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BAIL - OUTS

AND
STIMULATING THE ECONOMY
By: Bill Denman

INTRODUCTION

Congress recently passed legislation


in support of Obama’s plan to bail out
banks and the investment industry,
stimulate the economy, and reverse the
current trend toward depression. The
amount of money necessary to
implement this socialist boon-doggle is
four trillion dollars. This raises several
questions:

1. Where will the money come from to


fund Obama’s stimulus package
and bank bailouts?

2. Can national wealth be increased by issuing additional fraudulent money?

3. Will this simply lead to more “stimulus” money creation and eventually to
hyperinflation?

4. Does stimulus legislation violate the U.S. Constitution?

5. Will our freedom be lost?

SOURCE OF MONEY?

Where will government get the money to fund this “boost the economy” project? It
can not come from direct taxes but it will come from indirect taxes. If government
collected direct taxes to fund its projects, it would simply transfer purchasing power from
taxpayers to government. The purchasing power of taxpayers would be reduced by
exactly the same amount as the increase in government spending. There would be no net
increase in demand for products and no stimulation of the economy.

If taxpayers deposit their surplus money in a bank savings account, the bank will lend
it and it will still be spent. On the other hand, if taxpayers put money in their mattress or
piggy bank, demand for products will decrease and prices will fall; this is what is
currently happening. If government confiscates this surplus money by direct taxation it
will create a demand for products at a subdued pre-depression level and there will still be
a fall in prices. When government spending injects the surplus money into the economy,
many recipients will hoard it and government spending will not achieve its intended
effects. The anticipated economic boom will be suppressed and the trend towards
depression will continue. This is exactly what happened during the 1930's depression.
Documentation of this is contained in my article”Depression 1". This brings us to the
reality of the current situation.

In order to stimulate the economy, massive amounts of NEWLY CREATED money


must be injected into the economy. Furthermore, the method of injecting it is vitally
important. If government spends the money on pork barrel projects it will not have the
desired effect. It requires massive government projects such as building roads, expanded
defense contracts, and other construction, which requires additional demand for
manpower, machinery, materials, etc.

The newly created money can only come from one source – the Federal Reserve System
(FED). The FED is the only entity in the United States that is authorized by Congress to
engage in legalized counterfeiting. A loan to government is created by simply entering
numbers in the government’s account (see Treasury Secretary’s statement in Appendix
“A”). The government then proceeds to write checks to fund the economic stimulus
projects. This process was described in an article written by a former Secretary of the
Treasury (see Appendix A for his statement).
This debt, plus interest, must be repaid by taxpayers in the future. However, repayment
of the debt is only part of the overall disaster created by Obama’s stimulus project.

The projected $4 trillion cost of Obama’s “replace the infrastructure” program is


simply seed money for the creation of $40 trillion or more. The current FED reserve rate
is 10% and this means that for every $100 deposited in a checking account, the banking
system can create $1000 of new money (see Appendix B for documented proof of this). In
other words, the money deposited in checking accounts is multiplied by a factor of 10. Ten
times $4 trillion is $40 trillion and it could be more. We will return to this issue later.

BANK BAIL-OUTS

Bank bail-outs are undoubtedly the biggest scam in the history of the world. The
process is simply this:

1. The FED creates fraudulent money and gives it to banks and real estate investment
agencies such as Fanny Mae and Freddie Mac who make real estate loans.

2. The federal government instructs lending agencies to lower their requirements so that
people with low income can buy homes.

3. Predictably, a real estate boom is created and lots of people buy homes which they
commit to pay off with Adjustable Rate Mortgages (ARMS) they can not afford.

4. When the automatic mortgage rates begin to adjust upward, many of these people can
not keep up their payments and default on their loan.

5. The banks repossess the homes and a real estate panic develops which spreads to other
areas of the economy.

6. Real estate prices plummet and other home owners find that the value of their home
is less than they owe on it. The home can no longer be used as an ATM to fund other
purchases and demand for other products declines.

7. The decline in demand leads to closed factories and rising unemployment.

8. Banks have mountains of real estate mortgages that are almost worthless and begin to

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fail.

9. The specter of unemployment and bank failures begin to haunt those who are still
employed and they cut back on spending and begin to save – in their mattresses. They
also stop accumulating debt and since issuing debt is the method used by the FED to
create money (see Appendix C), there is a major reduction in the rate of fraudulent
money creation. This leads to a further reduction in demand and more
unemployment.

10. The FED, with the cooperation of the U.S. Treasury Department, begins to bail-out the
banks with massive injections of newly created fraudulent money.

