PART I –
MONETARY SYSTEM AND CREATION OF MONEY
Among all the social, political, economic and legal institutions and systems in which we live, willingly or unwillingly, that, directly or indirectly effect our life, seems that does not exist any other more complex, difficult, less comprehended and more mysterious than the Monetary System.
After reaching almost religious dimensions, the official monetary institutions exist as a sort of dogma as the most powerful amongst all of them. The way money is created from thin air, the monetary policies adopted and what are the real effects on the society, are topics generally unknown or kept away from the public opinion or awareness.
In a world where 1% of the population holds 40% of the world’s riches, in a world where 34,000 children die every day (or 1,420 per hour or 24 per minutes) due to poverty and epidemic disasters that could be prevented or even erased and where 50% of the world population lives under the poverty line of 2 USD per day, one thing is, and must be absolutely clear: there is something deeply and dangerously wrong going on.
Admittedly or not, the blood that provides life to all our institutions and society, is MONEY. Therefore, comprehending the institutions or mechanism of the monetary systems is fundamental in order to comprehend the reason why our lifestyle is influenced by the flows of money and the policies and strategies adopted by the monetary institutions to rule and run through the global society.
Unfortunately, Economics, as science or field of studies or social investigation, is considered chaotic and boring. And the spreading of economic and financial language and terminology, alongside graphs and charts and mathematics or statistical analysis providing fear into the minds and hearts of the public opinion. are all great deterrents and keep most of the people away from the study of the monetary system.
However, the reality is that: the mysterious and mystic image linked with the financial system is just a well created mask planned with the objective of hiding away and conceal one of the most paralyzing and deadly social mechanisms even introduced and created by humankind.
Johann Wolfgang Von Goethe once said “None are more hopelessly enslaved than those who falsely believe they are free”.
Many years ago, the Central Bank of the United States of America ( the Federal Reserve) has written a financial document titled “Modern Money Mechanics”. This report shows in details the institutional procedures to be followed for the creation of money used by, or to be used by, the Federal Reserve and all the banks associated or affiliated, because they are dependent from, In the initial pages it is perfectly introduced the object of the publication. Textually it is written, “The purpose of this booklet is to describe the basic process of money creation is a “fractionary reserve” banking system. The approach taken illustrates the changes in the bank balance sheet that occurs when deposits in bank change as a result of monetary action of the Federal Reserve System – The Central Bank of the United States.” Then the report proceeds to the description of the process of “fractionary reserve” making use of various and specific banking terminology whose meaning can be summarized as follows.
The government of the United States of America decides or needs money, and the next step is to ask the Federal Reserve, just for example, 10 billions USD. The FED answers: “It is not a problem we buy 10 billion USD of bonds from you”. Therefore, the government takes few pieces of papers on which it prints its official stamps and calls them “Treasury Bonds”. Then it decides a value of these bonds for a total of 10 billion USD and send then to the FED. On their part, the FED prints piles of papers called “banknotes of the Federal Reserve Bank” for a total value of 10 billion USD.
The FED uses these banknotes and exchanges then for the Treasury Bonds. After this exchange has been completed, the Government takes the 10 billion USD in banknotes from the FED and deposits then in a bank account. After this deposit, the banknotes from the FED become officially money with current legal value adding 10 billion USD in money to the account balance and assets of the government of the USA.
In this way 10 billion USD have been easily created. Naturally, this example is just a simplification because, in crude reality this financial transaction takes place electronically without any form of paper. As matter of fact, only 3% of the monetary basis of the USA is physically and materially existent while the remaining 97% exists only in the virtual electronic archives of the digital systems.