Just keep arguing what shape the Earth is,or better yet preach about your reptilians,because everyone knows that is more important than understanding just how they have enslaved your parents,you,and the whole damn neighborhood.If you cannot understand the scam after reading the following you might just as well give up your research.FACT!!!!! We take down this ONE CONSPIRACY against the People,we take down their whole house of cards. Trump,threatening to shut down the government...BULLS#*T LIE....Congress threatening to shut down the government...the other side of a BULLS#*T LIE. Are you aware they can run this scam with NO TAXES AT ALL?!!!!.....FACT!!!! You know how I know all these mass shootings are theater? Because NONE OF THEM are EVER DIRECTED at those deserving of them. This CREATURE needs to be destroyed NOW...
THE CREATURE FROM JEKYLL ISLAND
A Second Look at the Federal Reserve
by G. Edward Griffin
Chapter Ten
THE MANDRAKE
MECHANISM
The method by which the Federal Reserve creates
money out of nothing; the concept of usury as the
payment of interest on pretended loans; the true
cause of the hidden tax called inflation; the way in
which the Fed creates boom-bust cycles.
In the 1940s, there was a comic strip character called Mandrake
the Magician. His specialty was creating things out of nothing and,
when appropriate, to make them disappear back into that same
void. It is fitting, therefore, that the process to be described in this
section should be named in his honor.
In the previous chapters, we examined the technique developed
by the political and monetary scientists to create money out of nothing
for the purpose of lending. This is not an entirely accurate
description because it implies that money is created first and then
waits for someone to borrow it. On the other hand, textbooks on
banking often state that money is created out of debt. This also is
misleading because it implies that debt exists first and then is
converted into money. In truth, money is not created until the
instant it is borrowed. It is the act of borrowing which causes it to
spring into existence. And, incidentally, it is the act of paying off the
debt that causes it to vanish.1 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.
1. Printed Federal Reserve Notes that sit in the Treasury's vault do not become
money until they are released into circulation in exchange for checkbook money
that was created by a bank loan. As long as the bills are in the vault with no
debt-based money to replace them, they technically are just paper, not money.
So, let us now leave the historical figures of the past and jump
into their "future," in other words, into our present, and 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 travelled 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 eye wash. 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 metal in reserve, whereas the Fed has no such
restriction.
THE FEDERAL RESERVE IS CANDID
The Federal Reserve itself is amazingly frank about this process.
A booklet published by the Federal Reserve Bank of New York tells
us: "Currency cannot be redeemed, or exchanged, for Treasury gold
or any other asset used as backing. The question of just what assets
'back' Federal Reserve notes has little but bookkeeping significance."1
1. I Bet You Thought, Federal Reserve Bank of New York, p. 11.
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."2
2. Ibid., p. 19.
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.1
1. Modern Money Mechanics, Federal Reserve Bank of Chicago, revised October 1982, p. 3.
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 dollar. 2
2. "Money, Credit and Velocity," Review, May, 1982, Vol. 64, No. 5, Federal Reserve Bank of St. Louis, p. 25.
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 be not one penny in circulation—all coins and all
paper currency would be returned to bank vaults—and there would
be not one dollar in any one's checking account. In short, all money
would disappear.
Marriner Eccles was the Governor of the Federal Reserve System
in 1941. On September 30 of that year, Eccles was asked to give
testimony before the House Committee on Banking and Currency.
The purpose of the hearing was to obtain information regarding the
role of the Federal Reserve in creating conditions that led to the depression
of the 1930s. Congressman Wright Patman, who was
Chairman of that committee, asked how the Fed got the money to purchase two billion dollars worth of government bonds in 1933.
This is the exchange that followed.
ECCLES: We created it.
PATMAN: Out of what?
ECCLES: Out of the right to issue credit money.
PATMAN: And there is nothing behind it, is there, except our
government's credit?
ECCLES: That is what our money system is. If there were no
debts in our money system, there wouldn't be any money.
It must be realized that, while money may represent an asset to
selected individuals, when it is considered as an aggregate of the
total money supply, it is not an asset at all. A man who borrows
$1,000 may think that he has increased his financial position by that
amount but he has not. His $1,000 cash asset is offset by his $1,000
loan liability, and his net position is zero. Bank accounts are exactly
the same on a larger scale. Add up all the bank accounts in the
nation, and it would be easy to assume that all that money represents
a gigantic pool of assets which support the economy. Yet,
every bit of this money is owed by someone. Some will owe
nothing. Others will owe many times what they possess. All added
together, the national balance is zero. What we think is money is but
a grand illusion. The reality is debt.
