The following is my high school teaching assignment for Advanced Placement Macroeconomics students (available as extra credit for other classes) on how money is created. I offer this for non-profit use; divided into seven sections:


4. Debt (public, private) and money supply

“When our Federal Government, that has the exclusive power to create money, creates that money and then goes into the open market and borrows it and pays interest for the use of its own money, it occurs to me that that is going too far. I have never yet had anyone who could, through the use of logic and reason, justify the Federal Government borrowing the use of its own money… The Constitution of the United States does not give the banks the power to create money. The Constitution says that Congress shall have the power to create money, but now, under our system, we will sell bonds to commercial banks and obtain credit from those banks. I believe the time will come when people will demand that this be changed. I believe the time will come in this country when they will actually blame you and me and everyone else connected with this Congress for sitting idly by and permitting such an idiotic system to continue. I make that statement after years of study.” - Wright Patman (27) : excerpts from September 29, 1941, as reported in the Congressional Record of the House of Representatives (pages 7582-7583).

“One of the most astounding facts about our American life is that the wealth and property of the country and the control of the machinery of government are in the hands of less than 2 per cent of the inhabitants. That is to say, a small group of excessively wealthy individuals, members of the Republican and Democratic Parties alike, have, through the exercise of powerful, sinister and, too often, unlawful influence, usurped the government and seized public property on such a wholesale scale that they have become the virtual dictators of the destinies of more than 110,000,000 people (the US population at the time). That is a situation which, to my mind, constitutes the greatest menace to the safety of our republic.

A small group of international bankers and money lenders, public utility exploiters and tariff beneficiaries have actually dictated nominations for offices up to the Presidency. They have placed the slickest, cleverest, and most cunning manipulators in official positions, even in the minor posts, where they could be of service when called upon by the invisible power which, utterly devoid of all humanity, seeks but to wallow in riches.

… Woe to the public officials who dare to resent their dictatorship! If there be such public officials who will not submit to their imperious dictation, then the flood-gates of lying press propaganda are released, sweeping the unhappy public servant to an earthly as well as political grave, or compelling him to compromise with his conscience and become their subservient tool to the end of his term.” - New York City Mayor John F. Hylan, 1922 (his office was a half-mile from the New York Stock Exchange on Wall Street)

When banks “lend” credit, the interest charge can double the amount the customer must repay. Through fractional reserve banking, only the amount leant is created (principle) but not the interest. Because our US money is only created as debt in our current monetary system, and the interest is never created, we can now explain some extraordinary but predictable outcomes. Money is debt, created out of thin air by private banks, and then “leant” to us to repay at interest. The debt will always be greater than the money supply. It’s impossible to ever repay total debt; we are in debt forever in this monetary system. 

In fact, when you understand the mechanics, the engineering, the proper terms to understand what we have shift in Orwellian degree:

  • The US does not have a “money supply,” but a “debt supply.”
  • Nobody “borrows” money from a bank; banks have legal authority to create what we use for money out of nothing.
  • Banks don’t “lend” anything; they have legal authority to create what is “leant” out of nothing.

What we call “money” is actually its opposite: “debt.” This system is like adding negative numbers forever. The aggregate debt only gets larger, and will never be repaid because this is what we use for money. Also, as we see today, the interest and debt total become so tragic-comic we can’t get close to affording to pay.

To put the significance of this understanding in numbers, the total debt of the US public is currently ~ $60 trillion (28). The total US money supply is somewhere around $15 trillion (29). We don’t know the exact amount anymore because the Federal Reserve stopped publishing that figure in 2006, claiming it was unimportant and “too expensive to tabulate and print.” This decision was made without consultation from Congress or opportunity for comment from professional economists or the public. Critics responded that this number is among the most important because inflation is a function of the money supply, tabulating its cost is negligible, and not keeping track of the total money supply is potentially crippling to our overall economy through the risk of inflation. Critics suspect that the Fed is hiding how much they’re increasing the money supply (30).