11. President Obama begins his magic cure by dramatically expanding government
spending and applying a technique learned in earlier associations with ACORN.
ACORN (Association of Community Organizers for Reform Now) has been organizing
what it calls “homesteading” efforts in a half-dozen major U.S. cities. This means that
people move into homes that banks have repossessed. They don’t own the homes but
they occupy them and the banks apparently are not evicting them. This should come
as no surprise since ACORN was one of Obama’s pet projects before becoming
President. Is it likely that the banks will oppose a project supported by a man who
now holds the purse strings to the bank bail-outs? (Additional information about
ACORN was presented by Will Grigg during a radio station KBGN 1060 broadcast in
Caldwell, Idaho, on February 24, 2009). These activities removes homes from the glut
on the market and this creates the false appearance of a rebound in the real-estate
market. This paves the way for profitable real estate investments when the economic
stimulus package begins to take effect.

12. The FED bails out the banks to compensate for their losses in the real estate business
so why should they worry about ACORN activities.

13. Who will pay for these bail-outs? Taxpayers! The new money created by the FED and
loaned to the government for bank bail-outs is legally counterfeited money that causes
prices to rise. Thus in addition to paying off the government’s debt, the public pays
the higher prices caused by the newly created money to fund the government’s
projects.

Summarizing:

The FED creates money by book-keeping entries which causes a boom/bust in real
estate. People who bought homes using this easy money lose the homes and the money
invested in them. The banks repossess the homes. The FED creates more money to bail
out the banks. The ACORN people move into the vacant homes without any money
invested and simply occupy them. This reduces the number of homes on the market and
moves the real estate industry closer to a profitable market. Taxpayers pay the debt
incurred because of the money loaned to government by the FED. Isn’t this a nice scam
for everyone -- except taxpayers!

CREATING WEALTH

In his essay “Abundance and Scarcity”, the French political economist Frédéric Bastiat
made the statement that:

“Wealth consists in an abundance of commodities”

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This is obviously true and it does not say that wealth consists in an abundance of
fraudulent money. As we shall see, fraudulent money consumes wealth. To help clarify
this we will examine an illegal counterfeiting operation.

Suppose John Doe has a money printing press in his basement and can print as much
as he wants. He prints twenty five $1000 bills and buys a car with them. Is this $25,000
a medium of exchange? Absolutely not! John did not create any product to “exchange”
for the car, he simply used fraud to steal the car. But the $25,000 is purchasing power —
John bought a car with it and the car dealer will use it to buy other things. Thus the
$25,000 will circulate through the economy as purchasing media and cause prices to rise,
but there will always be a $25,000 deficit in commodities and prices will rise! In other
words, John steals not only from the car dealer, he steals from the entire community
because of the depreciating purchasing power of everyone’s money.

Counterfeiting by the FED operates the same way and has exactly the same effect from
a basic economics viewpoint. The only difference is that FED has a legal monopoly on the
counterfeiting business and they don’t need printing presses to create money – they just
enter numbers in books.

In the foregoing example it is obvious that John’s theft has removed a commodity from
the economy without producing any to exchange – this is known as capital consumption
which is the opposite of capital formation. In other words, there is no “balance in trade”,
as would exist in an honest money system. Honest money is simply a medium of
exchange which facilitates the exchange of commodities. Both parties to the exchange
must produce a commodity before the exchange can take place. In both the fraudulent
money creation systems of John Doe and the FED there is no exchange of commodities at
the time the money is issued – just creation of fraudulent money that steals from the
producers in society.

It’s true that this fraudulent money circulates as purchasing media – John bought a car
with it and the dealer will use it to purchase other things. But this purchasing media will
never be media of exchange because there will always be a deficit in commodities – the car
for which John exchanged NO commodity – he just stole it by fraud. Any society that tries
to live by consumption without production is doomed to fail – catastrophically.

When a bank makes a loan to someone for the purchase of a home, it just creates the
money by entering numbers in computers. At that point in time there are no new
commodities created as backing for the newly created money. Thus the loan creates an
additional demand for an existing supply of products and this drives prices up and the
purchasing power of everyone’s money down. Additionally, the bank gets a lien against
real property – the home purchased by the debtor. In principle this is no different than the
car purchased by John. Furthermore, this loan of fraudulent money is a lien against the
debtor’s future production. In other words, the bank just creates money that has nothing
backing it at the time of the loan but must be repaid with money obtained by the future
productive labor of the debtor. In other words, the debtor is enslaved.

