I previously wrote a rant on the United States Dollar, but this rant is about the more generic term, money. Money can include the U.S. Dollar, the Canadian Looney, the Mexican Peso, any other currency or coinage, or, for that matter, anything that is recognized by at least two people as a medium of exchange for goods and/or services.
Having said that, for most of us, the question of where money comes from brings to mind pictures of the Mint stamping coins and the Bureau of Engraving printing bills. Money, most of us believe, is created by the government. This is true, but only to a point. Those metal and paper symbols of value we usually think of as money are indeed produced by an agency called the Treasury. But the vast majority of money is not created by the Treasury Department. It is created in huge amounts everyday by private corporations known as banks.
For purposes of this rant, I will refer to both coinage, currency, and digital denomination as simply “money.”
The History of Money
Once upon a time, pretty much anything was used as money. It just had to be portable and enough people had to have faith that it could later be exchanged for things of real value, like food, clothing, and shelter. Shells, cocoa beans, pretty stones, and even feathers have been used as money at one time or another. Gold and silver were, attractive, malleable (that is, they could easily be fashioned into shapes that were easy to transport). So some cultures became expert with these metals. Goldsmiths made trade much easier by casting coins, which were standardized units of these metals whose weight and purity was certified.
To protect the gold, the goldsmith needed a safekeeping place and soon others wanted to rent space in order to safeguard their own coins and valuables. Before long, the goldsmith was renting every shelf in the safekeeping place and earning a small income from his rental business. Years passed and the goldsmith made a keen observation. Renters rarely 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 for the gold were being traded in the marketplace as if they were the gold itself. This paper money was far more convenient than heavy coins and amounts could simply be written instead of laboriously counted one by one for each transaction.
So the goldsmith began a side business. He loaned out his gold, charging a fee, called interest. When his convenient claim check money come into acceptance, borrowers began asking for their loans in the form of these claim checks instead of the actual metal. As industry expanded, more and more people asked the goldsmith for loans. This gave the goldsmith an even better idea. He knew that very few of his depositors ever actually removed their gold. So the goldsmith figured he could easily get away with writing these claim checks against his space renter’s gold, in addition to his own. As long as the loans would be repaid, his tenants would be unaware and no worse off. And the goldsmith, now more banker than artisan, would make a far greater profit than he could by lending his own gold.For many years, the goldsmith secretly enjoyed a good income from the income earned on everybody else’s deposits. Now a prominent lender, he grew steadily richer than his fellow townsmen. And he flaunted it. Suspicions grew that he was spending his depositors’ money. The goldsmith became greedy.
Money is a new form of slavery, and distinguishable from the old simply by the fact that it is impersonal, there is no human relation between master and slave.”
— Leo Tolstoy
You may have heard the phrase “Money is the root of all evil.” This is a misquote of the Christian Bible from 1 Timothy 6:10 which says, “The love of money is a root of all kinds of evil.” Greed, one of the Seven Deadly Sins, the excessive love of money and other possessions and Radix malorum est cupiditas, Latin for “Greed is the root of all evil,” and “Let not those who hoard up that which God has bestowed on them of His bounty think that it is good for them – nay, it will be worse for them (Holy Qur’an, 3:180). Therefore, one can deduce that the use of money is not morally objectionable per se, but rather it is the hoarding, or, more specifically, greed, which is anathema to all major religions.
So the goldsmith’s depositors got together and threatened the withdrawal of their gold if the goldsmith didn’t come clean about his new found wealth. Contrary to what one might expect, this did not turn out to be a disaster for the goldsmith. Despite the duplicity inherent in his scheme, his idea did work: the depositors had not lost anything. Their gold was all still safe in the goldsmith’s safekeeping place. But rather than taking back their gold the depositors demanded that the goldsmith, now their banker, cut them in by paying them a share of the interest. So that was the beginning of banking. The banker paid a low interest rate on the deposits of other people’s money that he then loaned out at a higher interest, the difference covered the banks cost of operation and its profit. The logic of this system was simple and it seemed like a reasonable way to satisfy the demand for credit. However, this is not the way that banking works today.
