The Federal Reserve Bank of Chicago once published a pamphlet entitled Modern Money Mechanics which explains M1, M2, and M3. It is a truly fascinating document that explains the process by which the Fed creates money "out of thin air".

In it, the process by which the Fed creates money "out of thin air" is detailed. Consider the opening paragraph:

Really read that paragraph.

The US Fed, in one of its own publications, is stating right there in black and white that money is not created from economic activity, nor from a government operation. How then is it created?

The pamphlet uses an example of $10,000 being deposited from the Federal Reserve Bank to "Bank A" and shows how that develops into an increase in assets to the amount of an additional $90,000.

Essentially the Federal Reserve simultaneously creates an asset and liability of the same amount with a private bank. The net sum is zero. This money is "deposited" in the bank's federal reserve account. The private bank can then use this money as a reserve through which they can lend out additional money to the public. This reserve rate is generally 10%. Thus, a "deposit" of the USFed of $10,000 will transform into the private bank being able to loan out $90,000.

A couple of points.

Firstly, if I loaned your company $10,000 would the net worth of your company increase by that amount? The answer is no, because while assets went up by $10,000 so did the liability. It would be fraudulent for you to report an increase in net worth of $10,000.

Secondly, your company could not lend out $90,000 from the initial $10,000 you borrowed from me. You simply would not have the funds and if you claimed to have them, again you would be committing fraud.

Thirdly, I would like to take a quote from another Reserve Bank publication, this time from page 8 of Philadelphia's The National Debt:

So not only are the banks committing fraudulent activity in the sense that they claiming asset value from their debt and secondly loaning out more than they have borrowed, they are protected from any risk of bankruptcy courtesy of the public! You and I would pay more for prices of goods and services should the Fed have to dilute the money supply further by printing sufficient money to prevent bankruptcy of a bank!

This is nothing short of outrageous.

Published on http://DollarDaze.org - Jun 6, 2006.

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© 2006 DollarDaze

ABOUT THE AUTHOR

Mike Hewitt is the editor of DollarDaze.org, a website pertaining to commentary on the instability of the global fiat monetary system and investment strategies on mining companies. His website also provides a no-cost market data feed service with up-to-date quotes on currency exchange rates, commodity prices and major indices. Mike can be emailed at mikehewitt@hotmail.com.

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Comments (1)

Posted by Red Hue on January 29th, 2010: I was just watching "Democracy Now". Amy Goodman was speaking with Naomi Klien about last nights SOTU address. Naomi made reference to the fact that Howard Zinn had died last night. I'm sure that he will be missed. Howard was a great voice for common man as well as the under privileged. What Naomi said was that she believed that if Howard had been asked his opinion on the recent activities in the areas of finance & banking, health care reform, campaign finance. Howard would encourage a "debtors revolt". I have to say Naomi is probably right. And in honor of Howard Zinn, I am here and now calling for a nation wide "DEBTORS REVOLT". All people anywhere that are stressing over debt, money owed to any financial institution, insurance company, state or federal institution, HMO, multi-national or national corporation. Should stop paying. Refuse to pay. Not just that but talk to your neighbors, co-workers, family, friends. And when any threatening letters are received from the band of thieves. Respond in person to what local or branch or home office is nearest you. Not just in person but en-mass with signs banners and chants simply refusing to pay. Also alert the media but not until a few minutes before you go into the facility to tell them the good news. All of this should be done peacefully of course and with the expectation of possibly being arrested. However the most you wil get in most cases is a misdemeanor charge or a ticket. Anyway if we don't have the courage to engage in some form of mass civil disobedience then maybe we deserve nothing better than what we've gotten. Power to the people!

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