The Fed is privately-owned by the banking industry with most meetings closed to Congress and the public (31). The purpose of all business is to maximize their own profit with limited interest in the public good. The Fed is only audited by giving their accounting books to an independent firm to verify their math is correct in the books (internal audit). Because the Fed is not strictly and transparently regulated by Congress, we have to trust the Fed that the numbers on their books are accurate. As I’ve gently suggested, trusting people in positions of power is un-American from the view of the Founding Fathers. The only “oversight” from Congress is semi-annual interviews for questions and answers with the Chair of the Federal Reserve (Semiannual Monetary Policy Report to the Congress [32]). Presidents appoints the seven Board of Governors to help manage the Fed, but historically these selections always come from a short-list of candidates approved by Fed ownership (33). The term of office for Board members is 14 years. As you may know, Congresspersons Ron Paul and Dennis Kucinich began bills to fully audit the Fed in 2009 (external audit) (HR 1207 and HR 2424, respectfully) that the Fed opposed to protect its “independence.” (34)

A watered-down audit bill passed, with a July 2011 GAO report showing the Fed gave $16 trillion to so-called “bailout” domestic and foreign banks, and private corporations (35) (list of top recipients [36]). Please view this 5-minute video (37) of Congressman Alan Grayson (an economist) asking questions of the Fed’s Inspector General during the Financial Services Subcommittee on Oversight and Investigations in 2009, where she admits she has no idea who received trillions in off-balance-sheet transfers from the Fed.

Because the Federal Reserve can always create money out of nothing to buy US government securities, the federal government is tempted to increase the national debt rather than operate a balanced budget. The current national debt of over $18 trillion has an annual interest cost to the American taxpayers over $400 billion (with danger of going much higher if interest rates rise). US taxpayers only pay the interest and never pay down the principal of the debt. When the securities are due to be paid, additional securities are sold to cover the cost. This is like only paying the interest on a credit card without ever reducing the amount owed. Importantly, there is no government plan to pay the national debt or reduce it other than vague promises to reduce spending and reduce the debt from higher tax revenue of a strong economy. This rhetoric has no track record of performance since Andrew Jackson enacted partial monetary reform in his administration that ended in 1836.

Let’s allow the costs of our current system to be fully understood: the interest payment cost of $400 billion every year to Americans is enormous. As we learned in, “Economics and policy of ending poverty,” the investment to fund the UN Millennium Goals that would save a million children’s lives every month while decreasing population growth rates is estimated by professional economists from a low of $40 billion/year to a maximum of $150 billion/year at the project’s most expensive phase. This is a ten-year investment, as sustainable and self-funding development is the project’s goal.

This means that if the US enacted monetary reform to end a national debt with its $400+ billion annual interest payment, the US could afford to end poverty on three Earths. Or, the US alone could end poverty on just this one Earth, and refund ~$3,000 every year to each US household.

To put this in another perspective, the US Bureau of Engraving and Printing (BEP) has two buildings, one in Washington, D.C. and one in Fort Worth, Texas. Imagine each building has two halves: both print pretty pieces of paper. In one half, money is printed; in the other half, US Treasury Securities. Securities are mostly T-Bills, Notes, and Bonds; they are auctioned to the public every week as loans to whoever buys them, and are repaid with interest. Bills are loans for a year or less, Notes are two to ten years, and Bonds are ten to thirty years. These are mostly all marketable, meaning that they can be resold.

If Congress wants to buy government programs beyond their tax revenue, they may print and sell as many securities as they wish, but cannot get money directly because that is illegal in our current monetary system. If the Fed wants money, they request as much as they wish at the cost of the paper and then charge the taxpayers as an operating expense. Of course, the Fed can also enter money electronically into accounts. We have no way of knowing if the Fed abuses their power to create money by entering money into accounts and not reporting this on their books. The only safeguard the public has is their word that they would never ever create money for themselves, even though that is possible with a few computer keystrokes and undetectable.

Important to consider the honesty of our current system that seems to escalate debt: the big bank owners don’t play by the rules for “reserve requirements.” The nine biggest “too big to fail” banks seem to play by different rules for “requirements” because they have close to $300 TRILLION in derivatives exposure (38) that turns the idea of reserve requirements and FDIC into a tragic-comedy (awesome infographic about these “too big” banks and their derivatives [39]), with the data here (40), and Jaime Dimon (CEO JP Morgan ) admitting this here (41) (end of article). In addition, even the Fed reports that the seven largest US banks have transferred over $10 trillion in assets (42) to offshore shell companies in order to eliminate taxes.