Our goldsmith-banker was not content with the income remaining after sharing the interest earnings with his depositors. And the demand for credit was growing fast as Europeans spread out across the world. His loans were limited by the amount of gold his depositors had in his safekeeping place. That’s when he got an even bolder idea. Since no one but himself knew exactly what was in this safekeeping place, he could lend out claim checks on gold that wasn’t even there, so long as all the claim check holders did not come to him at the same time and demand real gold no one would find out. This new scheme worked very well and the banker became enormously wealthy on the interest paid on gold that did not exist.
The idea that the banker would just create money out of was too outrageous to believe, so for a long time the thought did not occur to people. But the power to invent money went to the banker’s head as you can all imagine. In time, the magnitude of the banker’s loan and his ostentatious wealth did trigger suspicions once more. Some borrowers started to demand real gold instead of paper representation. Rumors spread. Suddenly several wealthy depositors showed up to remove their gold. The game was up. A sea of claim check holders flooded the streets outside the closed doors of the bank. Alas, the banker did not have enough gold and silver to redeem all the paper he had put into their hand. This is called a run on the bank and it is what every banker dreads. This phenomenon of a run on the bank ruined individual banks and not surprisingly damaged public confidence in all bankers.
The first International Bankers were the Knights Templar, a secretive society created and sponsored by an even more secret society known as the Priory De Scion during the time of the Christian Crusades to recapture the Holy Lands from Muslim control. Their stated mission was to guard the roads to the Holy Land. Their popularity became so great that they became a political force with which even kings had to reckon.
They created safe depositories where lords could leave their treasure in safekeeping while on pilgrimages to Jerusalem. These early form of banks, which were created across Europe and the Middle East from France to Jerusalem, were the first international banks.
They developed an early system of claim checks so that money could be drawn from a “bank” in Jerusalem by a lord writing a check based on his treasure being held in a Paris bank. These “checks,” as they have come to be known, were issued at the beginning of the traveler’s pilgrimage to the Holy Land and written in a secret cipher code, that was known only to the Templars. When arriving in Jerusalem, the traveler would simply present his check to another Templar to make a withdrawal, the amount would be subtracted and a new ciphered check would be issued indicating the remaining amount the traveler had deposited.
The process by which banks create money is so simple that the mind is repelled.”
— John Kenneth Galbraith,
The Templars, not unlike our goldsmith, soon became very wealthy. Because of this wealth, they became powerful, too, loaning money to monarchs to finance their wars, which led to their downfall.
On Friday the 13th of 1307, the Templars were Outlawed by a Papal Bull which charged them with Heresy. On this unlucky day all the Knight Templars in France were simultaneously arrested. Many were surprised by this unexpected turn of events because the knights Templars were considered the army of the Catholic Church. In fact, it took considerable effort on the part of the King of France, Phillip IV, to influence the Pope to make this declaration. Part of this effort included holding relatives of the Pope hostage to insure the declaration was made.
Phillip IV had his own motives. He had borrowed heavily from the Templar Treasury to finance his wars against England. If he could get the Templars outlawed, not only could the debt be canceled but the Templar banks with their treasure could be seized. This why even today, superstitious folk still consider the number 13 to be unlucky and, more specifically, Fridays which fall on the 13th day of a month. This is called triskaidekaphobia (fear of the number 13).
It would have been straightforward to outlaw the practice of creating money from nothing, but the large volumes of credit the bankers were offering had become essential to the success of European commercial expansion, so instead the practice was legalized and regulated. Bankers agreed to abide by limits on the amounts of fictional loan money that could be lent out. The limit would still be a number much larger than the actual amount of gold and silver in the vault. Quite often the ratio was nine fictional dollars to one actual dollar 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 banker’s bubble burst and the system come crashing down.
