How Money Is Created

This three part, 20 minute video describes the process by which American currency is created by the Federal Reserve, and the huge problems this creates within our society. I typed up the information, because I will use this as a reference page to come back and further study, because it takes a few minutes to read compared to watching a 20 minute video.





The government requests X amount of dollars from the Federal Reserve, and the Fed purchases X amount of government bonds from them. So the government paints some official looking designs on paper, calls them treasury bonds, puts a value on them to the sum of X ($10 billion) dollars, and sends them over to the Fed. Then the people at the Fed draw up designs on paper, but call them Federal Reserve notes. The Fed takes the $10 billion in notes, and trades them for the treasury bonds.

The government takes the $10 billion in Federal Reserve notes, and deposits them into a bank account. Upon this deposit, the paper notes become legal tender money, adding $10 billion to the US money supply. Except in reality, this transaction would occur electronically, with no paper used at all. Only 3% of the US money supply exists as physical currency. The other 97% essentially exists in computers alone.

Government bonds are by design instruments of debt. When the Fed purchases these bonds, with money it essentially created out of thin air, the government is actually promising to pay back that money to the Fed. In other words, the money was created out of debt.

So the exchange has been made, and $10 billion sits in a commercial bank account. Based on the fractional reserve practice, that deposit instantly becomes part of the banks reserves, just as all deposits do. A bank must maintain legally required reserves equal to a percentage of it's profits-- which is quantified currently at 10%. This means that $1 billion is held as the required reserve, while the other $9 billion is considered an excessive reserve, and can be used as the basis for new loans.

Logically, one would think that this $9 billion is coming from the $10 billion deposit, but that's not the case. What really happens is the $9 billion is created out of thin air on top of the existing $10 billion deposit, which is how the money supply is expanded. The $9 billion can be created out of nothing, simply because there is a demand for such a loan, and there is a $10 billion deposit required to satisfy the reserve requirements.

If somebody borrows the newly available $9 billion from the bank, they will then most likely take it, and deposit it into their own bank account. The process repeats: the $9 billion becomes a part of the banks reserves. 10% is isolated, and in turn $8.1 billion is now available as newly created money for more loans. That can be loaned out and re-deposited, creating an additional $7.2 billion, to $6.5 billion, to $5.9 billion, and so on.

This deposit-money creation loan cycle can technically go onto infinity, and the average mathematical result is that about $90 billion can be created on top of the original $10 billion. In other words, for every deposit that ever occurs in the banking system, about 9X that amount can be created out of thin air.

So what gives this newly created money value? The money that already exists. The new money essentially steals value from the existing money supply, for the total pool of money is being increased irrespective to demands for goods and services. And as supply and demand finds equilibrium, prices rise, diminishing the purchasing power of each individual dollar, AKA inflation-- essentially a hidden tax on the public.

The fractional reserve system of monetary expansion is inherently inflationary, for the act of expanding the money supply without there being a proportional expansion of goods and services in the economy will always debase a currency. The historical values of the US dollar versus the money supply reflects this point, for there is an obvious inverse relationship.

$1 in 1913 required $21.60 in 2007 to match value, which is a 96% devaluation since the Federal Reserve came to existence.

In our financial system, money is debt, and debt is money. A chart of the US money supply from 1950 to 2006 compared to a chart of the US national debt from 1950 to 2006 shows a nearly identical trend.

The more money, the more debt, and the more debt, the more money. Every dollar in your wallet is owed to somebody by somebody, because the only way the money can come into existence is from loans. Therefore if everybody in the country paid off all debts, including the government, there would not be one dollar in circulation.

The last time in American history the national debt was completely paid off was in 1835, after president Andrew Jackson shut down the central bank that preceeded the Federal Reserve. This didn't last long, as international bankers installed another central bank in 1913-- The Federal Reserve. As long as this institution exists, perpetual debt is guaranteed.

