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This statement was confirmed by Marriner Eccles, then Chairman
of the Federal Reserve Board, in testimony before the House Banking
and Currency Committee in 1935. Eccles acknowledged:
In purchasing offerings of Government bonds, the banking system
as a whole creates new money, or bank deposits. When the
banks buy a billion dollars of Government bonds as they are
offered . . . the banks credit the deposit account of the Treasury
with a billion dollars. They debit their Government bond account
a billion dollars; or they actually create, by a bookkeeping entry, a
billion dollars.6
Economist John Kenneth Galbraith would later comment, “The
process by which banks create money is so simple that the mind is
repelled.” The mind is repelled because the process is sleight of hand
and is completely foreign to what we have been taught. In a
phenomenon called “cognitive dissonance,” we can read the words
and still doubt whether we have read them right. To make sure that
we have, then, here is another credible source --
In 1993, National Geographic Magazine published an article by
assistant editor Peter White titled “Do Banks Really Create Money
Out of Thin Air?” White began by observing that 92 percent of the
money supply consists, not of bills or coins, but of checkbook and other
non-tangible money. To find out where this money comes from, he
asked a Federal Reserve official, who said that every day, the Federal
Reserve Bank of New York buys U.S. government securities from major
banks and brokerage houses. That™s if the Fed wants to expand the
money supply. If it wants to contract the money supply, it sells
government securities. White wrote:
Say today the Fed buys a hundred million dollars in Treasury
bills from those big securities dealers, who keep a stock of them
to trade with the public. When the Fed pays the dealers, a
hundred million dollars will thereby be added to the country™s
money supply, because the dealers will be credited that amount
by their banks, which now have that much more on deposit.
But where did the Fed get that hundred million dollars? “We
created it,” a Fed official tells me. He means that anytime the
central bank writes a check, so to speak, it creates money. “It™s
money that didn™t exist before,” he says. Is there any limit on
that? “No limit. Only the good judgement and the conscience
of the responsible Federal Reserve people.” And where did they

Chapter 17 - Wright Patman Exposes the Money Machine

get this vast authority? “It was delegated to them in the Federal
Reserve Act of 1913, based on the Constitution, Article I, Section
8. ˜Congress shall have the power . . . to coin money, regulate
the value thereof . . . .™”7
Andrew Jackson would probably have said “vipers and thieves!”
He stressed that the Constitution gives Congress the power only to
coin money; and if “coining” money means “creating” money, it gives
that power only to Congress. The Tenth Amendment provides that
powers not delegated to the United States or forbidden to the States
are reserved to the States or the people. In 1935, the U.S. Supreme
Court held that “Congress may not abdicate or transfer to others its
legitimate functions.” (Schechter Pultry v. U.S., 29 U.S. 495, 55 U.S.
837, 842.)

The Real Windfall

After relentless agitation by Patman™s Committee, the Fed finally
agreed to rebate most of the interest it received on its government
bonds to the U.S. Treasury. Congressman Jerry Voorhis, another early
Fed watchdog, said that the agreement was a tacit admission that the
Fed wasn™t entitled to interest. It wasn™t entitled to interest because its
own money wasn™t being lent.8 Fed apologists today argue that since
the interest, or most of it, is now rebated to the government, no net
advantage has accrued to the Fed.9 But that argument overlooks a far
greater windfall to the banks that are the Fed™s owners and real
constituents. The bonds that have been acquired essentially for free
become the basis of the Fed™s “reserves” “ the phantom money that is
advanced many times over by commercial banks in the form of loans.
Virtually all money in circulation today can be traced to government
debt that has been “monetized” by the Federal Reserve and the banking
system. This money is then multiplied many times over in the form of
bank loans.10 In 2006, M3 (the broadest measure of the money supply)
was nearly $10 trillion, and the Treasury securities held by the Federal
Reserve came to about one-tenth that sum. Thus the money supply
has expanded by a factor of about 10 for every dollar of federal debt
monetized by the Federal Reserve, and all of this monetary expansion
consists of loans on which the banks have been paid interest.11 It is this
interest, not the interest paid to the Federal Reserve, that is the real
windfall to the banks “ this and the fact that the banks now have a
money-making machine to back them up whenever they get in trouble