Mayer Amschel Rothschild (February12, 1744 – September 19, 1812)
Most of us believe that banks lend out money that has been entrusted to them by depositors. This is easy to picture, but is not reality. In point of fact, banks create the loan, not from the banks own earnings, not from the money deposited, but directly from the borrower’s promise to repay. That’s a big commitment from the borrower. The borrower’s signature on the loan papers is an obligation to pay the bank the amount of the loan plus interest, or lose the house, the car, or whatever asset was pledged as collateral. That loan contract, or note, becomes an asset of the bank. What does the same signature require of the bank? The bank gets to conjure into existent the amount of the loan and just write it into the borrower’s account. Sound far-fetched, doesn’t it?
Some 4 Decades later (1743), a goldsmith named Amshall Moses Bower opened a counting house in Frankfurt Germany. He placed a Roman eagle on a red shield over the door prompting people to call his shop the Red Shield Firm pronounced in German as “Rothschild.”
His son later changed his name to Rothschild when he inherited the business. Loaning money to individuals was all well and good but he soon found it much more profitable loaning money to governments and Kings. It always involved much bigger amounts, always secured from public taxes.
Permit me to issue and control the money of a nation, and I care not who makes its laws.”
— Mayer Anselm Rothschild,
Once he got the hang of things he set his sights on the world by training his five sons in the art of money creation, before sending them out to the major financial centers of the world to create and dominate the central banking systems.
J.P. Morgan was thought by many to be the richest man in the world during the second world war, but upon his death it was discovered he was merely a lieutenant within the Rothschild empire owning only 19% of the J.P. Morgan Companies.
Banking in the United States
The history of banking, and specifically the creation of a central bank has a long and sordid past in the United States.
By the mid 1700′s Britain was at its height of power, but was also heavily in debt.
Since the creation of the Bank of England, they had suffered four costly wars and the total debt now stood at £140,000,000, (which in those days was a lot of money).
In order to make their interest payments to the bank, the British government set about a plan to try to raise revenues from their American colonies, largely through an extensive program of taxation.
There was a shortage of material for minting coins in the colonies, so they began to print their own paper money, which they called Colonial Script. This provided a very successful means of exchange and also gave the colonies a sense of identity. Colonial Script was money provided to help the exchange of goods. It was debt free paper money not backed by gold or silver.
Dr. Benjamin Franklin (January 17, 1706 – April 17, 1790)
During a visit to Britain in 1763, the Bank of England asked Benjamin Franklin how he would account for the new found prosperity in the colonies. Franklin replied:
That is simple. In the colonies we issue our own money. It is called Colonial Script. We issue it in proper proportion to the demands of trade and industry to make the products pass easily from the producers to the consumers.
In this manner, creating for ourselves our own paper money, we control its purchasing power, and we have no interest to pay to no one.”
America had learned that the people’s confidence in the currency was all they needed, and they could be free of borrowing debts. That would mean being free of the Bank of England.
The First Bank of the United States was needed because the government had a debt from the Revolutionary War, and each state had a different form of currency. It was built while Philadelphia was still the nation’s capital. Alexander Hamilton conceived of the bank to handle the colossal war debt— and to create a standard form of currency.
Up to the time of the bank’s charter, coins and bills issued by state banks served as the currency of the young country. The First Bank’s charter was drafted in 1791 by the Congress and signed by George Washington. In 1811, Congress voted to abandon the bank and its charter. The bank was originally housed in Carpenters’ Hall from 1791 to 1795. The neo-classical design of the bank was intended to recall the democracy and splendor of ancient Greece. When you’re there, note the eagle which crowns the two-story portico. At the time of the bank’s creation the eagle had been our national symbol for only 14 years. The bank building was restored for the Bicentennial in 1976.
The inability of the Colonists to get power to issue their own money permanently out of the hands of George III and the international bankers was the PRIME reason for the revolutionary war.”
