The Creature from Jekyll Island

by G. Edward Griffin
(Available from: The Reality Zone)

Chapter 10

What is the Mandrake Mechanism?

It's the most important financial lesson of your life!
THE MANDRAKE MECHANISM . . . What is it? It is the method by which the
Federal Reserve creates money out of nothing; the concept of usury as the payment
of interest on pretended loans; the true cause of the hidden tax called inflation; the
way in which the Fed creates boom-bust cycles.

In the 1940s, there was a comic strip character called Mandrake the Magician. His
specialty was creating things out of nothing and, when appropriate, to make them
disappear back into that same void. It is fitting, therefore, that the process to be
described in this section should be named in his honor.

In the previous chapters, we examined the technique developed by the political and
monetary scientists to create money out of nothing for the purpose of lending. This is
not an entirely accurate description because it implies that money is created first and
then waits for someone to borrow it.

On the other hand, textbooks on banking often state that money is created out of
debt. This also is misleading because it implies that debt exists first and then is
converted into money. In truth, money is not created until the instant it is borrowed.
It is the act of borrowing which causes it to spring into existence. And, incidentally, it
is the act of paying off the debt that causes it to vanish. There is no short phrase
that perfectly describes that process. So, until one is invented along the way, we
shall continue using the phrase "create money out of nothing" and occasionally add
"for the purpose of lending" where necessary to further clarify the meaning.

So, let us now . . . see just how far this money/debt-creation process has been
carried -- and how it works.

The first fact that needs to be considered is that our money today has no gold or
silver behind it whatsoever. The fraction is not 54% nor 15%. It is 0%. It has
traveled the path of all previous fractional money in history and already has
degenerated into pure fiat money. The fact that most of it is in the form of checkbook
balances rather than paper currency is a mere technicality; and the fact that bankers
speak about "reserve ratios" is eyewash. The so-called reserves to which they refer
are, in fact, Treasury bonds and other certificates of debt.

Our money is "pure fiat" through and through.

The second fact that needs to be clearly understood is that, in spite of the technical
jargon and seemingly complicated procedures, the actual mechanism by which the
Federal Reserve creates money is quite simple. They do it exactly the same way the
goldsmiths of old did except, of course, the goldsmiths were limited by the need to
hold some precious metals in reserve, whereas the Fed has no such restriction.

The Federal Reserve is candid.

The Federal Reserve itself is amazingly frank about this process.

A booklet published by the Federal Reserve Bank of New York tells us:

"Currency cannot be redeemed, or exchanged, for Treasury gold or any

other asset used as backing. The question of just what assets 'back' Federal
Reserve notes has little but bookkeeping significance."

Elsewhere in the same publication we are told: "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.

In the fine print of a footnote in a bulletin of the Federal Reserve Bank of St. Louis,
we find this surprisingly candid explanation:

Modern monetary systems have a fiat base -- literally money by decree --

with depository institutions, acting as fiduciaries, creating obligations
against themselves with the fiat base acting in part as reserves. The decree
appears on the currency notes: "This note is legal tender for all debts, public
and private."

While no individual could refuse to accept such money for debt repayment, exchange
contracts could easily be composed to thwart its use in everyday commerce.
However, a forceful explanation as to why money is accepted is that the federal
government requires it as payment for tax liabilities. Anticipation of the need to clear
this debt creates a demand for the pure fiat dollars.

Money would vanish without debt.

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 not be 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.

Marriner Eccles was the Governor of the Federal Reserve System in 1941. On
September 30 of that year, Eccles was asked to give testimony before the House
Committee on Banking and Currency. The purpose of the hearing was to obtain
information regarding the role of the Federal Reserve in creating conditions that led
to the depression of the 1930s.

Congressman Wright Patman, who was Chairman of that committee, asked how the
Fed got the money to purchase two billion dollars worth of government bonds in
1933.

This is the exchange that followed.

Eccles: We created it.

Patman: Out of what?
Eccles: Out of the right to issue credit money.
Patman: And there is nothing behind it, is there, except our government's credit?
Eccles: That is what our money system is. 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 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 a grand illusion. The reality is debt.

Robert Hemphill was the Credit Manager of the Federal Reserve Bank in Atlanta. In
the foreword to a book by Irving Fisher, entitled 100% Money, Hemphill said this:

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.