Web of Debt

with their “fractional reserve” lending scheme. The Jekyll Island plan
had worked beautifully: the bankers succeeded in creating a secret
source of unlimited funds that could be tapped into whenever they
were caught short-handed. And to make sure their scheme remained
a secret, they concealed this money machine in obscure Fedspeak that
made the whole subject seem dull and incomprehensible to the
uninitiated, and was misleading even to people who thought they
understood it.
In The Creature from Jekyll Island, Ed Griffin writes that “modern
money is a grand illusion conjured by the magicians of finance and
politics.” The function of the Federal Reserve, he says, “is to convert
debt into money. It™s just that simple.” The mechanism 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 deceive.” The process
by which the Fed converts debt into money begins after the
government™s bonds are offered to the public at auction. Griffin
[T]he 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 that 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 result
of this process is the same as creating money on a printing press, but
the illusion is based on an accounting trick rather than a printing
The result is the same with this difference: in the minds of most
people, printing press money is created by the government. The
accounting trick that generates 99 percent of the U.S. money supply today
is the sleight of hand of private banks.

Chapter 17 - Wright Patman Exposes the Money Machine

The Magical Multiplying Reserves

The shell game devised by the seventeenth century goldsmiths is
now called “fractional reserve” banking. The fraction of a bank™s
outstanding loans that must be held in “reserve” is called the “reserve
requirement,” and it is set by the Fed. The website of the Federal
Reserve Bank of New York (FRBNY) explains:
Reserve requirements . . . are computed as percentages of
deposits that banks must hold as vault cash or on deposit at a
Federal Reserve Bank. . . . As of December 2006, the reserve
requirement was 10% on transaction deposits, and there were
zero reserves required for time deposits. . . . If the reserve
requirement is 10%, for example, a bank that receives a $100
deposit may lend out $90 of that deposit. If the borrower then
writes a check to someone who deposits the $90, the bank
receiving that deposit can lend out $81. As the process
continues, the banking system can expand the initial deposit of
$100 into a maximum of $1,000 of money ($100+$90+81+
$72.90+ . . . =$1,000).13
It sounds reasonable enough, but let™s have a closer look. First,
some definitions: a time deposit is a bank deposit that cannot be with-
drawn before a date specified at the time of deposit. Transaction de-
posit is a term used by the Federal Reserve for “checkable” deposits
(deposits on which checks can be drawn) and other accounts that can
be used directly as cash without withdrawal limits or restrictions.
Transaction deposits are also called demand deposits: they can be with-
drawn on demand at any time without notice. All checking accounts
are demand deposits. Some savings accounts require funds to be kept
on deposit for a minimum length of time, but most savings accounts
also permit unlimited access to funds.14 As long as enough money is
kept in “reserve” to satisfy depositors who come for their money,
“transaction deposits” can be lent many times over. The 90 percent
the bank lends is redeposited, and 90 percent of that is relent, in a
process that repeats about 20 times, until the $100 becomes $1,000.
But wait! These funds belong to the depositors and must remain
available at all times for their own use. How can the money be available
to the depositor and lent out at the same time? Obviously, it can™t.
The money is basically counterfeited in the form of loans. The 10
percent reserve requirement harkens back to the seventeenth century
goldsmiths, who found through trial and error that depositors
Web of Debt