— Benjamin Franklin,
signer of the Declaration of Independence
America had learned that the people’s confidence in the currency was all they needed, and they could be free of borrowing debts. That would mean being free of the Bank of England.
In Response the world’s most powerful independent bank used its influence on the British parliament to press for the passing of the Currency Act of 1764.
This act made it illegal for the colonies to print their own money, and forced them to pay all future taxes to Britain in silver or gold.
Here is what Franklin said after that.
In one year, the conditions were so reversed that the era of prosperity ended, and a depression set in, to such an extent that the streets of the Colonies were filled with unemployed.
“The colonies would gladly have borne the little tax on tea and other matters had it not been that England took away from the colonies their money, which created unemployment and dissatisfaction. The inability of the colonists to get power to issue their own money permanently out of the hands of George III and the international bankers was the PRIME reason for the Revolutionary War.” — Benjamin Franklin (from his autobiography)
By the time the war began on 19th April 1775 much of the gold and silver had been taken by British taxation. They were left with no other choice but to print money to finance the war.
What is interesting here is that Colonial Script was actually working so well, it became a threat to the established economic system of the time.
The idea of issuing money as Franklin put it “in proper proportion to the demands of trade and industry” and not charging any interest, was not causing any problems or inflation. This unfortunately was alien to the Bank of England which only issued money for the sake of making a profit for its shareholder’s.
If you can’t beat them, join them, might well have been his argument when arms dealer, Robert Morris suggested he be allowed to set up a Bank of England style central bank in the USA in 1781.
Desperate for money, the $400,000 he proposed to deposit, to allow him to loan out many times that through fractional reserve banking, must have looked really attractive to the impoverished American Government.
Already spending the money they would be loaned, no one made a fuss when Robert Morris couldn’t raise the deposit, and instead suggested he might use some gold, which had been loaned to America from France.
Once in, he simply used fractional reserve banking, and with the banks growing fortune he loaned to himself, and his friends the money to buy up all the remaining shares. The bank then began to loan out money multiplied by this new amount to eager politicians, who were probably too drunk with the new “power cash” to notice or care how it was done.
The scam lasted five years until in 1785, with the value of American money dropping like a lead balloon. The banks charter didn’t get renewed.
The shareholder’s walking off with the interest did not go unnoticed. American statesman and Founding Father of the United States Gouverneur Morris (credited with writing “We the People of the United States, in order to form a more perfect union…” in the Declaration of Independence) lamented:
The rich will strive to establish their dominion and enslave the rest. They always did… they always will. They will have the same effect here as elsewhere, if we do not, by the power of government, keep them in their proper spheres.”
That’s not all, banks create only the amount of the principal. They don’t create the money to pay the interest. Where is that suppose to come from? The only place that borrowers can go to obtain the money to pay the interest is the general economy’s overall money supply. But almost all that overall money supply has been created exactly the same way as bank credit that has to be paid back with more than what was created. So everywhere there are other borrowers in the same situation. Frantically trying to obtain the money they need to pay back both principal and interest from a total money pool which contains only principal. It is clearly impossible for everyone to pay back the principal plus interest because the interest money doesn’t exist.
Since I entered politics, I have chiefly had men’s views confided to me privately. Some of the biggest men in the United States, in the field of commerce and manufacture, are afraid of something. They know that there is a power somewhere so organized, so subtle, so watchful, so interlocked, so complete, so pervasive, that they had better not speak above their breath when they speak in condemnation of it.”
— Woodrow Wilson,
former President of the United States
It is only the time lag between money’s creation as new loans and its repayment that keeps the overall shortage of money from catching up and bankrupting the entire system. However, as the banks insatiable credit monster gets bigger and bigger the need to create more and more debt money to feed it becomes increasingly urgent. Why are interest rates so low? Why do we get unsolicited credit cards in the mail? Why is the U.S. government spending faster than ever? Could it be to stave off collapse of the entire monetary system? A rational person has to ask can this really go on forever. Isn’t a collapse inevitable?
