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 1.
2. "Money, Credit and Velocity,"
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THE CREATURE FROM JEKYLL ISLAND
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
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. Thisis a staggering thought. We are completely dependent on thecommercial banks. Someone has to borrow every dollar we have incirculation, cash, or credit. If the banks create ample synthetic moneywe are prosperous; if not, we starve. We are absolutely without apermanent money system. When one gets a complete grasp of thepicture, the tragic absurdity of our hopeless situation is almost incredible—but there it is.1
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 1. Irving Fisher,
THE MANDRAKE MECHANISM 189
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."1
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."2
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
The answer is nothing,
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.
