The Mandrake Mechanism
The U.S. dollar has no intrinsic value. It is a classic example of fiat money with no limit on the quantity that can be produced. Its primary value lies in the willingness of people to accept it and, to that end, legal tender laws require them to do so. It is true that our money is created out of nothing, but it is more accurate to say that it is based upon debt. In one sense, therefore, our money is created out of less than nothing. The entire money supply would vanish into bank vaults and computer chips if all debts were repaid. Under the present System, therefore, our leaders cannot allow a serious reduction in either the national or consumer debt. Changing interest on pretended loans is usury, and that has become institutionalized under the Federal Reserve System.
Mandrake the Magician could make
anything appear ex nihilo
In the 1940s, there was a comic strip character called Mandrake the Magician. His specialty was creating things out of nothing and, when appropriate, to make them disappear back into that same void. It is fitting, therefore, that the process of creating fiat currency should be named in his honor.
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 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. That's right, there would be not one penny in circulation -- all coins and all paper currency would be returned to bank vaults -- and there would be not one dollar in anyone's checking account. In short, all money would disappear.
The Mandrake Mechanism in Action: Debt
The entire purpose of the Federal Reserve machine is to convert debt into money. First the Fed takes all the government bonds which the public does not buy and writes a check to Congress in exchange for them. There is no money to back up this check. These fiat dollars are created on the spot for this purpose. By calling these bonds "reserves", the Fed then uses them as the base for creating 9 additional dollars for every dollar created for the bonds themselves. The money created for the bonds is spent by the government, whereas the money created on top of those bonds is the source of all the bank loans made to the nation's businesses and individuals.
The Mandrake Mechanism in Action: Money
There are three parallel 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 Market Committee. The third is by changing the so-called reserve ratio that member banks are required to hold. Each method is merely a different way of taking IOUs and converting them into spendable money.
The Discount Window: The Discount Window is banker's language for the loan window. When banks run short of money, the Federal Reserve stands ready as the "banker's bank" to lend it. There are many reasons for them to need loans. Since they hold "reserves" of only about one or two percent of their deposits in vault cash and eight or nine percent in securities, their operating margin is extremely thin. It is common to experience temporary negative balances caused by unusual customer demand for cash or unusually large clusters of checks all clearing through other banks at the same time.
Open Market Operation: The most important method used by the Federal Reserve for the creation of fiat money is the purchase and sale of securities on the open market. This is a somewhat techical subject, and will be covered in greater detail in my next post.
In summary, the Mandrake Mechanism by which the Fed converts debt into money may seem complicated at first, but it is simple if one remembers that the process is not intended to be logical but to confuse and decieve. The end product of the Mechanism is artificial expansion of the money supply, which is the root cause of the hidden tax called inflation. This expansion then leads to contraction and, together, they produce the destructive boom-bust cycle that has plagued mankind throughout history whenever fiat money has existed.
For more information on this subject, please consult the excellent book The Creature from Jekyll Island, by G. Edward Griffin.