Dakota Beacon

Starting in March, the US Treasury ramped up its borrowing by $3 trillion in the form of bills, notes, and bonds to pay for relief from the coronavirus shutdown. Congress authorized this spending in four relief bills. The US debt now stands at more than $24 trillion with another $2 trillion to be borrowed by December.

Reviewing “The Creature from Jekyll Island” by G. Edward Griffin (1994) proved a worthwhile reconsideration of the US debt and deficit issue. Griffin presents a very readable history of the creation and workings of the Federal Reserve System, America’s central bank. The title refers to Jekyll Island off the Georgia coast where a clandestine meeting in November 1910 attended by an elite group of financiers gave birth to the Federal Reserve. His book reads like an unbelievable story of smoke and mirrors; pulleys, cogs, and wheels creating a grand illusion we call money.

Griffin contends that debt is money. He calls it funny money. Others call it fiat money. The center piece in his argument discusses the “Mandrake Mechanism,” a name derived from a 1940s cartoon character called Mandrake the Magician. The mechanism described details the method by which the Federal Reserve creates money out of nothing, or out of debt to be more accurate. He reduces the technical to the understandable for the benefit of the lay person.

The actors in this one-act play are the US Treasury, the Federal Reserve, and Congress. Here is my understanding of his discussion.

American paper dollars today have no intrinsic value. People’s faith in the American government’s ability to honor its debt with pieces of paper decreed as legal tender gives the dollar its value. Dollars become the accepted medium of exchange.

The principle way in which the Federal Reserve creates fiat money is through the purchase of US securities, mainly bonds (debt instruments) printed by the US Treasury. Bonds are considered an asset because they are the government’s promise to redeem the bonds sold, with interest, from the buyers of those bonds. The government can make this promise because of its power to obtain whatever money it needs through taxes.

The bonds which the public does not buy are purchased by the Federal Reserve. The Fed simply writes a check to the US Congress. There is no commodity money such as gold or silver to back this check. Nevertheless, Congress in turn spends this fiat money from the Fed check to pay government bills. Some of the fiat money spent eventually makes its way into commercial banks.

These residual bonds bought by the Fed are called “reserves” which the Fed regards as assets and, which in turn, can be used to offset liabilities. In addition to the fiat money represented by the check the Fed wrote to congress, the Fed creates even more fiat money by making loans to commercial banks representing up to 90% of its own “reserves” with nothing but faith to back it up.

Just as the Fed maintains a “reserve” of 90% (which may fluctuate), likewise the Fed requires commercial banks to maintain a similar reserve ratio.

Commercial banks not only receive fiat money from depositors using the first wave of fiat money authorized by congress, they also borrow fiat money from the Fed through the “Discount Window” created by the Fed from their “reserves.”

This cycle is repeated over and over. The greater the debt, the more fiat money is created. To pay interest on the debt, more money is borrowed thereby increasing the debt, the interest on the debt and the fiat money in circulation. This goes on as long as people have faith in the US government to pay its debts. At what point does this collapse? Good question with no good answer.

Griffin does not see a solution without abolishing the Federal Reserve System and returning the dollar to an intrinsic value based on a gold standard. His list of proposals designed to wean us off the Federal Reserve is thorough in its detail.

Enter President Trump and his administration. Trump has not been happy with Chairman Jerome Powell’s handling of the Federal Reserve. Trump’s unhappiness stems from Powell’s recalcitrance to aggressively help boost the US economy. Trump’s solution? In effect, he merged the US Treasury and the Federal Reserve putting the Treasury Department in charge. Treasury Secretary Steven Munchin, on March 28, announced just that.

In a word, the federal government nationalized large swaths of the financial markets. The Federal Reserve will act as banker providing money to procure securities. It will be the US Treasury, and not the Federal Reserve, who will actually buy securities and backstop loans. To administer and to handle trades the Treasury Department hired BlackRock, Inc., a private company, to do the job. Problem solved.

This may not be G. Edward Griffin’s idea of a solution to a problematic Fed, but it is a start.

Confused? Me too – sort of. Once again, Trump shows himself, not as a political swamp rat, but as a problem solver on behalf of the America he loves. If the mainstream media is not covering the story, it is likely because Trump’s solution will work and the media will not give him credit – especially not before the November election.

Dennis M. Patrick can be contacted at (JavaScript must be enabled to view this email address).