Primer on Our Debt-Based Monetary System

By John Titus

In order to fully understand how the Federal Reserve implemented BlackRock’s “going direct” plan and how central bank digital currencies (CBDCs) pose a threat to national sovereignty, one needs a basic understanding of a few monetary ideas that are not widely known despite (or perhaps because of) their importance. To that end, we are providing this short primer on the U.S. debt-based monetary system.

As an initial matter, it’s helpful to know that there are four different types of money still issued in the United States:

Coins are physical money created and issued by the U.S. Treasury and sold at face value to the Federal Reserve, which books coins as an asset on its balance sheet; unlike the other three forms of money, coins are issued without any corresponding debt attached to them; coins are legal tender, meaning that they can be used to pay “all debts, public charges, taxes, and dues.” 31 U.S.C. § 5103.
Cash (Federal Reserve notes) is physical money issued by the Federal Reserve (though created by the Treasury’s Bureau of Engraving and Printing at the Fed’s instruction) and sold by the Fed at face value to commercial banks, which pay for cash using their reserve accounts at the Fed, which get debited in the amount of cash obtained; cash is one of two liabilities on the Federal Reserve’s balance sheet, and an obligation of the U.S. government; cash is legal tender, meaning that it can be used to pay “all debts, public charges, taxes, and dues.” 31 U.S.C. § 5103.
Reserves are electronic money created and issued by the Federal Reserve in exchange for U.S. government bonds and bills (i.e., IOUs from the U.S. government); reserves are the second liability on the Federal Reserve’s balance sheet, but reserves are assets to commercial banks and other entities that bank with the Fed, including the U.S. government and foreign central banks; reserves (i.e., Fed liabilities or IOUs) are money only for these entities, and exist only as the result of government debt; the amount of reserves in the system is controlled by the Federal Reserve, which increases reserves by buying government bonds (or agency mortgage-backed securities) and decreases reserves by selling government bonds (or agency mortgage-backed securities); reserves are not legal tender.
Bank money is electronic money created and issued by commercial banks in exchange for debt, public or private, taken on by borrowers from the bank, whose electronic accounts at the bank are credited in the amount of their new loan; bank money is a liability to commercial banks but is an asset to non-bank entities who bank at commercial banks, including people, non-financial businesses, non-bank financial businesses, and governments—bank money (i.e., a commercial bank liability or IOU) is money for these entities; the amount of bank money in the system is controlled by commercial banks, which increase bank money by buying debt (crediting bank accounts in exchange for loan paper) and decrease bank money by not issuing new debt as old debt gets paid off; bank money is not legal tender.

By way of that background on types of money, three basic concepts are helpful if not critical to understanding both BlackRock’s “going direct” formulation implemented by the Federal Reserve in 2020 and how CBDCs are likely to evolve in a way that will jeopardize U.S. sovereignty.

(1) Money creation is a sovereign power (regardless of whether or not the sovereign’s legal authorities understand that fact).

(2) Debt-based money gives the money issuers control of the money supply (and thus the economy).

(3) In the United States, there are two distinct tiers of debt-based money issuance—commercial banks and the Federal Reserve.

(1) Money Creation and Control Is a Sovereign Power

The critical nature of monetary creation and control to the sovereignty of national governments was well understood at one time even if it is not well understood now.

The inability of the Colonists to get power to issue their own money permanently out of the hands of George III was the prime reason for the revolutionary war. —Ben Franklin
The Government should create, issue, and circulate all the currency and credits needed to satisfy the spending power of the Government and the buying power of consumers. By the adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become servant of humanity. —Abraham Lincoln
Until the control of the issue of currency and credit is restored to government and recognized as its most conspicuous and sacred responsibility, all talk of the sovereignty of Parliament and of democracy is idle and futile. —William Lyon Mackenzie King, Canadian Prime Minister, 1935

The fact that money creation is inextricably bound up with national sovereignty is reflected in the U.S. constitution, which provides that “the Congress shall have Power… To coin Money, regulate the value thereof, and of foreign Coin, and fix the Standard of Weights and Measures…” (U.S. Const., Art. 1, §8, cl. 5).