Money is created out of debt through loans, which are based on a banks reserves, which are derived from deposits. Through this fractional reserve system, any one deposit can create 9X it's original value, in turn debasing the existing money supply, raising prices in society. Since all this money is created out of debt, and circulated randomly through commerce, people become detached from their original debt, and a disequilibrium exists where people are forced to compete for labor in order to pool enough money out of the money supply to cover their costs of living.

There's one more element to this sytem: interest. When the government borrows money from the Fed, or when a person borrows money from a bank, it almost always has to be paid back with interest. In other words, almost every single dollar that exists must be eventually returned to a bank with interest paid as well. But, if all money is borrowed from the central bank, and is expanded by commercial banks through loans, only what would be referred to as the "principal" is being created in the money supply.

Where is the money to cover all of the interest that's charged? Nowhere, it doesn't exist. The amount of money owed back to the banks will always exceed the amount of money that's available in circulation, which is why inflation is a constant in the economy, for new money is always needed to help cover the perpetual deficit built into the system, caused by the need to pay the interest.

What this also means is that mathematically, the faults and bankrupcy are literally built into the system, and there will always be poor pockets of society that get the short of end of the stick, like a game of musical chairs. It invariably transfers true wealth from the individual to the banks, for if you are unable to pay for your mortgage, they will take your property. This is particularly enraging when you realize that not only is such a default inevitable due to the fractional reserve practice, but also because of the fact that the money that the bank loaned to you didn't even legally exist in the first place.

In 1969, there was a Minnesota court case with a man named Jerome Daly, who was challenging the foreclosure of his home by the bank which provided the loan to purchase it. His argument was that the mortgage contract required both parties each put up a legitimate form of property for the exchange, which in legal terms is called consideration. Daly explained that the money wasn't the property of the bank, because it was created out of nothing as soon as the loan agreement was signed. The money doesn't come out of their existing assets, the bank is simply inventing it, putting up nothing of it's own, except a theoretical liability on paper.

The banks president, Mr. Morgan, took the stand, and in the judges personal memorandum, he recalled that the plantiff (bank president) admitted that in combination with the Federal Reserve bank, did create the money and credit upon its books by book-keeping entry. The money and credit first came into existence when they created it, and Mr. Morgan admitted that no US law or statute existed which gave him the right to do this. A lawful consideration must exist, and be tendered to support the note. The jury found that there was no lawful consideration, so the court rejected the banks claim for foreclosure.

This means that everytime you borrow money from a bank, whether a mortgage loan or credit card charge, the money given to you is not only counterfeit, but an illegitimate form of consideration, and hence voids the contract to repay, for the bank never had the money as property to begin with. Unfortunately this is suppressed and ignored, and the game of perpetual wealth transfer and debt continues.

During the Civil War, president Lincoln bypassed the high interest loans offered by the European banks, and decided to do what the Founding Fathers advocated-- create an independent, and inherently debt free currency, called the Greenback. Shortly after this measure was taken, an internal document circulated between private British and American banking interests, which stated:

"...slavery is but the owning of labor, and carries with it the care of laborers. While the European plan...is that capital shall control labor by controlling wages. This can be done by controlling the money. It will not do to allow the Greenback...as we cannot control that."
-- "The Hazard Circular", July 1862

The fractional reserve system is in fact a system of modern slavery. Money is created out of debt, and what do people do when they're in debt? They submit to employment to pay it off. But if money can only be created out of loans, how can society ever be debt free? It can't, and that's the point.

It's the fear of losing assets coupled with the struggle to keep up with the perpetual debt and inflation inherent in the system, compounded by the inescapable scarcity within the money supply itself, created by the interest that can never be repaid, that keeps the wage slave in line, running on the hampster wheel, in effect powering an empire that truly benefits only the elite at the top of the pyramid.

At the end of the day, you're working for the banks, because money is created in them, and ends up in them. They are the true masters, along with the corporations and governments they support. Physical slavery requires people to be housed and fed, but economic slavery requires people to house and feed themselves.