Money facilitates production and trade. As the money supply increases money just becomes increasingly worthless unless the volume of production and trade in the real world grows by the same amount. Add to this the realization that when we here that the economy is growing at 3% per year it sounds like a constant rate. But its not. This year’s 3% represents more real goods and services than last years 3% because it is 3% of the new total. Instead of a straight line as is naturally visualized from the words, it is really an exponential curve getting steeper and steeper.
Thus our national circulating medium is now at the mercy of loan transactions of banks, which lend, not money, but promises to supply money they do not possess.”
— Irving Fisher,
economist and author
The problem of course is that perpetual growth of the real economy requires perpetually escalating new use of real world resources and energy. More and more stuff has to go from natural resource to garbage every year, forever, just to keep the system from collapsing.
What can we do about this downright scary situation? For one thing we need a very different concept of money. Its time more people ask themselves and their governments four simple questions. Around the world governments borrow money at interest from private banks. Government debt is a major component of the total debt and servicing that debt takes a big chunk of our taxes.
Now we know that banks simply create the money they lend and the government has given them permission to do this. So the first question is: Why do governments choose to borrow money from private banks at interest when government could create all the interest free money it needs itself? And the second big question is: why create money as debt at all? Why not create money that circulates permanently and doesn’t have to be perpetually re-borrowed at interest in order to exist. The third question: how can a money system dependent on perpetually accelerating growth be used to build a sustainable economy? Isn’t it logical that perpetually accelerating growth and sustainability are incompatible? And finally: what is it about our current system that makes it totally dependent on perpetual growth? What specifically needs to change to allow the creation of a sustainable economy?
At one time charging any interest on a loan was called usury. It was subject to severe penalties including death. Every major religion forbade usury. Most of the arguments made against the practice were moral. It was held that money’s only legitimate purpose was to facilitate the exchange of goods and services. Any form of making money simply by having money was regarded as the act of a parasite or of a thief. However, as the credit means of commerce increased the moral arguments eventually gave way to the arguments that lending involves risk and loss of opportunity to the lender and therefore attempting to make a profit from lending is justified.
Today these notions seem quaint. Today the notion of making money from money is held as an ideal to strive for (i.e. loans, mortgages, bonds, stock market trading, currency speculation, real estate flipping, etc). Why work when you can get your money to work for you? However, in trying to envision a sustainable future it is very clear that the charging of interest is both a moral and a practical problem. Imagine a society and an economy that can endure for centuries because instead of plundering its capital stores of energy it restricts itself to present day income. No more wood is harvested than grows in the same period. All energy is renewable (i.e. solar, wind, tidal, hydroelectric, biomass, geothermal, etc). This society lives within the limits of its non renewable resources by reusing and recycling everything and the population just replaces itself.
"Jesus entered the Temple area and drove out all who were buying and selling there. He overturned the tables of the money changers and the benches of those selling doves. 'It is written,' he said to them, 'My house will be called a house of prayer but you are making it a den of robbers.'" (from the Christian Bible, Matthew 21:12-13)
“Fiat currency” is money created by government fiat or decree Legal tender laws declare that citizens must accept this money as payment or else the courts will not enforce the obligation.
Such a society could never function using a money system utterly dependent on perpetually accelerating growth. A stable economy would need a money supply at least capable of remaining stable without collapsing. Let’s say we fix the total volume of this stable money supply to a given amount. Let’s also imagine that money lenders must actually have existing money to lend. If some people within this money supply begin systematically lending money supply at interest their share of the money supply will grow. If they continually re-loan at interest all the money that get’s paid back, what’s the inevitable result? Whether it’s gold, fiat, or debt money it doesn’t matter. The money lenders will end up with all the money. And after the foreclosures and bankruptcies are all filed they will get all the real property too.