Coins are actually the only form of money issued in literal accordance with the constitution, that is, by a governmental entity representing (at least on paper) the constitutional sovereign of the United States, which of course is “we the people.” All other forms of money—cash, reserves, and bank money—are issued by private banks.

Moreover, these three forms of money cannot exist without the parallel creation of debt. All of this money, in other words, must be borrowed into existence. But for the existence of coins, which are issued by the sovereign government, the U.S. monetary system would be completely contrary to the constitution, which vests “we the people”—not a small group of bankers—with the power of money creation. Even more fundamentally, the U.S. monetary system flouts the rule of law in that rather than providing for equality under the law, the U.S. legal system instead installs and secures two legal classes of people: creditors (the tiny few) who create money out of thin air and lend it out at interest, and borrowers (the vast majority), who depend on creditors for their money and must pay them for the privilege of using it despite the fact that those creditors create the money out of thin air.

(2) In the U.S., the Money Supply Is Controlled by Private Banks

As noted, cash, bank money, and reserves are all issued by private banks.

Cash is a physical form of money issued by each of the 12 private regional Federal Reserve banks¹ and is labeled as such (i.e., as “Federal Reserve Notes”). As noted, the Fed issues cash when a commercial bank pays for it with reserves in its reserve account at the Fed. Thus, the amount of cash in the system is determined by private banks.

Reserves are an electronic form of money created and issued by the Federal Reserve in exchange for debt securities like U.S. Treasuries. Reserves are a liability on the Federal Reserve’s balance sheet, with the corresponding asset typically being a government bond. Legally, reserves are IOUs from the Federal Reserve to any entity having an account at the Fed, into which reserves can be deposited. Ordinary people and businesses—even non-bank financial businesses—do not have accounts at the Federal Reserve. Reserves are thus not money for ordinary people and businesses, nor are they money for the Fed itself. Reserves serve as money only to account holders at the Federal Reserve, mainly commercial banks. As such, reserves are assets on the balance sheets of commercial banks and (as noted) liabilities to the Federal Reserve.

Bank money is an electronic form of money created and issued by commercial banks. Bank money is a liability on the balance sheets of commercial banks. Legally, bank money is an IOU from a commercial bank to its customers (i.e., to people and businesses that have an account with the commercial bank). Bank money is thus not money to the Federal Reserve (which doesn’t maintain accounts at commercial banks), nor money for the commercial banks themselves. Bank money serves as money only to account holders (who treat bank money as an asset), but functions (as noted) as a liability to commercial banks.

The upshot here is that with the exception of coins, all money in the U.S. is created only with the issuance of debt, and the money supply in the U.S. is controlled completely by banks. That stems from the fact that IOUs and thus money are destroyed when loans are paid off. Consequently, bankers can shrink the money supply simply by not making new loans as outstanding loans get paid off—a process that can be accelerated by calling outstanding loans ahead of schedule. It is this feature of our monetary system that gives bankers near-total control in the U.S.

This is a staggering thought. 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.

(“Foreword by a Banker” by Robert Hemphill, former Credit Manager, Federal Reserve Bank of Atlanta, in: 100% Money by Irving Fisher, Adelphi Company, 1935.)

For proof that commercial banks create money out of thin air whenever they make loans, see “Mommy, Where Does Money Come From?” (S1 E4).

(3) In the U.S., There Are Two Separate Tiers of Electronic Money

As discussed above, electronic money in the U.S. comes in two different forms that are in a very real way opposite forms, too—bank money (issued by commercial banks) and reserves (issued by the Federal Reserve).

From the point of view of a commercial bank, bank money is a liability (legally a promise from the bank to pay a depositor), while reserve money is an asset (an IOU from the Fed to account holders like commercial banks).

