Behind The Vault Part 5: The Hidden Tax of Money Creation
Money, as we know it today, is a fascinating yet perplexing phenomenon. It powers economies, fuels commerce, and shapes our daily lives, but its creation process is shrouded in complexity and often misunderstood. From ancient gold coins to colonial fiat experiments and now the Federal Reserve, the story of money reveals a system designed to benefit elites while burdening the public with hidden costs. This blog post dives deep into the mechanics of how money is created in today’s financial system, exploring the roles of central banks, commercial banks, and government debt. By the end, you’ll understand the intricate machinery to our economy and why it demands scrutiny. Also, if you haven’t read Part 3: When Banks Fail, You Foot The Bill, you can do so by clicking here to give a better understanding of what is discussed in this post.
Modern money is fiat currency with no intrinsic value, like gold or silver, to back it. Its worth hinges on public confidence in its exchangeability and legal-tender laws mandating its acceptance for debts. Unlike historical gold-based systems, today’s money exists as paper notes, digital deposits, or coins with negligible material value. Fiat money, however, lacks an anchor, making it prone to manipulation.
More startling, money is born from debt. Borrowing creates money, and repaying debt destroys it. If all debts—government, corporate, personal were repaid, the money supply would vanish: no coins, no notes, no checking balances. This debt-based system ensures that money exists only as long as debt persists. Reducing debt would collapse the economy, a reality that shapes central bank policies and benefits those who control the system.
How Money Is Created: The Central Bank’s Role
The Federal Reserve, America’s central bank since 1913, orchestrates money creation, echoing historical goldsmiths who issued more receipts than gold held. Unlike gold-limited systems, the Fed creates fiat money through accounting maneuvers, not printing presses. Here are the primary methods:
Purchasing Government Debt (Open Market Operations)
The Federal Reserve’s primary mechanism for creating money is through open market operations, specifically purchasing government bonds—essentially IOUs issued by the U.S. Treasury promising repayment with interest. These bonds, often called Treasury notes or securities, are sold to finance government deficits when tax revenues fall short. If public or institutional demand for these bonds is insufficient, the Fed steps in as a buyer of last resort. Unlike private investors, the Fed doesn’t use existing funds; it creates money by issuing a check with no pre-existing reserves, a practice that would be fraudulent for individuals but is standard for central banks.
When the Fed buys, say, $1 billion in bonds, it credits the seller’s bank account at the Fed, instantly creating $1 billion in new reserves. The government, receiving these funds, deposits them into its accounts at commercial banks, which then issue checks for spending—on infrastructure, defense, or social programs. These checks circulate as deposits in the banking system, becoming the basis for further money creation through fractional-reserve lending, as described later. The bond, now held by the Fed, is recorded as an “asset” because the government’s promise to repay is backed by its taxing authority. This asset offsets the “liability” of the new money, maintaining accounting balance, though the money itself costs nothing to produce.
This process, often called “monetizing the debt”. The Fed’s bond purchases inject money into the economy, enabling government spending without immediate tax hikes. However, this artificial expansion risks inflation. The 1980 Monetary Control Act amplified the Fed’s reach, allowing it to monetize foreign debt and fund global bailouts. By creating money tied to debt, the Fed perpetuates a system where spending is limitless but inflationary costs are born to that economy in the form of hidden taxation.
Lending to Commercial Banks (Discount Window)
The Fed also creates money by lending directly to commercial banks through the discount window, a mechanism that addresses liquidity needs or supports profitable lending. Banks may face cash shortages due to depositor withdrawals, bad loans reducing reserves, or regulatory requirements. Alternatively, they borrow to lend at higher rates, pocketing the spread. When a bank borrows, say, $100 million from the Fed, the loan is credited as reserves, instantly increasing the bank’s lending capacity.
These reserves fuel the fractional-reserve system, where banks lend multiples of their holdings, magnifying money creation. From 1913 to 2025, average U.S. wages soared approximately 8,900% nominally ($633 to $57,000), yet in gold terms, they plummeted by about 44% (30.6 to 17.02 ounces). This stark contrast reveals the erosive impact of fiat currency inflation. Fueled by mechanisms like the discount window, which allows banks to expand credit with minimal tangible backing, this inflation has significantly diminished purchasing power. The discount window’s influence is understated but profound, enabling unchecked credit growth.
Historically, unchecked lending led to crises, usually triggered by speculative loans. Today, the Fed’s discount window operates under stricter oversight but remains a key tool, especially during crises like 2008, when it supported banks facing mortgage defaults. The ability to create reserves at will gives the Fed flexibility but risks instability. This fiat-driven lending also supports global financial schemes, as the Fed’s reserves fund international bailouts, furthering centralized control.
Adjusting Reserve Ratios
Historically, the Federal Reserve shaped the money supply by setting reserve requirements, such as a 10% ratio for transaction deposits, which dictated the portion of deposits banks had to hold as reserves (vault cash or Fed deposits). A lower ratio allowed banks to lend more, expanding the money supply, while a higher ratio restricted lending, contracting it. This mechanism gives the Fed significant influence over credit and economic activity. For example, reducing a 10% requirement to 5% could double banks’ lending capacity.