ECONOMIC BOOM

Give me a money printing press and the authority to print unlimited amounts of
money (this is what the Federal Reserve Act of 1913 did for international bankers) and I
guarantee that a TEMPORARY economic boom will be created.

If that kind of activity is really beneficial why doesn’t government simply give

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everyone a printing press and let them print all the money they want? The answer is
obvious: everyone would stop working, all commodities would rapidly disappear from
the market and everyone would begin starving. Thus government grants a monopoly on
the counterfeiting business to a few favored individuals (owners of the FED). However,
the end result of their activities is the same as described above – it just takes longer,
transfers the wealth of the nation to the counterfeiters, and the rest are enslaved.

When fraudulent money is created, legally or illegally, and injected into the economy
there is an increase in demand for an already existing supply of commodities. To meet this
increase in demand, businessmen compete with each other in hiring new employees,
buying new machinery and purchasing additional natural resources. This competition
drives prices higher and an economic boom begins. Prices rise until the increased money
supply balances the supply of commodities. When balance is once again established, the
depreciated purchasing power of money will not buy any more commodities than it would
before the addition to the money supply – people simply pay more money for the same
amount of commodities. Since supply and demand are once again balanced there can be
no further increase in demand because the existing money supply is not sufficient to
support it at the higher prices. Businessmen then find themselves with too many
employees because demand is now back where it was before the artificial boom started
and the newly hired employees are a burden instead of an asset. Unemployment begins,
frightened consumers stop consuming and begin saving and this results in further
unemployment.

This further reduces demand, prices begin to fall as businesses unload surplus
inventory, and a panic develops. If monetary authorities (the FED and government)
intervene by pumping more fraudulent money into the economy it will simply create more
instability and make matters worse in the long run. However, short term effects may be
another economic boom that wastes natural resources on things people would not
willingly pay for and cause misallocation of labor, for example: bureaucratic boon-doggles
that pay people to not farm – euphemistically called the land bank.

Since the fraudulent money used to create the boom simply enables debtors to
consume existing commodities without giving any in exchange at the time of initial money
creation, the process obviously consumes capital. It’s true that future production is
necessary to pay off the debt and this partially replaces the consumed commodities. A
nation can not forever consume capital faster than it is replaced. Thus this process is self
destructive, as the American people are beginning to discover. Let’s examine this process
a little closer:

A bank creates $25,000 by a book-keeping entry and lends it to John Doe for the
purchase of a car. When John drives the car off the dealer’s lot, the amount of commodities
available in the market has been reduced by $25,000 because neither the bank nor John has
produced that amount of commodities. In other words, the $25,000 is not a medium of
exchange because no “exchange” of a commodity for a different commodity took place –
just consumption. It’s true that in the future john will produce $25,000 worth of
commodities in order to pay off the loan. But the initial purchase is an increase in demand
against an existing supply. Since demand has increased but supply hasn’t at that point in
time, prices rise and everyone’s money loses value. In other words, the bank has
authorized John to steal a $25,000 car. Of course John isn’t aware of this because the bank
didn’t tell him that the $25,000 is counterfeit and that they have a legal monopoly on the
counterfeiting business. Furthermore, this is capital consumption because the natural
resources (steel, oil that plastics are made from, glass, etc.) plus the depreciation of tools
and facilities used to make the car have been consumed. (See Appendix “B” for a

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documented explanation of the money creation process.)

When such fraud is perpetuated nationwide over an extended period of time, the
consequences are always severe. If the creation of new money continues it will necessarily
develop into hyperinflation which always ends in complete destruction of the value of
money. When money loses its exchange value, nobody will accept it in exchange for
commodities and the economy reverts to a barter system. This is exactly what happened
in France between 1789 and 1796 when they resorted to printing press money to fund
government operations.

“It ended in the complete financial, moral, and political prostration of France –
a prostration from which only a Napoleon could raise it.”
From “Fiat Money Inflation In France” by Andrew Dixon White
founder and first president of Cornel University.

The results of the 1923 German hyperinflation were similar:

“In the closing months of 1923, Germany had reverted to a medieval economy.
At that time the few sellers who were willing to assume the risk of receiving
payment in marks demanded 224 billion for a one-pound rye bread (slightly more
than one-fourth of a mark in 1913), 80 billion for an egg (less than one-twelfth
of a mark in prewar days), 3 trillion marks for a pound of butter, and 2 trillion,
500 billion marks for a pound of beef. ... Berliners cursed a fate that put the price
of a kilo of bread at 15 billion marks at two o’clock and 25 billion at three o’clock.
They could not endure a situation in which a restaurant meal was priced at 100
billion marks when the diner began eating, was already priced at 115 billion when
he began his main course, and cost 125 billion when he was handed his check.
Toward the close of 1923 most small restaurants shut their doors, partly because
people could not afford the cost but predominantly because patrons could not
abide the constant change in prices.”
From “The Penniless Billionaires” by Max Shapiro, partner in
charge of research for Wall Street securities firms.