Robert Hemphill was the Credit Manager of the Federal Reserve
Bank in Atlanta. In the foreword to a book by Irving Fisher, entitled
100% Money, Hemphill said this:
If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin or currency in circulation. This is a staggering thought. We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash, or credit. If the banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless situation is almost incredible—but there it is.1
1. Irving Fisher, 100% Money (New York: Adelphi, 1936), p. xxii
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."1
1. The National Debt, Federal Reserve Bank of Philadelphia, pp. 2,11.
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."2
2. Two Faces of Debt, Federal Reserve Bank of Chicago, p. 33.
An honest transaction is one in which a borrower pays an agreed upon sum in return for the temporary use of a lender's asset. That asset could be anything of tangible value. If it were an automobile, for example, then the borrower would pay "rent." If it is money, then the rent is called "interest." Either way, the concept is the same.
When we go to a lender—either a bank or a private party—and receive a loan of money, we are willing to pay interest on the loan in recognition of the fact that the money we are borrowing is an asset which we want to use. It seems only fair to pay a rental fee for that asset to the person who owns it. It is not easy to acquire an automobile, and it is not easy to acquire money—real money, that is. If the money we are borrowing was earned by someone's labor and talent, they are fully entitled to receive interest on it. But what are we to think of money that is created by the mere stroke of a pen or the click of a computer key? Why should anyone collect a rental fee on that?
When banks place credits into your checking account, they are merely pretending to lend you money. In reality, they have nothing to lend. Even the money that non-indebted depositors have placed with them was originally created out of nothing in response to someone else's loan. So what entitles the banks to collect rent on nothing? It is immaterial that men everywhere are forced by law to accept these nothing certificates in exchange for real goods and services. We are talking here, not about what is legal, but what is moral. As Thomas Jefferson observed at the time of his protracted battle against central banking in the United States, "No one has a natural right to the trade of money lender, but he who has money to lend."1
1. The Writings of Thomas Jefferson, Library Edition (Washington: Jefferson Memorial Association, 1903), Vol XIII, p. 277-78.
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 full of dirt on the project 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. 2
2. As quoted by Brian L. Bex, The Hidden Hand (Spencer, Indiana: Owen Litho, 1975), p. 161. Unfortunately, Edison did not understand the whole problem. He was correctly opposed to paying interest to banks for their fiat money, but he was not opposed to government fiat money. It was only the interest to which he objected. He did not see the larger picture of how fiat money, even when issued solely by the government and without interest, has always been destructive of the economy through the creation of inflation, booms, and busts.
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 compounded 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 the 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.
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 arc 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 the revolving door as your wages, and then back into the bank as loan repayment.
It is not necessary that you work directly for the bank. No matter where you earn the money, its origin was a bank and its ultimate destination is a bank. The loop through which it travels can be large or small, but the fact remains all interest is paid eventually by human effort. And the significance of that fact is even more startling than the assumption that not enough money is created to pay back the interest. It is that the total of this human effort ultimately is for the benefit of those who create fiat money. It is a form of modern serfdom in which the great mass of society works as indentured servants to a ruling class of financial nobility.
1. This 10% figure (ten-to-one ratio) is based on averages. The Federal Reserve requires a minimum reserve of 10% on deposits over $46.8 million but only 3% on deposits up to that amount. Deposits in Eurodollars and nonpersonal time deposits require no reserves at all. Reserves consist of vault cash and deposits at the Federal Reserve. See Regulation D; Reserve Requirements of Depository Institutions, Federal Reserve document 12 CFR 204; as amended effective December 22,1992, p. 23.
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.1 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.
1. banks must cover these ,loans with bonds or other interest-bearing assets which it possesses, but that does not diminish the money-multiplier effect of the new deposit.
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.
2- Debt obligations from the private sector and from other governments also are used in the same way, but government bonds are the primary instruments.
1. That is a theoretical maximum. In actual practice, the banks can seldom loan out all of the money they are allowed to create, and the numbers fall short of the maximum.
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.1 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.
1. Only about 11 to 15 percent of the federal debt at that time was held by the Federal Reserve System.
On the other side of the coin, the Federal Reserve has the option
of manufacturing money even if the federal government does not go
deeper into debt. For example, the huge expansion of the money
supply leading up to the stock market crash in 1929 occurred at a
time when the national debt was being paid off. In every year from
1920 through 1930, federal revenue exceeded expenses, and there
were relatively few government bonds being offered. The massive
inflation of the money supply was made possible by converting
commercial bank loans into "reserves" at the Fed's discount window
and by the Fed's purchase of banker's acceptances, which are
commercial contracts for the purchase of goods.
Now the options are even greater. The Monetary Control Act of 1980 has made it possible for the Creature to monetize virtually any debt instrument, including IOUs from foreign governments. The apparent purpose of this legislation is to make it possible to bail out those governments which are having trouble paying the interest on their loans from American banks. When the Fed creates fiat American dollars to give foreign governments in exchange for their worthless bonds, the money path is slightly longer and more twisted, but the effect is similar to the purchase of U.S. Treasury Bonds. The newly created dollars go to the foreign governments, then to the American banks where they become cash reserves. Finally, they flow back into the U.S. money pool (multiplied by nine) in the form of additional loans. The cost of the operation once again is born by the American citizen through the loss of purchasing power. Expansion of the money supply, therefore, and the inflation that follows, no longer even require federal deficits. As long as someone is willing to borrow American dollars, the cartel will have the option of creating those dollars specifically to purchase their bonds and, by so doing, continue to expand the money supply.