Only if the proceeds of lending at interest were evenly distributed amongst the population would this central problem be solved. Heavy taxation of bank profits might accomplish this goal. But then why would banks want to be in business. If we are ever able to free ourselves of the current situation we could imagine banking run as a non-profit service to society dispersing its interest earnings as a universal citizen dividend for lending without charging interest at all.
Over the years, the fractional reserve system and its integrated network of banks backed by a central bank has become the dominant money system of the world. At the same time, the fraction of gold backing the debt money has steadily shrunk to nothing.
The basic nature of money has changed. In the past the paper dollar was actually a receipt that could be redeemed for a fixed weight of gold or silver. In the present, a paper or digital dollar can only be redeemed for another paper or digital dollar. In the past, privately created bank credit existed only in the form of private bank notes, which people had the choice to refuse, just as we have the choice to refuse someone’s private check today. In the present, privately created bank credit is legally convertible to government issued fiat currency, or the dollars, loonies, and pounds we habitually think of as money.
Fiat currency is money created by government fiat, or decree. Legal tender laws declare that citizens must accept this fiat money as payment for debt or else the courts will not enforce the obligation. So now the question is if governments and banks can both just create money than how much money exists? In the past, the total amount of money in existence was limited to the actual, physical quantity of whatever commodity was in use as money. For example, in order for new gold or silver money to be created more gold or silver had to be found and dug out of the ground. In the present, money is literally created as debt. New money is created whenever anyone takes a loan from the bank. As a result the total amount of money that can be created has only one real limit: the total level of debt.
Each and every time a bank makes a loan, new bank credit is created– new deposits– brand new money.”
— Graham F. Towers,
Governor, Bank of Canada, 1934-54.
Governments place an additional statutory limit on the creation of new money 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 that banks have at least one dollar worth of real gold in the vault to back ten dollars of debt money created. Today reserve requirement ratios no longer apply to the ratio of new money to gold on deposit but merely to the ratio of new debt money to the ratio of existing debt money on deposit in the bank.
Today, a bank’s reserves consist of two things. The amount of government issued cash or equivalent that the bank has deposited with the central bank plus the amount of already existing debt money that the bank has on deposit. To illustrate this in a simple way, let’s imagine that a new bank has just started up and has no depositors yet. However, the bank’s investors have made a reserve deposit of $1,111.12 of existing cash money at the central bank. Your required reserve ratio is nine to one.
Step one: the doors open and the bank welcomes its first loan customer. He needs ten thousand dollars to buy a car. At the nine to one reserve ratio the new bank’s reserve at the central bank, also known as high powered money, allows it to legally conjure into existence nine times that amount or ten thousand dollars on the basis of the borrower’s pledge of debt. This ten thousand dollars is not taken from anywhere. It is brand new money simply typed into the borrower’s account as bank credit. The borrower then writes a check on that bank credit to buy the new car.
Step two: the seller then deposits this newly created ten thousand dollars at her bank. Unlike the high powered government money deposited at the central bank this newly created credit money cannot be multiplied by the reserve ratio. Instead it’s divided by the reserve ratio. At a ratio of nine to one a new loan of $9,000 can be created on the basis of the ten thousand dollar deposit.
Step three: if that $9,000 is then deposited by a third party at the same bank that created it or at a different one it becomes the legal basis for a third issue of bank credit, this time for the amount of $8,100. Like one of those Russian dolls, where each layer contains a slightly smaller doll inside, each new deposit contains the potential for a slightly smaller loan in an infinitely decreasing series.
Now, if the loan money created is not deposited at the bank the process stops. That is the unpredictable part of the money creation mechanism. But more likely at every step the new money will be deposited at a bank and the reserve ratio process can repeat itself over and over until almost one hundred thousand dollars has been created within the banking system. All of this new money has been created entirely from debt and the whole process has been legally authorized by the initial reserve deposit of just $1,111.12, which is still sitting untouched at the central bank. What’s more, under this ingenious system the books of each bank in the chain must show that the bank has ten percent more on deposit than it has out on loans. This gives the bank a very real incentive to seek deposits in order to be able to make loans supporting the general but misleading impression that loans come out of deposits.
