What I Noticed About The Federal Reserve

After writing about what money actually is—or isn’t—a mate asked me the obvious follow-up question: “Okay, so who creates the money then?”

Fair question. And the answer is more interesting than you’d think.

Most Australians assume the Reserve Bank of Australia creates our dollars, which is partly true. But here’s what I didn’t know: The RBA only creates a fraction of the money supply. The vast majority—about 97%—is created by private banks when they make loans.

Yeah. Private banks create money. Not metaphorically. Actually create it.

Before I explain how that works, let me tell you about where this system came from. Because it wasn’t designed by economists in universities. It was designed by bankers. In secret. On an island.

The Meeting That Changed Everything

November 1910. A private railway car departed New Jersey under cover of darkness. On board: representatives of the most powerful banks in America. Their destination: Jekyll Island, Georgia—a private resort owned by J.P. Morgan and associates.

They traveled in secret, used only first names, and told no one where they were going. For nine days, they drafted a plan that would become the Federal Reserve Act.

This isn’t conspiracy theory. It’s documented history. One of the attendees, Frank Vanderlip (president of National City Bank), later wrote about it in the Saturday Evening Post: “I do not feel it is any exaggeration to speak of our secret expedition to Jekyll Island as the occasion of the actual conception of what eventually became the Federal Reserve System.”

The attendees included:

Nelson Aldrich (Senator, father-in-law to John D. Rockefeller Jr.)
Frank Vanderlip (representing Rockefeller banking interests)
Henry Davison (senior partner at J.P. Morgan)
Charles Norton (president of First National Bank of New York)
Benjamin Strong (representing J.P. Morgan)
Paul Warburg (representing Rothschild banking interests)

These weren’t government officials designing public policy. These were private bankers designing their ideal banking system. And three years later, in 1913, Congress passed their plan almost verbatim.

If you want the full story, read The Creature from Jekyll Island by G. Edward Griffin. It’s one of those books that changes how you see everything. Fair warning though—once you read it, you can’t unread it.

So What Is The Federal Reserve?

Here’s what most people assume: The Federal Reserve is a government agency that manages America’s money supply in the public interest.

Here’s what it actually is: A private banking cartel, owned by member banks, operating independently of government oversight, with monopoly control over the US dollar.

Let me break that down:

“Federal” – It’s not federal. It’s as federal as Federal Express. The name was chosen deliberately to make it sound like a government institution.

“Reserve” – There’s no reserve. It doesn’t store gold or silver backing the currency. The name implies stability and backing that don’t exist.

Ownership – The Federal Reserve is owned by member banks. These are private institutions that bought shares in the Fed when it was created. The public owns none of it.

Structure – Twelve regional Federal Reserve banks, privately owned, plus a Board of Governors appointed by the President. But the Board doesn’t control the regional banks—it coordinates them.

Accountability – The Fed has never been fully audited. It operates independently. Congress can’t override its decisions. The President can’t fire the Chairman mid-term.

It’s the most powerful financial institution in the world, and it answers to… well, itself.

The Australian Context

Now, Australia’s system is different. The Reserve Bank of Australia is government-owned. Fully owned by the Commonwealth. That’s actually better than the American model.

But—and this is important—it operates with the same independence. The RBA sets interest rates without government approval. It manages monetary policy independently. And most critically, it operates within the same fractional reserve banking system the Fed pioneered.

So while the ownership structure differs, the mechanism is the same. And that mechanism is what we need to understand.

How Money Actually Gets Created

Right. This is the bit that sounds insane until you realize it’s standard practice.

When you deposit $1,000 in a bank, you’d think that money just sits there until you withdraw it, right? Wrong.

Here’s what actually happens:

Fractional Reserve Banking:

You deposit $1,000
Bank is required to keep a reserve (in Australia, historically around 10%, though this has changed)
Bank keeps $100, lends out $900 to someone else
That person deposits their $900 in a bank
That bank keeps $90, lends out $810
And on it goes…

Your original $1,000 becomes $10,000 in the system through this multiplication process.