Not surprisingly, the confusion generated by the fact that a dollar can take on opposite “polarities,” depending on whether it was issued by a commercial bank or the Fed, is essentially endless. Thus it is we often hear people speaking of banks as motivated to “steal deposits,” when the reality is that banks have just the opposite incentive—to reduce deposits—since money in deposit accounts is a bank liability. Likewise, people speak of banks lending out reserves even though doing so is impossible.

For a demonstration of why reserves are necessary in our two-tiered monetary system at all, see “Wherefore Art Thou Reserves?” (S3 E1) starting the 20:00 mark. For an in-depth discussion of the split-circuit monetary system, see chapter 4 of Sovereign Money (2017), by Joseph Huber.

The takeaway here is that whenever the discussion involves the Federal Reserve, which can only issue reserves (to account holders at the Federal Reserve) and cannot issue bank money, one must remain cognizant of the fact that in the “real world,” reserves appear as assets on commercial bank balance sheets as a counterbalance to our money, which from the point of view of the banks is a liability.

This leads to the second key insight here. Commercial banks can be used to “convert” reserves into bank money for a non-bank seller of an asset by way of a three-way transaction: (1) Fed buys asset from non-bank seller by depositing reserves into the commercial bank of said seller; (2) commercial bank of seller books reserves as asset and creates equal amount of bank money, depositing it into seller’s account; and (3) seller tenders asset to Fed and gets paid via new deposit money on account with commercial bank. This is precisely how the Federal Reserve expanded its balance sheet (reserve money) by $3 trillion in 2020 at the same time that it caused the expansion of the bank money supply by $3 trillion.

The relationship among the Federal Reserve, commercial banks and commercial bank customers (people and non-bank businesses) is depicted in the following frame taken from “Quantitative Easing Is the Biggest Sham Ever” (S3 E2).

Starting from the right, Nullity Group’s $1400 balance sheet includes a $300 asset in the form of a bank account (illustrated by three red marbles) at Jolly Jester Bank. This illustrates the fact that our money in bank accounts, while an asset to us, is actually a liability to the bank.

The same asset-liability relationship obtains the next tier up: Jolly Jester’s $400 reserve account, while an asset to Jolly Jester Bank, is a $400 liability to the Federal Reserve, indicated by white marbles.

The differently colored marbles indicate different “polarities” that money takes on in a debt-based monetary system. Each $100 of bank money is represented by a red marble, indicating that it is a liability to commercial banks—a $100 IOU from a commercial bank to its customer. A white marble represents $100 as well, only in this case it is a liability of the Federal Reserve—a $100 IOU from the Fed to its commercial bank customer.

This structure is directly relevant to how the Federal Reserve expanded its balance sheet during the pandemic: by purchasing assets from non-banks, the Federal Reserve with each (say) $1 billion purchase using reserves (the only money that the Fed can issue) forced commercial banks to create $1 billion in bank money. The parallel creation of bank money is necessary both to compensate the non-bank asset seller and to balance the books of the commercial bank that was credited with $1 billion in new reserve money (an asset) and thus needed a countervailing $1 billion liability.

That structure should also be kept in mind with CBDCs.

Under the current system, reserves (white marbles) are needed for commercial banks to settle transactions between commercial banks (conducted with red marbles). If Customer 2 from Bank B pays Customer 1 from Bank A with $100 electronically, Bank B ends up deleting a $100 liability from its balance sheet (when Customer reduces his account by making the payment), and Bank A ends up taking on the $100 liability (by crediting Customer A’s account). For this transaction to go through—for settlement to take place, so Bank A isn’t left in the lurch and Bank B doesn’t get a $100 windfall—Bank B must transfer a $100 asset to Bank A to counterbalance the $100 liability being shifted from B to A. Bank B does this by transferring $100 in reserves to Bank A.

With CBDCs, however, commercial banks are eliminated. The diagram above must be modified by removing the center column. In all discussions of CBDCs by central banks, the liabilities of the Fed will include accounts for each user of the Fed’s CBDC, with the corresponding asset on the Fed’s balance sheet being a U.S. government bond.

