From The Horse’s Mouth: How Money Is Created

Cover of last edition, 1994

I have recently re-posted an article written by Paul Rosenberg for Casey Research’s website, “That Couldn’t Possibly Be True: The Startling Truth About the US Dollar.”

However, if you want to understand the basic process of money creation in a “fractional reserve” banking system, why not hear it directly from the horse’s mouth: a Federal Reserve Bank.

Modern Money Mechanics – A Workbook on Bank Reserves and Deposit Expansion is a booklet that was first published in 1961 by the Federal Reserve Bank of Chicago.

Later revised and distributed up to 1994, it provides a simplified description of the United States’ monetary system since the inception of the Federal Reserve System, in 1913.

Originally written by Dorothy M. Nichols in May 1961, this booklet is now out of print, but it remains freely available on the Web through such websites as the Internet Archive (click here). The last revision was prepared in June 1992 by Anne Mary L. Gonczy.

Revision history:

May 1968
September 1971
June 1975
October 1982
June 1992

Here are some excerpts from the booklet’s description on the Internet Archive website:

“The introductory pages contain a brief general description of the characteristics of money and how the U.S. money system works.

The illustrations in the following two sections describe two processes: first, how bank deposits expand or contract in response to changes in the amount of reserves supplied by the central bank; and second, how those reserves are affected by both Federal Reserve actions and other factors.

A final section deals with some of the elements that modify, at least in the short run, the simple mechanical relationship between bank reserves and deposit money.”

Commissioned by poet Ezra Pound in 1948 and published in 1952, this book by Eustace Mullins (1923-2010) was the first nationally-circulated revelation of the secret meetings of the international bankers at Jekyll Island, Georgia, where the draft of the Federal Reserve Act of 1913 was written. Click on cover to view on Internet Archive.

This booklet has been widely used by critics of the Federal Reserve System as damning evidence that the American “fiat” currency system has been basically flawed since its very inception in 1913. It has been cited by “hard money” (i.e. precious metals such as gold and silver) advocates, political libertarians and others, such as Gary North and Lew Rockwell. It has also been featured in various YouTube videos, as well as in the movie “Zeitgeist: Addendum” (2008), which uses it to give a clear and simple explanation of money creation by the Federal Reserve.

The Federal Reserve is the United States’ central bank, and its money creation system is essentially the same used by all other central banks in the world. Basically, the critics argue that this system is used to create money virtually out of thin air, and that money created this way is simply debt that can never be repaid.

As a simplified expose of fractional reserve banking, Modern Money Mechanics remains an excellent primer that can be read in a single sitting. It also has the advantage of showing us the Federal Reserve presenting itself and its operations to the general public.

Update, March 18, 2015

In Episode 4 of his Hidden Secrets of Money 5-part series, entitled “The Biggest Scam In The History Of Mankind (In 7 Easy Steps)”, Mike Maloney provides a clear explanation of how money is created. You may want to watch it more than once, and you’ll definitely want to make sure your friends watch it too!

“Learning this will change your life, because it will change the choices that you make. If enough people learn it, it will change the world…because it will change the system . For this is the biggest Hidden Secret Of Money. Never in human history have so many been plundered by so few, and it’s all accomplished through this…The Biggest Scam In The History Of Mankind.”

– Mike Maloney