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
THE MANDRAKE MECHANISM: A DETAILED VIEW
Start with...
1
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 eventu-
ally becomes the foundation for almost the entire
nation's money supply.2 In reality, the government has
created cash, but it doesn't yet
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 ...
1
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1 u b a n k S m U S t C O V e r t h e s e , o a n s w i t h b o n d s o r o t h e r interest-bearing assets which it possesses, but that does not diminish the money-multiplier effect of the new deposit.
2- Debt obligations from the private sector and from other governments also are used in the same way, but government bonds are the primary instruments.
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THE CREATURE FROM JEKYLL ISLAND
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| 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 ...
1
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, how-
ever, is the same as turning on government printing
presses and simply manufacturing fiat money (money
created by the order of government with nothing of tan-
gible 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 ...
THE MANDRAKE MECHANISM 197
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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 consid-
ered 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
'1
reclassified in the books and called ...
BANK RESERVES
Reserves for what? Are these for paying off depositors
should they want to close out 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
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THE CREATURE FROM JEKYLL ISLAND
$900,000 more than they are required to keep on hand
