Money - It's Not What You Think
There is nothing so revered, yet so misunderstood as the subject of money. Most adults spend half their waking hours laboring to acquire it. Many people measure a person's standing in society by how much ”money” they have. And nearly everything in our modern world is measured by its monetary value.
But how many people have a clue what money is? Where it comes from? What gives it value? The history of money? And what value would our modern money have if everyone knew what it really was?
Pull out a dollar bill, look at it, and ask yourself, How did this get here? What gives it value? Do you know what makes money, “money”?
by Hari Heath
In the Beginning
Before money, there was barter. One thing traded for another thing. This only works if both traders want the other's thing. Otherwise, no trade. By having a commonly accepted third medium of exchange, expanded commerce became possible.
Coins, drilled shells, beads and animal skins were among the early forms of money. In the early forms of money, value came from the rarity of the material or the labor to produce it.
So how did that paper “dollar” in your hand become money? An excellent answer is found in G. Edward Griffin's 600+ page book, “The Creature from Jekyll Island.” This highly illuminating and educational study on money covers the history of money, banking, wars and the political shenanigans behind the money powers. But we don't have 600 pages here to answer every detail of that question.
The short history is that coins made of precious metals became the favored medium of exchange since at least the Roman times. The word money comes from the word “Moneta,” an epithet for the Roman goddess Juno. A temple to this goddess, who was considered the guardian of the Roman treasury, was converted into a mint, according to James Ewart in his book, Money – Ye shall have honest weights and measures. The Romans began to call this temple “The Moneta” and later used the name for other places where coins were made. Moneta evolved over the years to an abbreviated “mone” or “monet.” The older English spelling of “monie” eventually became “money.”
From Roman times through Medieval Europe there was a proliferation of coinage and various ways to debauch the coins by lightening their weight, plating or alloying with less valuable metals. But the ultimate debauchery came from the Goldsmiths in the 1200s who discovered the dirty scheme of fractional reserve holdings. The Goldsmiths issued paper receipts for gold they held in storage for their customers. The receipts came to be used “as” money since they could be returned to the Goldsmith for the gold held in storage.
The Goldsmiths discovered that, since not everyone wanted their gold at once, they could issue more receipts than they had gold and create wealth for themselves “out of thin air,” or more accurately, paper and ink. This little experiment has been tried over and over again ever since. It forms the basis for the banking industry and has repeatedly led to the same inescapable result -- financial collapse caused by unfettered greed.
What is Money?
Money in the pure sense of the word, can only mean coins, not paper currency. Congress was only given the power in the Constitution to “coin money, regulate the value thereof, and of foreign coin.” The Constitution does not authorize Congress to issue currency or create a central bank. Constitutionally, only coins can be money.
Ewart makes another clear distinction. Money is not something to be used “as” a medium of exchange, money “is” a medium of exchange. Money doesn't represent value, like a note, it “is” something with intrinsic value like a coin.
But all of these otherwise correct definitions do not correlate with our modern misguided notions of “money.” Do you have coins in your bank account? When you write a check to someone can they cash it for the face value in gold or silver coins? When you swipe your credit or debit card at the gas pumps does a coin fall out of the card and into the pumps to pay for your fuel? Of course not; you don't really use “money.”
In modern reality, since we have no “money,” what we use “as” money, has become “money.” Being an advocate of constitutional reality, I am often perplexed when explaining real money to my fellow citizens who have lost all sense of monetary reality. How can I explain the value of precious metal coin money that “is” a medium of exchange, to members of the current herd who have been programmed to believe Federal Reserve Notes, credit cards and bank accounts are money or have money in them?
The Four Kinds of Money
Griffin provides the answer in the Creature From Jekyll Island. He offers a working definition that “Money is anything which is accepted as a medium of exchange and it may be classified into the following forms:
1. Commodity money;
2. Receipt money;
3. Fractional money;
4. Fiat money.”
Ever since the era of the goldsmiths, if monetary systems are allowed to run the full course steered by human greed, they eventually end up somewhere in the latter two forms before they collapse. Griffin's book provides example after example throughout history of the short lived and devastating effects of paper currencies.
That “dollar” you are holding in your hand has been in the “fiat money” phase for 70 years -- one of the longest running fiat schemes the political and monetary scientists have yet devised. To understand the nature of the fiat scheme we must first visit the other three forms of money and see how one begets the next.