Under this system, CBDCs would represent liabilities of each central bank, assuming the role of red marbles. It is thus foreseeable that payments would be made between residents from two different central bank jurisdictions, but wouldn’t net out to zero, as is the case now with customers from different commercial banks. Thus, to settle net imbalances from different central bank jurisdictions, it is likewise foreseeable that a new global reserve currency would be needed—just as central bank reserves are needed now to settle net imbalances between commercial banks.

In that event, the new global reserve currency would occupy a superior legal footing to the CBDCs that require settling. In such a system, the U.S. dollar would be on equal footing with other central bank currencies, and its position as world reserve currency supplanted by perhaps a basket of currencies or special drawing rights (SDRs) or the like from, say, the Bank for International Settlements (BIS).

But that is a story for another day.

Endnote:

^{1 For proof in the form of admissions from the New York Fed that all 12 regional Federal Reserve banks are private rather than governmental institutions, see “The Federal Reserve – Kicking People When They’re Down” (S2 E2).}

Category	Catherine’s 2017 Grade	Catherine’s 2018 Grade	Catherine’s 2019 Grade	Catherine's 2020 Grade	Dr. Farrell’s 2017 Grade	Dr. Farrell’s 2018 Grade	Dr. Farrell’s 2019 Grade	Dr. Farrell’s 2020 Grade
Vision	B-	C+	B-	C	B-	B-	B	C-
Recruiting a Team	B-	D+	D	D	C	C-	C-	D
Building a Team	D	F	F	F	C	D-	C-	F
Accomplishments To-Date	B+	B-	B-	B	B	C+	A-	B+
Effort	B	B+	A	A	—	B+	A	A
Communication	C+	C-	B	B-	C+	C-	B+	C+
War Games (Mapping the Swamp)	C-	B+	A	C-	B	B	B+	D
Building Bottom-Up Support	D	C	C	B-	C-	C	B+	B+
Introducing Important Change	B	B	B	B	C	B	B	C
Building Bridges Internationally	C-	C	C-	C-	—	C	C-	C-
Building Bridges Domestically	F	D	C-	C-	D	C-	B	C
Managing the Executive Branch Bureaucracy	C-	D	D	D	C / C-	D	C-	D
Grand Strategy for America and Our Role In the World	Too Early To Grade	C	C+	C+	A-	C	C-	C-
Managing the Federal Budget and Contracting Budget	F	F	F	F	F	F	G	G-
Staying Physically and Emotionally Healthy	B-	B+	B	B	B+	B+	A-	B+
Growing in the Job	B-	A-	B-	B-	B / B-	B+	B	B-