Let’s put this $10 trillion from just the largest seven US banks that they hide in tax havens into perspective:

  • As we studied, global poverty kills about a million children every month.
  • Since these seven US banks created the last 10,000 of their tax haven subsidiaries since 1991, more human beings have died from preventable poverty than from all wars, murders, and violent deaths of any kind in all human history.
  • The total global cost to end all planetary poverty is between $1 to $3 trillion (here (43), here [44]).
  • Therefore, under our fractional reserve banking system, the top banks with the legal authority to create what we use for money have created over 10,000 shell companies to hide assets from taxes in the amount that is three to ten times more than required to end global poverty.

Big banks aren’t alone in this practice; the richest people on the planet have ~$30 trillion in offshore tax havens (45), according to the former Chief Economist at McKinseyJames Henry.

Please let the above facts and sink-in.

To help your understanding of the system we have, let’s consider an analogy: imagine your family is a nation with power to print your own money. I succeed in taking this job from you with the following spin: I’m a banking expert. Whomever you appoint from your family to create money will combine ignorance with inevitable corruption that will be incapable of managing your family’s money, no matter what transparent safeguards you enact. Therefore, I will print money to lend to your family at interest. With your family’s increased education and economic productivity, you can only increase the money supply by additional lending from me. As a “government,” your family need never pay off the loan, only the interest. Your family will work for me in paying the interest, and my family will manage the money to lend to your family. This is fair because printing your own money will lead to your ruin.

Over time, your family becomes increasingly in debt to me. After decades of this practice, your family doesn’t give this system any thought and whines about the interest payment and debt without taking any action to understand the system and look for alternative structures.

This is our Federal Reserve system in our “modern” world of the present.


27 Herman, C. NYC Mayor John Hylan, House Banking Committee Chairs on monetary reform. March 8, 2012:

28 Federal Reserve Bank of St. Louis. Economic Research. All sectors; credit market instruments; liability, level. 2014: Q3:

29 Shadow Government Statistics. Williams, J. Chart library: money supply:

30 The mess that Greenspan made. M3, we hardly knew you. Nov. 22, 2005:

31 Federal Reserve. Board of governors: board meetings:

32 Federal Reserve. Board of governors. Testimony of Federal Reserve officials:

33 I couldn’t find documentation of this. That said, nobody who serves on the Fed Board of Governors has ever spoken of monetary reform or public banking.

34 Washington’s Blog. Fed “independence” is a scam… and no reason to avoid an audit. July 25, 2012:

35 Washington’s Blog. Quantitative easing benefits the super-elite … and hurts the little guy and the American economy. Dec. 13, 2012:

36 The Burning Platform. Shepard, S. Rand Paul reintroduces bill to audit the Fed. Feb. 2, 2015:

37 YouTube: Alan Grayson. Alan Grayson (high quality version): is anyone minding the store at the Federal Reserve? May 12, 2009:

38 Zero Hedge. Durden, T. 5 U.S. banks each have more than 40 trillion dollars in exposure to derivatives. Sept. 25, 2014:

39 Derivatives: the unregulated global casino for banks:

40 Zero Hedge. Notational amount of derivative contracts: top 25 commercial banks and trust companies in derivatives: December 31, 2011:

41 Zero Hedge. Durden, T. Dear Steve Liesman: here is how the US financial system really works. Jan. 7, 2013:

42 Huff Post. Kavoussi, B. Seven largest U.S. banks have created thousands of subsidiaries to avoid taxes: Fed report. July 23, 2012:

43 Vision of Earth. Harack, B. How much would it cost to end extreme poverty in the world? Aug. 26, 2011:

44 Herman, C. Teaching critical thinking to high school students: case study of failure to end poverty (4 of 6). Feb. 18, 2015:

45 Herman, C. 1% hide $21 trillion, US big banks hide $10 trillion; ending world poverty: $3 trillion. July 24, 2012: