This publication detailed the institutionalized practice of currency creation as utilized by the Federal Reserve and the web of global commercial banks that it supports.
On the opening page the document states is objective. “The purpose of this booklet is to describe the basic process of money creation in a fractional reserve banking system.”
It then proceeds to describe this fractional reserve process through various banking terminology. A translation of which goes something like this:
The United States Government decided it needs it needs some money so it calls up the Federal Reserve and requests, say, $10,000,000,000.00 (Ten Billion dollars).
The Fed replies, “Sure, we’ll buy Ten Billion Dollars in Government Bonds from you.”
So the Government takes some pieces of paper, paints some official designs on them and calls them Treasury Bonds. Then it put a value on these Bonds to the sum of Ten Billion Dollars and sends them over the The Fed.
As a next step, the people at the Fed draws up a bunch of pieces of paper themselves, only this time calling them Federal Reserve Notes, or money currency. This new currency also has a designated value of Ten Billion Dollars.
The Fed then takes these notes and trades them for the Government Bonds.
Once the money exchange is complete, the Government then takes the Ten Billion in Federal Reserve Notes and deposits it into a bank account.
Upon this deposit the paper notes officially become legal tender money, adding $10,000,000,000.00 (Ten Billion) to the U.S. money supply.
And there it is. Ten Billion of new money has been created.
Of course, this example is a generalization, for, in reality, this transaction would occur electronically with no paper used at all.
In fact only three percent of the U.S. money supply exists in physical currency. The other 97% essentially exists in computers alone.
Now, Government Bonds are by design, instruments of debt. And when the Fed purchases these Bonds with money that is essentially created out of thin air, the Government is promising to pay back that money to the Fed. In other words, the money was created out of debt.
This minds numbing paradox that money or value can be created out of debt or liability will become more clear as we further this exercise.
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