Since March 2020, however, the Fed has set reserve requirements to 0% for all depository institutions, eliminating mandatory reserves in response to the COVID-19 crisis. Instead, it manages money supply through tools like interest on reserve balances (IORB), which incentivizes or discourages lending by adjusting the rate banks earn on reserves. This shift, enabled by fiat money’s lack of intrinsic value, grants the Fed flexible control, unlike gold-based systems where supply and demand naturally regulated money creation.
The move to 0% reserves reflects fiat’s arbitrary nature, allowing the Fed to adapt without supply constraint. This Flexibility was criticized in 1966 by future Fed Chairman Alan Greenspan for enabling wealth confiscation through inflation in his article Gold and Economic Freedom. You can read it here. Historical attempts to control money supply, like the 1844 Peel’s Bank Act, failed due to unchecked fractional lending, and today’s IORB system continues this trend, prioritizing elite control over stability. This aligns with the Fed’s global role, funding bailouts that advance the New World Order’s agenda.
The Multiplier Effect: Commercial Banks and Fractional-Reserve Banking
Commercial banks amplify central bank actions through fractional-reserve banking. When government checks from Fed bond purchases are deposited, they become liabilities (owed to depositors) and assets (reserves for lending). With a 10% reserve requirement, a $1 billion deposit allows $9 billion in new loans—money created by crediting borrowers’ accounts, not transferring existing funds.
Spent loans return as deposits, generating more reserves and loans in a diminishing cycle. This multiplier effect can create up to $9 billion additional money from $1 billion in Fed-created reserves, totaling $10 billion including the original amount. Today’s system drives economic cycles through debt-fueled money creation.
Expanding the money supply faster than goods production erodes purchasing power, causing inflation—a hidden tax. Through bond purchases, the Fed can amplify the money supply by up to ten times, casting a far greater shadow on the economy than the national debt’s apparent weight. Inflation hits hardest the poor, fixed-income earners, and savers. Thomas Jefferson was quoted in 1786 calling it, “an oppressive tax”. Unlike transparent taxes, inflation’s complexity shields it from scrutiny, enriching those involved in this scheme while impoverishing everyone else.
The Boom-Bust Cycle: Expansion and Contraction
Debt-based money creates instability. Borrowing expands the money supply, fueling booms with spending and rising prices. But when borrowing slows—due to downturns or uncertainty—repaying old debts without new loans contracts money supply, causing busts. The Fed’s attempts to counteract busts with lower rates or money injections often fail if public borrowing stalls.
Reducing debt would collapse the money supply, making debt elimination undesirable for central banks and governments. The Fed monetizes debt to fund spending without tax hikes, avoiding political backlash. Banks profit from interest on money created from nothing, a continuous wealth transfer. The 1980 Monetary Control Act expanded this, funding global bailouts.
Charging interest on fiat money—created with no effort—raises ethical concerns. Historically, usury meant any interest, but modern fiat lending is inherently excessive. A $70,000 mortgage at 11% over 30 years yields $167,806 in interest, doubling construction costs without justifying the lender’s gain.
Where Does the Interest Come From?
A perplexing question arises in the fiat money system: if banks create only the principal of a loan, where does the money to pay the interest come from? For instance, a $10,000 loan at 9% annual interest requires $10,900 in repayment, but the bank only created $10,000. This apparent shortfall suggests an impossible spiral where borrowers must perpetually borrow more to cover interest, trapping the economy in escalating debt. The answer lies in the dynamic interplay of human labor, economic circulation, and the continuous creation of new money, a cycle that shows the system’s reliance on effort to sustain itself.
At its core, the interest is paid through the value of human labor. When a borrower takes a $10,000 loan, they use it to purchase goods or services—say, a car or home improvements. To repay the loan plus interest, they must generate additional income, often by working. For example, a borrower might take a part-time job earning enough to cover the new loan and interest. The interest paid to the bank, doesn’t vanish; the bank spends it back into the economy, perhaps paying wages to its employees or fees to contractors. Those recipients then spend the money, and it eventually cycles back to the borrower as income—perhaps as a customer’s payment for the borrower’s services. This circular flow, driven by labor, ensures the economy has enough money to cover interest, provided people continue working and spending.
This cycle is not seamless however. The money to pay interest often comes from other loans created elsewhere in the system. When banks issue new loans, they create new principal that enters circulation as deposits, which can be used to pay interest on existing loans. For instance, a business borrowing $50,000 to expand operations creates $50,000 in new money, which it spends on wages or supplies. Those funds may end up in the hands of our original borrower, enabling them to pay their interest. This interconnected web of loans and repayments, fueled by labor, keeps the system afloat but reveals a critical flaw: the money supply must continually expand to cover interest obligations, risking inflation.
The Illusion of Money
Modern money is an illusion, conjured by accounting and sustained by trust. Without gold’s backing, it’s vulnerable to collapse as history shows. Inflation and debt cycles burden citizens, while politicians and banks profit.
Modern money creation, intertwining central banks, commercial banks, and debt, fuels economies but breeds inflation, debt dependency, and instability. Historical failures reveal fiat’s flaws, contrasting with gold’s proven stability. Understanding these mechanics empowers us to demand transparency, challenge elite control, and explore sound money alternatives to break the cycle of debt and volatility.
Don’t let your hard-earned wealth be eroded by this inflationary cycle. With Eagle Legacy Planning, you can protect your financial future through strategic investments like gold and silver, which have preserved value for centuries. Contact Eagle Legacy Planning today to build a legacy that withstands and secures your family’s prosperity.