This is entirely different than the situation where people consume less than they
produce. In this case, the $25,000 that the producer deposits in his bank savings account
represents surplus (unconsumed) commodities he has produced which are available for
others to use. Notice that $25,000 worth of commodities exists BEFORE the loan is made
to John and consumption does not exceed production. This is a process for capital
formation.

Issuing fraudulent money consumes wealth; it does not increase it. This consumption
of wealth is not recognized while the artificial boom is in progress but when the inevitable
depression appears, it can no longer be ignored. Unfortunately a lot of innocent people
are hurt and this can lead to serious social problems, such as riots. Riots over rising food
prices are already occurring in Yemen, India, Morocco and Indonesia. This simply
emphasizes the fact that issuing fraudulent money is a world-wide problem which is
beginning to have world-wide consequences.

HYPERINFLATION

When fraudulent money is injected into the economy, it causes prices to rise until a
balance is reestablished between the artificially bloated money supply and the quantity of
commodities. In other words, as prices rise increasing numbers of people can not afford

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the higher prices and are forced to reduce consumption. This continues until consumption
returns to pre-inflation levels. When this balance occurs, two things happen: (1)prices stop
rising because there isn’t enough money to support a further rise and (2) the demand for
commodities returns to pre-inflation levels because the depreciation in the value of the
currency simply means that it takes more money to buy the same amount of commodities
than it did before the inflation. At this point the monetary authorities must make a
decision between further inflation (expansion of the money supply) or a depression.

Since allowing a depression to develop is political suicide for the party in power, the
decision is always to avoid the depression by further injections of fraudulent money. But
this time it takes more money to get the same economic stimulus because of the higher
prices caused by the previous injection. Thus each time a balance returns between money
and commodities, the increase in the money supply must be greater than that used in the
previous injection in order to perpetuate the artificial boom and prevent a depression. This
process continues until hyperinflation develops and the value of the currency is
depreciating (prices are rising) so fast that noone will accept it in exchange for
commodities. This is exactly what happened in France in 1795 and in Germany in 1923.

Money is the life-blood of any highly developed division-of-labor society. As the


injections of fraudulent money continue, the life-blood of the nation becomes so thin that
it spews out of all the orifices of the social body and it collapses for want of nourishment
(commodities). In other words, hyperinflation is economic and social suicide. Let’s stop
the suicide NOW before it’s too late.

IS THE STIMULUS CONSTITUTIONAL?

NO! ABSOLUTELY NOT! Article 1, Section 8 of the U.S. Constitution says:

“The Congress shall have Power ... To coin Money, regulate the Value thereof,
and of foreign Coin, and fix the Standard of Weights and measures;”

Coining money is simply a metal stamping process and regulating the value thereof
is determining the size, weight and fineness of the coin and stamping that information on
its face. In other words, this section simply authorizes Congress to establish the standards
and provide a service to the owners of gold and silver bullion by establishing facilities for
minting coins. This is why it is in the section on the “Standard of Weights and Measures.”
It does not authorize Congress to interfere in the free market economy by purchasing
bullion, converting it into coins and then issuing them. This is reinforced by Section 14 of
the 1792 Coinage Act which is simply an implementation of Article 1, Section 8.

The Coinage Act of 1792 says:

“Section 14. And be it further enacted, That it shall be lawful for any person or persons to
bring to the mint gold and silver bullion, in order to their being coined; ... And as soon
as the said bullion shall have been coined, the person or persons ... shall upon demand
receive ... coins of the same species of bullion which shall have been so delivered, ...”

In other words, anyone who owns gold and silver bullion (not just the mining
companies) can take it to the mint and have it converted into certified coins and then
SPEND THEM INTO CIRCULATION. It is not necessary to have government, or banks,
“issue” currency.

Honest money is simply a medium of exchange. This means it’s a tool which facilitates

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the exchange of commodities. But who produces the commodities? Certainly not
government – it consumes commodities without producing any to exchange. We do not
elect public officials to produce commodities, they are elected to provide protection for
those who do. Since protection is a service provided to society, government is entitled to
the money necessary for providing that service. The problem is, and has always been, how
to keep government from destroying those upon whom it depends for its sustenance and
is supposed to protect – the producers in society.