But here’s the crucial bit: That $9,000 of “new” money was created by banks making loans. It didn’t exist before the loans. It was created through the lending process itself.

Every time a bank approves a loan, it creates new money. Just adds numbers to an account. The money didn’t come from someone else’s deposits. It was created from nothing.

This is legal. This is standard. This is how the system works.

And every dollar created this way is someone’s debt. Every dollar in circulation is owed to someone, plus interest.

The Implication That Broke My Brain

Think about what this means:

If everyone tried to pay off all their debts simultaneously, there wouldn’t be enough money in existence to do it. Because the money IS the debt. Remove the debt, and the money disappears.

The system requires eternal debt to function.

Banks create money when they lend, and that money vanishes when the loan is repaid. So the money supply must constantly grow to prevent the whole thing from collapsing. Which means more debt, forever.

And who pays interest on money that was created from nothing?

You do. With actual work. Real labor. Exchanged for currency that was conjured into existence by a bank deciding to issue a loan.

They’re charging rent on money they created from nothing.

Who Benefits?

There’s a concept in economics called the Cantillon Effect, named after an 18th-century economist who noticed that new money doesn’t affect everyone equally.

Those closest to the money creation benefit most. They get to spend the new money before prices rise. By the time it reaches regular wage earners, prices have already adjusted upward.

So who’s closest to money creation?

Banks (they create it)
Large corporations (they borrow big and get prime rates)
Government (borrows at preferential rates)
Asset holders (their holdings rise in dollar terms)

Who’s furthest from it?

Wage earners
Savers
Retirees on fixed incomes
Anyone without assets or access to cheap credit

It’s not that the system is broken. It’s working exactly as designed. It’s just not designed for you.

Where Does Australia Fit?

And Australia? We’re part of this system whether we like it or not.

The Reserve Bank holds billions in US dollar reserves. Our international trade largely settles in USD. Our mining exports—iron ore, coal, gas—are priced in American dollars. When the US Federal Reserve prints trillions, we feel it through currency fluctuations, imported inflation, and asset price movements.

We have our own currency, sure. Our own central bank. But we’re swimming in their pool. The global financial system runs on US dollars, and everyone else adjusts accordingly.

When America sneezes, we catch a cold. Not because we’re weak, but because the entire system is denominated in their currency. We’re independent in name, but dependent in practice.

The Questions I Can’t Stop Asking

Why does government borrow money from private banks instead of creating it directly? If we need money for schools, hospitals, infrastructure—why go into debt to banks when we could just… create it ourselves?

The usual answer: “That would cause inflation.”

But we already have inflation. The targeted 2-3% annually. And the money supply is expanding constantly anyway through bank lending. So what’s the actual difference, besides who profits?

If the Federal Reserve was truly working in the public interest, why was it designed in secret by private bankers? Why is it still owned by private banks? Why has it never been fully audited?

Why do we treat this system as inevitable and unchangeable when it’s barely a century old?

Maybe there are good answers I’m missing. Maybe the system, despite its obvious flaws, is still the best option. I’m open to that. But I haven’t found those answers yet.

What I have found is a pattern: Those who control money creation profit immensely. Those who work for that money receive less and less purchasing power for their labor.

Connect The Dots

Remember from last essay: In 1971, Nixon severed the dollar’s tie to gold. Unlimited fiat currency was born.

Now we see who controls that currency: A system designed by private bankers, for private bankers, operating independently of democratic oversight.

It’s not a conspiracy when they write about it in newspapers and publish memoirs. It’s just a well-designed system that most people never look at closely.

Next essay, we’ll look at what money used to be before this system. Because for thousands of years, money was something else entirely. Something they couldn’t create from nothing.

Silver. And what happened to it is worth noticing.

If you want to go deeper on any of this, read: