the concept of usury as the payment of interest on pretended

What is the Mandrake Mechanism?From The Creature from Jekyll Island by G. Edward GriffinIt’s the most important financial lesson of your life!THE MANDRAKE MECHANISM . . . What is it? It is the method by which the Federal Reserve creates money out ofnothing; the concept of usury as the payment of interest on pretended loans; the true cause of the hidden tax calledinflation; the way in which the Fed creates boom-bust cycles.In the 1940s, there was a comic strip character called Mandrake the Magician. His specialty was creating things out ofnothing and, when appropriate, to make them disappear back into that same void. It is fitting, therefore, that the process tobe described in this section should be named in his honor.In the previous chapters, we examined the technique developed by the political and monetary scientists to create moneyout of nothing for the purpose of lending. This is not an entirely accurate description because it implies that money iscreated first and then waits for someone to borrow it.On the other hand, textbooks on banking often state that money is created out of debt. This also is misleading because itimplies that debt exists first and then is converted into money. In truth, money is not created until the instant it isborrowed. It is the act of borrowing which causes it to spring into existence. And, incidentally, it is the act of paying off thedebt that causes it to vanish. There is no short phrase that perfectly describes that process. So, until one is invented alongthe way, we shall continue using the phrase "create money out of nothing" and occasionally add "for the purpose oflending" where necessary to further clarify the meaning.So, let us now . . . see just how far this money/debt-creation process has been carried — and how it works.The first fact that needs to be considered is that our money today has no gold or silver behind it whatsoever. The fractionis not 54% nor 15%. It is 0%. It has traveled the path of all previous fractional money in history and already hasdegenerated into pure fiat money. The fact that most of it is in the form of checkbook balances rather than paper currencyis a mere technicality; and the fact that bankers speak about "reserve ratios" is eyewash. The so-called reserves to whichthey refer are, in fact, Treasury bonds and other certificates of debt.Our money is "pure fiat" through and through.The second fact that needs to be clearly understood is that, in spite of the technical jargon and seemingly complicatedprocedures, the actual mechanism by which the Federal Reserve creates money is quite simple. They do it exactly thesame way the goldsmiths of old did except, of course, the goldsmiths were limited by the need to hold some preciousmetals in reserve, whereas the Fed has no such restriction.The Federal Reserve is candid.The Federal Reserve itself is amazingly frank about this process.A booklet published by the Federal Reserve Bank of New York tells us:"Currency cannot be redeemed, or exchanged, for Treasury gold or any other asset used as backing. Thequestion of just what assets ‘back’ Federal Reserve notes has little but bookkeeping significance."Elsewhere in the same publication we are told: "Banks are creating money based on a borrower’s promise to pay (theIOU) . . . Banks create money by ‘monetizing’ the private debts of businesses and individuals."In a booklet entitled Modern Money Mechanics, the Federal Reserve Bank of Chicago says:In the United States neither paper currency nor deposits have value as commodities. Intrinsically, a dollar bill isjust a piece of paper. Deposits are merely book entries. Coins do have some intrinsic value as metal, butgenerally far less than their face amount.What, then, makes these instruments — checks, paper money, and coins — acceptable at face value in payment of alldebts and for other monetary uses? Mainly, it is the confidence people have that they will be able to exchange suchmoney for other financial assets and real goods and services whenever they choose to do so. This partly is a matter oflaw; currency has been designated "legal tender" by the government — that is, it must be accepted.In the fine print of a footnote in a bulletin of the Federal Reserve Bank of St. Louis, we find this surprisingly candidexplanation:Modern monetary systems have a fiat base — literally money by decree — with depository institutions, acting asfiduciaries, creating obligations against themselves with the fiat base acting in part as reserves. The decreeappears on the currency notes: "This note is legal tender for all debts, public and private."While no individual could refuse to accept such money for debt repayment, exchange contracts could easily be composedto thwart its use in everyday commerce. However, a forceful explanation as to why money is accepted is that the federalgovernment requires it as payment for tax liabilities. Anticipation of the need to clear this debt creates a demand for thepure fiat dollars.Money would vanish without debt.It is difficult for Americans to come to grips with the fact that their total money-supply is backed by nothing but debt, and itis even more mind boggling to visualize that, if everyone paid back all that was borrowed, there would be no money left inexistence.That’s right, there would not be one penny in circulation — all coins and all paper currency would be returned to bankvaults — and there would be not one dollar in any one’s checking account. In short, all money would disappear.Marriner Eccles was the Governor of the Federal Reserve System in 1941. On September 30 of that year, Eccles wasasked to give testimony before the House Committee on Banking and Currency. The purpose of the hearing was to obtaininformation regarding the role of the Federal Reserve in creating conditions that led to the depression of the 1930s.Congressman Wright Patman, who was Chairman of that committee, asked how the Fed got the money to purchase twobillion dollars worth of government bonds in 1933.This is the exchange that followed.Eccles: We created it.Patman: Out of what?Eccles: Out of the right to issue credit money.Patman: And there is nothing behind it, is there, except our government’s credit?Eccles: That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.It must be realized that, while money may represent an asset to selected individuals, when it is considered as anaggregate of the total money supply, it is not an asset at all. A man who borrows $1,000 may think that he has increasedhis financial position by that amount but he has not. His $1,000 cash asset is offset by his $1,000 loan liability, and his netposition is zero. Bank accounts are exactly the same on a larger scale. Add up all the bank accounts in the nation, and itwould be easy to assume that all that money represents a gigantic pool of assets which support the economy. Yet, everybit of this money is owed by someone. Some will owe nothing. Others will owe many times what they possess. All addedtogether, the national balance is zero. What we think is money is but a grand illusion. The reality is debt.Robert Hemphill was the Credit Manager of the Federal Reserve Bank in Atlanta. In the foreword to a book by IrvingFisher, entitled 100% Money, Hemphill said this:If all the bank loans were paid, no one could have a bank deposit, and there would not be a dollar of coin orcurrency in circulation. This is a staggering thought. We are completely dependent on the commercial banks.Someone has to borrow every dollar we have in circulation, cash, or credit. If the banks create ample syntheticmoney we are prosperous; if not, we starve. We are absolutely without a permanent money system. When onegets a complete grasp of the picture, the tragic absurdity of our hopeless situation is almost incredible — butthere it is.With the knowledge that money in America is based on debt, it should not come as a surprise to learn that the FederalReserve System is not the least interested in seeing a reduction in debt in this country, regardless of public utterances tothe contrary.Here is the bottom line from the System’s own publications. The Federal Reserve Bank of Philadelphia says:"A large and growing number of analysts, on the other hand, now regard the national debt as something useful, ifnot an actual blessing . . . [They believe] the national debt need not be reduced at all."The Federal Reserve Bank of Chicago adds:"Debt — public and private — is here to stay. It plays an essential role in economic processes . . . What is requiredis not the abolition of debt, but its prudent use and intelligent management."What’s wrong with a little debt?There is a kind of fascinating appeal to this theory. It gives those who expound it an aura of intellectualism, theappearance of being able to grasp a complex economic principle that is beyond the comprehension of mere mortals. And,for the less academically minded, it offers the comfort of at least sounding moderate. After all, what’s wrong with a littledebt, prudently used and intelligently managed? The answer is nothing, provided the debt is based on an honesttransaction. There is plenty wrong with it if it is "based upon fraud".An honest transaction is one in which a borrower pays an agreed upon sum in return for the temporary use of a lender’sasset. That asset could be anything of tangible value. If it were an automobile, for example, then the borrower would pay"rent." If it is money, then the rent is called "interest." Either way, the concept is the same.When we go to a lender — either a bank or a private party — and receive a loan of money, we are willing to pay interest onthe loan in recognition of the fact that the money we are borrowing is an asset which we want to use. It seems