money as debt

8/6/2019 Money as Debt

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MONEY AS DEBT

The real monetary system


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The study of money, above all other fieldsin economics, is the one in which

complexity is used to disguise or to evadethe truth, not to reveal it.

~John Kenneth GalbraithEconomist, author


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Where does money come from?

For most of us the question where does money come from brings to mindthe picture of the mint printed by the press. Money most of us believe is

created by the government. Its true but only to a point.

The vast majority of the money is created in huge amounts bybanks.

Banks create the money the loan not from the banks on earnings not fromthe money deposited but from the borrowers promise to repay. The

borrowers signature on the loan paper is an obligation to pay the loan withinterest or lose the house the car or whatever asset as a collateral.

The bank in turn conjure into existence the amount which isn't even there.


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The Goldsmiths tale

Once upon a time pretty much anything was used as money.

It just had to be portable to be used in exchange.

Gold and silver were soft and easy to work with so some cultures becameexpert with these metals. Goldsmiths made trade much easier with coins,standardized units of these metals whose weight and purity was certified.


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The goldsmith needed a vault to safeguard his gold and soon his fellowtownsmen were knocking on his door wanting to rent space to safeguard

their own coins and valuable before long the goldsmith was renting everyshelf from the vault and earning a small income from his vault rentalbussiness.

Years went by and the goldsmith made an astute observation. Depositorsrarely came in to remove their actual, physical gold, and they never all came

in at once.

That was because the claim checks the goldsmith had written as receipts forthe gold deposited, were being traded in the marketplace as if they were thegold itself.


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This paper money was far more convenient than heavy coins, and amountscould simply be written, instead of laboriously counted one by one for each

transaction. Meanwhile, the goldsmith had developed another business. Helent out his gold charging interest.

Well, as convenient claim check money came into acceptance, borrowersbegan asking for their loans in the form of these claim checks instead of theactual metal. As industry expanded more and more people asked the

goldsmith for loans.

He knew that very few of his depositors ever removed their actual gold. So,the goldsmith figured he could easily get away with lending out claimchecks against his depositors gold, in addition to his own.


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THE ORIGIN OF BANKING

As long as the loans were repaid, his depositors would be none the wiser,and no worse off. And the goldsmith, now more banker than artisan, wouldmake a far greater profit than he could by lending only his own gold.

For years the goldsmith secretly enjoyed a good income from the interestearned on everybody elses deposits. Now a prominent lender, he grewsteadily richer than his fellow townsmen and he flaunted it. Suspicionsgrew that he was spending his depositors money. His depositors gottogether and threatened withdrawal of their gold if the goldsmith didnt

come clean about his newfound wealth.

Contrary to what one might expect, this did not turn out to be a disaster forthe goldsmith. Despite the duplicity inherent in his scheme, his idea didwork. The depositors had not lost anything. Their gold was all safe in thegoldsmiths vault.


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Rather than taking back their gold, the depositors demanded that thegoldsmith, now their banker, cut them in by paying them a share of the

interest.

And that was the beginning of banking. The banker paid a low interest rateon deposits of other peoples money that he then loaned out at a higherinterest.

The difference covered the banks cost of operation and its profit. The logicof this system was simple. And it seemed like a reasonable way to satisfy thedemand for credit. However this is NOT the way banking works today.


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THE AWAKENING OF MONETARY SYSTEM

Our goldsmith/banker was not content with the income remaining aftersharing the interest earnings with his depositors.

Thats when he got an even bolder idea. Since no one but himself knew whatwas actually in his vaults he could lend out claim checks on gold that wasnteven there!

As long as all the claim check holders didnt come to the vault at the same

time and demand real gold, how would anyone find out?

This new scheme worked very well, and the banker became enormouslywealthy on the interest paid on gold that did not exist!


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The idea that the banker would just create money out of nothing was toooutrageous to believe, so, for a long time, the thought did not occur to

people.

But, the power to just invent money went to the bankers head as you can well imagine. In time, the magnitude of the bankers loans and hisostentatious wealth did trigger suspicions once again.

Some borrowers started to demand real gold instead of paperrepresentations. This set off rumors.

Suddenly, several wealthy depositors showed up to remove their gold. Thegame was up!

A sea of claim check holders flooded the street outside the closed doors ofthe bank. Alas, the banker did not have enough gold & silver to redeem allthe paper he had put into their hands.

This is called a run on the bank and is what every banker dreads.


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Bankers agreed to abide by limits on the amount of fictional loan moneythat could be lent out.

The limit would still be a number much larger than the actual value of gold& silver in the vault. Quite often the ratio was 9 fictional dollars to 1 actualdollar in gold.

These regulations were enforced by surprise inspections.

It was also arranged that, in the event of a run, central banks would

support local banks with emergency infusions of gold.

Only if there were runs on a lot of banks simultaneously would the bankers

credit bubble burst and the system come crashing down.


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THE MONEY SYSTEM TODAY

Over the years, the fractional reserve system and its integrated network ofbanks backed by a central bank has become the dominant money system ofthe world. At the same time, the fraction of gold backing the debt money

has steadily shrunk to nothing.

In the past, a paper dollar was actually a receipt that could be redeemed fora fixed weight of gold or silver. In the present, a paper or digital dollar canonly be redeemed for another paper or digital dollar.