Date:	Comment:
2019	Since Federal Reserve went operational in 1914, the U.S. dollar has lost 97% of its purchasing power. Since 1910, the U.S. national debt has grown from $2.6 billion to $22 trillion with unfunded liabilities for social security and health care benefits estimated at $240 trillion.
2019-01	Germany, France, and the UK introduce INSTEX (Instrument in Support of Trade Exchanges). The intent of the special-purpose vehicle is to facilitate transactions between Iran and Europe that bypass the U.S. dollar and SWIFT so as to protect EU banks against legal exposure for breaking sanctions against Iran. Five additional countries (Belgium, Denmark, Finland, the Netherlands, and Sweden) announce on November 29, 2019, that they will join the INSTEX mechanism.
2019-03	Italy endorses China's Belt and Road Initiative and signs related commercial deals. Italy also borrows money (in yuans) in China's $12 trillion bond market.
2019-05	The annual Bilderberg Meeting is held in Switzerland. Their number-one topic is "a stable world order."
2019-05-02	'Sullivan & Cromwell's Rodge Cohen: The Untold Story of the Fed's $29 Trillion Bailout 2008 Bail Out. Do we want to include it?'
2019-05-05	The annual Bilderberg Meeting is held in Switzerland. Their number-one topic is a stable world order.”
2019-05-24	SpaceX launches its first 60 operational Starlink satellites.
2019-06	Russian economist and Putin adviser Sergey Glazyev states, "The U.S. is the most powerful economy in the world. If we want to avoid dollar hegemony, the first thing we need to do is to avoid using dollars, because the foundation of the U.S. economy is based on the dollar reserves owned by other countries and this has given it the ability and confidence to press other countries to play by its rules. U.S. influence would eventually be weakened if we do so."
2019-06-06	Xi Jinping and Putin reach currency agreement. The draft decree states, "Settlements and payments for goods, service and direct investments between economic entities of the Russian Federation and the People's Republic of China are made in accordance with the international practice and the legislation of the sides' states with the use of foreign currency, the Russian currency (rubles) and the Chinese currency (yuan)."
2019-06-28	World Bank Launches First-Ever Pandemic Bonds to Support $500 Million Pandemic Emergency Financing Facility
2019-07	JPMorgan strategist Craig Cohen writes in note to investors, "We believe the dollar could lose its status as the world's dominant currency (which could see it depreciate over the medium term) due to structural reasons as well as cyclical impediments."
2019-07	Elon Musk gives presentation about Neuralink brain-machine interfaces, a technology that he views as allowing a "merging with AI." Musk states that he expects to have Neuralink in a human patient by the end of 2020. Harvard professor Charles Lieber, an expert in nanotechnology and "ultraflexible mesh electronics," is one of the top scientists in dialogue with Musk and Neuralink.
2019-07-20	The G7 finance ministers agree to a Crypto Action Plan.
2019-07-28	Bohemian Grove meets
2019-08	President Erdogan says that Turkey's trade with China, Russia, and Ukraine will use national currencies. This statement follows similar agreements reached in 2018 with Iran and Russia to trade in national currencies. In 2018, Erdogan also calls on Turks to convert their dollars and euros into Turkish lira.
2019-08-15	G7 central bankers meet in Jackson Hole Wyoming to review Going Direct" plan by former central bankers of Switzerland Canada the U.S. and Israel now working at BlackRock an investment manager of $7trillion in stock and bond funds soon retained by the Fed to manage some of its "Going Direct" portfolios. MarkCarney of the Bank of England gives an interview stating that the dollar reserve currency system cannot remain as is.”
2019-09	French President Macron gives speech to French ambassadors after the French host G7 meeting. Macron declares the failure of the unipolar model due to American failures and mistakes over several administrations and proposes a radical rethinking of strategy going forward to adapt to the emerging multipolar world and the rise of China.
2019-09-17	U.S. Federal Reserve begins a repo loan bailout program making hundreds of billions of dollars a week in loans by going direct" to the trading houses on Wall Street."
2019-09-19	U.S. Navy confirms that three F-18 gun camera videos first released by The New York Times and a UFO research organization show "unidentified aerial phenomena" or UAPs - a more formal term for UFOs. The implication is that the U.S. military does not control U.S. air space.
2019-09-19	The ID2020 Alliance - led by Microsoft, Accenture, IDEO, GAVI, and the Rockefeller Foundation and incorporated into the UN Sustainable Development Goals - hosts its annual summit in New York City. Among other goals, ID2020 aims to offer "a persistent digital identity from birth" using "cutting-edge infant biometric technologies" and microchip implants.
2019-10-05	Pentagon awards $10 billion JEDI cloud computing contract to Microsoft.