We must not forget, however, that one of the reasons the Fed was created in the first place was to make it possible for Congress to spend without the public knowing it was being taxed. Americans have shown an amazing indifference to this fleecing, explained undoubtedly by their lack of understanding of how the Mandrake Mechanism works. Consequently, at the present time, this cozy contract between the banking cartel and the politicians is in little danger of being altered. As a practical matter, therefore, even though the Fed may also create fiat money in exchange for commercial debt and for bonds of foreign governments, its major concern likely will be to continue supplying Congress.
The implications of this fact are mind boggling. Since our money supply, at present at least, is tied to the national debt, to pay off that debt would cause money to disappear. Even to seriously reduce it would cripple the economy.1 Therefore, as long as the Federal Reserve exists, America will be, must be, in debt.
1. With the Fed holding only 7% of the national debt, the effect would still be devastating. Since the money supply is pyramided ten times on top of the underlying government bonds, each $1 eliminated from the federal debt would cause the money supply to shrink by 70 cents (1.00 X .07 X 10 = .70).
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.
If the idea of eliminating the IRS sounds like good news, remember that the inflation that results from monetizing the debt is just as much a tax as any other; but, because it is hidden and so few Americans understand how it works, it is more politically popular than a tax that is out in the open.
Inflation can be likened to a game of Monopoly in which the game's banker has no limit to the amount of money he can distribute. With each throw of the dice he reaches under the table and brings up another stack of those paper tokens which all the players must use as money. If the banker is also one of the players—and in our real world that is exactly the case—obviously he is going to end up owning all the property. But, in the meantime, the increasing flood of money swirls out from the banker and engulfs the players. As the quantity of money becomes greater, the relative worth of each token becomes less, and the prices bid for the properties goes up. The game is called monopoly for a reason. In the end, one person holds all the property and everyone else is bankrupt. But what does it matter. It's only a game.
Unfortunately, it is not a game in the real world. It is our livelihood, our food, our shelter. It does make a difference if there is only one winner, and it makes a big difference if that winner obtained his monopoly simply by manufacturing everyone's money.
The political scientists who authorize this process of monetizing the national debt, and the monetary scientists who carry it out, know that it is not true debt. It is not true debt, because no one in Washington really expects to repay it—ever. The dual purpose of this magic show is simply to create free spending money for the politicians, without the inconvenience of raising direct taxes, and also to generate a perpetual river of gold flowing into the banking cartel. The partnership is merely looking out for itself.
Why, then, does the federal government bother with taxes at all? Why not just operate on monetized debt? The answer is twofold. First, if it did, people would begin to wonder about the source of the money, and that might cause them to wake up to the reality that inflation is a tax. Thus, open taxes at some level serve to perpetuate public ignorance which is essential to the success of the scheme. The second reason is that taxes, particularly progressive taxes, are weapons by which elitist social planners can wage war on the middle class.
In an introduction to the article, the magazine's editor summarized Ruml's views as follows:
His thesis is that, given control of a central banking system and an inconvertible currency [a currency not backed by gold], a sovereign national government is finally free of money worries and needs no longer levy taxes for the purpose of providing itself with revenue. All taxation, therefore, should be regarded from the point of view of social and economic consequences.1
1. "Taxes for Revenue Are Obsolete," by Beardsley Ruml, American Affairs, January, 1946, p. 35.
Ruml explained that, since the Federal Reserve now can create out of nothing all the money the government could ever want, there remain only two reasons to have taxes at all. The first of these is to combat a rise in the general level of prices. His argument was that, when people have money in their pockets, they will spend it for goods and services, and this will bid up the prices. The solution, he says, is to take the money away from them through taxation and let the government spend it instead. This, too, will bid up prices, but Ruml chose not to go into that. He explained his theory this way:
The dollars the government spends become purchasing power in the hands of the people who have received them. The dollars the government takes by taxes cannot be spent by the people, and therefore, these dollars can no longer be used to acquire the things which are available for sale. Taxation is, therefore, an instrument of the first importance in the administration of any fiscal and monetary policy. 1
1. Ruml, p. 36.
The second principle purpose of federal taxes is to attain more equality of wealth and of income than would result from economic forces working alone. The taxes which are effective for this purpose are the progressive individual income tax, the progressive estate tax and the gift tax. What these taxes should be depends on public policy with respect to the distribution of wealth and of income. These taxes should be defended and attacked in terms of their effect on the character of American life, not as revenue measures.2
2- Ibid., p. 36.