With the knowledge that money in America is based on debt, it should not come as a
surprise to learn that the Federal Reserve System is not the least interested in seeing
a reduction in debt in this country, regardless of public utterances to the contrary.
Here is the bottom line from the System's own publications. The Federal Reserve
Bank of Philadelphia says:

"A large and growing number of analysts, on the other hand, 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 Federal Reserve Bank of Chicago adds:

"Debt -- public and private -- is here to stay. It plays an essential role in

economic processes . . . What is required is not the abolition of debt, but its
prudent use and intelligent management."

What's wrong with a little debt?

There is a kind of fascinating appeal to this theory. It gives those who expound it an
aura of intellectualism, the appearance of being able to grasp a complex economic
principle that is beyond the comprehension of mere mortals. And, for the less
academically minded, it offers the comfort of at least sounding moderate. After all,
what's wrong with a little debt, prudently used and intelligently managed? The
answer is nothing, provided the debt is based on an honest transaction. There is
plenty wrong with it if it is "based upon fraud".

An honest transaction is one in which a borrower pays an agreed upon sum in return
for the temporary use of a lender's asset. That asset could be anything of tangible
value. If it were an automobile, for example, then the borrower would pay "rent." If
it is money, then the rent is called "interest." Either way, the concept is the same.

When we go to a lender -- either a bank or a private party -- and receive a loan of

money, we are willing to pay interest on the loan in recognition of the fact that the
money we are borrowing is an asset which we want to use. It seems only fair to pay
a rental fee for that asset to the person who owns it. It is not easy to acquire an
automobile, and it is not easy to acquire money -- real money, that is. If the money
we are borrowing was earned by someone's labor and talent, they are fully entitled
to receive interest on it. But what are we to think of money that is created by the
mere stroke of a pen or the click of a computer key? Why should anyone collect a
rental fee on that?

When banks place credits into your checking account, they are merely pretending to
lend you money. In reality, they have nothing to lend. Even the money that non-
indebted depositors have placed with them was originally created out of nothing in
response to someone else's loan. So what entitles the banks to collect rent on
nothing? It is immaterial that men everywhere are forced by law to accept these
nothing certificates in exchange for real goods and services. We are talking here, not
about what is legal, but what is moral. As Thomas Jefferson observed at the time of
his protracted battle against central banking in the United States, "No one has a
natural right to the trade of money lender, but he who has money to lend."

Third reason to abolish the system.

Centuries ago, usury was defined as any interest charged for a loan. Modern usage
has redefined it as excessive interest. Certainly, any amount of interest charged for a
pretended loan is excessive. The dictionary, therefore, needs a new definition.
Usury: The charging of any interest on a loan of fiat money.

Let us, therefore, look at debt and interest in this light. Thomas Edison summed up
the immorality of the system when he said:

People who will not turn a shovel of dirt on the project [Muscle Shoals] nor
contribute a pound of materials will collect more money . . . than will the
people who will supply all the materials and do all the work.

Is that an exaggeration? Let us consider the purchase of a $100,000 home in which

$30,000 represents the cost of the land, architect's fee, sales commissions, building
permits, and that sort of thing and $70,000 is the cost of labor and building
materials. If the home buyer puts up $30,000 as a down payment, then $70,000
must be borrowed. If the loan is issued at 11% over a 30-year period, the amount of
interest paid will be $167,806. That means the amount paid to those who loan the
money is about 2 1/2 times greater than paid to those who provide all the labor and
all the materials. It is true that this figure represents the time-value of that money
over thirty years and easily could be justified on the basis that a lender deserves to
be compensated for surrendering the use of his capital for half a lifetime. But that
assumes the lender actually had something to surrender, that he had earned the
capital, saved it, and then loaned it for construction of someone else's house. What
are we to think, however, about a lender who did nothing to earn the money, had not
saved it, and, in fact, simply created it out of thin air?

What is the time-value of nothing?

As we have already shown, every dollar that exists today, either in the form of
currency, checkbook money, or even credit card money -- in other words, our entire
money supply -- exists only because it was borrowed by someone; perhaps not you,
but someone.

That means all the American dollars in the entire world are earning daily
and compounding interest for the banks which created them. A portion of
every business venture, every investment, every profit, every transaction which
involves money -- and that even includes losses and the payment of taxes -- a
portion of all that is earmarked as payment to a bank.

And what did the banks do to earn this perpetually flowing river of wealth? Did they
lend out their own capital obtained through investment of stockholders? Did they
lend out the hard-earned savings of their depositors? No, neither of these were their
major source of income. They simply waved the magic wand called fiat money.

The flow of such unearned wealth under the guise of interest can only be viewed as
usury of the highest magnitude. Even if there were no other reasons to abolish the
Fed, the fact that it is the supreme instrument of usury would be more than sufficient
by itself.

Who creates the money to pay the interest?

One of the most perplexing questions associated with this process is "Where does the
money come from to pay the interest?" If you borrow $10,000 from a bank at 9%,
you owe $10,900. But the bank only manufactures $10,000 for the loan. It would
seem, therefore, that there is no way that you -- and all others with similar loans --
can possibly pay off your indebtedness. The amount of money put into circulation
just isn't enough to cover the total debt, including interest. This has led some to the
conclusion that it is necessary for you to borrow the $900 for interest, and that, in
turn, leads to still more interest. The assumption is that, the more we borrow, the
more we have to borrow, and that debt based on fiat money is a never ending spiral
leading inexorably to more and more debt.

This is a partial truth. It is true that there is not enough money created to include
the interest, but it is a fallacy that the only way to pay it back is to borrow still more.
The assumption fails to take into account the exchange value of labor. Let us assume
that you pay back your $10,000 loan at the rate of approximately $900 per month
and that about $80 of that represents interest. You realize you are hard pressed to
make your payments so you decide to take on a part-time job.

The bank, on the other hand, is now making $80 profit each month on your loan.
Since this amount is classified as "interest," it is not extinguished as is the larger
portion which is a return of the loan itself. So this remains as spendable money in
the account of the bank. The decision then is made to have the bank's floors waxed
once a week. You respond to the ad in the paper and are hired at $80 per month to
do the job. The result is that you earn the money to pay the interest on your loan,
and -- this is the point -- the money you receive is the same money which you
previously had paid. As long as you perform labor for the bank each month, the
same dollars go into the bank as interest, then out of the revolving door as your
wages, and then back into the bank as loan repayment.

It is not necessary that you work directly for the bank. No matter where you earn the
money, its origin was a bank and its ultimate destination is a bank. The loop through
which it travels can be large or small, but the fact remains all interest is paid
eventually by human effort. And the significance of that fact is even more startling
than the assumption that not enough money is created to pay back the interest. It is
that the total of this human effort ultimately is for the benefit of those who create
fiat money.

It is a form of modern serfdom in which the great mass of society works as

indentured servants to a ruling class of financial nobility.

Understanding the Illusion . . .

That's really all one needs to know about the operation of the banking cartel under
the protection of the Federal Reserve. But it would be a shame to stop here without
taking a look at the actual cogs, mirrors, and pulleys that make the magical
mechanism work. It is a truly fascinating engine of mystery and deception.

Let us, therefore, turn our attention to the actual process by which the magicians
create the illusion of modern money. First we shall stand back for a general view to
see the overall action.

Then we shall move in closer and examine each component in detail.

The Mandrake Mechanism: An Overview

The entire function of this machine is to convert debt into money. It's just that
simple. First, 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 nine (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.

Now for a more detailed view. There are three general ways in which the Federal
Reserve creates fiat money out of debt.

One is by making loans to the member banks through what is called the Discount
Window.

The second is by purchasing Treasury bonds and other certificates of debt through
what is called the Open Market Committee.

The third is by changing the so-called reserve ratio that member banks are required
to hold. Each method is merely a different path to the same objective: taking IOUs
and converting them into spendable money.

THE DISCOUNT WINDOW

The Discount Window is merely bankers' language for the loan window. When banks
run short of money, the Federal Reserve stands ready as the "bankers' bank" to lend
it. There are many reasons for them to need loans. Since they hold "reserves" of
only about one or two per cent of their deposits in vault cash and eight or nine per
cent in securities, their operating margin is extremely thin. It is common for them to
experience temporary negative balances caused by unusual customer demand for
cash or unusually large clusters of checks all clearing through other banks at the
same time. Sometimes they make bad loans and, when these former "assets" are
removed from their books, their "reserves" are also decreased and may, in fact,
become negative. Finally, there is the profit motive. When banks borrow from the
Federal Reserve at one interest rate and lend it out at a higher rate, there is an
obvious advantage. But that is merely the beginning.

