A Crash Course on Money

excerpted from the book

The Creature from Jekyll Island

a second look at the Federal Reserve

by G. Edward Griffin

American Media, 2008, paperback (original 1994)

"fiat money" - American Heritage dictionary

Paper money decreed legal tender ... not backed by gold or silver.

Wars are seldom funded out of the existing treasury, nor are they even done so out of increased taxes. If governments were to levy taxes on their citizens fully adequate to finance the conflict, the amount would be so great that many of even its most ardent supporters would lose enthusiasm. By artificially increasing the money supply, however, the real cost is hidden from view. It is still paid, of course, but through inflation, a process that few people understand.

The American Revolution was no exception. In order to pay the bill for independence, both the Confederation and the individual states went heavily into the printing business. At the beginning of the war in 1775, the total money supply stood at $12 million. In June of that year, the Continental Congress issued another $2 million. Before the notes were even put into circulation, another $1 million was authorized. By the end of the year, another $3 million. In 1776, another $19 million. $13 million in 1777. $64 million in 1778. $125 million in 1779. And still more: the Continental Army issued its own "certificates" for the purchase of supplies totaling $200 million. A total of $425 million in five years on top of a base of $12 million is an increase of over 3500%. And, in addition to this massive expansion of the money supply on the part of the central government, it must be remembered that the states were doing exactly the same thing. It is estimated that, in just five years from 1775 to the end of 1779, the total money supply expanded by 5000%. By contrast, the amount raised in taxes over the five-year period was inconsequential, amounting to only a few million dollars.

The first exhilarating effect of this flood of new money was the flush of apparent prosperity, but that was quickly followed by inflation as the self-destruct mechanism began to operate. In 1775, paper Continentals were traded for one dollar in gold. In 1777, they were exchanged for twenty-five cents. By 1779, just four years from their issue, they were worth less than a penny. The phrase "Not worth a Continental" has its origin in this dismal period. Shoes sold for $5,000 a pair. A suit of clothes cost a million.

Fiat money is the means by which governments obtain instant purchasing power without taxation. But where does that purchasing power come from? Since fiat money has nothing of tangible value to offset it, government's fiat purchasing power can be obtained by subtracting it from somewhere else. It is, in fact "collected' from us all through a decline in our purchasing power.

In the beginning, banks served as warehouses for the safe keeping of their customers' coins. When they issued paper receipts for those coins, they converted commodity money into receipt money. This was a great convenience, but it did not alter the money supply. People had a choice of using either coin or paper but they could not use both. If they used coin, the receipt was never issued. If they used the receipt, the coin remained in the vault and did not circulate.

When the banks abandoned this practice and began to issue receipts to borrowers, they became magicians. Some have said they created money out of nothing, but that is not quite true. What they did was even more amazing. They created money out of debt.

Obviously, it is easier for people to go into debt than to mine gold. Consequently, money no longer was limited by the natural forces of supply and demand. From that point in history forward, it was to be limited only by the degree to which bankers have been able to push down the gold-reserve fraction of their deposits.

From this perspective, we can now look back on fractional money and recognize that it really is a transitional form between receipt money and fiat money. It has some of the characteristics of both. As the fraction becomes smaller, the less it resembles receipt money and the more closely it comes to fiat money. When the fraction finally reaches zero, then it has made the complete transition and becomes pure fiat. Furthermore, there is no example in history where men, once they had accepted the concept of fractional money, didn't reduce the fraction lower and lower until, eventually, it became zero. No bank can stay in business for very long with a zero reserve. The only way to make people accept such a worthless currency is by government force. That's what legal-tender laws are all about. The transition from fractional-reserve money to fiat money, therefore, requires the participation of government through a mechanism which is called a central bank.

Fractionai money is paper money which is backed by precious metals up to only a portion of the face amount. It is a hybrid, being part receipt money and part fiat money... the fraction which represents the reserve becomes smaller and smaller until, eventually, it is reduced to zero... Fractional money will always degenerate into fiat money. It is but fiat money in transition.

... Fractional money is defined as paper money with precious-metal backing for part, not all of its stated value... Fractional money always degenerates into pure fiat money.

The reality of central banks - the Federal Reserve System is such a creature - is that, under the guise of purchasing government bonds, they act as hidden money machines which can be activated any time the politicians want. This is a godsend to the political scientists who no longer must depend on taxes or the good credit of their treasury to raise money It is even easier than printing and, because the process is not understood by the public, it is politically safe.