Commodity money is just that. Some thing “is” the money. Gold, silver or copper coins; deer skins; trade beads; whiskey, sugar or salt. When the American colonies became productive they were short on money but long on tobacco. Bales of tobacco were widely accepted in colonial ports as commodity money to purchase the goods imported from Europe. On the return trip, merchants accepted tobacco as money for more goods purchased for shipment to the New World.
Gold has been preferred commodity money for thousands of years. It is relatively rare, doesn't spoil or corrode and, unlike jewels, it is infinitely divisible into a consistent quality and quantity of coinage.
Griffin points out another often overlooked advantage to the use of a commodity money. It automatically creates stability in an economy through the natural forces of a free market. The supply of the commodity money will naturally regulate its value relative to the products and services available in a given society. He presents numerous examples of economies that were essentially self-healing after their fractional or fiat monies collapsed and they returned to whatever commodity money they had on hand.
Griffin also debunks the myth that there isn't enough gold to go around if we had to go back to a gold monetary unit. He details how gold or another commodity is only a measure of value. The amount of gold available and the items available in commerce would not change -- only the measurement we use between them -- money.
He offers a well-thought out 16 point plan to replace the Federal Reserve System with silver and gold based commodity money and receipt money. His calculations, based on September 1993 data, include the quantity of gold and silver held by the government; their historical, relative and current (1993) values; the quantity of the Federal Reserve Note (FRN) “dollars” or M-1 money supply; and the bottom line if the FRN “dollars” were redeemed by silver dollars. The bottom line is that FRNs would be valued at .0047 silver dollars or a silver dollar would be worth 213 FRNs after redemption.
Receipt money is literally a receipt for commodity money. It is used “as” money. If it remains 100 percent backed by the commodity it does no harm. It's lighter and can be very valuable if, for example, the receipt entitles the holder to a large stack of precious coins.
Typically, receipt money offers some terms of redemption such as “payable to bearer on demand.”
The only problem with receipt money is when by some fraud, legal or otherwise, it is turned into fractional money. The Goldsmiths pioneered that concept which was one of the steps along the way to make that “dollar” in your hand what it is today.
Fractional money is what happens when more receipt money is circulated than there is commodity money to redeem it with. Only a fraction of the substance is there to back the promise to pay. Fractional money is the direct result of human greed -- the desire to get something for nothing.
The Creature From Jekyll Island provides many examples of receipt money gone bad. With various motives from simple greed to the funding of wars, bankers and governments have been fractionalizing receipt money for the last 800 years.
What happens when banks or governments get caught with their pants down, and the commodity money demanded doesn't match the fractional money in circulation? There are three basic options: Total collapse of the economic system involved; partial collapse of the monetary unit where it is devalued to match the commodity money; or conversion to fiat money.
Fiat money is often defined as paper currency not backed by gold or silver. It is sometimes “enforced” by “legal tender” laws which compel people to accept it even though it has no real value. “Fiat” is Latin for “let it be done,” as in an arbitrary or authoritative order or decision.
Fiat money is what we have “let be done” to our economy, which constitutionally is required to be a commodity money system of coins. There are good reasons why the founders of our nation mandated a coin-based economy.
The fiat paper fiasco began in the colonies in the 1690s. Griffin states, “Massachusetts was the first to use it as a means to finance its military raids against the French colony in Quebec. The other colonies were quick to follow suit and, within a few years, were engaging in a virtual orgy of printing 'bills of credit.'”
As one colonial legislator explained it, “do you think, gentlemen that I will consent to load my constituents with taxes when we can send to our printer and get a whole wagon load of money, one quire of which will pay for the whole?”
But there is a hidden tax called inflation associated with the issuance of fiat money.
Inflation is the natural result whenever more currency is added to a given economy. The value of the existing currency is deflated relative to the amount of new currency issued and circulated. By the late 1750s Connecticut had price inflated by 800 percent, the Carolinas had inflated 900 percent, Massachusetts 1,000 percent and Rhode Island 2,300 percent. Fiat inflation was so out of hand the British Parliament stepped in and banned the production of fiat money. Griffin described the result:
“What followed was unforeseen by the promoters of fiat money. Amid great gloom about 'insufficient money,' a miracle boom of prosperity occurred. The forced use of fiat money had compelled everyone to hoard their real money and use the worthless paper instead. Now that the paper was in disgrace, the colonists began to use their English, French and Dutch gold coins again, prices rapidly adjusted to reality, and commerce returned to a solid footing. It remained so even during the economic strain of the Seven-Years War (1756-1763) and during the period immediately prior to the Revolution. Here was a perfect example of how an economic system in distress can recover if government does not interfere with the healing process.”