only fair topay a rental fee for that asset to the person who owns it. It is not easy to acquire an automobile, and it is not easy toacquire money — real money, that is. If the money we are borrowing was earned by someone’s labor and talent, they arefully entitled to receive interest on it. But what are we to think of money that is created by the mere stroke of a pen or theclick of a computer key? Why should anyone collect a rental fee on that?When banks place credits into your checking account, they are merely pretending to lend you money. In reality, they havenothing to lend. Even the money that non-indebted depositors have placed with them was originally created out of nothingin response to someone else’s loan. So what entitles the banks to collect rent on nothing? It is immaterial that meneverywhere are forced by law to accept these nothing certificates in exchange for real goods and services. We are talkinghere, not about what is legal, but what is moral. As Thomas Jefferson observed at the time of his protracted battle againstcentral banking in the United States, "No one has a natural right to the trade of money lender, but he who hasmoney to lend."Third reason to abolish the system.Centuries ago, usury was defined as any interest charged for a loan. Modern usage has redefined it as excessive interest.Certainly, any amount of interest charged for a pretended loan is excessive. The dictionary, therefore, needs a newdefinition.Usury: The charging of any interest on a loan of fiat money.Let us, therefore, look at debt and interest in this light. Thomas Edison summed up the immorality of the system when hesaid:People who will not turn a shovel of dirt on the project [Muscle Shoals] nor contribute a pound of materials willcollect more money . . . than will the people who will supply all the materials and do all the work.Is that an exaggeration? Let us consider the purchase of a $100,000 home in which $30,000 represents the cost of theland, architect’s fee, sales commissions, building permits, and that sort of thing and $70,000 is the cost of labor andbuilding materials. If the home buyer puts up $30,000 as a down payment, then $70,000 must be borrowed. If the loan isissued at 11% over a 30-year period, the amount of interest paid will be $167,806. That means the amount paid to thosewho loan the money is about 2 1/2 times greater than paid to those who provide all the labor and all the materials. It istrue that this figure represents the time-value of that money over thirty years and easily could be justified on the basis thata lender deserves to be compensated for surrendering the use of his capital for half a lifetime. But that assumes thelender actually had something to surrender, that he had earned the capital, saved it, and then loaned it for construction ofsomeone else’s house. What are we to think, however, about a lender who did nothing to earn the money, had not savedit, and, in fact, simply created it out of thin air?What is the time-value of nothing?As we have already shown, every dollar that exists today, either in the form of currency, checkbook money, or even creditcard money — in other words, our entire money supply — exists only because it was borrowed by someone; perhaps notyou, but someone.That means all the American dollars in the entire world are earning daily and compounding interest for the bankswhich created them. A portion of every business venture, every investment, every profit, every transaction whichinvolves money — and that even includes losses and the payment of taxes — a portion of all that is earmarked as paymentto a bank.And what did the banks do to earn this perpetually flowing river of wealth? Did they lend out their own capital obtainedthrough investment of stockholders? Did they lend out the hard-earned savings of their depositors? No, neither of thesewere their major source of income. They simply waved the magic wand called fiat money.The flow of such unearned wealth under the guise of interest can only be viewed as usury of the highest magnitude. Evenif there were no other reasons to abolish the Fed, the fact that it is the supreme instrument of usury would be more thansufficient by itself.Who creates the money to pay the interest?One of the most perplexing questions associated with this process is "Where does the money come from to pay theinterest?" If you borrow $10,000 from a bank at 9%, you owe $10,900. But the bank only manufactures $10,000 for theloan. It would seem, therefore, that there is no way that you — and all others with similar loans — can possibly pay off yourindebtedness. The amount of money put into circulation just isn’t enough to cover the total debt, including interest. Thishas led some to the conclusion that it is necessary for you to borrow the $900 for interest, and that, in turn, leads to stillmore interest. The assumption is that, the more we borrow, the