In the present, privately created bank credit is legally convertible togovernment issued fiat currency, the dollars, loonies and pounds wehabitually think of as money. Fiat currency is money created by governmentfiat, or decree, and legal tender laws declare that citizens must accept thisfiat money as payment for debt or else the courts will not enforce theobligation.


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In the past, the total amount of money in existence was limited to the actualphysical quantities of whatever commodity was in use as money. For

example, in order for new gold or silver money to be created, more gold orsilver had to be found and dug out of the ground.

In the present, money is literally created as debt. New money is createdwhenever anyone takes a loan from a bank. As a result, the total amount ofmoney that can be created has only one real limit -the total level of debt.

Governments place an additional statutory limit on the creation of newmoney, by enforcing rules known as fractional reserve requirements.

Essentially arbitrary, fractional reserve requirements vary from country to

country and from time to time. In the past, it was common to require banksto have at least one dollars worth of real gold in the vault to back 10 dollarsworth of debt money created.

Today, reserve requirement ratios no longer apply to the ratio of newmoney to gold on deposit, but merely to the ratio of new debt money toexisting debt money on deposit in the bank


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THE GROWING DEBT

To illustrate this in a simple way lets imagine that a new bank hasjust started up and has no depositors yet. Investors have paid for thebanks infrastructure and have supplied it with sufficient cash to meetthe demand for cash withdrawals. Typically, cash in the vault willamount to no more than one dollar for every 20 or 30 dollars that couldbe demanded from the bank. The bank has joined the central banksystem, which permits the new bank to borrow cash from the centralbank if its needed.

The doors open and the new bank welcomes its first loan customer. Thecustomer needs $10,000 to buy a car. On approval, the bank creates anaccount for the borrower and types in that the bank owes the borrower$10,000. This $10,000 is not taken from anywhere. It is created on thespot. The borrower does not take this money out in cash. Instead hewrites a check on his account to buy the car.


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The seller then deposits this newly created $10,000 check at her bank.

16. At a ratio of 9:1, this new $10,000 deposit allows the sellers bank tocreate a new loan of $9,000.

Step 3 CommercialBank Deposit $9,000 $8100 : $900new loan : reserve

And if that $9000 is then deposited by a third party, it becomes the legalbasis for a third issue of bank credit, this time for the amount of $8100.

Like one of those Russian dolls, each layer of which contains a smaller dollinside, each new deposit contains the potential for a slightly smaller loan ina decreasing series.

Now, at any stage, if the money created is taken in cash and not depositedat a bank, the process stops. Thats the unpredictable part of the moneycreation mechanism.


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But more likely, at every step, the new bank credit money will be depositedat a bank, and the reserve ratio process can repeat itself over and over untilalmost $100,000 of brand new bank credit money has been created withinthe banking system.

All of this new money has been created entirely from debt. And alltransactions have been carried out with bank credit. None of the banksinvolved have needed to use any of the cash in their vaults.

Whats more, under this ingenious system, the books of each bank in thechain must show that the bank has 10% more on deposit than it has out on

loan. This gives banks a very real incentive to seek deposits in order to beable to make loans, supporting the general but misleading impression

that loans come out of deposits.

Now, it cant said that any one bank got to multiply the initial $10,000 ofbank credit into $100,000 of bank credit. However, the banking system is aclosed loop. Bank credit created at one bank becomes a deposit in another,and so on and so on.


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Sowhile the rules are complex the common sense reality is actually quitesimple.Banks can create as much money as we can borrow.

Despite the endlessly presented mint footage, government-created moneytypically accounts for less than 5% of the money in circulation. More than95% of all money in existence today was created by someone signing apledge of indebtedness to a bank. Whats more, this bank credit money isbeing created and destroyed in huge amounts every day, as new loans aremade and old ones repaid.

And thats not all. Banks create only the amount of the Principal. Theydont create the money to pay the Interest. Where is that supposed to comefrom?

The only place borrowers can go to obtain the money to pay Interest is thegeneral economys overall money supply. But almost all that overall moneysupply has been created exactly the same way as bank credit that has to bepaid back with more than was created!


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Its clearly impossible for everyone to pay back the Principal plus the Interestunless every penny of interest the lenders take in is recycled back to those who

need this money to make their payments. This means interest earnings must be100% spent so that borrowers can earn these dollars repeatedly. While much ISspent as interest to depositors, operating expenses and dividends, some of theinterest income becomes new loans at interest, or investments, creatingadditional demand for money and an ultimate shortage of debt-free moneyavailable for borrowers to earn.

It is only the time lag between moneys creation as new loans and its repaymentthat keeps the overall shortage of money from catching up and bankrupting theentire system. However, as the banks insatiable credit monster gets bigger and bigger, the need to create more and more debt money to feed it becomesincreasingly urgent.


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A system with usury will collapse sooner or later its only a matter of timewhen the repayment will catch up to the creation of new money and the

whole system will go down. The only answer to this system is no usury orIslamic monetary system which is free of usury completely.

One thing to realize about our fractional reserve banking system isthat, like a childs game of

musical chairs, as long as the music is playing, there are no losers.

~ AndrewGause, monetary historian The Secret World of Money, 1996

To profit from money alone is like unto thievery


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