As we have seen, Senator Nelson Aldrich was one of the creators of the Federal Reserve System. That is not surprising in light of the cartel nature of the System and the financial interests which he represented. Aldrich also was one of the prime sponsors of the federal income tax. The two creations work together as a far more delicate mechanism for control over the economic and social life of society than either one alone.
In more recent years, there has been hopeful evidence that the master planners were about to abandon Ruml's blueprint. We have heard a great deal both in Congress and at the Federal Reserve about the necessity of reducing expenses so as to diminish the growth of federal debt and inflation. But it has been lip service only. The great bulk of federal funding continues to be created by the Mandrake Mechanism, the cost of government continues to outpace tax revenues, and the Ruml formula reigns supreme.
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 and 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 assurance 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.
next
Section III
THE NEW ALCHEMY
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.1
1. Irving Fisher, 100% Money (New York: Adelphi, 1936), p. xxii
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."1
1. The National Debt, Federal Reserve Bank of Philadelphia, pp. 2,11.
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."2
2. Two Faces of Debt, Federal Reserve Bank of Chicago, p. 33.
WHAT'S WRONG WITH A LITTLE DEBT?
There is a kind of fascinating appeal to this theory. It gives those
who expound it an aura of intellectualism, the appearance of being
able to grasp a complex economic principle that is beyond the comprehension
of mere mortals. And, for the less academically minded,
it offers the comfort of at least sounding moderate. After all, what's
wrong with a little debt, prudently used and intelligently managed?
The answer is nothing, provided the debt is based on an honest transaction.
There is plenty wrong with it if it is based upon fraud. An honest transaction is one in which a borrower pays an agreed upon sum in return for the temporary use of a lender's asset. That asset could be anything of tangible value. If it were an automobile, for example, then the borrower would pay "rent." If it is money, then the rent is called "interest." Either way, the concept is the same.
When we go to a lender—either a bank or a private party—and receive a loan of money, we are willing to pay interest on the loan in recognition of the fact that the money we are borrowing is an asset which we want to use. It seems only fair to pay a rental fee for that asset to the person who owns it. It is not easy to acquire an automobile, and it is not easy to acquire money—real money, that is. If the money we are borrowing was earned by someone's labor and talent, they are fully entitled to receive interest on it. But what are we to think of money that is created by the mere stroke of a pen or the click of a computer key? Why should anyone collect a rental fee on that?
When banks place credits into your checking account, they are merely pretending to lend you money. In reality, they have nothing to lend. Even the money that non-indebted depositors have placed with them was originally created out of nothing in response to someone else's loan. So what entitles the banks to collect rent on nothing? It is immaterial that men everywhere are forced by law to accept these nothing certificates in exchange for real goods and services. We are talking here, not about what is legal, but what is moral. As Thomas Jefferson observed at the time of his protracted battle against central banking in the United States, "No one has a natural right to the trade of money lender, but he who has money to lend."1
1. The Writings of Thomas Jefferson, Library Edition (Washington: Jefferson Memorial Association, 1903), Vol XIII, p. 277-78.
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 full of dirt on the project 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. 2
2. As quoted by Brian L. Bex, The Hidden Hand (Spencer, Indiana: Owen Litho, 1975), p. 161. Unfortunately, Edison did not understand the whole problem. He was correctly opposed to paying interest to banks for their fiat money, but he was not opposed to government fiat money. It was only the interest to which he objected. He did not see the larger picture of how fiat money, even when issued solely by the government and without interest, has always been destructive of the economy through the creation of inflation, booms, and busts.
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 compounded 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 the 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 the 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 arc 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 the revolving door as your wages, and then back into the bank as loan repayment.
It is not necessary that you work directly for the bank. No matter where you earn the money, its origin was a bank and its ultimate destination is a bank. The loop through which it travels can be large or small, but the fact remains all interest is paid eventually by human effort. And the significance of that fact is even more startling than the assumption that not enough money is created to pay back the interest. It is that the total of this human effort ultimately is for the benefit of those who create fiat money. It is a form of modern serfdom in which the great mass of society works as indentured servants to a ruling class of financial nobility.
UNDERSTANDING THE ILLUSION
That's really all one needs to know about the operation of the
banking cartel under the protection of the Federal Reserve. But it
would be a shame to stop here without taking a look at the actual
cogs, mirrors, and pulleys that make the magical mechanism work.
It is a truly fascinating engine of mystery and deception. Let us,
therefore, turn our attention to the actual process by which the magicians create the illusion of modern money. First we shall stand
back for a general view to see the overall action. Then we shall move
in closer and examine each component in detail.