But that was not the end of fiat currency in the colonies. To fund the revolutionary war the printing presses began rolling again. The Creature From Jekyll Island provides the following figures which speak for themselves:
* At the beginning of the war in 1775, the total monetary supply for the federated colonies stood at $12 million.
* In June of that year, the Continental Congress issued another $2 million. Before the notes were printed, another $1 million was authorized.
* By the end of the year, another $3 million.
* $19 million in 1776.
* $13 million in 1777.
* $64 million in 1778.
* $125 million in 1779.
* A total of $227 million in five years on top of a base of $12 million is an increase of about 2,000 percent.
* On top of this “federal” money, the states were doing the same in an approximately equal amount.
* And still more: the Continental Army, unable to get enough money from Congress, issued “certificates” for the purchase of supplies totaling $200 million.
* $650 million created in five years on top of a base of $12 million is an expansion of the money supply of over 5000 percent.
The result? In 1775, the colonial money called the Continental was worth one dollar in gold. In
1778 it was valued at twenty-five cents. By 1779 it was worth less than a penny.
Thomas Jefferson clearly explained the nature of the hidden tax called inflation:
“It will be asked how will the two masses of Continental and of State money have cost the people of the United States seventy-two millions of dollars, when they are to be redeemed now with about six million? I answer that the difference, being sixty-six millions, has been lost on the bills separately by the successive holders of them. Every one, through whose hands a bill passed, lost on that bill what it lost in value during the time it was in his hands. This was a real tax on him; and in this way the people of the United States actually contributed those sixty-six millions of dollars during the war, and by a mode of taxation the most oppressive of all.”
Is there any question in your mind now as to why the founders of this nation only gave Congress the power to “coin money? Oliver Ellsworth, a Constitutional Convention delegate from Connecticut and later Chief Justice of the Supreme Court said, “This is a favorable moment to shut and bar the door against paper money. The mischief of the various experiments which have been made are now fresh in the public mind and have excited the disgust of all the respectable parts of America.”
Not all fiat money follows a progression from commodity money, to receipt money, to fractional money, to fiat money. Many of the colonial currencies began and ended as fiat money. The modern “Euro” is nothing but pure fiat money.
The Fractional Fiat
There is “fractional” money that has been conjured up by the monetary scientists. It's not really a separate form of money in our working definition of money, but it could be called fractional fiat money. Instead of fractional money where only a fraction of the commodity money is kept on hand, a fractional portion of the fiat money is used by the financial institution as a basis to make loans. It is more commonly referred to as fractional reserves. The “reserve” is kept on hand just like the goldsmith's fractional gold to pay out to the unsuspecting customers and keep them unsuspecting.
The fractional reserve rate is carefully calculated by the monetary scientists at the Fed to keep our fiat world rolling along. Fractional fiat money is part of the grand scheme to create money out of thin paper and ink. We'll cover that further, as we unravel the magic illusion of that “dollar” in your hand.
The trail of economic treason
So how did that “dollar” bill you're holding become money? The first thing to understand is that the Federal Reserve Bank or Fed, is not part of the federal government. Most Americans fail to comprehend this fact.
Griffin summarizes the real purposes of the Fed since its conception: “stop the growing competition from the nation's newer banks; obtain a franchise to create money out of nothing for the purpose of lending; get control of the reserves of all banks so that the more reckless ones would not be exposed to currency drains and bank runs; Get the taxpayer to pick up the cartel's inevitable losses; and convince Congress that the purpose was to protect the public.”
Conceived at a secret meeting of the western world's financial elite on Jekyll Island, Georgia, in 1910, the Federal Reserve Bank became the fourth and current experiment in American central banking. The history of that experiment, and the wars, chaos and mayhem caused by it are already the subject of numerous books. We can't begin to touch on its history in this article so we'll stick to a short timeline of the Fed's transition through the four forms of money and how the Fed's mechanisms manipulate our fiat world.
In 1913, the Fed was created by the Federal Reserve Act. Congress also gave away many of our Treasury buildings to the Fed and the Fed assumed control of our nation's gold stores. In the true spirit of European bankers (who held the strings behind the scenes), the Fed began the looting of America.
