It has been called "the most astounding piece of sleight of hand ever invented." The creation of money has
been privatized, usurped from Congress by a private banking cartel. Most people think money is issued by fiat by
the government, but that is not the case. Except for coins, which compose only about one one-thousandth of the total U.S.
money supply, all of our money is now created by banks. Federal Reserve Notes (dollar bills) are issued
by the Federal Reserve, a private banking corporation, and lent to the
government.¹ Moreover, Federal Reserve Notes and coins together compose less than 3 percent of
the money supply. The other 97 percent is created by commercial banks as loans.²

Don’t believe banks create the money they lend? Neither did the jury in a landmark Minnesota case, until they heard
the evidence. First National Bank of Montgomery vs. Daly (1969) was a courtroom drama worthy of a movie
script.³ Defendant Jerome Daly opposed the banks foreclosure on his $14,000 home mortgage
loan on the ground that there was no consideration for the loan. "Consideration" ("the thing
exchanged") is an essential element of a contract. Daly, an attorney representing himself, argued that the bank had
put up no real money for his loan. The courtroom proceedings were recorded by Associate Justice Bill Drexler, whose chief
role, he said, was to keep order in a highly charged courtroom where the attorneys were threatening a fist fight. Drexler
hadn’t given much credence to the theory of the defense, until Mr. Morgan, the banks president, took the stand.
To everyones surprise, Morgan admitted that the bank routinely created money "out of thin air" for its
loans, and that this was standard banking practice. "It sounds like fraud to me," intoned Presiding Justice Martin Mahoney amid nods from the jurors.
In his court memorandum, Justice Mahoney stated:

Plaintiff admitted that it, in combination with the Federal Reserve Bank of Minneapolis, . . . did create the
entire $14,000.00 in money and credit upon its own books by bookkeeping entry. That this was the consideration used
to support the Note dated May 8, 1964 and the Mortgage of the same date. The money and credit first came into existence
when they created it. Mr. Morgan admitted that no United States Law or Statute existed which gave him the right to do
this. A lawful consideration must exist and be tendered to support the Note.

The court rejected the banks claim for foreclosure, and the defendant kept his house. To Daly, the implications
were enormous. If bankers were indeed extending credit without consideration – without backing their
loans with money they actually had in their vaults and were entitled to lend – a decision declaring their loans
void could topple the power base of the world. He wrote in a local news article:

This decision, which is legally sound, has the effect of declaring all private mortgages on real and personal property,
and all U.S. and State bonds held by the Federal Reserve, National and State banks to be null and void. This amounts
to an emancipation of this Nation from personal, national and state debt purportedly owed to this banking system.
Every American owes it to himself . . . to study this decision very carefully . . . for upon it hangs the
question of freedom or slavery.

Needless to say, however, the decision failed to change prevailing practice, although it was never overruled. It was
heard in a Justice of the Peace Court, an autonomous court system dating back to those frontier days when defendants had
trouble traveling to big cities to respond to summonses. In that system (which has now been phased out), judges and
courts were pretty much on their own. Justice Mahoney, who was not dependent on campaign financing or hamstrung by
precedent, went so far as to threaten to prosecute and expose the bank. He died less than six months after the trial,
in a mysterious accident that appeared to involve poisoning.⁴ Since that time, a number of
defendants have attempted to avoid loan defaults using the defense Daly raised; but they have met with only limited
success. As one judge said off the record:

If I let you do that – you and everyone else – it would bring the whole system down. . . . I cannot let you
go behind the bar of the bank. . . . We are not going behind that curtain!⁵

From time to time, however, the curtain has been lifted long enough for us to see behind it. A number of reputable
authorities have attested to what is going on, including Sir Josiah Stamp, president of the Bank of England and the
second richest man in Britain in the 1920s. He declared in an address at the University of Texas in 1927:

The modern banking system manufactures money out of nothing. The process is perhaps the most astounding
piece of sleight of hand that was ever invented. Banking was conceived in inequity and born in sin . . . . Bankers
own the earth. Take it away from them but leave them the power to create money, and, with a flick of a pen, they
will create enough money to buy it back again. . . . Take this great power away from them and all great fortunes like
mine will disappear, for then this would be a better and happier world to live in. . . . But, if you want to
continue to be the slaves of bankers and pay the cost of your own slavery, then let bankers continue to create money
and control credit.