THE MANDRAKE MECHANISM:
AN OVERVIEW
The entire function of this machine is to convert debt
into money. It's just that simple. First, the Fed takes all
the government bonds which the public does not buy
and writes a check to Congress in exchange for them. (It
acquires other debt obligations as well, but government
bonds comprise most of its inventory.) There is no
money to back up this check. These fiat dollars are created
on the spot for that purpose. By calling those bonds
"reserves," the Fed then uses them as the base for creating
9 additional dollars for every dollar created for the
bonds themselves. The money created for the bonds is
spent by the government, whereas the money created on
top of those bonds is the source of all the bank loans
made to the nation's businesses and individuals. The
result of this process is the same as creating money on a
printing press, but the illusion is based on an accounting
trick rather than a printing trick. The bottom line is that
Congress and the banking cartel have entered into a
partnership in which the cartel has the privilege of
collecting interest on money which it creates out of nothing,
a perpetual override on every American dollar that
exists in the world. Congress, on the other hand, has
access to unlimited funding without having to tell the
voters their taxes are being raised through the process of
inflation. If you understand this paragraph, you understand
the Federal Reserve System.
Money
Now for a more detailed view. There are three general ways in
which the Federal Reserve creates fiat money out of debt. One is by
making loans to the member banks through what is called the
Discount Window. The second is by purchasing Treasury bonds and other certificates of debt through what is called the Open Market
Committee. The third is by changing the so-called reserve ratio that
member banks are required to hold. Each method is merely a different
path to the same objective: taking in IOUs and converting them
into spendable money.
THE DISCOUNT WINDOW
The Discount Window is merely bankers' language for the loan
window. When banks run short of money, the Federal Reserve
stands ready as the "bankers' bank" to lend it. There are many reasons
for them to need loans. Since they hold "reserves" of only
about one or two per cent of their deposits in vault cash and eight or
nine per cent in securities, their operating margin is extremely thin.
It is common for them to experience temporary negative balances
caused by unusual customer demand for cash or unusually large
clusters of checks all clearing through other banks at the same time.
Sometimes they make bad loans and, when these former "assets"
are removed from their books, their "reserves" are also decreased
and may, in fact, become negative. Finally, there is the profit motive.
When banks borrow from the Federal Reserve at one interest rate
and lend it out at a higher rate, there is an obvious advantage. But
that is merely the beginning. When a bank borrows a dollar from the
Fed, it becomes a one-dollar reserve. Since the banks are required to
keep reserves of only about ten per cent, they actually can loan up to
nine dollars for each dollar borrowed.1 1. This 10% figure (ten-to-one ratio) is based on averages. The Federal Reserve requires a minimum reserve of 10% on deposits over $46.8 million but only 3% on deposits up to that amount. Deposits in Eurodollars and nonpersonal time deposits require no reserves at all. Reserves consist of vault cash and deposits at the Federal Reserve. See Regulation D; Reserve Requirements of Depository Institutions, Federal Reserve document 12 CFR 204; as amended effective December 22,1992, p. 23.
1. banks must cover these ,loans with bonds or other interest-bearing assets which it possesses, but that does not diminish the money-multiplier effect of the new deposit.
THE OPEN MARKET OPERATION
The most important method used by the Federal Reserve for the
creation of fiat money is the purchase and sale of securities on the
open market. But, before jumping into this, a word of warning.
Don't expect what follows to make any sense. Just be prepared to
know that this is how they do it. The trick lies in the use of words and phrases which have technical meanings quite different from what they imply to the average citizen. So keep your eye on the words. They are not meant to explain but to deceive. In spite of first appearances, the process is not complicated. It is just absurd.
THE MANDRAKE MECHANISM:
A DETAILED VIEW
Start with...
............GOVERNMENT DEBT
The federal government adds ink to a piece of paper,
creates impressive designs around the edges, and calls it
a bond or Treasury note. It is merely a promise to pay a
specified sum at a specified interest on a specified date.
As we shall see in the following steps, this debt eventually
becomes the foundation for almost the entire
nation's money supply.2 In reality, the government has
created cash, but it doesn't yet look like cash. To convert
these I.O.U's 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........................2- Debt obligations from the private sector and from other governments also are used in the same way, but government bonds are the primary instruments.
.........SECURITIES ASSET
An instrument of government debt is considered an
asset because it is assumed the government will keep its
promise to pay. This is based upon its ability to obtain
whatever money it needs through taxation. Thus, the
strength of this asset is the power to take back that which
it gives. So the Federal Reserve now has an "asset"
which can be used to offset a liability. It then creates this
liability by adding ink to yet another piece of paper and
exchanging that with the government in return for the
asset. That second piece of paper is a ................
........FEDERAL RESERVE CHECK
There is no money in any account to cover this check.
Anyone else doing that would be sent to prison. It is
legal for the Fed, however, because Congress wants the
money, and this is the easiest way to get it. (To raise
taxes would be political suicide; to depend on the public
to buy all the bonds would not be realistic, especially if
interest rates are set artificially low; and to print very
large quantities of currency would be obvious and controversial.)
