OK, now it is time to show exactly how the Federal Reserve System creates money out of nothing. But before we do that, let's quickly recap the different forms of money discussed up to this point.

1. Commodity Money

Commodity money can be based on any commodity that people value.[1] Sheep, cows, corn, wheat — all of these served as early forms of commodity money.

When mankind discovered metal, it became a new (more convenient) form of commodity money. Unlike livestock, metal didn't need to be fed, watered, and cleaned up after. And, unlike wheat and corn, you didn't have to worry about metal going bad, becoming contaminated with bugs or mold, etc.

Also, metal was easily divisible. Assuming a cow was equal in value to 100 pounds of iron, and an item was for sale valued at 10 pounds of iron (or one-tenth of a cow), the individual buying with iron had a distinct advantage; he could easily produce the exact amount of money needed.

For these reasons, metal became the most common form of commodity money. Though different metals were used (iron, tin, copper, etc.), gold and silver coins became the standard.

2. Receipt Money

Gold and silver coins were a much-improved form of commodity money, but they still had some drawbacks. For instance, if you were even moderately wealthy, carrying all of your gold or silver coins around with you was cumbersome and potentially dangerous. Finding a place to safely hide your coins wasn't easy either.

Seeing an opportunity to earn a little extra money, goldsmiths solved this problem by renting storage space in their vaults. When a citizen came in to deposit their coins, the goldsmith would give them a paper receipt as proof of their deposit. If a customer deposited $1,000 in gold coins, they were given a receipt (or receipts) valued at $1,000 worth of gold.

These receipts were "payable on demand," meaning the depositor, at any time, could come in and exchange the receipts for their gold.

Because the receipts were literally "good as gold," citizens began accepting them as payment for products and services. From that point forward, the receipts became a legitimate form of paper money, 100% backed by gold (or sometimes backed by silver).

As time passed, it became increasingly rare for individuals to visit the goldsmith and demand coins in exchange for their receipts. (Although receipt holders had the right to exchange their receipts for gold at any time, they were happy to leave it locked up in the goldsmith's vault.) It was much more convenient to use the paper money, instead of the physical coins they represented, in commerce.

3. Fractional Money:

At some point, goldsmiths realized that almost nobody came in to withdraw their coins, and this sparked an idea. Why leave all that gold gathering dust in the vault (earning only a small storage fee) when instead it could be loaned out at interest for a much greater profit?

Since receipt money was already in use, the goldsmith wouldn't even have to remove the coins from storage. When a borrower came in seeking $1,000, the goldsmith could simply print up $1,000 worth of new receipts!

This, of course, was an act of pure fraud. The goldsmith had no right to give the borrower (or anyone the borrower purchased from), a claim on somebody else's gold.

Additionally, the only reason citizens accepted receipts as payment was because they believed the value stamped on every receipt was backed by an equal number of coins in storage. Unbeknownst to them, this was no longer the case.

What began as legitimate receipt money (backed 100% by coins held in reserve) was now fractional money. By creating new receipts, the goldsmith had secretly driven down the percentage of reserves backing each receipt. (And with each new printing, the fraction became less and less.)

Before long, citizens were unknowingly accepting receipts backed by only half of the printed value, a quarter of the printed value, a tenth of the printed value. When people finally figured out what was going on, they rushed to exchange their receipts for gold.

Unfortunately, only the first few in line were able to do so. The rest were left holding worthless paper receipts.

4. Fiat Money:

Encarta defines fiat money as: "paper money that a government declares to be legal tender although it is not based on or convertible into coins." Another way to put that would be: Fiat money is paper (backed by nothing), and because so, government forces people to accept it via legal tender laws.

But believe it or not, there is actually something worse than fiat paper money. And this brings us to the final form of money we'll be discussing in this book. The form of money we're using today is:

5. Debt Money:

Take the inherently fraudulent characteristics of a fractional money system; add in the greater fraud of pure fiat, top it off with a mechanism designed to generate inescapable perpetual debt, and presto: You've got the greatest monetary fraud ever perpetrated against mankind. And, wouldn't you know, you also have all the components that make up our current monetary system. It is dishonest money at its worst.