When a bank borrows a dollar from the Fed, it becomes a one-dollar reserve.

Since the banks are required to keep reserves of only about ten per cent, they
actually can loan up to nine dollars for each dollar borrowed.
Let's take a look at the math. Assume the bank receives $1 million from the Fed at a
rate of 8%. The total annual cost, therefore, is $80,000 (.08 X $1,000,000). The
bank treats the loan as a cash deposit, which means it becomes the basis for
manufacturing an additional $9 million to be lent to its customers. If we assume that
it lends that money at 11% interest, its gross return would be $990,000 (.11 X
$9,000,000). Subtract from this the bank's cost of $80,000 plus an appropriate share
of its overhead, and we have a net return of about $900,000. In other words, the
bank borrows a million and can almost double it in one year. That's leverage! But
don't forget the source of that leverage: the manufacture of another $9 million which
is added to the nation's money supply.

THE OPEN MARKET OPERATION

The most important method used by the Federal Reserve for the creation of fiat
money is the purchase and sale of securities on the open market. But, before
jumping into this, a word of warning. Don't expect what follows to make any sense.
Just be prepared to know that this is how they do it.

The trick lies in the use of words and phrases which have technical meanings quite
different from what they imply to the average citizen. So keep your eye on the
words. They are not meant to explain but to deceive. In spite of first appearances,
the process is not complicated. It is just absurd.

THE MANDRAKE MECHANISM: A DETAILED VIEW

Start with . . .

GOVERNMENT DEBT

The federal government adds ink to a piece of paper, creates impressive designs
around the edges, and calls it a bond or Treasury note. It is merely a promise to pay
a specified sum at a specified interest on a specified date. As we shall see in the
following steps, this debt eventually becomes the foundation for almost the entire
nation's money supply. In reality, the government has created cash, but it doesn't
yet look like cash. To convert these IOUs into paper bills and checkbook money is the
function of the Federal Reserve System. To bring about that transformation, the bond
is given to the Fed where it is then classified as a . . .

SECURITIES ASSET

An instrument of government debt is considered an asset because it is assumed the

government will keep its promise to pay. This is based upon its ability to obtain
whatever money it needs through taxation. Thus, the strength of this asset is the
power to take back that which it gives. So the Federal Reserve now has an "asset"
which can be used to offset a liability. It then creates this liability by adding ink to
yet another piece of paper and exchanging that with the government in return for
the asset. That second piece of paper is a . . .

FEDERAL RESERVE CHECK

There is no money in any account to cover this check. Anyone else doing that 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, especially if
interest rates are set artificially low; 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 (money created
by the order of government with nothing of tangible value backing it) to pay
government expenses. Yet, in accounting terms, the books are said to be "balanced"
because the liability of the money is offset by the "asset" of the IOU. The Federal
Reserve check received by the government then is endorsed and sent back to one of
the Federal Reserve banks where it now becomes a . . .

GOVERNMENT DEPOSIT

Once the Federal Reserve check has been deposited into the government's account,
it is used to pay government expenses and, thus, is transformed into many . . .

GOVERNMENT CHECKS

These checks become the means by which the first wave of fiat money floods into
the economy. Recipients now deposit them into their own bank accounts where they
become . . .

COMMERCIAL BANK DEPOSITS

Commercial bank deposits immediately take on a split personality.

On the one hand, they are liabilities to the bank because they are owed back to the
depositors. But, as long as they remain in the bank, they also are considered as
assets because they are on hand. Once again, the books are balanced: the assets
offset the liabilities. But the process does not stop there. Through the magic of
fractional-reserve banking, the deposits are made to serve an additional and more
lucrative purpose. To accomplish this, the on-hand deposits now become reclassified
in the books and called . . .

BANK RESERVES

Reserves for what? Are these for paying off depositors should they want to close out
of their accounts? No. That's the lowly function they served when they were
classified as mere assets. Now that they have been given the name of "reserves,"
they become the magic wand to materialize even larger amounts of fiat money. This
is where the real action is: at the level of the commercial banks. Here's how it works.
The banks are permitted by the Fed to hold as little as 10% of their deposits in
"reserve." That means, if they receive deposits of $1 million from the first wave of
fiat money created by the Fed, they have $900,000 more than they are required to
keep on hand ($1 million less 10% reserve). In bankers' language, that $900,000 is
called . . .