This way, the process is mysteriously
wrapped up in the banking system. The end result, however,
is the same as turning on government printing
presses and simply manufacturing fiat money (money
created by the order of government with nothing of tangible
value backing it) to pay government expenses. Yet,
in accounting terms, the books are said to be "balanced"
because the liability of the money is offset by the "asset "
of the IOU. The Federal Reserve check received by the
government then is endorsed and sent back to one of the
Federal Reserve banks where it now becomes a ...........
.........GOVERNMENT DEPOSIT
Once the Federal Reserve check has been deposited into
the government's account, it is used to pay government
expenses and, thus, is transformed into many.........
........GOVERNMENT CHECKS
These checks become the means by which the first wave
of fiat money floods into the economy. Recipients now
deposit them into their own bank accounts where they
become.............
.......COMMERCIAL BANK DEPOSITS
Commercial bank deposits immediately take on a split
personality. On the one hand, they are liabilities to the
bank because they are owed back to the depositors. But,
as long as they remain in the bank, they also are considered
as assets because they are on hand. Once again, the
books are balanced: the assets offset the liabilities. But
the process does not stop there. Through the magic of
fractional-reserve banking, the deposits are made to
serve an additional and more lucrative purpose. To
accomplish this, the on-hand deposits now become
reclassified in the books and called .........
.......BANK RESERVES
Reserves for what? Are these for paying off depositors
should they want to close out their accounts? No. That's
the lowly function they served when they were classified
as mere assets. Now that they have been given the name
of "reserves," they become the magic wand to materialize
even larger amounts of fiat money. This is where the
real action is: at the level of the commercial banks. Here's
how it works. The banks are permitted by the Fed to
hold as little as 10% of their deposits in "reserve." That
means, if they receive deposits of $1 million from the
first wave of fiat money created by the Fed, they have $900,000 more than they are required to keep on hand
($1 million less 10% reserve). In bankers' language, that
$900,000 is called.........
......EXCESS RESERVES
The word "excess" is a tip off that these so-called
reserves have a special destiny. Now that they have been
transmuted into an excess, they are considered as available
for lending. And so in due course these excess
reserves are converted into ..........
.........BANK LOANS
But wait a minute. How can this money be loaned out
when it is owned by the original depositors who are still
free to write checks and spend it any time they wish?
Isn't that a double claim against the same money? The
answer is that, when the new loans are made, they are not made with the same money at all. They are made
with brand new money created out of thin air for that
purpose. The nation's money supply simply increases by
ninety per cent of the bank's deposits. Furthermore, this
new money is far more interesting to the banks than the
old. The old money, which they received from depositors,
requires them to pay out interest or perform services
for the privilege of using it. But, with the new
money, the banks collect interest, instead, which is not
too bad considering it cost them nothing to make. Nor is
that the end of the process. When this second wave of fiat
money moves into the economy, it comes right back into
the banking system, just as the first wave did, in the form
of......
......MORE COMMERCIAL
BANK DEPOSITS
The process now repeats but with slightly smaller numbers
each time around. What was a "loan" on Friday
comes back into the bank as a "deposit" on Monday. The
deposit then is reclassified as a "reserve" and ninety per
cent of that becomes an "excess" reserve which, once
again, is available for a new "loan." Thus, the $1 million of first wave fiat money gives birth to $900,000 in the
second wave, and that gives birth to $810,000 in the third
wave ($900,000 less 10% reserve). It takes about twenty eight
times through the revolving door of deposits
becoming loans becoming deposits becoming more
loans until the process plays itself out to the maximum
effect, which is.........
........ BANK FIAT MONEY =
UP TO 9 TIMES GOVERNMENT
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 HAT MONEY =
UP TO 10 TIMES GOVERNMENT (1)
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........1. That is a theoretical maximum. In actual practice, the banks can seldom loan out all of the money they are allowed to create, and the numbers fall short of the maximum.
......... HIDDEN TAX =
UP TO 10 TIMES
THE NATIONAL DEBT**)
Without realizing it, Americans have paid over the
years, in addition to their federal income taxes and excise
taxes, a completely hidden tax equal to many times the
national debt! And that still is not the end of the process.
Since our money supply is purely an arbitrary entity
'' with nothing behind it except debt, its quantity can go down as well as up. When people are going deeper into
debt, the nation's money supply expands and prices go
up, but when they pay off their debts and refuse to
renew, the money supply contracts and prices tumble.
That is exactly what happens in times of economic or
political uncertainty. This alternation between periods of
expansion and contraction of the money supply is the
underlying cause of.........
.....BOOMS, BUSTS,
AND DEPRESSIONS
Who benefits from all of this? Certainly not the average
citizen. The only beneficiaries are the political scientists
in Congress who enjoy the effect of unlimited revenue to
perpetuate their power, and the monetary scientists
within the banking cartel called the Federal Reserve
System who have been able to harness the American
people, without their knowing it, to the yoke of modern
feudalism.