Robert H. Hemphill, Credit Manager of the Federal Reserve Bank of Atlanta in the Great Depression, wrote in 1934:

We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation,
cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are
absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity
of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent
persons can investigate and reflect upon.⁶

Graham Towers, Governor of the Bank of Canada from 1935 to 1955, acknowledged:

Banks create money. That is what they are for. . . . The manufacturing process to make money consists of making an
entry in a book. That is all. . . . Each and every time a Bank makes a loan . . . new Bank credit is created —
brand new money.⁷

Robert B. Anderson, Secretary of the Treasury under Eisenhower, said in an interview reported in the August 31, 1959
issue of U.S. News and World Report:

[W]hen a bank makes a loan, it simply adds to the borrowers deposit account in the bank by the amount of the
loan. The money is not taken from anyone elses deposit; it was not previously paid in to the bank by anyone.
Its new money, created by the bank for the use of the borrower.

How did this scheme originate, and how has it been concealed for so many years? To answer those questions, we need to
go back to the seventeenth century.

The Shell Game of the Goldsmiths

In seventeenth century Europe, trade was conducted primarily in gold and silver coins. Coins were durable and had
value in themselves, but they were hard to transport in bulk and could be stolen if not kept under lock and key. Many
people therefore deposited their coins with the goldsmiths, who had the strongest safes in town. The goldsmiths issued
convenient paper receipts that could be traded in place of the bulkier coins they represented. These receipts were also
used when people who needed coins came to the goldsmiths for loans.

The mischief began when the goldsmiths noticed that only about 10 to 20 percent of their receipts came back to be
redeemed in gold at any one time. They could safely "lend" the gold in their strongboxes at interest several
times over, as long as they kept 10 to 20 percent of the value of their outstanding loans in gold to meet the demand.
They thus created "paper money" (receipts for loans of gold) worth several times the gold they actually held.
They typically issued notes and made loans in amounts that were four to five times their actual supply of gold. At an
interest rate of 20 percent, the same gold lent five times over produced a 100 percent return every year, on gold the
goldsmiths did not actually own and could not legally lend at all. If they were careful not to overextend this
"credit," the goldsmiths could thus become quite wealthy without producing anything of value themselves.
Since only the principal was lent into the money supply, more money was eventually owed back in principal and interest
than the townspeople as a whole possessed. They had to continually take out loans of new paper money to cover the
shortfall, causing the wealth of the town and eventually of the country to be siphoned into the vaults of the
goldsmiths-turned-bankers, while the people fell progressively into their debt.⁸

Following this model, in nineteenth century America, private banks issued their own banknotes in sums up to ten times
their actual reserves in gold. This was called "fractional reserve" banking, meaning that only a fraction of
the total deposits managed by a bank were kept in "reserve" to meet the demands of depositors. But periodic
runs on the banks when the customers all got suspicious and demanded their gold at the same time caused banks to go
bankrupt and made the system unstable. In 1913, the private banknote system was therefore consolidated into a national
banknote system under the Federal Reserve (or "Fed"), a privately-owned corporation given the right to issue
Federal Reserve Notes and lend them to the U.S. government. These notes, which were issued by the Fed basically
for the cost of printing them, came to form the basis of the national money supply.

Twenty years later, the country faced massive depression. The money supply shrank, as banks closed their doors and
gold fled to Europe. Dollars at that time had to be 40 percent backed by gold, so for every dollars worth of gold
that left the country, 2.5 dollars in credit money also disappeared. To prevent this alarming deflationary spiral from
collapsing the money supply completely, in 1933 President Franklin Roosevelt took the dollar off the gold standard.
Today the Federal Reserve still operates on the "fractional reserve" system, but its "reserves"
consist of nothing but government bonds (I.O.U.s or debts). The government issues bonds, the Federal Reserve issues
Federal Reserve Notes, and they basically swap stacks, leaving the government in debt to a private banking corporation
for money the government could have issued itself, debt-free.