Rather than openly print money to cover their reckless spending, our politicians use a less obvious tactic. Make no mistake; they still end up creating money out of nothing. It's just that they use their friends at the Federal Reserve to do it for them. And in exchange for helping politicians get the money they want, the banking elite reap benefits that are nothing short of obscene.

You see, unlike a normal fiat money system (where the government simply creates its own paper money, spends it into the economy, and demands everyone accept it), our entire money supply is built on debt.

That means that not a single dollar comes into existence but by the act of borrowing it into existence. First, let me explain this in the simplest terms possible, and then we'll get into a more detailed explanation.

Assume the politicians need (want) $1 billion. Rather than print the money, they go to their banking buddies at the Federal Reserve. The Federal Reserve is always happy to loan whatever amount of money the politicians ask for.

The problem is the Fed doesn't actually loan anything. Yes, when the government shows up with its $1 billion bond, the Fed will give it a $1 billion check in exchange; but that $1 billion Federal Reserve check doesn't have anything backing it. The money (keystrokes in the Fed's computer system) is created on the spot out of thin air; poof, there it is.

The government signs its new Federal Reserve check, deposits it in its Federal Reserve bank account, and immediately begins "paying its bills." (Writing checks to government contractors, bureaucrats, etc., and inflating our money supply by $1 billion in the process.) But that's just the beginning of the inflation. The government contractors, bureaucrats, etc., take their government checks and deposit them in their local bank accounts.

Now the local banks, using the original $1 billion worth of government checks as "reserves," are permitted to inflate our money supply by another $9 billion! (And they accomplish this by making yet more loans of money created out of nothing to businesses, individuals, and government.)

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.[2]

Such is the nature of our entire money supply. Our purchasing power is stolen via inflation; our collective purchasing power is eroded by inescapable interest on every dollar in existence, and if we (as a nation) attempted to pay off any significant portion of our debt (within the rules of the current system), our country would be thrust into economic chaos. Why?

Because just as the "debt dollars" are created out of nothing when a loan is issued, they are "erased" when the debt is repaid (and this deflates our money supply).

As the money supply decreases, those who are trapped in high-dollar loans (like home loans taken out during a real estate bubble) will find it increasingly difficult to make their payments. There are simply too few dollars to service the debt and fuel the economy.[3]

It's sobering to consider, under our current system, there can never be another debt-free generation. Not even close. To pay off a large portion of our debt would be disastrous; to pay it all off, impossible. Does this sound like a system designed with our best interests in mind?

The nuts and bolts

Alright, we've given the easy explanation; now, a slightly expanded overview of how the Federal Reserve System creates and expands our nation's debt money supply. As in the previous example, we'll focus on the primary method used; it's called the "open market operation."

1. The government needs money, but under our current system, it can't just create it. So instead, it creates the next best thing. The government "adds ink to a piece of paper, creates impressive designs around the edges, and calls it a [Treasury] bond or Treasury note."[4] These pieces of paper are generically referred to as Treasury securities, and they are offered as collateral to potential lenders.

As a simple example: The government creates a bond in a denomination of $100,000 with a maturity date of 10 years. All that means is a lender can acquire the bond for $100,000, he will earn interest on the loan for 10 years, and when the bond matures (at the end of 10 years), his principal loan amount ($100,000) will be repaid.

Treasury securities are offered in many different denominations, and maturity can vary between 30 days (a very short-term loan) to 30 years.

2. The government, looking to convert its Treasury securities into something it can spend (Federal Reserve Notes and checkbook money), turns to the Fed. The Fed is happy to oblige. It pulls a check out of its magic checkbook, writes in whatever dollar amount is needed, and gives it to the government in exchange for the securities.

There is no money in any account to cover this check. Anyone else doing this 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 ... 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 ... to pay government expenses.[5]

3. The government endorses its Federal Reserve check and then deposits it with one of the Federal Reserve banks. The check amount is added to the government's account balance, and just like that, the government can begin spending the money, which it does by writing checks of its own.

"These checks become the means by which the first wave of fiat money floods into the economy. Recipients now deposit them into their own [commercial] bank accounts[.]"[6] And this is where the real action begins.

4. Assume the government pays Joe Contractor $1 million by check and Joe promptly deposits that check at his commercial bank. Joe is happy because his bank account balance is now $1 million bigger. But the bank is even happier.

