a one-FR4 reserve. ,ince the ban&s are re(uired to &eep reserves of only about ten per cent$ they actually can loan up to nine FR4s for each FR4 borrowed. ;et's ta&e a loo& at the math. +ssume the ban& receives @ million from the Fed at a rate of E1. )he total annual cost$ therefore$ is @E#$### H.#E J @ $###$###I. )he ban& treats the loan as a cash deposit$ which means it becomes the basis for manufacturing an additional @! million to be lent to its customers. If we assume that it lends that money at 1 interest$ its gross return would be @!!#$### H. J @!$###$###I. ,ubtract from this the ban&'s cost of @E#$### plus an appropriate share of its overhead$ and we have a net return of about @!##$###. In other words$ the ban& borrows a million and can almost double it in one year. )hat's leverage! 3ut don't forget the source of that leverage6 the manufacture of another @! million which is added to the nation's money supply. T(E ' E, M&R-ET ' ER&T%', )he most important method used by the Federal Reserve for the creation of fiat money is the purchase and sale of securities on the open mar&et. 3ut$ before .umping into this$ a word of warning. Gon't expect what follows to ma&e any sense. Aust be prepared to &now that this is how they do it. )he tric& lies in the use of words and phrases which have technical meanings (uite different from what they imply to the average citi2en. ,o &eep your eye on the words. )hey are not meant to explain but to deceive. In spite of first appearances$ the process is not complicated.

It is .ust absurd. T(E M&,)R&-E ME+(&,%*M # & )ET&%.E) /%EW ,tart with... G'/ER,ME,T )E0T )he federal government adds in& to a piece of paper$ creates impressive designs around the edges$ and calls it a bond or )reasury note. It is merely a promise to pay a specified sum at a specified interest on a specified date. +s 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 loo& li&e cash. )o convert these I*Bs into paper bills and chec&boo& money is the function of the Federal Reserve ,ystem. )o bring about that transformation$ the bond is given to the Fed where it is then classified as a... *E+$R%T%E* &**ET +n instrument of government debt is considered an asset because it is assumed the government will &eep its promise to pay. )his is based upon its ability to obtain whatever money it needs through taxation. )hus$ the strength of this asset is the power to ta&e bac& that which it gives. ,o the Federal Reserve now has an -asset- which can be used to offset a liability. It then creates this liability by adding in& to yet another piece of paper and exchanging that with the government in return for the asset. )hat second piece of paper is a... FE)ER&. RE*ER/E +(E+)here is no money in any account to cover this chec&. +nyone else doing that would be sent to prison. It is legal for the Fed$ however$ because 8ongress wants the money$ and this is the easiest way to get it. H)o 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 (uantities of currency would be obvious and controversial.I )his way$ the process is mysteriously wrapped up in the ban&ing system. )he end result$ however$ is the same as turning on government printing presses and simply manufacturing fiat money Hmoney created by the order of government with nothing of tangible value bac&ing itI to pay government expenses. 5et$ in accounting terms$ the boo&s are said to be -balanced- because the liability of the money is offset by the -asset- of the I*B. )he Federal Reserve chec& received by the government then is endorsed and sent bac& to one of the Federal Reserve ban&s where it now becomes a... G'/ER,ME,T )E '*%T *nce the Federal Reserve chec& has been deposited into the government's account$ it is used to pay government expenses and$ thus$ is transformed into many... G'/ER,ME,T +(E+-* )hese chec&s become the means by which the first wave of fiat money floods into the

economy. Recipients now deposit them into their own ban& accounts where they become... +'MMER+%&. 0&,- )E '*%T* 8ommercial ban& deposits immediately ta&e on a split personality. *n the one hand$ they are liabilities to the ban& because they are owed bac& to the depositors. 3ut$ as long as they remain in the ban&$ they also are considered as assets because they are on hand. *nce again$ the boo&s are balanced6 the assets offset the liabilities. 3ut the process does not stop there. )hrough the magic of fractional-reserve ban&ing$ the deposits are made to serve an additional and more lucrative purpose. )o accomplish this$ the on-hand deposits now become reclassified in the boo&s and called... 0&,- RE*ER/E* Reserves for what: +re these for paying off depositors should they want to close out of their accounts: 4o. )hat's the lowly function they served when they were classified as mere assets. 4ow that they have been given the name of -reserves$- they become the magic wand to materiali2e even larger amounts of fiat money. )his is where the real action is6 at the level of the commercial ban&s. 'ere's how it wor&s. )he ban&s are permitted by the Fed to hold as little as #1 of their deposits in -reserve.- )hat means$ if they receive deposits of @ million from the first wave of fiat money created by the Fed$ they have @!##$### more than they are re(uired to &eep on hand H@ million less #1 reserveI. In ban&ers' language$ that @!##$### is called... E1+E** RE*ER/E* )he word -excess- is a tip off that these so-called reserves have a special destiny. 4ow that they have been transmuted into an excess$ they are considered as available for lending. +nd so in due course these excess reserves are converted into... 0&,- .'&,* 3ut wait a minute. 'ow can this money be loaned out when it is owned by the original depositors who are still free to write chec&s and spend it any time they wish: )he answer is that$ when the new loans are made$ they are not made with the same money at all. )hey are made with brand new money created out of thin air for that purpose. )he nation's money supply simply increases by ninety per cent of the ban&'s deposits. Furthermore$ this new money is far more interesting to the ban&s than the old. )he old money$ which they received from depositors$ re(uires them to pay out interest or perform services for the privilege of using it. 3ut$ with the new money$ the ban&s collect interest$ instead$ which is not too bad considering it cost them nothing to ma&e. 4or is that the end of the process. 9hen this second wave of fiat money moves into the economy$ it comes right bac& into the ban&ing system$ .ust as the first wave did$ in the form of... M'RE +'MMER+%&. 0&,- )E '*%T* )he process now repeats but with slightly smaller numbers each time around. 9hat was

