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
"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
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
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
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
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%
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
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
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.
Creature from Jekyll Island