Federal Reserve Notes, which apparently began as receipt money, “payable to bearer on demand,” no doubt were soon converted to fractional money. But many more FRNs were issued than they had coin money to back them. Congressman Louis McFadden made some inquiries and reported to Congress about the Creature called the Federal Reserve. He found that in 1928 alone the Fed had made loans of gold-backed “dollars” to its member banks in an amount that was six times the world's known gold supply. Simultaneously, As Congressman McFadden pointed out, much of our nation's gold supply was being shipped overseas in trade for German notes and other paper “assets.”
Heavily fractionalized, the “roar” of the roaring 20s was fueled by infusions of Fed fractional money. This continued until the Fed tightened the purse strings, contracting the money supply and causing the crash of 1929 and the ensuing depression. By the spring of 1933, enough Americans figured out there wasn't enough gold in the vaults to “pay to bearer on demand,” so they made a run on the banks to get their gold while they could.
To avert a meltdown of the Fed, President Roosevelt declared a banking holiday and closed the banks by Executive Order. Congress soon followed suit and declared that Fed notes were no longer redeemable in gold. Fed fractional money became Fed fiat money with the acts of a compliant and complicit president and Congress. Why would elected politicians who presumably want to get re-elected violate the will of the people and the Constitution, in favor of a private central bank?
The Mandrake Mechanism
It's easy to say fiat money is made out of thin air or paper and ink, but there is more to it than that. If it were that easy, more people besides the Montana Freemen would be doing it. The magic of fiat money is something bankers, presidents and congressmen would do anything for.
Griffin, in The Creature from Jekyll Island, explains this magic and calls it the “Mandrake Mechanism” after the 1940s comic strip character “Mandrake the Magician.” Mandrake's specialty was making things out of nothing and making them disappear back into the same void. First, the principles behind the Mandrake Mechanism:
“In truth, money is not created until the instant it is borrowed, It is the act of borrowing which causes it to spring into existence. And, incidentally, it is the act of paying off the debt that causes it to vanish....In spite of the technical jargon and seemingly complicated procedures, the actual mechanism by which the Federal Reserve creates money is quite simple. They do it exactly the same way the goldsmiths of old did except, of course, the goldsmiths were limited by the need to hold some precious metal in reserve, whereas, the Fed has no such restriction.
“It is difficult for Americans to come to grips with the fact that their total money supply is backed by nothing but debt, and it is even more mind boggling to visualize that, if everyone paid back all that was borrowed, there would be no money left in existence.”
Federal Reserve Governor Marriner Eccles testified before the House Committee on Banking and Currency, September 30, 1941. Congressman Wright Patman asked Eccles how the fed got the money to purchase two billion dollars worth of government bonds in 1933. Eccles answered, “We created it.” Patman asked, “Out of what?” Eccles replied, “Out of the right to issue credit money.” Patman queried, “And there is nothing behind it, is there, except our government's credit?” Eccles responded, “That is what our money system is. If there were no debts in our money system, there wouldn't be any money.”
Griffin explains the immorality of the Mandrake Mechanism:” When banks place credits into your account, they are merely pretending to lend you money. In reality, they have nothing to lend. Even the money that non-indebted depositors have placed with them was originally created out of nothing in response to someone else's loan. So what entitles the banks to collect rent on nothing? It is immaterial that men everywhere are forced by law to accept these nothing certificates in exchange for real goods and services. We are talking here not about what is legal, but what is moral.”
He continues, “And what did the banks do to earn this perpetually flowing river of wealth? Did they lend out their own capital through the investment of stockholders? Did they lend out the hard-earned savings of their depositors? No. Neither of these were their major source of income. They simply waved their magic wand called fiat money.
“...The bottom line is that Congress and the banking cartel have entered into a partnership in which the cartel has the privilege of collecting interest on money which it creates out of nothing, a perpetual override on every American dollar that exists in the world. Congress, on the other hand, has access to unlimited funding without having to tell the voters their taxes are being raised through the process of inflation. If you understand this paragraph, you understand the Federal Reserve System.”
So what actually happens to operate the Mandrake Mechanism? First, the government adds ink to a piece of paper called a Treasury Bond or note, which is a promise to pay a certain sum with interest at a certain date. The bond is then given to the Fed where it is classified as a securities “asset.” It is considered an asset because it is assumed the government will pay it back with money from future taxation. This “asset” can be used to offset a “liability, ” so the Fed creates a liability by adding ink to another piece of paper called a Federal Reserve Check, which it exchanges with the government in exchange for the “asset.”