In accordance with the rules of our Federal Reserve System, commercial banks only need to keep 10% reserves on hand. That means the bank Joe deposited his million dollars with now has $900,000 in excess reserves. ($1 million minus 10% in required reserves leaves $900,000 in excess reserves.) Guess what that means? It means the bank is allowed to create $900,000 in new money (for loans) out of thin air.

But that's not all! When that $900,000 in newly created debt money is spent into the economy, it finds its way right back into the banking system as new deposits, and those deposits create excess reserves too.

So that means a bank can now create $810,000 in new loans out of the $900,000 deposit; again, the debt money supply increases! And when that newly created $810,000 is deposited, it can be used to create another $729,000.

This continues over and over again. By the time the process reaches its legal limit, the commercial banks will have created nine million new debt dollars on top of the original $1 million Federal Reserve loan (also created out of thin air) for the government. (A total increase in our money supply of $10 million!)

Even if the Fed bank hands over every penny of interest it earns on the $1 million loan to the government, the commercial banks can earn 10 times as much (or more depending on the interest rates) on the $9 million they created. Now, for a disturbing update, read this footnote: [7]

Try to imagine the wealth and power you could amass under a system that allowed you to do this. Imagine being legally allowed to "create" money and then collect interest on it.

With only $1 billion, you could easily generate $50–100 million per year in interest payments. Even the best among us, given the chance to acquire such a lucrative, government-backed monopoly, might find it hard to resist.

...To say nothing of a group of unscrupulous, yet highly intelligent, bankers.

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.[8]

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.

... This alternation between periods of expansion and contraction of the money supply is the underlying cause of ... booms, busts, and depressions.[9]

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.[10]

That covers the most common method by which the Fed System inflates our money supply, by "monetizing" government debt. (Converting government IOUs like Treasury bonds into "money" by simply creating the money out of nothing and loaning it to the government.) The government spends the money, and then commercial banks inflate on top of what was originally created. But if the government isn't borrowing enough from the Fed, there are plenty of other ways for the system to work its magic.

Another inflation mechanism is known as the "discount window." The discount window is where commercial banks go to borrow money from the Fed. The inflationary process is similar to the open market operation, only a little more direct.

Rather than loan the government money (which then becomes government checks, then eventually becomes deposits in commercial banks, then is counted as reserves, which then can be multiplied by up to 10 times the original loan amount), the Fed simply loans money to the commercial banks directly. It's a much easier process. If a bank borrows $1 million, it can immediately start the process of creating more money. (Subtract 10% for reserves; create $900,000. When the $900,000 makes its way back, subtract 10% for reserves; create $810,000, etc.)

The enormous increase in our nation's money supply leading up to the stock market crash in 1929 (and the Great Depression) was not due to government borrowing. The government, prior to the crash, was doing well and had little need to borrow. No, the bulk of new money originated out of the Fed's discount window. At this point in our history, there is little doubt about whether or not Fed policy is what crashed our economy and led to the Great Depression. It most certainly did. Today, the arguments should be based on whether or not the monetary scientists, working through the Fed, did it on purpose.[11]

Another method the Fed can use to increase our money supply is to simply change the required reserve ratios that commercial banks must hold. The current requirement of 10% is purely arbitrary. If there is a need for more money, it could be easily cut in half to 5% (doubling the amount of new money that can be created from deposits), quartered to 2.5%, or even dropped all together. It's the Fed's call.[12]

And as if all this weren't enough, the Monetary Control Act of 1980 handed the Fed even more power. Now, the Fed has the authority to legally monetize foreign debt too! (Which it has already done to the tune of many billions of dollars.)

The apparent purpose of this legislation is to ... bailout 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.

... [T]hey flow back into the U.S. money pool (multiplied by nine) in the form of additional loans. The cost of the operation is once again borne by the American citizen through the loss of purchasing power. ... 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.[13]

By confiscating and "redistributing" purchasing power, the elite effectively purchase cooperation. It enables them to shape the world as they see fit. (Money is given to those who comply, and it's withheld from those who insist on independence.)

Income tax is one way to confiscate purchasing power, and needless to say, it is a real burden on those who actually have to earn their money.

But inflation is a form of taxation too, and because so few understand it, it is the preferred method for shearing the public. Sadly, as the citizens find it harder and harder to get by, they're driven into the arms of the very same people who seek to rob and control them.