THE MONEY QUESTION
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Albert Ellis said in a New Guide to Rational Living:

...you could hardly conceive of a more irrational world than our present society. In spite of the enormous advances in technical knowledge made during the last century, and the theoretical possibility that all of us could live in peace and prosperity, we actually hang on to the brink of local strife, world war, economic insecurity, political skulduggery, organized crime, pollution, ecological bankruptcy, business fraud, sexual violence, racial bigotry, labor and management inefficiency, religious fanaticism, and other manifestions of inhumanity. ...Modern life, instead of seeming just a bowl of cherries, often more closely resembles a barrel of prune pits.

Even though Ellis recognizes that we have the technology to feed, house, and clothe all mankind as well as live in peace, freedom, abundance, and leisure, he never in all of his writings which I have ever read ever once addressed the cause of our maladies. But others have. If only we will listen, learn, and act on our knowledge there is hope of a remedy that will enhance the life and liberty of every individual.

In America today there is no shortage of people willing to work at alleviating society’s ills. Unfortunately, very few recognize just what it is that is causing such turmoil in our supposedly enlightened world.

What is the cause of all this social turmoil?

C. H. Douglas said, "The answer is so short as to be almost banal. It is money."

Ralph Borsodi said, "Without money reform, no social reform would be possible," and added, "Money reform, or an honest money system, will be the most difficult reform to bring about because so few people understand the problem."

Lord Maynard Keynes said, "There is no subtler, no surer means of overturning the existing basis of society than to debauch their currency. The process engages all the hidden force of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."

The supposedly mysterious arena of money mechanics is the battlefield where the war to defeat the power of a corrupt money system will be won or lost. Money mechanics is the nuts and bolts procedure that creates and uncreates money. I will attempt an explanation of the mechanics of America’s money system. It is so simple that I have often said that its simplicity is its best cover. It is incredibly simple and many people refuse to believe it.

This explanation will be quite brief, but it is based on documented facts not the least of which are the publications of the system itself.(1) I hope my explanation will be sufficient for us to begin to expose commonly believed myths and fallacies. It should help expose the anti-democratic, anti-social, and anti-libertarian nature of the system. It should also expose some of the mutually exclusive contradictions in orthodox economics. No economic theory or ideological construct that excludes money mechanics has any chance of being accurate and complete.

In 1791 the Congress established a central bank to monetize the government’s debt. In 1792 the Congress enacted a coinage bill to establish a mint and coin privately owned silver. The monetized debt assured a justification for taxation for the benefit of the financial oligarchy. The Coinage Act assured that rich people could convert their silver to legal tender money.

The Federal Reserve Act of 1913 and subsequent revisions, particularly in 1935 and 1980, are but consolidations of financial oligarchic power that began in 1791.

You need not share my opinions of the foregoing history to observe and learn what the present financial system is all about and observe its effects. Total Credit Market Debt is nearly $23 trillion.(2) TCMD includes government, financial, foreign, and private debt but excludes corporate stock. Social, financial, political, and environmental chaos runs rampant.

Nothing I am about to tell you is secret, but the information will not come to you through ordinary education and media sources. You must go to it.

The present private monopoly banking system was enacted into law Dec. 23, 1913 by legislation blatantly mislabeled the Federal Reserve Act. It has been subsequently revised.(3)

This private monopoly bank is our central banking system. It is the monetary policy authority of the United States. It is a bank of issue, that is, it creates and regulates the money supply. It is sometimes called the bankers’ bank. It is erroneously called the government’s bank. The government banks there, but the government does not own or control the Federal Reserve Banks any more than you own or control the bank where you bank.

Monetary policy of the bank monopoly must be clearly distinguished from fiscal policy of the government. Monetary policy is creation and regulation of the money supply; fiscal policy of the government is tax, borrow, and spend. Monetary and fiscal policy are different and sometimes conflict.

In its present form the nationwide banking monopoly consists of twelve regional banks, a Board of Governors, the Federal Open Market Committee, several advisory committees, and the member depository institutions such as commercial banks, S & Ls, credit unions, etc. Most depository institutions are members but a few still operate under state laws.

The bank monopoly makes monetary policy in three ways: 1. It creates and regulates original bank reserves. 2. It dictates fractional reserve ratios. 3. It dictates the discount interest rate.

Regulation of original bank reserves is accomplished, primarily, by buying and selling U. S. Treasury securities in the open market.(4) The Fed buys securities by writing checks or creating deposits by computer entry for money that does not exist. The Fed does not complete a transaction by transferring money from one account to another as ordinary businesses do. The Fed creates the money it uses in its open market transactions.