EXCESS RESERVES

The word "excess" is a tip off that these so-called reserves have a special destiny.
Now that they have been transmuted into an “excess,” they are considered as
available for lending. And so in due course these excess reserves are converted into .
..
BANK LOANS

But wait a minute. How can this money be loaned out when it is owned by the
original depositors who are still free to write checks and spend it any time they wish?
The answer is that, when the new loans are made, they are not made with the same
money at all. They are made with brand new money created out of thin air for that
purpose. The nation's money supply simply increases by ninety per cent of the
bank's deposits. Furthermore, this new money is far more interesting to the banks
than the old. The old money, which they received from depositors, requires them to
pay out interest or perform services for the privilege of using it. But, with the new
money, the banks collect interest, instead, which is not too bad considering it cost
them nothing to make. Nor is that the end of the process. When this second wave of
fiat money moves into the economy, it comes right back into the banking system,
just as the first wave did, in the form of . . .

MORE COMMERCIAL BANK DEPOSITS

The process now repeats but with slightly smaller numbers each time around. What
was a "loan" on Friday comes back into the bank as a "deposit" on Monday. The
deposit then is reclassified as a "reserve" and ninety per cent of that becomes an
"excess" reserve which, once again, is available for a new "loan." Thus, the $1 million
of first wave fiat money gives birth to $900,000 in the second wave, and that gives
birth to $810,000 in the third wave ($900,000 less 10% reserve). It takes about
twenty-eight times through the revolving door of deposits becoming loans becoming
deposits becoming more loans until the process plays itself out to the maximum
effect, which is . . .

BANK FIAT MONEY = UP TO 9 TIMES GOVERNMENT DEBT

The amount of fiat money created by the banking cartel is approximately nine times
the amount of the original government debt which made the entire process possible.
When the original debt itself is added to that figure, we finally have . . .

TOTAL FIAT MONEY = UP TO 10 TIMES GOVERNMENT

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. The reality of this process, therefore, is that it is a . . .

HIDDEN TAX = UP TO 10 TIMES THE NATIONAL DEBT

Without realizing it, Americans have paid over the years, in addition to their federal
income taxes and excise taxes, a completely hidden tax equal to many times the
national debt! And that still is not the end of the process. 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. That is exactly what happens
in times of economic or political uncertainty. This alternation between period of
expansion and contraction of the money supply is the underlying cause of . . .

BOOMS, BUSTS, AND DEPRESSIONS

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.

RESERVE RATIOS

The previous figures are based on a "reserve" ratio of 10% (a money-expansion ratio
of 10-to-1). It must be remembered, however, that this is purely arbitrary. Since the
money is fiat with no previous-metal backing, there is no real limitation except what
the politicians and money managers decide is expedient for the moment. Altering
this ratio is the third way in which the Federal Reserve can influence the nation's
supply of money. The numbers, therefore, must be considered as transient.

At any time there is a "need" for more money, the ratio can be increased to 20-to-1
or 50-to-1, or the pretense of a reserve can be dropped altogether. There is virtually
no limit to the amount of fiat money that can be manufactured under the present
system.

NATIONAL DEBT NOT NECESSARY FOR INFLATION

Because the Federal Reserve can be counted on to "monetize" (convert into money)
virtually any amount of government debt, and because this process of expanding the
money supply is the primary cause of inflation, it is tempting to jump to the
conclusion that federal debt and inflation are but two aspects of the same
phenomenon. This, however, is not necessarily true. It is quite possible to have
either one without the other.

The banking cartel holds a monopoly in the manufacture of money. Consequently,

money is created only when IOUs are "monetized" by the Fed or by commercial
banks. When private individuals, corporations, or institutions purchase government
bonds, they must use money they have previously earned and saved. In other
words, no new money is created, because they are using funds that are already in
existence. Therefore, the sale of government bonds to the banking system is
inflationary, but when sold to the private sector, it is not. That is the primary reason
the United States avoided massive inflation during the 1980s when the federal
government was going into debt at a greater rate than ever before in its history. By
keeping interest rates high, these bonds became attractive to private investors,
including those in other countries. Very little new money was created, because most
of the bonds were purchased with American dollars already in existence. This, of
course, was a temporary fix at best.