ARE WE FREE ??

Money represents the fruits of labor, which is simply the application of human energy
to the conversion of natural resources into useable commodities. Since human energy
belongs exclusively to the individual, the results of its application (commodities) also
belong exclusively to the individual. This is the source of “property”, which money
represents. If we do not control the fruits of our labor we are not free, even though we
may still be able to move about. When we allow others to control our money, we give up
our freedom.

We have allowed government and an international cabal of bankers to control our


money, so we have given up our freedom. We work ceaselessly to pay our debts and those
that government owes to the bankers who control us and therefore we are not free. Our
twentieth President, James A. Garfield was absolutely right:

“Whoever controls the volume of money in any country is absolute master of all
industry and commerce.”

But “commerce” is simply an interaction between producers in society. These


producers are people who have lost control over the fruits of their labor and therefore are
slaves because the FED controls the volume of money in our country. Our government is
simply the collection agency for the international slave masters. If you still think you are
free, try starting your own business without the permission of government.

Obama’s “stimulus” package is nothing more than an accelerated slave raid and the
burden of our chains will become more than we can bear. Society will collapse into
another dark age, many will perish along the way, and those who survive will live in
misery.

At this stage of decline there is no way to avoid a major reduction in our standard of
living, we have already eaten the seed corn, but the plunge into another “Roman” type
dark age CAN BE PREVENTED. It will require a major effort to change the thinking of
people about money, political philosophy and morality – nothing short of this will suffice.
If the freedom that results in a high standard of living is not worth the effort to re-educate
ourselves in the underlying fundamental principles, then our destiny is automatically
determined.

In other words we still have a choice: accept the lumps that are rightfully ours because
of our past lethargy and work our way out of the depression, or continue on the present
path to oblivion. It appears that Thomas Jefferson’s prediction is being fulfilled: (emphasis
added)

“Our rulers will become corrupt, our people careless. A single zealot may
commence persecutor and better men be his victims. It can never be too often

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repeated, that the time for fixing every essential right on a legal basis is while our
rulers are honest, and ourselves united. From the conclusion of this war we shall
be going down hill. It will not then be necessary to resort every movement to the
people for support. They will be forgotten, therefore, and their rights disregarded.
They will forget themselves, but in the sole faculty of making money, and
will never think of uniting to effect a due respect for their rights.”
From Jefferson’s Writings, Query XVII, 1781.

Men seem to reach a point of darkness where they must decide whether to turn the lights
back on or slip into a darkness where no lights remain. Let’s turn the lights back on!

The battle is for men’s minds. If we lose this battle the consequences will be terrible.
Let’s CHANGE THE THINKING OF PEOPLE to light the candle of freedom again!

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APPENDIX “A”

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APPENDIX “B”
THE FEDERAL RESERVE SYSTEM – DETAILS

The information provided herein


comes from a book titled “The Federal
Reserve System — Purposes and
Functions” authored by the Board of
Governors of the FED. The adjacent
figure is a copy of the book’s cover. On
page 23 of this book (shown on the next
page), a table is provided which gives
a detailed description of the reserve
rate technique of creating money,
which will be analyzed in detail.

The United States is divided into 12


Federal Reserve Districts with a main
reserve bank and several branch banks
in each district (see Map in Appendix
D). For example Idaho and
Washington are in district 12 and the
main reserve bank for that district is in
San Francisco. Commercial banks in
Idaho deal with the FED branch bank
in Portland and commercial banks in
Washington deal with the FED branch
in Seattle. These FED branch banks
serve as the “banker’s bank” for local
commercial banks and provide many
“services” for them. One of these
services is calculating the reserves
which each commercial bank must have on deposit with its FED branch bank.

Before we begin our analysis, two misleading features in the table on the page 12 need
to be clearly understood.

1. In the comments above the columns of numbers, the statement is made that “A member
bank at which $100 is deposited needs to hold $20 in reserves at the Reserve Bank. The
remaining $80 can be lent.” This gives the impression that the local commercial bank
deducts $20 from the $100 and deposits it with it’s reserve bank. This is utterly and
absolutely false, as we shall see.

2. The Board of Governors has the authority to manipulate reserve rates between the
limits specified in the Federal Reserve Act. The reserve rate in this example is 20%
and up until the Monetary Control Act of 1980 this would be a possible rate, but was

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never used. Until 1980, the
legal limit on checking account
reserve rates ranged from 7% to
22%. The Board of Governors
could set the rate anywhere
within this rage. On Aug. 31,
1959 it was 18%, the highest rate
in history. During the same
period the reserve rate on time
deposits (savings accounts)
ranged from 3% to 6% — it’s
been 3% for many years. The
Monetary Control Act of 1980
changed the reserve rate on
checking accounts to a range of
3% to 14% — the current rate is
10%. Thus today’s actual figures
are much worse than those
shown in the adjacent table. The
Monetary Control Act of 1980
changed the reserve rate on time
deposits (savings accounts) to a
range of 0% to 9% — it is
currently 3%.