more we have to borrow, and that debt based on fiatmoney is a never ending spiral leading inexorably to more and more debt.This is a partial truth. It is true that there is not enough money created to include the interest, but it is a fallacy that the onlyway to pay it back is to borrow still more. The assumption fails to take into account the exchange value of labor. Let usassume that you pay back your $10,000 loan at the rate of approximately $900 per month and that about $80 of thatrepresents interest. You realize you are hard pressed to make your payments so you decide to take on a part-time job.The bank, on the other hand, is now making $80 profit each month on your loan. Since this amount is classified as"interest," it is not extinguished as is the larger portion which is a return of the loan itself. So this remains as spendablemoney in the account of the bank. The decision then is made to have the bank’s floors waxed once a week. You respondto the ad in the paper and are hired at $80 per month to do the job. The result is that you earn the money to pay theinterest on your loan, and — this is the point — the money you receive is the same money which you previously had paid.As long as you perform labor for the bank each month, the same dollars go into the bank as interest, then out of therevolving door as your wages, and then back into the bank as loan repayment.It is not necessary that you work directly for the bank. No matter where you earn the money, its origin was a bank and itsultimate destination is a bank. The loop through which it travels can be large or small, but the fact remains all interest ispaid eventually by human effort. And the significance of that fact is even more startling than the assumption that notenough money is created to pay back the interest. It is that the total of this human effort ultimately is for the benefit ofthose who create fiat money.It is a form of modern serfdom in which the great mass of society works as indentured servants to a ruling class offinancial nobility.Understanding the Illusion . . .That’s really all one needs to know about the operation of the banking cartel under the protection of the Federal Reserve.But it would be a shame to stop here without taking a look at the actual cogs, mirrors, and pulleys that make the magicalmechanism work. It is a truly fascinating engine of mystery and deception.Let us, therefore, turn our attention to the actual process by which the magicians create the illusion of modern money.First we shall stand back for a general view to see the overall action.Then we shall move in closer and examine each component in detail.The Mandrake Mechanism: An OverviewThe entire function of this machine is to convert debt into money. It’s just that simple. First, the Fed takes all thegovernment bonds which the public does not buy and writes a check to Congress in exchange for them. (It acquires otherdebt obligations as well, but government bonds comprise most of its inventory.) There is no money to back up this check.These fiat dollars are created on the spot for that purpose. By calling those bonds "reserves," the Fed then uses them asthe base for creating nine (9) additional dollars for every dollar created for the bonds themselves. The money created forthe bonds is spent by the government, whereas the money created on top of those bonds is the source of all the bankloans made to the nation’s businesses and individuals. The result of this process is the same as creating money on aprinting press, but the illusion is based on an accounting trick rather than a printing trick.The bottom line is that Congress and the banking cartel have entered into a partnership in which the cartel has theprivilege of collecting interest on money which it creates out of nothing, a perpetual override on every American dollar thatexists in the world.Congress, on the other hand, has access to unlimited funding without having to tell the voters their taxes are being raisedthrough the process of inflation. If you understand this paragraph, you understand the Federal Reserve System.Now for a more detailed view. There are three general ways in which the Federal Reserve creates fiat money out of debt.One is by making loans to the member banks through what is called the Discount Window.The second is by purchasing Treasury bonds and other certificates of debt through what is called the Open MarketCommittee.The third is by changing the so-called reserve ratio that member banks are required to hold. Each method is merely adifferent path to the same objective: taking IOUs and converting them into spendable money.THE DISCOUNT WINDOWThe Discount Window is merely bankers’ language for the loan window. When banks run short of money, the FederalReserve stands ready as the "bankers’ bank" to lend it. There are many reasons for them to need loans. Since they hold"reserves" of only about