In Europe and America, the banks have always operated with the assumption that their partners in government will come to their aid when they get into trouble. Politicians may speak about "protecting the public," but the underlining reality is that the government needs the fiat money produced by the banks. The banks, therefore - at least the big ones - must not be allowed to fail. Only a cartel with government protection can enjoy such insulation from the workings of a free market.

The Bank of England was formed in 1694 to institutionalize fractional-reserve banking. As the world's first central bank, it introduced the concept of a partnership between bankers and politicians. The politicians would receive spendable money (created out of nothing by the bankers) without having to raise taxes. In return, the bankers would receive a commission on the transaction-deceptively called interest-which would continue in perpetuity. Since it all seemed to be wrapped up in the mysterious rituals of banking, which the common man was not expected to understand, there was practically no opposition to the scheme. The arrangement proved so profitable to the participants that it soon spread to many other countries in Europe and, eventually, to the United States.

in a booklet published by the Federal Reserve Bank of New York

Banks are creating money based on a borrower's promise to pay (the IOU)... Banks create money by 'monetizing' the private debts of businesses and individuals.

in a booklet entitled 'Modern Money Mechanics' the Federal Reserve Bank of Chicago says

In the United States neither paper currency nor deposits have value as commodities. Intrinsically, a dollar bill is just a piece of paper. Deposits are merely book entries. Coins do have some intrinsic value as metal, but generally far less than their face 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.

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.

Mariner Eccles, Governor of the Federal Reserve system, giving testimony before a House Committee on Banking and Currency in 1941

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 J 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 grand illusion. The reality is debt.

Robert Hemphill Credit Manager of the Federal Reserve Bank in Atlanta, in the foreword to a book by Irving Fisher entitled "100% Money"

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.

from a publication of The Federal Reserve Bank of Philadelphia

A large and growing number of analysts ... now regard the national debt as something useful, if not an actual blessing .... [They believe] the national debt need not be reduced at all.

The 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.

The federal government now could operate ... 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.

... 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.

Beardsley Ruml, Chairman of the Federal Reserve Bank of New York, wrote an article in the January 1946 issue of American Affairs titled "Taxes for Revenue Are Obsolete". In an introduction to the article, the magazine's editor summarized Rumi's views

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.

Beardsley Ruml, Chairman of the Federal Reserve Bank of New York, wrote an article in the January 1946 issue of American Affairs titled "Taxes for Revenue Are Obsolete"

The ... 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.

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 o it 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

Cecil Rhodes made one of the world's greatest fortunes of the 19th century. Financed by Nathan Rothschild and the Bank of England, he established a monopoly over the diamond output of South Africa and most of the gold as well. He formed a secret society which included many of the top leaders of British government. Their elitist goal was nothing less than world domination and the establishment of a modem feudalist society controlled by themselves through the world's central banks. In America, the Council on Foreign Relations (CFR) was an outgrowth of that group.

J.P. Morgan, Sr. was brought into banking by his father, Junius Morgan, in England. The Morgans were friendly competitors with the Rothschilds and became socially close to them. Morgan's London-based firm was saved from financial ruin in 1857 by the Bank of England over which the Rothschilds held great influence. Thereafter, Morgan appears to have served as a Rothschild financial agent and went to great length to appear totally American.

John D. Rockefeller made his initial fortune in oil but soon gravitated into banking and finance. His entry into the field was not welcomed by J.P. Morgan, and they became fierce competitors. Eventually, they decided to minimize their competition by entering into joint ventures. In the end, they worked together to create a national banking cartel called the Federal Reserve System.

Carroll Quigley was a professor of history at Georgetown University. His book, Tragedy and Hope, revealed that the Council on Foreign Relations (CFR) is an outgrowth of the secret society formed by Cecil Rhodes. He wrote the history of how an international network of financiers has created a system of financial control able to dominate the political systems of all countries through their central banks.

Winston Churchill was the First Lord of the Admiralty in World War I. As the Lusitania entered into an area where a German U-Boat was known to be operating, he called off the destroyer escort that had been assigned to protect her. He calculated that the destruction of a British ship with U.S. passengers aboard would inflame American passions against Germany and help create a political climate for coming into the war.

The Creature from Jekyll Island

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