Now let’s examine the adjacent


table which is page 23 in the
FED book referenced above.

In the column titled


“Transactions”, on the line “Bank
1”, under the second column
heading “Amount deposited in
checking accounts”, we see that
$100.00 is deposited. In the third column with the heading “Amount lent”, we see $80.00.
Since the reserve rate in this example is 20% of the $100 deposit, the amount in column 4
under “Amount set aside as reserves on deposit at Reserve Banks” is $20 (20% of $100).
However, this column heading is misleading, as will be explained in the example below.

It’s important to keep in mind that we are talking about checking account money.
People put money in checking accounts when they expect to spend it soon (usually by
writing a check against it). If they intended to save it, they would have put it in a savings
account (where the 3% reserve applies - more about that later). The following example
will illustrate the money creation process shown in this table.

Let’s suppose spender “A” deposits $100 in his checking account and the next day
writes a $100 check against his deposit to buy a lamp. If the bank had deducted $80 from
his account and loaned it to debtor “B”, as shown in column 3, “A’s” check would bounce

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when the store manager deposited it. Needless to say, spender “A” would be on the bank
like a wet blanket and close his account. Thus we see that the $80 can not come from the
$100 deposit. Where does it come from? Due to FED regulations, the local commercial
bank is authorized to simply create an additional $80 based on the $100 deposit. In other
words, if debtor “B” wants to borrow $80 after spender “A” makes his deposit, the bank
is authorized to create the $80 by lending it.

Next let’s move to the last column, the title of which is misleading. The column is
labeled “Amount set aside as reserves on deposit at Reserve Banks”. This gives the impression
that $20 out of the $100 deposit is “set aside” as reserves at a Federal Reserve Bank for the
local commercial bank. Hmmm, let’s see now, $80 loaned to debtor “B” and another $20
deposited in the FED Bank as reserves for the commercial bank — $80 + $20 = $100 and
there is nothing left in spender “A’s” checking account to cover his $100 check — simply
can not happen; the statements at the top of the table are simply a deliberate attempt to
mislead the reader.

As we saw in a previous paragraph, the $20 reserve can not be deducted from spender
“A’s” checking account. The FED simply creates another $20 by crediting the local
commercial bank’s reserve account at the Federal Reserve Bank in the amount of $20. Thus
we see that the total amount of new money created by the local commercial bank ($80 loan)
plus that created by the FED ($20 reserves) equals the original $100 deposit ($80 + $20 =
$100). At this point we see that the banking system has created a new $100 equal to the
initial checking account deposit.

Now let’s return to the table on the previous page. Notice that the $80 created by the
bank and loaned to debtor “B” has been deposited in “B’s” checking account, as shown in
column two, line 2 under “Amount deposited in checking accounts”. Usually when someone
borrows money from a bank, they must set up a checking account with the lending bank
and the bank simply credits “B’s” checking account in the amount of the loan ($80). The
bank (and the FED) see this as a new $80 deposit and the 20% reserve applies. Therefore
in column three we see an additional $64 (20% of $80 is $16 and $80 minus $16 is $64) is
loaned and the FED credits the commercial bank’s reserves with an additional $16.00.
Thus in columns 3 & 4, on the line identified as 2 under “Transactions”, we see that the
banking system has created an additional $80 ($64 loan + $16 reserves) but in this case the
original $80 was created by the loan in “Transaction 1" (column 3, line 1) and it is not
backed by any products at the time of the loan. At this point, the banking system has
created an additional $180 based on the initial $100 deposit and no new products have
been created as backing for this $180. We are assuming that spender “A” produced
products as backing for the $100 (even though this may not be true as we shall see later).

The total new demand for products is now $280 (initial $100 deposit plus $180 created
by the banking system) for $100 worth of products. Of course $280 chasing after $100
worth of products is what drives prices up. It will undoubtedly be objected that the
reserves created by the FED for the local commercial bank are not chasing products. In
order to see that they are, we would have to examine what happens when the local
commercial bank borrows its reserves from the FED and loans them into circulation. That
would take us into details about the “Discount Rate” and “FED Funds Rate”, which is not
practical here.

