Published February 27, 2015

“That Couldn’t Possibly Be True”: The Startling Truth About the US Dollar

For years I had heard people talking about “the fraud of the Federal Reserve.” But I was busy trying to survive and the dollars I was paid with bought food at the grocery store, so I didn’t give those reports a great deal of attention.

The more I began to study economics, however, the more I understood that this was an essential issue: that if I didn’t understand the foundation, I’d never really understand what was built upon it. So, little by little, I began to pay attention to the question, “Where do dollars come from?”

One of my first discoveries was that almost no one knew anything about this. Shocking though it may seem, they don’t teach this in general economics programs. I’ve had econ grads from well-respected programs come to me and say, “I’m kind of embarrassed to ask, but they never taught it to us in school: Where do dollars come from?”

“No, That Can’t Be True”

That’s what I said when I first understood where dollars came from. I said, “No way. That couldn’t be what it is.”

Unfortunately, I was wrong; it really is this way.

The secret to understanding the creation of dollars and of the operation of the Fed lies in two quotes from economist John Kenneth Galbraith:

The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it.

The process by which banks create money is so simple that the mind is repelled.

I must give the Fed credit for one thing: it has admitted to what it does. A publication called Modern Money Mechanics identifies how the Fed creates dollars. It cloaks that admission in unnecessarily difficult accounting and a convoluted discussion (confirming the first Galbraith quote), but still, it does admit it.

You can find Modern Money Mechanics online, and I recommend that you do. You should see it for yourself.

Brief Points

There’s a lot to discuss here and we have limited space, so allow me to make just a few central points. It will be your job to verify them.

#1: Dollars originate with an accounting trick.

Dollars begin with a process that looks like this:

While intricately accounted for, dollars begin as a check that the Fed writes “drawn on itself.” Those are the precise words from Modern Money Mechanics, by the way.

Can you and I write checks “drawn on ourselves”? Of course not. We have to back them up with value. The Fed does not.

So, the mighty US dollar is not backed by gold or silver or anything at all; it’s simply an accounting trick.

#2: Every dollar is skimmed from, as it is created.

As shown in the chart above, dollars come from a transaction between the Fed and the Treasury. Can you think of any reason why these two institutions would be unable to handle this transaction by themselves? (And in fact, we know they can, because they gave the Chinese an exemption from the middle step a few years back.)

So, what’s the purpose of the primary dealers (simply called “dealers” in Modern Money Mechanics) that sit between the Fed and the Treasury?

In fact, there is no purpose, aside from the obvious. The primary dealers take a slice from every dollar as it is made.

Again, get Modern Money Mechanics. Go through it slowly. Check this for yourself. I know it sounds crazy, but most of it is right there in black and white.

And who are these primary dealers? The big banks, of course.

#3: Your mortgage loan was created out of thin air.

It's A Wonderful Life is a fine film, but Jimmy Stewart’s character was entirely wrong when he claimed that he borrowed the savings of one virtuous person to make a home loan to another.

When you take a loan from a bank, they do not take Mr. Smith’s money or Mrs. Jones’ money and lend it to you. They make it up on the spot with a bookkeeping entry. Until you take the loan, that money doesn’t exist.

You don’t have to take my word on this. Here are the words of Robert B. Anderson, who was Secretary of the Treasury under Eisenhower:

When a bank makes a loan, it simply adds to the borrower’s deposit account by the amount of the loan. It does not take this money from anyone else’s deposit; it was not previously paid in to the bank by anyone. It’s new money, created by the bank for the use of the borrower.

You may have to work overtime to pay those dollars back, but no one worked overtime to get them in the first place. They were simply made up on the spot.

#4: Money for interest is never created.

Every dollar is created with interest attached:

  • T bills yield interest—buy one for $1,000, and you will, over time, receive more than $1,000.
  • A $1,000 loan, as we all know, must eventually be repaid with $1,000 plus extra dollars as interest.

So every dollar is birthed with a debt obligation attached.

This creates an interesting problem: extra dollars will be required to pay back all of that interest. Where will they come from? I can work hard and pay back my $1,000 loan with interest, but every dollar I use to pay interest is created with an interest obligation of its own. Where does it end?

In fact, it cannot end—it cannot resolve—unless there are debt-free dollars that can cover the gaps. And there are none.

This means that the dollar system can run effectively in one direction only. It can operate smoothly while creating ever more currency, but if the system starts to contract, there will be a currency shortage. And that leads to all sorts of troubles.

I Know This Sounds Crazy…

If all of this is new to you, you have my sympathies; I know it’s a lot to take in. Go slowly and double check it all. Make up your own mind.

Like I say, the first time I saw this, I couldn’t believe that it could possibly be true. Reading the Fed’s own words, even though I had to plod through them slowly, convinced me.

And if you want to read the wild story of how this astonishing system was created, you can find it in The Creature from Jekyll Island by G. Edward Griffin.

A Free-Man’s Take is written by adventure capitalist, author, and freedom advocate Paul Rosenberg. You can get much more from Paul in his unique monthly newsletter, Free-Man’s Perspective.