Today, those bonds are continually maturing and are being replaced by still more
bonds to include the original debt plus accumulated interest. Eventually this process
must come to an end and, when it does, the Fed will have no choice but to literally
buy back all the debt of the '80s -- that is, to replace all of the formerly invested
private money with newly manufactured fiat money -- plus a great deal more to
cover the interest. Then we will understand the meaning of inflation.

On the other side of the coin, the Federal Reserve has the option of manufacturing
money even if the federal government does not go deeper into debt. For example,
the huge expansion of the money supply leading up to the stock market crash in
1929 occurred at a time when the national debt was being paid off. In every year
from 1920 through 1930, federal revenue exceeded expenses, and there were
relatively few government bonds being offered. The massive inflation of the money
supply was made possible by converting commercial bank loans into "reserves" at
the Fed's discount window and by the Fed's purchase of banker's acceptances, which
are commercial contracts for the purchase of goods.

Now the options are even greater. The Monetary Control Act of 1980 has made it
possible for the Creature to monetize virtually any debt instrument, including IOUs
from foreign governments. The apparent purpose of this legislation is to make it
possible to bail out 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. The newly created dollars go to the foreign governments, then to
the American banks where they become cash reserves. Finally, they flow back into
the U.S money pool (multiplied by nine) in the form of additional loans. The cost of
the operation once again is born by the American citizen through the loss of
purchasing power. Expansion of the money supply, therefore, and the inflation that
follows, no longer even require federal deficits. 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.

We must not forget, however, that one of the reasons the Fed was created in the first
place was to make it possible for Congress to spend without the public knowing it
was being taxed. Americans have shown an amazing indifference to this fleecing,
explained undoubtedly by their lack of understanding of how the Mandrake
Mechanism works. Consequently, at the present time, this cozy contract between the
banking cartel and the politicians is in little danger of being altered. As a practical
matter, therefore, even though the Fed may also create fiat money in exchange for
commercial debt and for bonds of foreign governments, its major concern likely will
be to continue supplying Congress.

The implications of this fact are mind boggling. Since our money supply, at present
at least, is tied to the national debt, to pay off that debt would cause money to
disappear. Even to seriously reduce it would cripple the economy. Therefore, as long
as the Federal Reserve exists, America will be, must be, in debt.

The purchase of bonds from other governments is accelerating in the present political
climate of internationalism. Our own money supply increasingly is based upon their
debt as well as ours, and they, too, will not be allowed to pay it off even if they are
able.

EXPANSION LEADS TO CONTRACTION

While it is true that the Mandrake Mechanism is responsible for the expansion of the
money supply, the process also works in reverse. Just as money is created when the
Federal Reserve purchases bonds or other debt instruments, it is extinguished by the
sale of those same items. When they are sold, the money is given back to the
System and disappears into the inkwell or computer chip from which it came. Then,
the same secondary ripple effect that created money through the commercial
banking system causes it to be withdrawn from the economy. Furthermore, even if
the Federal Reserve does not deliberately contract the money supply, the same result
can and often does occur when the public decides to resist the availability of credit
and reduce its debt. A man can only be tempted to borrow, he cannot be forced to
do so.

There are many psychological factors involved in a decision to go into debt that can
offset the easy availability of money and a low interest rate: A downturn in the
economy, the threat of civil disorder, the fear of pending war, an uncertain political
climate, to name just a few. Even though the Fed may try to pump money into the
economy by making it abundantly available, the public can thwart that move simply
by saying no, thank you. When this happens, the old debts that are being paid off
are not replaced by new ones to take their place, and the entire amount of consumer
and business debt will shrink. That means the money supply also will shrink,
because, in modern America, debt is money. And it is this very expansion and
contraction of the monetary pool -- a phenomenon that could not occur if based upon
the laws of supply and demand -- that is at the very core of practically every boom
and bust that has plagued mankind throughout history.

In conclusion, it can be said that modern money is a grand illusion conjured by the
magicians of finance in politics. We are living in an age of fiat money, and it is
sobering to realize that every previous nation in history that has adopted such
money eventually was economically destroyed by it. Furthermore, there is nothing in
our present monetary structure that offers any assurances that we may be exempted
from that morbid roll call.
Correction. There is one. It is still within the power of Congress to abolish the Federal
Reserve System.

SUMMARY

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 out 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 the 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. jekyll.htm

'The Creature from Jekyll Island' is available from: The Reality Zone