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If you look at the bottom of column 4 in the table on page 12, you will see that the
reserves created by the FED for the local commercial bank is equal to the amount of the
initial $100 deposit. The difference is that the initial $100 deposit had products backing
it up whereas this $100 reserve has absolutely nothing backing it up. The commercial bank
can borrow this newly created $100 and start the money creation process all over again.
Remember that spender “A” has already spent his $100 and withdrawn that amount of
products from the market.

At the bottom of column 3, we see that $400 of NEW LOANS have been made by the
bank in addition to the $100 IN RESERVES which have been created by the FED. $400 +
$100 = $500 of newly created money without anything to back it up at the time of creation.
Thus we have $600 (the initial $100 deposit plus the $500 created by the banking system)
chasing the original $100 worth of products (ignoring the time element). $600 chasing $100
worth of products is what drives prices up and the value of the dollar down.

The time element is very important in understanding the basic economics involved in
this money creation system and is often overlooked. It’s true that debtor “B” will have to
produce enough products in the future to repay the loan but at the time of the loan, he
withdraws $80 worth of products from the market when none have been created to back
it up. This is additional demand against an existing supply of products and drives prices
up and the value of the money down. In other words, total demand has increased by
$500 but the supply has not — at the time of money creation.

A more complete analysis will show that debtor “B” will be in the process of creating
products to repay the $80 he borrowed while others are borrowing newly created money
at later points in time. Thus, by the time the 50 transactions (see the section titled “Reserve
Calculations” below for this figure) necessary to create the $500 are completed, people who
borrow earlier in the cycle will be producing products to repay their loans. Thus, the
quantity of products to back up the newly created money is increasing as the creation
process proceeds. Even so, the overall situation is much worse than this analysis indicates
because we have not considered parallel bank transactions based on the initial $100 deposit
or the bank float. Also, there are many cases where the initial $100 deposit will not be
backed by any products at all (explained later).

The present reserve rate is 10%, not 20%, therefore banks can create $1000 of new
purchasing media for each $100 deposit in a checking account (see the two websites below
for more detail on reserve requirements) .

http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=cecbaa57a8b0cf4fa51822d63209c117
&rgn=div8&view=text&node=12:2.0.1.1.4.0.2.9&idno=12

http://www.federalreserve.gov/monetarypolicy/reservereq.htm#table1

[Those who are mathematically inclined will recognize that the figures in the table on
page 12 form a geometric progression and the amount created can be determined for any
reserve rate by calculating the sum of the progression. The equation for doing this is
provided in the section titled “Reserve Calculations” for those interested in exploring the
effects of reserve rate changes. Working with these equations reveals why the FED usually

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relies more on “discount rate” and “FED funds rate” manipulations than on the reserve
rate. As the reserve rate is decreased, the number of transactions required to complete the
cycle increases – dramatically. As the number of transactions increases it becomes very
doubtful if the money creation cycle will ever be completed because of the commercial
bank reporting period. These details are not explained here because the purpose of this
article is to promote a general understanding of how the legalized counterfeiting machine
(FED) creates the money.]

When the FED Board of Governors arbitrarily reduce the reserve rate, the amount of
money that can be created from each deposit increases, except as noted in the previous
paragraph. Furthermore, reducing the reserve rate makes more money available to
commercial banks immediately. If the reserve rate is reduced from 10% to 9.5 %, this
means that, at the time of reduction, the banks have a half percent more in reserves at the
FED than necessary to meet reserve requirements. These excess reserves can be
immediately withdrawn by the commercial bank and loaned into circulation. Nationwide
this amounts to a lot of money.

Conversely, increasing the reserve rate reduces the amount of money created. If the
FED wants to follow a tight money policy and create a recession, it can increase the
reserve requirement and the banks will have to scramble to come up with the additional
money to deposit in their reserve account at the FED to meet the higher reserve
requirement. This withdraws money from circulation and reduces economic activity —
a recession begins. However, this technique is rarely used; discount rate (not explained
herein) manipulations accomplish the same thing.

Between the time that Congress passed the Federal Reserve Act and President Wilson
signed it, Congressman Lindberg warned the American people that the Federal Reserve
would: (emphasis added)

“... establish the most gigantic trust on earth. When the President signs the act,
the invisible government by the money power ... will be legitimized. The new
law will create inflation whenever the trusts want inflation. From now on,
depressions will be scientifically created.”
Congressman Charles Lindberg, Sr.