a -loan- on Friday comes bac& into the ban& as a -deposit- on %onday. )he deposit then is reclassified as a -reserve- and ninety per cent of that becomes an -excessreserve which$ once again$ is available for a new -loan.- )hus$ the @ million of first wave fiat money gives birth to @!##$### in the second wave$ and that gives birth to @E #$### in the third wave H@!##$### less #1 reserveI. It ta&es 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... 0&,- F%&T M',E2 3 $ T' 4 T%ME* G'/ER,ME,T )E0T )he amount of fiat money created by the ban&ing cartel is approximately nine times the amount of the original government debt which made the entire process possible. 9hen the original debt itself is added to that figure$ we finally have.. T'T&. F%&T M',E2 3 $ T' 56 T%ME* G'/ER,ME,T )he total amount of fiat money created by the Federal Reserve and the commercial ban&s together is approximately ten times the amount of the underlying government debt. )o 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. ?rices go up because the relative value of the money has gone down. )he result is the same as if that purchasing power had been ta&en from us in taxes. )he reality of this process$ therefore$ is that it is a... (%))E, T&1 3 $ T' 56 T%ME* T(E ,&T%',&. )E0T 9ithout reali2ing it$ +mericans have paid over the years$ in addition to their federal income taxes and excise taxes$ a completely hidden tax e(ual to many times the national debt! +nd that still is not the end of the process. ,ince our money supply is purely an arbitrary entity with nothing behind it except debt$ its (uantity can go down as well as up. 9hen 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. )hat is exactly what happens in times of economic or political uncertainty. )his alternation between period of expansion and contraction of the money supply is the underlying cause of... 0''M*7 0$*T*7 &,) )E RE**%',* 9ho benefits from all of this: 8ertainly not the average citi2en. )he only beneficiaries are the political scientists in 8ongress who en.oy the effect of unlimited revenue to perpetuate their power$ and the monetary scientists within the ban&ing cartel called the Federal Reserve ,ystem who have been able to harness the +merican people$ without their &nowing it$ to the yo&e of modern feudalism. RE*ER/E R&T%'* )he previous figures are based on a -reserve- ratio of #1 Ha money-expansion ratio of #-to- I. It must be remembered$ however$ that this is purely arbitrary. ,ince the money is fiat with no precious-metal bac&ing$ there is no real limitation except what the politicians and money managers decide is expedient for the moment. +ltering this ratio

is the third way in which the Federal Reserve can influence the nation's supply of money. )he numbers$ therefore$ must be considered as transient. +t any time there is a -need- for more money$ the ratio can be increased to F#-to- or 0#-to- $ or the pretense of a reserve can be dropped altogether. )here is virtually no limit to the amount of fiat money that can be manufactured under the present system. ,&T%',&. )E0T ,'T ,E+E**&R2 F'R %,F.&T%', 3ecause the Federal Reserve can be counted on to -moneti2e- Hconvert into moneyI 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 .ump to the conclusion that federal debt and inflation are but two aspects of the same phenomenon. )his$ however$ is not necessarily true. It is (uite possible to have either one without the other. )he ban&ing cartel holds a monopoly in the manufacture of money. 8onse(uently$ money is created only when I*Bs are -moneti2ed- by the Fed or by commercial ban&s. 9hen 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. )herefore$ the sale of government bonds to the ban&ing system is inflationary$ but when sold to the private sector$ it is not. )hat is the primary reason the Bnited ,tates avoided massive inflation during the !E#s when the federal government was going into debt at a greater rate than ever before in its history. 3y &eeping interest rates high$ these bonds became attractive to private investors$ including those in other countries. Kery little new money was created$ because most of the bonds were purchased with +merican FR4s already in existence. )his$ of course$ was a temporary fix at best. )oday$ those bonds are continually maturing and are being replaced by still more bonds to include the original debt plus accumulated interest. 7ventually this process must come to an end and$ when it does$ the Fed will have no choice but to literally buy bac& all the debt of the 'E#s - 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. )hen we will understand the meaning of inflation. *n 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 stoc& mar&et crash in !F! occurred at a time when the national debt was being paid off. In every year from !F# through !=#$ federal revenue exceeded expenses$ and there were relatively few government bonds being offered. )he massive inflation of the money supply was made possible by converting commercial ban& loans into -reserves- at the Fed's discount window and by the Fed's purchase of ban&er's acceptances$ which are commercial contracts for the purchase of goods.