RESERVE RATIOS
The previous figures are based on a "reserve" ratio of 10% (a
money-expansion ratio of 10-to-l). It must be remembered, however,
that this is purely arbitrary. Since the money is fiat with no
precious-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-l or 50-
to-1, or the pretense of a reserve can be dropped altogether. There is
virtually no limit to the amount of fiat money that can be manufactured
under the present system.
NATIONAL DEBT NOT
NECESSARY FOR INFLATION
Because the Federal Reserve can be counted on to "monetize''
(convert into money) virtually any amount of government debt, and
because this process of expanding the money supply is the primary
cause of inflation, it is tempting to jump to the conclusion that federal
debt and inflation are but two aspects of the same phenomenon.
This, however, is not necessarily true. It is quite possible to have
either one without the other. The banking cartel holds a monopoly in the manufacture of money. Consequently, money is created only when IOUs are "monetized" by the Fed or by commercial banks. When private individuals, corporations, or institutions purchase government bonds, they must use money they have previously earned and saved. In other words, no new money is created, because they are using funds that are already in existence. Therefore, the sale of government bonds to the banking system is inflationary, but when sold to the private sector, it is not. That is the primary reason the United States avoided massive inflation during the 1980s when the federal government was going into debt at a greater rate than ever before in its history. By keeping interest rates high, these bonds became attractive to private investors, including those in other countries.1 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.
1. Only about 11 to 15 percent of the federal debt at that time was held by the Federal Reserve System.
Now the options are even greater. The Monetary Control Act of 1980 has made it possible for the Creature to monetize virtually any debt instrument, including IOUs from foreign governments. The apparent purpose of this legislation is to make it possible to bail out those governments which are having trouble paying the interest on their loans from American banks. When the Fed creates fiat American dollars to give foreign governments in exchange for their worthless bonds, the money path is slightly longer and more twisted, but the effect is similar to the purchase of U.S. Treasury Bonds. The newly created dollars go to the foreign governments, then to the American banks where they become cash reserves. Finally, they flow back into the U.S. money pool (multiplied by nine) in the form of additional loans. The cost of the operation once again is born by the American citizen through the loss of purchasing power. Expansion of the money supply, therefore, and the inflation that follows, no longer even require federal deficits. As long as someone is willing to borrow American dollars, the cartel will have the option of creating those dollars specifically to purchase their bonds and, by so doing, continue to expand the money supply.
We must not forget, however, that one of the reasons the Fed was created in the first place was to make it possible for Congress to spend without the public knowing it was being taxed. Americans have shown an amazing indifference to this fleecing, explained undoubtedly by their lack of understanding of how the Mandrake Mechanism works. Consequently, at the present time, this cozy contract between the banking cartel and the politicians is in little danger of being altered. As a practical matter, therefore, even though the Fed may also create fiat money in exchange for commercial debt and for bonds of foreign governments, its major concern likely will be to continue supplying Congress.
The implications of this fact are mind boggling. Since our money supply, at present at least, is tied to the national debt, to pay off that debt would cause money to disappear. Even to seriously reduce it would cripple the economy.1 Therefore, as long as the Federal Reserve exists, America will be, must be, in debt.
1. With the Fed holding only 7% of the national debt, the effect would still be devastating. Since the money supply is pyramided ten times on top of the underlying government bonds, each $1 eliminated from the federal debt would cause the money supply to shrink by 70 cents (1.00 X .07 X 10 = .70).
The purchase of bonds from other governments is accelerating in the present political climate of internationalism. Our own money supply increasingly is based upon their debt as well as ours, and they, too, will not be allowed to pay it off even if they are able.
TAXES NOT EVEN NECESSARY
It is a sobering thought that the federal government now could
operate—even at its current level of spending—without levying any
taxes whatsoever. All it has to do is create the required money
through the Federal Reserve System by monetizing its own bonds.
In fact, most of the money it now spends is obtained that way. If the idea of eliminating the IRS sounds like good news, remember that the inflation that results from monetizing the debt is just as much a tax as any other; but, because it is hidden and so few Americans understand how it works, it is more politically popular than a tax that is out in the open.
Inflation can be likened to a game of Monopoly in which the game's banker has no limit to the amount of money he can distribute. With each throw of the dice he reaches under the table and brings up another stack of those paper tokens which all the players must use as money. If the banker is also one of the players—and in our real world that is exactly the case—obviously he is going to end up owning all the property. But, in the meantime, the increasing flood of money swirls out from the banker and engulfs the players. As the quantity of money becomes greater, the relative worth of each token becomes less, and the prices bid for the properties goes up. The game is called monopoly for a reason. In the end, one person holds all the property and everyone else is bankrupt. But what does it matter. It's only a game.
Unfortunately, it is not a game in the real world. It is our livelihood, our food, our shelter. It does make a difference if there is only one winner, and it makes a big difference if that winner obtained his monopoly simply by manufacturing everyone's money.