It was mentioned earlier that the reserve rate on savings accounts is 3%. Let’s suppose
saver “C” deposits $100 in his savings account. With a 3% reserve requirement, the bank
can lend $97 of this $100. This $97 loan is placed in someone’s checking account where the
10% reserve requirement applies. So 97% of the savings account deposits (time deposits
in bankers jargon) are used for creating new money by the same process as checking
account deposits — the only difference is that an initial checking account deposit (from a
savings account loan) is slightly less — $97 instead of $100. With a 10% reserve rate on
checking accounts, this means that the banks can only create $970 of new money from a
$100 deposit in a savings account.

Now we can begin to understand what Josiah Stamp meant when he said:

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“The modern banking system manufactures money out of nothing. The
process is perhaps the most astounding piece of sleight of hand that was ever
invented. Banking was conceived in inequity and born in sin . Bankers own the
earth. Take it away from them but leave them the power to create money, and
with a flick of a pen, they will create enough money to buy it back again . Take
this great power away from them and all great fortunes like mine will disappear,
for then this would be a better and happier world to live in . But if you want to
continue to be the slaves of bankers and pay the cost of your own slavery,
then let bankers continue to create money and control credit.”
Sir Josiah Stamp, president of the Bank of England and the second
richest man in Britain in the 1920’s, speaking at the University of
Texas in 1927.

Understanding how this fraudulent money-creation system works can be very useful
for personal financial planning. If you hear that the FED is reducing the reserve rate (or
the discount rate, or FED funds rate) you automatically know that prices will rise and the
value of the dollar will decline.

STEALING REAL PROPERTY

“He who steals from a citizen, ends his days in fetters and chains; but he who
steals from the community ends them in purple and gold.”
Marcus Porcius Cato The Elder (234 - 149 B.C.) Held several offices in
the Roman Empire and was elected censor in 184 B.C. Acted as census
taker, assessor, and inspector of morals and conduct.

The point is that the banks use fraud (legally counterfeited money) to obtain title to
real property. People who borrow from the banks must provide collateral as backing for
the loan — if the debtor defaults on the loan, the bank gets the property. The sub-prime
mortgage debacle is a prime example of this. The FED simply created (counterfeited) the
money used by Freddie Mac, Fannie Mae, FHA, banks, and other lending institutions, to
grant loans to people who could not afford them. In spite of all the hullabaloo about
banking problems, you can rest assured that the big banks will come out smelling like a
rose — after all, the FED can create as much money as necessary to bail them out, like they
did in the stock market crash of 1987. Bernanke is presently doing exactly that — he
injected $40 billion into the banking system in December, 2007; another $60 billion in
January, 2008 and has made it clear that he will create whatever funds necessary to avoid
a depression. Remember, before taking office he said he would drop dollars out of
helicopters to prevent deflation (falling prices in his false usage of the term).

RESERVE CALCULATIONS

where S is the sum, a equals the initial amount deposited ($100 in


this case), r equals one minus the reserve requirement expressed as
a decimal (1 - 0.2 = 0.8 in this example), and n equals the number
of terms in the progression, which is the number of deposits that
must be made to generate the maximum amount of newly created
money.

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From the table on page 12, we would have the following definitions of terms in the
equation:

a = 100 (The amount deposited in transaction 1 in the table.)

The reserve rate is 20% which expressed as a decimal is 0.2. (see note 1 at the bottom
of the table; “demand deposit” is bankers jargon for checking account deposit.)
Therefore:

r = 1 - 0.2 = 0.8

If we let n = 50 (Transactions) then:

S = $499.99 (pretty close to $500)

In the table on page 12, the Board of Governors of the FED only carried their example
to 20 transactions (n = 20) and the resulting sum was $494.29 — they made up the
difference by alluding to deposits in “Additional Banks” in order to keep the example
simple. This brings up another point: it is not necessary that all these transactions take
place in the same bank. The businessman who sold spender “A” the lamp may deposit his
check in a different bank than the one that “A’s” check is written against. This does not
make any difference in the final outcome since all banks are operating under the same
“central bank” rules and regulations.

APPENDIX “C”

Statements made during hearings of the House Committee on Banking and Currency,
September 30, 1941. Members of the Federal Reserve Board call themselves “Governor”.
Governor Eccles was Chairman of the Federal Reserve Board at the time of these hearings.

Congressman Patman: “How did you get the money to buy those two billion dollars
worth of Government securities in 1933?”

Governor Eccles: “Out of the right to issue credit money.”

Patman: “And there is nothing behind it, is there, except our Governments credit?”

Eccles: “That is what our money system is. If there were no debts in our money
system, there wouldn’t be any money.”

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APPENDIX “D”

Revised December 30, 2009

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