The operation may be best understood if we use the example of checks. The Fed writes a check to a securities dealer. The dealer deposits the check at his commercial bank. The commercial bank credits the dealer’s account and returns the check to the Fed. The Fed credits the bank’s reserve account. New money has been created and can be circulated by the dealer writing checks to pay his bills.

The money created by this process has no corporeal existence other than numbers in a bank’s ledger. Keep in mind that no notes have been printed and no coins have been minted. This is the secret of understanding money mechanics which I call ledger entry legerdemain or ledger entry shell game. Also, keep in mind that if you or I did such a thing, we would be called federal although not Federal Reserve Bank officer. We would be called federal prisoner.

The deposit made by the securities dealer creates an addition to the commercial bank’s reserve account. Commercial banks may lend a portion of the value of the reserve account. The portion is determined by the specified fractional reserve requirement. If the specified fraction is 10%, the bank may lend 90% of its reserve account value.

If the Fed wrote a check for $1000 to the securities dealer, the commercial bank would accrue $1000 in new reserves and could lend $900. The $900 loan creates new deposits and a transfer of $900 of reserves to the recipient bank. The recipient bank may lend $810. The deposit of $810 and transfer of reserves enables a loan of $729. The process limits the commercial banking system to a maximum creation limit of $9000 from an original $1000 dollar deposit and reserve creation by the Fed. It is a cascading system of money creation that is limited by the reserve ratio. Do not forget that all the money was created out of nothing by bank officers’ signatures on checks. The Fed checks are not written against funded accounts. Commercial banks’ checks are written against make-believe reserves. The reserve account, to the extent that it is supported by deposits, is a bookkeeping fiction that enables the bank to show you that your money is in your account even though it has used your money as the basis of a loan. This is what I call ledger entry legerdemain or ledger entry shell game. Which account is the money in? The deposit account? The reserve account? The loan account? Or all three at the same time?

Technically, checks are no longer necessary. All operations can be done by computers.

Actual reserve ratios required to be held are variable.(5) Presently they are 10%, 3%, and 0%. The theoretical limit of 3% ratio is 32 times multiplication of reserves. 0% has no theoretical limit. Actual commercial bank multiplier of the system as a whole is around 12 to 14.

Commercial banks do not lend out money that has been deposited with them as is commonly believed. In reality, banks create the money, lend it, and accept it as additional deposits. Modern Money Mechanics, published by the Federal Reserve Bank of Chicago, explains on page six, "Of course, they [commercial banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers’ transaction accounts." Remember that no corporeal thing has been created at all. It is entirely numbers transferred by checks. The fractional reserve requirement limits how much money commercial banks can create. It is the Fed’s most powerful regulatory method. Changes made in reserves whip-crack through the banking system with an approximate 12 times effect.

The art of commercial banking is the bookkeeping management of this ledger entry shell game. Banks are constantly accepting deposits, paying demand checks, making loans and receiving pay back of loans. When a bank’s loan-reserve ratio cannot otherwise be maintained, the bank may go to the Fed with Treasury securities as collateral and borrow. The interest the Fed charges the commercial bank is the discount rate of interest. The discount rate generally influences all other interest rates.

There are two other forms of money worth mentioning. Coins issued by the Treasury is a minor source of currency. It is our only government issued debt-free money. U. S. Notes are no longer circulated. Federal Reserve Notes, paper money, are part of the ledger entry shell game. FRNs are printed for the Fed by the Bureau of Printing and Engraving. The Fed pays the cost of the printing and issues the notes. Commercial banks receive the notes as a debit to their reserve account and issue them to customers who demand them in exchange for deposit debits. Coins and notes support the myth that money is something tangible and substantial.

The foregoing is how our money is created. Money destruction is the rest of the story of money mechanics. The Fed can shrink basic bank reserves by taking the opposite action in the open market that it took to create reserves. That is, it sells securities. The buyer’s check is sent to the buyer’s commercial bank for debit of his deposit account and deposits and reserves are reduced. The reduction in reserves creates a reverse cascade or collapse of loans and deposits of up to 12 times the reduction in reserves. Money is thereby uncreated.

Commercial banks uncreate money corresponding to loan principle when a loan is repaid. In order to repay a loan, the money must come out of a deposit account. A reduction in deposits may leave the bank with reserves that supported the deposit and are now excess. To restore money to circulation, a new loan must be made. No reverse cascading effect occurs, because reserves are not reduced. Keep in mind that we are not talking about anything corporeal. We are talking about deposit money that only exists as numbers. It is all numbers and bookkeeping. Numbers can be created and erased with the touch of a computer button as easily as they can be transferred from one account to another.