It's one of the most ingenious scams for social manipulation ever created, and at it's core it's an invisible war against the population. Debt is the weapon used to conquer and enslave societies, and interest is it's prime ammunition. As the majority walks around oblivious to this reality, banks, in collusion with governments and corporations, continue to expand their tactics of economic warfare, spawning new bases such as the World Bank, and International Monetary Fund.

Nice economics lesson, but it's too late i'm afraid.

second line

reply to post by litterbaux


It's never too late. Look what happened with Andrew Jackson: The main element of his platform was that he would get rid of the central bank, and he got elected and did just that. Sounds familiar? One of Ron Pauls main issues that sets him apart from the other candidates is that he will end the Fed, and if he gets elected, he may do just that.

Must say thanks. Always wondered how this works. Always thought the government can print as much money it wants to and now I think I'm right. This applies to most other countries too right?

reply to post by dec23


Yeah based on what I heard in the video, the fractional reserve system is used in many other countries as well.

Star and flag this guys, it's important!!!

reply to post by TupacShakur


Watch how fast this thread gets to the bottom of the click list. I'm not arguing with ya, its fascinating how the little scam they have going just came to light in the recent years.

The problem is people aren't going to read the thread and/or watch the vids.

i did, and was great lesson in economics

reply to post by jazzguy


I know dude, right! I thought I had a pretty good handle on what the Fed does, but I had no idea. This video is extremely informative, and the reason I typed it up was so that I could read and re-read the information and begin to fully understand every aspect of it.

One little correction:

The reserve they have to hold is not a % from the profit, but a % of the deposit!

Otherwise clear, good work.

reply to post by EartOccupant


One other correction, the percentage of the deposits to loans can also change. I'm not sure who decides that but it must be the bank itself unknowingly to its depositors (people with deposits aka lenders). Sometimes its 30 to 1.

This is where banks fail, they get too greedy.

The real question is, where is the money going?

While I agree with pretty much everything you have said there is a few things I think I should point out to you...

1. The Federal Reserve itself cannot directly buy treasury bonds from the US Government, though through the 20 or so primary dealers of the Federal Reserve they ensure along with foreign investors and central banks that each auction is bought up and there isnt a failure. Recently through Quantitive easing programs the Fed has bought bonds (from the primary dealers not directly from the government) and reinvested payments from their earlier MBS purchases into Treasuries aswell.

2. All profits that the Federal Reserve makes from interest payments on their portfolio of Treasuries and MBS is payed backed to the Treasury in installments but the Fed makes a 6% divended that is payed to the shareholders (primary dealers) of the Federal Reserve system. Of course any losses of the portfolio are also now liabilities to the US government after an accounting change in the Feds bookeeping earlier this year.

After than that though I give you a star and a flag.

reply to post by litterbaux


Yes the percentage changes, i did think it was around 10% but I'm not up to date.

The one regulating this % , I think you have a few options:

1. Local (country) finance supervision department
2. The bank self (nothing surprises me anymore)
3. Central bank
4. The BIS (Zürich)
5. Politicians with need for some fast money.

I could look it up, but don't feel like it.

Where the money goes?

It's them not do do about getting more money, it is Them to do that YOU have LESS money to keep you obedient, afraid, and dependent. So they keep taking it away from youy, pumping it around or transporting it overseas.

Thats Western style Government & Banking, there is a name for : DemoCrazy

reply to post by TankWolf


6% gain from monopoly money? Sign me up!

Oh wait, I'm not in the club. Never mind I'll resort to slave labor like everyone else.

Oh, thanks for making our point. Idiot.

Lol mate did you not read the part where I completely agree with everything he said I was just stating some corrections to his initial post that they make a 6% dividend and cant actually buy directly from the US government, I definately didn't agree that this is morally or ethically right... I am a huge hater just like 90% of everyone else on this website of the Federal Reserve system and all central banks around the world including the scumbags at the tops of these institutions. Zerohedge is my favourite website if you know the site it should say enough about what I think of the way the economic system is at the moment.