How Money is Created
All funds in the system we currently have
originated from a loan of some sort that bears interest or usury. This interest is the
Achilles heal of the system and eventually will bring it and the American people to their
Creation of Cash by Securities
The cash in circulation starts out by the
creation of a loan or the sale of a debt instrument. The FED begins the process by
creating "Raw Money" and exchanging it for a Treasury security on the open
market. Lets look at the process.
The government takes good paper and ink and prints
up a certificate with a lot of designed borders on it and calls it a bond or a Treasury
note. It is a fancy IOU that promises to pay a specific amount at a specific date with a
specific amount of interest. Lets say for the exercise it is a 100 million dollar
certificate with a 5% interest rate.
The Federal Reserve classifies this paper as a Securities Asset because the American
People will guarantee it and pay it back with taxes they volunteer. The FED then takes
another piece of paper, a check, and writes out the amount of $100,000,000.00 on it. The
paper check (IOU) is then exchanged for the paper certificate IOU. Now keep in mind that
neither piece of paper has anything but the American Taxpayer backing it. Their is no
money in the FED checking account to cover this check. The accounting books are balanced
by the two worthless entries so everything looks OK.
The government endorses the check and deposits it in a FED bank where the account is
credited for the $100 million dollars. This is the initial funds that are written out as
checks out of the bank and go to pay for salaries, equipment and other items. These checks
are all deposited into other banks.
Fractional Reserve Lending
The deposits are all considered assets in the banks where they are
deposited. Now through the magic of fractional reserves the money is re-loaned out into
the public. These banks are allowed to loan 90% of their deposits so the bank loans 90
million out at interest lets say 10%. These loans are executed and checks or deposit slips
are issued. When this 90 million is deposited it is considered an asset and can be used to
loan 81 million and so on.
The original 100 million fabricated on paper is generating 5% interest payable to the
FED and it has grown through fractional reserves to more than 900 million generating 10%
per year. This is really a total of 1 billion dollars all created out of thin air with
paper and ink. It all generates interest. A few dollars of paper and ink in this
case generates 100 million every year.
The effect is cumulative and eventually catastrophic to this system.
Loans to Banks
Banks borrow funds from the Federal Reserve when their cash supply runs
low or they have loaned more money out than their reserves dictate or when the FED
increases the reserves percentage. These loans carry interest attached at a low rate
called the discount rate.
So here we have a mini economy.
It has a 100 million in cash supplied by the FED costing 10%. We have
through the miracle of Fractional Reserves created loans of an additional 900 million
dollars. Lets evenly spread it over 9 banks to make it simple.
Now lets work this little economic system to the end of the cycle.
We have for this example 100 companies out there who borrowed the fractionally provided
900 million dollars created from the "raw Money the FED traded for the Treasury
Our mini Economy has a total of 1 Billion in it.
The companies used their loaned cash it to expand their companies and paid it all
out into the economy as purchases of materials equipment and salaries. They now sell their
products to obtain funds. These funds are used to pay bills, payroll and some pays the
interest on the loans and some may be used to reduce the principle of the original loans.
Our government did the same thing. It used the 100 million to do all kinds of wonderful
Now the entire economy here only has a total of 100 million in real cash to cover
the circulation of up to a billion in checks. Some of the people in the economy have a
little cash in their pockets also so this puts pressure on the local banks. Some of
these banks need to go to the FED money store in order to keep enough cash, lets say they
get an additional 90 million between them at 5%.
OK lets see how we do through a few years.
Year one goes by and the government pays out its 10 million in interest to the FED and
the banks that borrowed cash because their customers wanted a little walk about money paid
5% on their 90 million or 4.5 million.
These interest payments to the FED are out of the real cash so after year one there is
now only 85.5 million in "Raw Money" in the system. The interest paid to
the banks is recycled into the system so we can ignore that for now. None of the
principle was paid down so the full billion is still owed . The companies all did
well and they produced a lot of goods that are on the market now so the general public
needs a little extra money to buy these goods. They are writing more checks or carrying
more money at the same time that the banks and the government have paid some of the
raw cash back. Cash tightens up and the companies decide to not pay back any principle
this year and maybe the banks need to borrow a little more money from the FED, but lets
not go there as it will cause a quicker crash.
Year two goes by and lets say our government managed its finances well and doesn't need
to borrow any more money and the member banks customers don't come in for more cash and
let their deposits just sit in the bank. This helps our economy hold on. The banks pay
another 4.5 million and the government pays another 10 million in interest so our little
economy is down to 71 million in "Raw Money"
The banks deposits have decreased as the money supply has been reduced so the banks
reserves are low and they need to borrow additional money from the FED in order for their
reserves to stay at 10%. The borrow an additional 90 million.
Year three goes by and our government didn't borrow any more and the companies didn't
borrow any more but the interest paid this year is now 28 million so the "Raw Money
is down to 43 million dollars.
If nothing changes the system is totally bankrupt in just a few years.
This system can be supported only by additional borrowings which only make the problem
worse. The borrowings must increase as the "Raw Money" is removed from the
system as interest.
Here it is in plain simple terms for all to see. The mystery of the system is removed
and the scam plain for all to see.
We must change our system NOW.