Our money supply is a dynamic function of money creation by lending and cancellation by repayment. The money supply known as M1, M2, M3, and L commonly published in business and statistical literature is the total of liquid money in the pipeline at a given time. It is not a true representation of the dynamic money supply. The M’s obscure the dynamics of lending and paying back.

Loans, of course, require payment of interest. When banks create money to loan, they do not create any money to pay interest. Therefore we always have more debt than money. When the loan principle is repaid, money is canceled and the money supply is reduced. The interest debt can only be paid by additional borrowing. Money, called interest, is the banks’ income; and by not creating money to pay interest, banks have created an exponential annuity to themselves. The entire banking system is a lose-lose game for all of us, and a win-win game for bankers.

It is a system of bankers, by bankers, for bankers. This is true not only for us but for all people of the planet. We Americans live in the la-la land of lies shouting for all the world to hear—we are free! we are free! Yes, free to put ourselves, our kids, grandkids, and everyone into debt-money slavery. This is reason enough to understand why we are not loved worldwide.

Based on the above explanation of the money system, I am about to lob some handgrenades at commonly believed myths.

MYTH No. 1. The government prints money. This myth is supported by semantic sophistry. Printing money and issuing money are two entirely different things. As explained above, the Bureau of Printing and Engraving prints Federal Reserve Bank Notes, but the government does not issue them. The Fed does. The government mints coins, an insignificant part of the money supply, taxes, and borrows in the open market from private investors. Perpetrators of this myth equate this to printing money.
     When the Fed or commercial banks buy government securities, new money is created as described above. The total of those bank transactions constitutes about 20% of the Gross Public Treasury Debt erroneously labeled the "national" debt, or about $1 trillion. This is less than 20% of the money supply, but it must be remembered that all money, coins excepted, originates as debt. The true money supply is the dynamic creation and payback of debt. The perpetrators of this myth resort to polemical sophistry. New money is created when anyone borrows from a fractional reserve institution. ANYONE!

MYTH No. 2. Inflation is caused by printing too much money. The explanation in Myth No. 1 explodes this myth. No printing press, no printing press inflation.

MYTH No. 3. We must pay off the national debt. This is one of the more pernicious myths. When money is created by debt at interest and canceled by repayment, it is impossible to pay off all debt and maintain a money supply. It is mathematically possible for the government to pay off its debt to all but the Fed; but if the government paid off the Fed, bank reserves would disappear and so would the money supply. The debt can never be paid off until an alternate source of money is available with which to do it. I repeat, the debt cannot be paid off without an ALTERNATE SOURCE OF MONEY.

MYTH No. 4. Inflation is caused by too much money chasing too few goods. To believe this myth, one must be deaf, dumb, and blind. Open your eyes and observe that there is no shortage of goods. In fact, there are too many goods chasing too few dollars. Consumer debt is more than $1 trillion for goods not yet paid for. Stores are full and begging us to buy more by debt erroneously called credit. There has been too little money since W.W.II, yet inflation as measured by prices is endemic. The perpetrators of this myth engage in the doublethink that money derives its value from scarcity while at the same time they assure us there is too much money! That surely must cause Orwell to twist in his grave.

MYTH No. 5. Consumer Price Index is a valid measure of inflation. This would be true only if inflation is defined that way. CPI is massaged to create false images for political consumption. The product base, the weighting, and the time base are all altered for political subterfuge. CPI is also distorted by price decreases caused by technological innovation.

MYTH No. 6. Business makes money. This myth is largely supported by semantic confusion. Only banks make money; businesses get money that has been created by banks as debt.

MYTH No. 7. The problems of unemployment and debt can be solved by producing more. Producing more what? We cannot pay for what we have already produced because of an obvious shortage of money. Production means nothing without concomitant consumption. The more we produce and consume by going into debt, the faster the debt rises in a vicious spiral of financial and social stratification.

MYTH No. 8. The problems of unemployment and debt can be solved by exporting goods. Exports in excess of imports only earn debt currency issued by foreign banks. Foreign debt currency is useless in the domestic market. Here we encounter yet another mathematical impossibility. All nations CANNOT be net exporters. The objective of foreign trade is to get an advantage in the competition for resources and artificially scarce money. What a colossal folly to export our real wealth for useless debt currency issued by foreign banks. The ultimate end of this fallacious competition is WAR—yet another creator of debt and waste.

