by Peter Cook, M.Sc., C.M.E. (c) 1997
            Monetary Science Publishing, Wickliffe, OH  44092

Reading about Federal Reserve is guaranteed to either bore you into
submission or make your eyes cross like a siamese cat, but you really
should give it a try.  Because when you begin to understand how it all
works, you will begin to understand WHY the IRS wants your checkbook
money (not your cash) AND why, as a holder of bank checking and/or
savings accounts, you are (through adhesion contracts) required to file.

Since the establishment of the Bank of England, central banks and their
member commercial, chartered and other banks throughout the world,
including the United States (the Federal Reserve) operate after the
DEPOSIT MONEY creating, lending and banking techniques developed by the
Bank of England.  The First and Second Bank of the United States were
also central banks -- but were short-lived because our Founding Fathers
were aware of the potential pernicious socio-economic consequences and
government indebtedness that can emerge in the wake of a central bank

It might be of interest to note that, contrary to the widespread
educated assumption, the central banks are not owned by governments.
As a matter of fact, neither the English, French, German nor the United
States government owns any stock in the central bank of its country.
The Bank of England is run entirely as a private corporation; the
stockholders elect the board of directors, who rotate in holding the
governorship office.  In the United States the Federal Reserve banks
are also run by stockholders, the commercial banks, which elect the
board of directors, who in turn govern the respective Federal Reserve
banks. (2)


Central banks are the commercial bankers' banks.  The 12 Federal
Reserve banks are the central banks in the United States.  They are
primarily the commercial bankers' banks, in which the commercial banks
have their checking accounts.  The commercial banks' checking accounts
in the Federal Reserve banks are known as the commercial banks'
"reserve accounts".  The "reserve accounts" of the commercial banks
DIFFER from those of the general public, commerce and the Government's
checking accounts.  All others, that is, the general public, commerce
and the governments (federal and other) must DEPOSIT (lodge) funds,
either coin or paper currency, business or paychecks, and the
governments deposit (lodge) their tax revenue funds into their checking
accounts, to LAWFULLY DRAW PAYMENT checks on their checking account

However, commercial banks collectively CANNOT add anything to their
reserve account deposit credits with their own bank-house checks.  The
Federal Reserve banks provide their member banks with "reserves account
deposit-credits" (3) through their Open Market purchases and
investments, paid for with Federal Reserve bank credit funds.  Federal
Reserve bank credit "funds" consist of checks drawn upon NO BANK
DEPOSITED FUNDS. (4)  In this way the commercial bank's "reserve
account deposit-credits" are created with the Fed's bounce-proof checks
-- indirectly as FREE GIFTS to commercial banks -- which reserve
account deposit-credits are 100% convertible into federal reserve notes
cash currency upon bank request. (5)

Putting the above into the simplest of terms:  Federal Reserve bank
credit, which is also known as "high power money" and is equivalent in
value to physical cash currency, is created simply by a Federal Reserve
bank officer drawing a check upon no bank deposit account, (6) as
payment for a Federal Reserve purchase or investment.  To make that
check (or checks) good, the Federal Reserve simply asks the Treasury
Department's Bureau of Engraving to print up enough Federal Reserve
notes currency to make those checks good. (7)

(1) First and Second Bank of the United States were short-lived Central
Banks.  "A Primer on Money", printed for the use of the Committee on
Banking and Currency, 88th Congress, 2nd Session.

(2) From a 1906 essay by Paul Warburg, reputed author of the 1913
Federal Reserve Act, updated 1991 by Peter Cook, M.S.C., C.M.E.

(3) Bank reserves cannot be paid for by private banks.  Reserves can be
shifted from bank to bank after they are created.  "Money Facts", a
supplement to "A Primer on Money", printed for the House Banking and
Currency Committee, 1964, 88th Congress, 2nd Session.

(4) The Federal Reserve has no checking account anywhere in the
country.  Federal Reserve Bank of Boston, page 17 and "Primer on
Money", page 34.

(5) "Readings on Money", Federal Reserve Bank of Richmond, page 31, and
also in the "A Primer on Money", page 43.

(6) "Federal Reserve is different... it has no bank deposit anywhere in
the country..." Federal Reserve Bank of Boston in a 1977 publication
titled "Putting It Simply... The Federal Reserve", page 17.

(7) " (the Federal Reserve) never has a problem of making its
checks good because it can obtain the $5, $10 etc. bills necessary to
cover its check simply by asking the Treasury Department's Bureau of
Engraving to print them."  "Money Facts", a supplement to "A Primer on
Money" printed for the use of House Banking and Currency Committee in
August of 1964, 88th Congress, 2nd Session.


The money systems of the world, including in the United States, operate
on a two-level system.  Both levels are based on "promise to pay" --
historically to pay gold, and in our time to pay legal tender cash
currency.  Even though the Federal Reserve bank credit funds in the
commercial banks' reserve accounts are 100% convertible into Federal
Reserve notes cash currency to banks, the Federal Reserve bank credit
Coinage Act, U.S. Code Title 31, S. 392.

The central banks, that is the Federal Reserve in the United States,
promises its member banks to pay them physical cash currency on demand
for the amount of Federal Reserve bank credit funds they have on record
in their reserve accounts in the Federal Reserve banks.  The Federal
Reserve banks can always make those promises good, because they can
purchase the physical federal reserve notes cash currency from the
Treasury's Printing and Engraving Bureau for the cost of paper, ink and
printing labor.  [Per Treasury Dept. letter of 3/10/78, 1.5 cents per
bill of any imprinted denomination.  Per Detroit Free Press of 5/4/95,
4 cents per bill.]

There are no known laws limiting central banks as to the money volume
of reserve credits they can create.  There is no known law limiting the
Federal Reserve as to what dollar amount of Federal Reserve bank credit
funds the federal reserve banks can or may create, or extend.

In the second or lower level of the world's money and banking system
are the commercial or chartered banks which are members of the central
banks.  The commercial banks in the United States are members of the
Federal Reserve banks.  In the second or lower level of money creating,
the banks operate on the same "promise to pay" principle as the central
banks.  However, the commercial banks' promises to pay are limited.
The commercial banks must have Federal Reserve bank credit
deposit-credits in their reserve accounts at Federal Reserve banks
before they can create any commercial bank deposit-credits, either for
bank expenditures, bank loans, or for bank investments.

The Federal Reserve bank created deposit-credits are formally known as
"Federal Reserve Bank Credit".  THe commercial banks created
deposit-credits are known simply as "Bank Credit".  The two "Credits"
resemble each other to the extent that both are nothing more than
simply checking accout deposit-credits transferable by check.  That's
were the similarity ends.

The Federal Reserve bank credit, dollar amounts, are 100% convertible
into federal reserve notes cash currency on commercial bank demands.
However, the aggregate commercial bank credit is only FRACTIONALLY
convertible, at any point of time, into federal reserve notes cash
currency.  If the so-called bank "reserve requirement" is 10%, that
means that only $1 of $10 in the checking accounts of bank clients is
convertible into cash currency.  That is why the prevailing money and
banking system is often referred to as a "fractional reserve" system.