Dakota Beacon

I kicked off my summer reading program with “The Creature from Jekyll Island” by G. Edward Griffin, Appleton, WI: American Opinion (1994). Seasons change but my reading never stops.

No, this is not a “B” novel. It is a very readable history of the creation and workings of the Federal Reserve System. The title refers to Jekyll Island off the Georgia coast where a clandestine meeting in Novermber 1910 attended by an elite group of financiers gave birth to the Federal Reserve. This is the unbelievable story of smoke and mirrors; pulleys, cogs and wheels that create the grand illusion called money.

Griffin contends that debt, the national debt, is money -- funny money -- fiat money and an illusion. The center piece of his argument discusses the “Mandrake Mechanism,” a name derived from a 1940s cartoon character called Mandrake the Magician. The mechanism described by Griffin details the method by which the Federal Reserve creates money out of nothing, or out of debt to be more accurate. His telling of the process reduces the technical to the practical for the benefit of the lay person.

Here is my understanding of his explanation.

The American dollar has no intrinsic value. The dollar’s value derives from people’s faith in the American government honoring its debt with pieces of paper decreed as legal tender. The principle of fiat money lies in people’s willingness to accept it and the legal tender laws that require the paper in payment for debt. The American dollar actually has its basis in debt.

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

The bonds the US Treasury prints and which the public does not buy are purchased by the Fed. The Fed simply writes a check to the US Congress. There is no real money to back this check. Nevertheless, congress spends this fiat money to pay government bills. Some of the fiat money spent by the US government eventually makes its way into commercial banks.

The bonds now held by the Fed are called “reserves” which the Fed regards as assets and, which in turn, can be used to offset liabilities. “Reserves” become the magic wand used by the Fed to create even more fiat money. 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 it “reserves” with nothing but faith to back it up.

Just as the Fed maintains a “reserve” of 90% (which may fluctuate) so to does the Fed require 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 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?

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 thought through and detailed.

A distraction weaves in and out of Griffin’s account. Early in the telling of the Federal Reserve story, Griffin drifts surreptitiously into a sub-theme of conspiracy. He could just as easily have ignored the linkage of the Federal Reserve founders to the Trilateral Commission in which he sees an end run around the sovereignty of nations. He also sees Fabian intrigue by the Council on Foreign Relations. Maybe he thought a heightened sense of suspense would increase the interest of his book. That wasn’t necessary. Factual documentation and the historical workings of the Fed supported by his bibliography and copious footnotes generate all the drama and intrigue without the conspiratorial speculation.

As a minimum, “Creature” provides the reader with a thoroughly documented history of the founding, growth and functioning of the Federal Reserve and what it means for ordinary Americans.

“Creature” is a fascinating read with all the plot and excitement of a well told story.

Dennis M. Patrick can be contacted at P. O. Box 337, Stanley, ND 58784 or (JavaScript must be enabled to view this email address).