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Zeitgeist: Addendum - Part One - Page 2

Author: Edward L Winston
Added: August 16th, 2009

This is the second page of part one in my series of articles on Zeitgeist: Addendum. Please refer to the introduction if you were lead to this page.

"None are more hopelessly enslaved than those who falsely believe they are free."
- Johann Wolfgang von Goethe
1749 - 1832

Originally I couldn't find a source for this, but I had guessed it was likely a real quote; thanks to Bart vdPligt for providing a source for this. It's from Goethe's novel Die Wahlverwantschaften[7a]

Modern Money Mechanics

A number of years ago, the central bank of the United States, the Federal Reserve, produced a document entitled "Modern Money Mechanics." This publication detailed the institutionalized practice of money creation, as utilized by the Federal Reserve and the web of global commercial banks it supports.

It was hard to find direct proof this publication existed. Granted, I already knew it existed, but for sake of sourcing everything I do, I wanted to find proof. So, I emailed the Federal Reserve Bank of Chicago.


Dear Edward, 

Sorry, that publication is out of print for several years now. It dealt with the expansion of the money supply through the banking system. This process can be studied in books at your local library in the money and banking section.. 

Don Wagener 
Public Information

While this is technically hearsay and self-sourcing, you can email the address above if you'd like and ask Mr. Don Wagener about the document if you'd like.

On the opening page, the document states its objective, "The Purpose of this booklet is to describe the basic process of money creation in a fractional reserve banking system." It then proceeds to describe this "fractional reserve process" through various banking terminology. A translation of which goes something like this:

The United States Government decides it needs some money, so it calls up the Federal Reserve, and requests, say, 10 billion dollars. The fed replies, saying, "Sure,  we'll buy 10 billion in government bonds from you." So, the government takes some pieces of paper, paints some official looking designs on them, and calls them "Treasury Bonds." Then, it puts a value on these Bonds to the sum of 10 billion dollars, and sends them over to the Fed. In turn, the people at the Fed draw up a bunch of impressive pieces of paper themselves, only this time calling them "Federal Reserve Notes" also designating a value of 10 billion dollars to the set. 

The Fed then takes these notes and trades them for the Bonds. Once this exchange is complete, the government then takes the 10 billion in Federal Reserve Notes and deposits it into a bank account and upon this deposit, the paper notes officially become "legal tender" money, adding 10 billion to the US money supply. And there it is: 10 billion in new money has been created.

The Federal Reserve rarely buys bonds directly from the Treasury, but rather typically only does it during economic crisis -- it's rarely done because it can cause a lot of inflation[7b]. [ Originally I had said here that the Federal Reserve was forbidden from buying them directly, but I was wrong, rather they almost never do except when absolutely necessary. Thanks to Eric for clearing this up after Peter Joseph cried about it. ]

The majority of the time bonds are purchased from the open market[7][7b]. Because the Federal Reserve does not usually buy the bonds directly from the Treasury, but rather from the market and thus is buying debt that already exists in the hands of others and no new debt is created[7][8]. Regardless, inflation can be controlled by retracting or expanding the money supply, so out of control inflation is extraordinary rare in the US. Zeitgeist then claims that the Federal Reserve prints money, but this is the exact opposite of what happens. The US Treasury prints money, not the Federal Reserve; further the US Mint prints coinage. The money is then sent to member banks[9][10][11].

Of course, this example is a generalization, for, in reality, this transaction would occur electronically, with no paper used at all. In fact only 3% of the US money supply exists in physical currency. The other 97% essentially exists in computers alone.

Now, Government bonds are, by design, instruments of debt and when the Fed purchases these bonds, with money it created essentially 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. This mind numbing paradox of how money, or value, can be created out of debt, or a liability, will become more clear as we further this exercise.

So, the exchange has been made and now 10 billion dollars sits in a commercial bank account. 

Zeitgeist is arguing that currency and deposit are the exact same thing, even Modern Money Mechanics makes a distinction between currency and deposits. Since Zeitgeist misses this point, the arguments in the movie become further skewed. There's an important point to make here, it's that money is a broad term for various things; it can be a measure of value, a means of payment, and a store of value. Further, there is also a distinction between money stored in central banks and money stored in commercial banks; central banks create money, commercial banks distribute money. These are all different things, even though we generally think of "money" as only bills and coinage[12].

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