MYTH No. 9. One of the most tenacious and emotionally charged myths is that the physical substance of money matters. It is of no consequence what-so-ever what money is made of as long as it is issued as debt. The mechanism, the irreconcilable mathematics, and mal-distribution of wealth will result in the same social, financial, environmental, and political chaos. It always has. The historical records of the junkyard of empires show it well.

MYTH No. 10. The myth of eminent bankruptcy. One glimpse at the exponential increase in Total Sector Assets, Liabilities, Credit Market Debt, and money supply shows there is no inherent reason for the fictions touted by bankruptcy mongers such as Henry Figge. All functions increase along similar curves. In articles published in The Spotlight on February 27 and March 6, 1995, we addressed this myth in more detail including a graph of the functions. Only mismanagement or deliberate management could cause debt to ever exceed assets. The subtle effect of inflation makes it so. Nothing here should be construed to mean the depression of the 1930s or hyper-inflation such as Germany in 1923 did not happen or will not happen again. If and when they happen, they will happen by design to accomplish some political or financial goal.

MYTH No. 11. The myth that there is a simple solution to a complex problem. This myth is not unique to money, but it supports all money myths one way or another. There is mathematical proof that a system of n variables must have no less than n solutions. The empirical reasoning is that in any system of interdependent variables, changing one variable affects all other variables. Hence, they must all be solved simultaneously. I have outlined only a few variables. There are many more. Is the solution to this money problem beyond the reach of human intellectuality? I hope not, but perhaps that is just my wishful thinking. But if scientific methodology can put men on the moon and bring them back, why can it not solve the money problem? I hope it can if we opt for the necessary mental discipline and begin to deal with real data in real time. When we do that we will see that many problems facing society are a result of the financial structure. No change is possible without a change in the structure. Just as an automobile cannot fly due to its structure no matter how much one tinkers with the engine or what color it is painted, the financial system can only do what it was designed to do. What it is designed to do is perpetuate an exponentially increasing annuity to the financial oligarchy.

If we divide the total money of the nation by the total population of the nation we conclude that there is about $21,500 for each person. This sounds like plenty of money for everyone. Unfortunately, there is about $58,000 of debt for every person. Apply your $21,500 to the debt and $37,500(6) of debt would remain. Your options are forfeiture of assets or borrow more money. Can you borrow yourself out of debt? You cannot!

Since the average person only deals with money after it has been created, perhaps it is not surprising that the cause of the ever increasing debt is not widely perceived. But it must be widely perceived before there is any hope of correcting it.

Since the established mechanism of money creation and uncreation is itself the cause of ever increasing debt, it is not possible to correct the debt problem using any method that deals with money after it has been created.

Working harder or longer will not correct it.

Having a job for everyone will not correct it.

Neither raising nor lowering wages will correct it.

Neither greater nor lesser utilization of natural resources will correct it.

Neither increasing nor decreasing exports will correct it.

Neither more nor less spending will correct it.

Neither full employment nor less than full employment will correct it.

Changing interest rates will not correct it.

Changing tax rates will not correct it.

The only thing that will correct it is the one thing that is a sacrosanct non-subject in media, education, politics, religion, and even social discourse. The only thing that will correct it is to strip banks of their power to create their money as debt at interest and adopt a method of money creation whereby the U. S. Treasury creates our money as CREDIT!

This issue is the key issue in the financial future of our nation and world!

This FRAUDULENT money mechanism is utilized throughout the world and is destroying nations, communities, families, and individuals right before our eyes!

We must turn an entrenched, centuries old financial establishment on its ear!

READ ABOUT IT.

STUDY IT.

UNDERSTAND IT.

TALK ABOUT IT.

THEN RAISE SOME HELL!

1. Modern Money Mechanics, published by the Chicago Federal Reserve Bank.return

2. Second quarter, 1999. return

3 See Title 12 USC for complete, current banking law.return

4. See Modern Money Mechanics for a complete review of open market operations.return

5. See current issue of Federal Reserve Bulletin for requirements and conditions.return

6. Based on credit market non-financial debt. Total other liabilities could triple it.return

Bibliography

A Matter of Life or Debt by Eric de Maré.

The Money Creators by Gertrude Coogan.

The Truth in Money Book by Ted Thoren and Richard Warner.

The Credit-Money Blue Book by Peter Cook

Social Credit by C. H. Douglas.

Monopoly of Credit by C. H. Douglas.

Human Ecology by Thomas Robertson.

A Primer on the Fed published by FRB Richmond.

Modern Money Mechanics published by FRB Chicago.

Economic Insanity by Roger Terry.

United States Code, Title 12 and Title 31.

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