one or two per cent of their deposits in vault cash and eight or nine per cent in securities, theiroperating margin is extremely thin. It is common for them to experience temporary negative balances caused by unusualcustomer demand for cash or unusually large clusters of checks all clearing through other banks at the same time.Sometimes they make bad loans and, when these former "assets" are removed from their books, their "reserves" are alsodecreased and may, in fact, become negative. Finally, there is the profit motive. When banks borrow from the FederalReserve at one interest rate and lend it out at a higher rate, there is an obvious advantage. But that is merely thebeginning.When a bank borrows a dollar from the Fed, it becomes a one-dollar reserve.Since the banks are required to keep reserves of only about ten per cent, they actually can loan up to nine dollars for eachdollar borrowed.Let’s take a look at the math. Assume the bank receives $1 million from the Fed at a rate of 8%. The total annual cost,therefore, is $80,000 (.08 X $1,000,000). The bank treats the loan as a cash deposit, which means it becomes the basisfor manufacturing an additional $9 million to be lent to its customers. If we assume that it lends that money at 11%interest, its gross return would be $990,000 (.11 X $9,000,000). Subtract from this the bank’s cost of $80,000 plus anappropriate share of its overhead, and we have a net return of about $900,000. In other words, the bank borrows a millionand can almost double it in one year. That’s leverage! But don’t forget the source of that leverage: the manufacture ofanother $9 million which is added to the nation’s money supply.THE OPEN MARKET OPERATIONThe most important method used by the Federal Reserve for the creation of fiat money is the purchase and sale ofsecurities on the open market. But, before jumping into this, a word of warning. Don’t expect what follows to make anysense. Just be prepared to know that this is how they do it.The trick lies in the use of words and phrases which have technical meanings quite different from what they imply to theaverage citizen. So keep your eye on the words. They are not meant to explain but to deceive. In spite of firstappearances, the process is not complicated. It is just absurd.THE MANDRAKE MECHANISM: A DETAILED VIEWStart with . . .GOVERNMENT DEBTThe federal government adds ink to a piece of paper, creates impressive designs around the edges, and calls it a bond orTreasury note. It is merely a promise to pay a specified sum at a specified interest on a specified date. As we shall see inthe following steps, this debt eventually becomes the foundation for almost the entire nation’s money supply. In reality, thegovernment has created cash, but it doesn’t yet look like cash. To convert these IOUs into paper bills and checkbookmoney is the function of the Federal Reserve System. To bring about that transformation, the bond is given to the Fedwhere it is then classified as a . . .SECURITIES ASSETAn instrument of government debt is considered an asset because it is assumed the government will keep its promise topay. This is based upon its ability to obtain whatever money it needs through taxation. Thus, the strength of this asset isthe power to take back that which it gives. So the Federal Reserve now has an "asset" which can be used to offset aliability. It then creates this liability by adding ink to yet another piece of paper and exchanging that with the government inreturn for the asset. That second piece of paper is a . . .FEDERAL RESERVE CHECKThere is no money in any account to cover this check. Anyone else doing that would be sent to prison. It is legal for theFed, however, because Congress wants the money, and this is the easiest way to get it. (To raise taxes would be politicalsuicide; to depend on the public to buy all the bonds would not be realistic, especially if interest rates are set artificiallylow; and to print very large quantities of currency would be obvious and controversial.) This way, the process ismysteriously wrapped up in the banking system. The end result, however, is the same as turning on government printingpresses and simply manufacturing fiat money (money created by the order of government with nothing of tangible valuebacking it) to pay government expenses. Yet, in accounting terms, the books are said to be "balanced" because theliability of the money is offset by the "asset" of the IOU. The Federal Reserve check received by the government then isendorsed and sent back to one of the Federal Reserve banks where it now becomes a . . .GOVERNMENT DEPOSITOnce the Federal Reserve check has been deposited into the government’s account, it is used to pay governmentexpenses and, thus, is transformed into many . . .GOVERNMENT CHECKSThese checks become the means by which the firs…



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