FOURTH REASON TO
ABOLISH THE SYSTEM
Make no mistake about it, inflation is a tax. Furthermore, it is the
most unfair tax of them all because it falls most heavily upon those
who are thrifty, those on fixed incomes, and those in the middle and
lower income brackets. The important point here is that this hidden
tax would be impossible without fiat money. Fiat money in America
is created solely as a result of the Federal Reserve System. Therefore,
it is totally accurate to say that the Federal Reserve System generates our most unfair tax. Both the tax and the System that makes
it possible should be abolished. The political scientists who authorize this process of monetizing the national debt, and the monetary scientists who carry it out, know that it is not true debt. It is not true debt, because no one in Washington really expects to repay it—ever. The dual purpose of this magic show is simply to create free spending money for the politicians, without the inconvenience of raising direct taxes, and also to generate a perpetual river of gold flowing into the banking cartel. The partnership is merely looking out for itself.
Why, then, does the federal government bother with taxes at all? Why not just operate on monetized debt? The answer is twofold. First, if it did, people would begin to wonder about the source of the money, and that might cause them to wake up to the reality that inflation is a tax. Thus, open taxes at some level serve to perpetuate public ignorance which is essential to the success of the scheme. The second reason is that taxes, particularly progressive taxes, are weapons by which elitist social planners can wage war on the middle class.
A TOOL FOR SOCIAL PLANNING
The January 1946 issue of American Affairs carried an article written
by Beardsley Ruml who, at that time, was Chairman of the Federal
Reserve Bank of New York. Ruml had devised the system of
automatic withholding during World War II, so he was well qualified
to speak on the nature and purpose of the federal income tax.
His theme was spelled out in the title of his article: "Taxes for Revenue
Are Obsolete." In an introduction to the article, the magazine's editor summarized Ruml's views as follows:
His thesis is that, given control of a central banking system and an inconvertible currency [a currency not backed by gold], a sovereign national government is finally free of money worries and needs no longer levy taxes for the purpose of providing itself with revenue. All taxation, therefore, should be regarded from the point of view of social and economic consequences.1
1. "Taxes for Revenue Are Obsolete," by Beardsley Ruml, American Affairs, January, 1946, p. 35.
Ruml explained that, since the Federal Reserve now can create out of nothing all the money the government could ever want, there remain only two reasons to have taxes at all. The first of these is to combat a rise in the general level of prices. His argument was that, when people have money in their pockets, they will spend it for goods and services, and this will bid up the prices. The solution, he says, is to take the money away from them through taxation and let the government spend it instead. This, too, will bid up prices, but Ruml chose not to go into that. He explained his theory this way:
The dollars the government spends become purchasing power in the hands of the people who have received them. The dollars the government takes by taxes cannot be spent by the people, and therefore, these dollars can no longer be used to acquire the things which are available for sale. Taxation is, therefore, an instrument of the first importance in the administration of any fiscal and monetary policy. 1
1. Ruml, p. 36.
REDISTRIBUTION OF WEALTH
The other purpose of taxation, according to Ruml, is to redistribute
the wealth from one class of citizens to another. This must
always be done in the name of social justice or equality, but the real
objective is to override the free market and bring society under the
control of the master planners. Ruml said: The second principle purpose of federal taxes is to attain more equality of wealth and of income than would result from economic forces working alone. The taxes which are effective for this purpose are the progressive individual income tax, the progressive estate tax and the gift tax. What these taxes should be depends on public policy with respect to the distribution of wealth and of income. These taxes should be defended and attacked in terms of their effect on the character of American life, not as revenue measures.2
2- Ibid., p. 36.
As we have seen, Senator Nelson Aldrich was one of the creators of the Federal Reserve System. That is not surprising in light of the cartel nature of the System and the financial interests which he represented. Aldrich also was one of the prime sponsors of the federal income tax. The two creations work together as a far more delicate mechanism for control over the economic and social life of society than either one alone.
In more recent years, there has been hopeful evidence that the master planners were about to abandon Ruml's blueprint. We have heard a great deal both in Congress and at the Federal Reserve about the necessity of reducing expenses so as to diminish the growth of federal debt and inflation. But it has been lip service only. The great bulk of federal funding continues to be created by the Mandrake Mechanism, the cost of government continues to outpace tax revenues, and the Ruml formula reigns supreme.
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 and 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 assurance that we may be exempted from that morbid roll call.
Correction. There is one. It is still within the power of Congress to abolish the Federal Reserve System.
SUMMARY
The American dollar has no intrinsic value. It is a classic example
of fiat money with no limit to the quantity that can be produced.
Its primary value lies in the willingness of people to accept it and, to
that end, legal tender laws require them to do so. It is true that our
money is created out of nothing, but it is more accurate to say that it
is based upon debt. In one sense, therefore, our money is created out
of less than nothing. The entire money supply would vanish into
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. next
Section III
THE NEW ALCHEMY