4ow the options are even greater. )he %onetary 8ontrol +ct of !E# has made it possible for the 8reature to moneti2e virtually any debt instrument$ including I*Bs from foreign governments. )he apparent purpose of this legislation is to ma&e it possible to bail out those governments which are having trouble paying the interest on their loans from +merican ban&s. 9hen the Fed creates fiat FR4s 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 B.,. )reasury 3onds. )he newly created FR4s go to the foreign governments$ then to the +merican ban&s where they become cash reserves. Finally$ they flow bac& into the B., money pool Hmultiplied by nineI in the form of additional loans. )he cost of the operation once again is born by the +merican citi2en through the loss of purchasing power. 7xpansion of the money supply$ therefore$ and the inflation that follows$ no longer even re(uire federal deficits. +s long as someone is willing to borrow FR4s$ the cartel will have the option of creating those FR4s specifically to purchase their bonds and$ by so doing$ continue to expand the money supply. 9e must not forget$ however$ that one of the reasons the Fed was created in the first place was to ma&e it possible for 8ongress to spend without the public &nowing it was being taxed. +mericans have shown an ama2ing indifference to this fleecing$ explained undoubtedly by their lac& of understanding of how the %andra&e %echanism wor&s. 8onse(uently$ at the present time$ this co2y contract between the ban&ing cartel and the politicians is in little danger of being altered. +s 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 ma.or concern li&ely will be to continue supplying 8ongress. )he implications of this fact are mind boggling. ,ince our money supply$ at present at least$ is tied to the national debt$ to pay off that debt would cause money to disappear. 7ven to seriously reduce it would cripple the economy. )herefore$ as long as the Federal Reserve exists$ +merica will be$ must be$ in debt. )he purchase of bonds from other governments is accelerating in the present political climate of internationalism. *ur 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. E8"ansion .eads to +ontraction 9hile it is true that the %andra&e %echanism is responsible for the expansion of the money supply; the process also wor&s in reverse. Aust as money is created when the Federal Reserve purchases bonds or other debt instruments$ it is extinguished by the sale of those same items. 9hen they are sold$ the money is given bac& to the ,ystem and disappears into the in&well or computer chip from which it came. )hen$ the same secondary ripple effect that created money through the commercial ban&ing 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. + man can only be tempted to borrow$ he cannot be forced to do so. )here are many psychological factors involved in a decision to go into debt that can offset the easy availability of money and a low interest rate6 + downturn in the economy$ the threat of civil disorder$ the fear of pending war$ an uncertain political climate$ to name .ust a few. 7ven though the Fed may try to pump money into the economy by ma&ing it abundantly available$ the public can thwart that move simply by saying no$ than& you. 9hen this happens$ the old debts that are being paid off are not replaced by new ones to ta&e their place$ and the entire amount of consumer and business debt will shrin&. )hat means the money supply also will shrin&$ because$ in modern +merica$ debt is money. +nd 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 man&ind throughout history. In conclusion$ it can be said that modern money is a grand illusion con.ured by the magicians of finance in politics. 9e are living in an age of fiat money$ and it is sobering to reali2e 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. 8orrection. )here is one. It is still within the power of 8ongress to abolish the Federal Reserve ,ystem. *ummary )he FR4 has no intrinsic value. It is a classic example of fiat money with no limit to the (uantity that can be produced. Its primary value lies in the willingness of people to accept it and$ to that end$ legal tender laws re(uire 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. )he entire money supply would vanish into the ban& vaults and computer chips if all debts were repaid. Bnder the present ,ystem$ therefore$ our leaders cannot allow a serious reduction in either the national or consumer debt. 8harging interest on pretended loans is usury$ and that has become institutionali2ed under the Federal Reserve ,ystem. )he %andra&e %echanism 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. )he end product of the %echanism is artificial expansion of the money supply$ which is the root cause of the hidden tax called inflation. )his expansion then leads to contraction and$ together$ they produce the destructive

boom-bust cycle that has plagued man&ind throughout history wherever fiat money has existed.