At this point Griffin states, “There is no money in any account to cover this check. Anyone else doing this 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. This way, the process is mysteriously wrapped up in the banking system. The end result, however, is the same as turning on government printing presses and simply manufacturing fiat money to pay government expenses. Yet, in accounting terms, the books are said to be 'balanced' because the 'liability' of the check is 'offset' by the 'asset' of the bond.”
The Fed check is then endorsed and “deposited” in a Federal Reserve bank where it becomes a government deposit. It can then be used to pay government expenses by issuing government checks. This begins the first wave of the creation of fiat money. The government checks are either deposited or cashed, adding to the M-1 money supply as an account balance or circulating currency. The deposited government checks become commercial bank deposits, which Griffin describes:
“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 are considered 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 reclassified in the books and are 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 $900,000 more than they are required to keep on hand. In bankers' language, that $900,000 is called excess reserves. Now that they have been transmuted into an excess, they are considered available for lending. And so in due course these excess reserves are converted into bank loans.
“But how can this money be loaned out when it is owned by the original depositors who are still free to write checks and spend it anytime they wish? Isn't that a double claim against the same money? The answer is that, when the new loans are made, they are not made with the same money at all. They are made with brand new money created out of thin air for that purpose. The nation's money supply simply increases by ninety per cent of the bank's deposits. Furthermore, this new money is far more interesting to the banks than the old. The old money, which they received from depositors, requires them to pay out interest or perform services for the privilege of using it. But, with the new money, the banks collect interest, instead, which is not too bad considering it cost them nothing to make.
“Nor is that the end of the process. When this second wave of fiat money moves into the economy, it comes right back into the banking system, just as the first wave did, in the form of more commercial bank deposits. The process now repeats itself but with slightly smaller numbers each time around. The deposit is then reclassified as a 'reserve' and ninety per cent of that becomes an 'excess reserve' which, once again is available for a new “loan”.
“Thus, the $1 million of the first wave of fiat money gives birth to $900,000 in the second wave, and that gives birth to $810,000 in the third wave ($900,000 less 10% reserve). It takes about 28 times through the revolving door of deposits becoming loans, becoming deposits, becoming more loans, until the process plays itself out to the maximum effect which is [that] the amount of fiat money created by the banking cartel is approximately nine times the amount of the original government debt which made the entire process possible.
“When the original debt itself is added to that figure, we finally have approximately ten times the amount of the underlying government debt. To the degree that this newly created money floods into the economy, in excess of goods and services, it causes the purchasing power of all money, both old and new, to decline. Prices go up because the relative value of the money has gone down. The result is the same as if that purchasing power had been taken from us in taxes. The reality of this process, therefore, is that it is a hidden tax up to ten times the national debt.
“Without realizing it, Americans have paid, in addition to the regular taxes, a completely hidden tax equal to many times the national debt! And that is still not the end of the process. Since our money supply is purely arbitrary with nothing behind it except debt, its quantity can go down as well as up. When people are going deeper into debt, the nation's money supply expands and prices go up, but when they pay off their debts and refuse to renew, the money supply contracts and prices tumble. This alternation between periods of expansion and contraction of the money supply is the underlying cause of booms, busts and depressions.
“The only beneficiaries are the political scientists in Congress who enjoy the effect of unlimited revenue to perpetuate their power, and the monetary scientists within the cartel called the Federal Reserve System who have been able to harness the American people, without their knowing it, to the yoke of modern feudalism.”
Do you understand now what a criminal enterprise the Congress, the U.S. Treasury and the Federal Reserve have been operating? Do you see why President Roosevelt and the Congress ignored the obvious will of the people and took their gold to protect the bankers scheme in 1933? And why Congress can appropriate to no end, with bail-outs and give-aways for the whole world?
In history, most fiat money schemes lasted only a few years and rarely over a decade. The Fed has been running their system in a total fiat mode for 70 years. The monetary scientists have honed their fraud to a fine art, keeping tight controls and making adjustments to extract their control over every last drop of American productivity without creating the collapse of their otherwise hollow scheme. Their partners at the International Monetary Fund and the World Bank, also creations of the U.S. Congress, have stretched the fiat money net around the globe.
And so now you know where that “dollar” bill in your hand came from. Does it still look like the dollar bill you thought it was when you started reading this article?