2019-10-07	The BIS publishes the G7 Working Group on Stablecoins report Investigating the impact of global stablecoins."
2019-10-18	A rising number of CEO resignations Johns Hopkins Center for Health Security and World Economic Forum hold Event 201 a pandemic tabletop exercise" simulating the outbreak of a novel coronavirus that becomes a pandemic."
2019-10-18	The Bill & Melinda Gates Foundation, Johns Hopkins Center for Health Security, and World Economic Forum hold Event 201, a "pandemic tabletop exercise" simulating the outbreak of a novel coronavirus that becomes a pandemic.
2019-10-25	Pentagon awards $10 billion JEDI cloud computing contract to Microsoft.
2019-11	Vaxxed II: The People's Truth (a sequel to the 2016 documentary Vaxxed) is released, providing overwhelming documentation that vaccines are neither safe nor effective - and are directly connected to an epidemic of autism and chronic disease slowly destroying the American people and their family wealth.
2019-11	Following BRICS meeting, President Putin says, "The dollar enjoyed great trust around the world but for some reason it is being used as a political weapon, imposing restrictions. Many countries are now turning away from the dollar as a reserve currency. The U.S. dollar will collapse soon."
2019-11-13	Italy endorses China's Belt and Road Initiative and signs related commercial deals. Italy also borrows money (in yuan) in China’s $12 trillion bond market. Xi Jinping and Putin reach a currency agreement. The draft decree states Settlements and payments for goods service and direct investments between economic entities of the Russian Federation and the People's Republic of China are made in accordance with the international practice and the legislation of the sides'' states with the use of foreign currency the Russian currency [rubles] and the Chinese currency [yuan].” Following the 11th BRICS summit in Brazil on November 13-14 President Putin states "The dollar enjoyed great trust around the world but for some reason it is being used as a political weapon imposing restrictions. Many countries are now turning away from the dollar as a reserve currency. The U.S. dollar will collapse soon.” In mid-November reports emerge from Wuhan that there is a lockdown for a coronavirus.
2019-11-13	Denmark-based tech company BiChip cancels launch of microchip implant readable from a distance and connected to the Internet in the face of protests by Christian activists. BiChip has contracts to produce the microchip implants for the Danish governmentand U.S. Navy. A 2018 update to the implants allows wearers to store Ripple cryptocurrencies using Ripple's payment system.
2019-11-14	Amazon, which manages the CIA and intelligence clouds, notifies U.S. Court of Federal Claims of its intent to protest award of JEDI contract to Microsoft.
2019-12	U.S. creates the United States Space Force to be the space operations service branch of the United States Armed Forces.
2019-12	Verizon 5G rollout in several U.S. cities, including Los Angeles, goes into effect. The 5G rollout has begun and accelerates to support the "Going Direct" global reset, marked by competition between the U.S. and China over who controls the telecommunications hardware and AI access to data.
2019-12-2,3	Video footage from the Global Vaccine Safety Summit - organized by the World Health Organization and held at the WHO's headquarters in Geneva, Switzerland - captures reports of growing global resistance to vaccinations based on the absence of any scientific studies showing that individual or collective vaccinations and vaccination schedules are safe and effective. It appears that the global vaccine push is about to stall for lack of scientific support.
2019-12-09	U.S. creates the United States Space Force to be the space operations service branch of the United States Armed Forces
2019-12-12	Basel Committee invites comments on the design of a prudential treatment for crypto-assets by March 13, 2020.
2019-12-15	Verizon 5G rollout in several U.S. cities including Los Angeles goes into effect. The 5G rollout has begun and accelerates to support the Going Direct” global reset marked by competition between the U.S. and China over who controls the telecommunications hardware and AI access to data."
2019-12-18	MIT researchers publish study—funded by the Gates Foundation and directly requested by Bill Gates—that establishes a proof of concept for intradermal on-person vaccination record keeping." The study uses dissolvable microneedles to codeliver vaccines and "near-infrared quantum dots" into the skin that encode information about vaccination status readable by modified smartphones. The senior author says the invisible "tattoos" could create "new possibilities for data storage bio-sensing and vaccine applications.”
2019-12-31	China's WHO office is informed of "unknown pneumonia" cases in Wuhan.
2020-01,02	A rising number of CEO resignations permits corporate leaders to sell their stocks at or near the market high. Reports of selling by members of Congress who receive early briefings on Covid-19 circulate. Jeff Bezos of Amazon is reported to sell $4 billion of Amazon stock.
2020-01-09	WHO announces "coronavirus-related" pneumonia in China.