Theft by Inflation

M3, the broadest measure of the U.S. money supply, shot up from $3.7 trillion in February 1988 to $10.3 trillion
14 years later, when the Fed quit reporting it. Why the Fed quit reporting it in March 2006 is suggested by John Williams
in a website called "Shadow Government Statistics" (shadowstats.com), which shows that by the spring of 2007,
M3 was growing at the astounding rate of 11.8 percent per year. Best not to publicize such figures too widely!
The question posed here, however, is this: where did all this new money come from? The government did not step up its
output of coins, and no gold was added to the national money supply, since the government went off the gold standard in
1933. This new money could only have been created privately as "bank credit" advanced as
loans.

The
problem with inflating the money supply in this way, of course, is that
it inflates prices. More money competing for the same goods drives
prices up. The dollar buys less, robbing people of the value of their
money. This rampant inflation is usually blamed on the government,
which is accused of running the dollar printing presses in order to
spend and spend without resorting to the politically unpopular
expedient of raising taxes. But as noted earlier, the only money the
U.S. government actually issues are coins. In countries in which the
central bank has been nationalized, paper money may be issued by the
government along with coins, but paper money still composes only a very
small percentage of the money supply. In England, where the Bank of
England was nationalized after World War II, private banks continue to
create 97 percent of the money supply as loans.⁹

Price inflation is only one problem with this system of private money creation. Another is that banks create only the
principal but not the interest necessary to pay back their loans. Since virtually the entire money supply is created by
banks themselves, new money must continually be borrowed into existence just to pay the interest owed to the bankers. A
dollar lent at 5 percent interest becomes 2 dollars in 14 years. That means the money supply has to double every 14 years
just to cover the interest owed on the money existing at the beginning of this 14 year cycle. The Federal Reserves
own figures confirm that M3 has doubled or more every 14 years since 1959, when the Fed began reporting it.
¹⁰ That means that
every 14 years, banks siphon off as much money in interest as there was in the entire economy 14 years earlier. This
tribute is paid for lending something the banks never actually had to lend, making it perhaps the greatest scam ever
perpetrated, since it now affects the entire global economy. The privatization of money is the underlying cause of
poverty, economic slavery, underfunded government, and an oligarchical ruling class that thwarts every attempt to shake it
loose from the reins of power.

This problem can only be set right by reversing the process that created it. Congress needs to take back the
Constitutional power to issue the nations money. "Fractional reserve" banking needs to be eliminated,
limiting banks to lending only pre-existing funds. If the power to create money were returned to the government, the
federal debt could be paid off, taxes could be slashed, and needed government programs could be expanded. Contrary to
popular belief, paying off the federal debt with new U.S. Notes would not be dangerously inflationary, because
government securities are already included in the widest measure of the money supply. The dollars would just replace
the bonds, leaving the total unchanged. If the U.S. federal debt had been paid off in fiscal year 2006, the savings to
the government from no longer having to pay interest would have been $406 billion, enough to eliminate the $390 billion
budget deficit that year with money to spare. The budget could have been met with taxes, without creating money out of nothing either
on a government print press or
as accounting entry bank loans. However, some money created on a
government printing press could actually be good for the economy. It
would be good if it were used for the productive purpose of creating new goods and services, rather than for the non-productive
purpose of paying interest on loans. When supply (goods and services) goes up along with demand (money), they remain in
balance and prices remain stable. New money could be added without creating price inflation up to the point of full
employment. In this way Congress could fund much-needed programs, such as the development of alternative energy sources
and the expansion of health coverage, while actually reducing taxes.

___________________

Ellen Brown, J.D., developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt,
her latest book, she turns those skills to an analysis of the Federal
Reserve and "the money trust." She shows how this private cartel has
usurped the power to create money from the people themselves, and how
we the people can get it back. Browns eleven books include the
bestselling Natures Pharmacy, co-authored with Dr. Lynne Walker, which has sold 285,000 copies.