collectively would not come for more than about 10 percent of their
money at one time. The money could therefore be lent 9 times over
without anyone being the wiser. Today the scheme gets obscured
because many banks are involved, but the collective result is the same:
when the banks receive $1 million in deposits, they can “lend” not
just $900,000 (90 percent of $1 million) but $9 million in computer-
generated funds. As we™ll see shortly, “reserves” are being phased
out, so the multiple is actually higher than that; but to keep it simple,
we™ll use that figure. Consider this hypothetical case:
You live in a small town with only one bank. You sell your house
for $100,000 and deposit the money into your checking account at the
bank. The bank then advances 90 percent of this sum, or $90,000, to
Miss White to buy a house from Mr. Black. The bank proceeds to
collect from Miss White both the interest and the principal on this
loan. Assume the prevailing interest rate is 6.25 percent. Interest at
6.25 percent on $90,000 over the life of a 30-year mortgage comes to
$109,490. Miss White thus winds up owing $199,490 in principal and
interest on the loan “ not to you, whose money it allegedly was in the
first place, but to the bank.i Legally, Miss White has title to the house;
but the bank becomes the effective owner until she pays off her mort-
Mr. Black now takes the $90,000 Miss White paid him for his house
and deposits it into his checking account at the town bank. The bank
adds $90,000 to its reserve balance at its Federal Reserve bank and
advances 90 percent of this sum, or $81,000, to Mrs. Green, who wants
to buy a house from Mr. Gray. Over 30 years, Mrs. Green owes the
bank $81,000 in principal plus $98,541 in interest, or $179,541; and
the bank has become the effective owner of another house until the
loan is paid off.
Mr. Gray then deposits Mrs. Green™s money into his checking ac-
count. The process continues until the bank has “lent” $900,000, on
which it collects $900,000 in principal and $985,410 in interest, for a
total of $1,885,410. The bank has thus created $900,000 out of thin
air and has acquired effective ownership of a string of houses, at least
temporarily, all from an initial $100,000 deposit; and it is owed $985,410
in interest on this loan. The $900,000 principal is extinguished by an

In practice, you probably wouldn™t keep $100,000 in a checking account that

paid no interest; you would invest it somewhere. But when the bank makes
loans based on its collective checking account deposits, the result is the same: the
bank keeps the interest.

Chapter 17 - Wright Patman Exposes the Money Machine

entry on the credit side of the ledger when the loans are paid off; but
the other half of this conjured $2 million “ the interest “ remains sol-
idly in the coffers of the bank, and if any of the borrowers should
default on their loans, the bank becomes the owner of the mortgaged
Instead of houses, let™s try it with the $100 million in Treasury bills
bought by the Fed in a single day in the National Geographic example,
using $100 million in book-entry money created out of thin air. At a
reserve requirement of 10 percent, $100 million can generate $900
million in loans. If the interest rate on these loans is 5 percent, the
$900 million will return $45 million the first year in interest to the
banks that wrote the loans. At compound interest, then, a $100 million
“investment” in money created out of thin air is doubled in about two

To Audit or Abolish?

The Fed reports that 95 percent of its profits are now returned to
the U.S. Treasury.15 But a review of its balance sheet, which is avail-
able on the Internet, shows that it reports as profits only the interest
received from the federal securities it holds as reserves.16 No mention
is made of the much greater windfall afforded to the banks that are
the Fed™s corporate owners, which use the securities as the “reserves”
that get multiplied many times over in the form of loans. The Federal
Reserve maintains that it is now audited every year by Price
Waterhouse and the Government Accounting Office (GAO), an arm
of Congress; but some functions remain off limits to the GAO, includ-
ing its transactions with foreign central banks and its open market
operations (the operations by which it creates money with accounting
entities).17 Thus the Fed™s most important “ and most highly suspect “
functions remain beyond public scrutiny.
Wright Patman proposed cleaning up the books by abolishing the
Open Market Committee and nationalizing the Federal Reserve, re-
claiming it as a truly federal agency under the auspices of Congress.
The dollars the Fed created would then be government dollars, issued
debt-free without increasing the debt burden of the country. Jerry
Voorhis also advocated skipping the middleman and letting the gov-
ernment issue its own money. But neither proposal was passed by
Congress. Rather, Patman was removed as head of the House Bank-
ing and Currency Committee, after holding that position for twelve

Web of Debt

years; and Voorhis lost the next California Congressional election to
Richard Nixon, after being targeted by an aggressive smear campaign
financed by the American Bankers™ Association.18

The Illusion of Reserves

At one time, a bank™s “reserves” consisted of gold bullion, which
was kept in a vault and was used to redeem paper banknotes pre-


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