Now unless all the successive loans are deposited at the same bank it cannot be said that any one bank got to multiply its initial high powered money reserve almost ninety times by issuing bank credit out of nothing. However, the banking system is a closed loop. Bank credit created at one bank becomes a deposit at another and vice-versa. In a theoretical world of perfectly equal exchanges the ultimate effect would be exactly the same as if the whole process took place within one bank. That is, the bank’s initial central reserve of a little over eleven hundred dollars allowed it to ultimately collect interest on up to one hundred thousand dollars the bank never had.
If that sounds ridiculous, try this. In recent decades, as a result of steady lobbying by the banks, the requirements to make a deposit at the nation’s central bank have all but disappeared in some countries and actual reserve ratios can be much higher than nine to one. For some types of accounts twenty to one or thirty to one reserve ratios are common. And even more recently, by using loan fees to raise the required reserve from the borrower, banks have now found a way to circumvent fractional reserve requirements entirely. So, while the rules are complex, the common sense reality is actually quite simple. Banks can create as much money as we can borrow.
Everyone sub-consciously knows banks do not lend money. When you draw on your savings account, the bank doesn’t tell you you can’t do this because it has lent the money to somebody else.”
— Mark Mansfield,
economist and author
Despite the endlessly presented mint footage, government created money typically accounts for less than five percent of the money in circulation. More than 95% of all the money in existence today was created by someone signing a pledge of indebtedness to a bank. What’s more, this bank credit money is being created and destroyed in huge amounts everyday. New loans are made and old ones are repaid.
Banks can only practice this money system with the active participation of government. First, governments pass legal tender laws to make us use the national fiat currency. Secondly, governments allow private bank credit to be paid out as government currency. Thirdly, government courts enforce debts. And lastly, governments pass regulations to protect the money system’s functionality and credibility with the public while doing nothing to inform the public about where money really comes from.
The simple truth is that when we sign on the dotted line for a so-called loan or mortgage our sign pledge of payment backed by the assets we pledge to forfeit should we fail to pay is the only thing of real value involved in the transaction. To anyone who believes we will honour our pledge that loan agreement or mortgage is now a portable, exchangeable, and saleable piece of paper. It’s an IOU. It represents value and is therefore a form of money. This money the borrower exchanges for the bank’s so-called loan. Now, a loan in the real world means that the lender must have something to lend. If you need a hammer my loaning you a promise to provide a hammer I don’t have won’t be of much help. But in the artificial world of money, a bank’s promise to pay money it doesn’t have is allowed to be passed off as money. And we accept it as such.
balances the transaction, by creating with a few key strokes on a computer, a matching debt of the bank to the borrower. From the borrower’s point of view this becomes loan money in his or her account. And because the government allows this debt of the bank to the borrower to be converted to government fiat currency everyone has to accept it as money. Again, the basic truth is very simple. Without the document the borrower signed the banker would have nothing to lend.
Money as Debt
The modern money as debt system was born a little over three hundred years ago when the first Bank of England was set up in 1694 with a Royal Charter for fractional lending of gold receipts at a modest ratio of two to one. That modest ratio was just the proverbial foot in the door. The system is now world wide and creates virtually unlimited amounts of money out of thin air and has almost everyone on the planet chained to a perpetually growing debt that can never be paid off. Could it have all happened by accident? Or is it a conspiracy? Obviously something very big is at stake herThe highest and best form of efficiency is the spontaneous cooperation of a free people.
Have you ever wondered how everyone, governments, corporations, small businesses, and families can all be in debt at the same time and for such astronomical amounts? Have you ever question how there could be that much money out their to lend? Now you know – there isn’t! Banks do not lend money; they simply create it from debt. And as debt is potentially unlimited so is the supply of money. And as it turns out the opposite situation is also true.
I am afraid that the ordinary citizen will not like to be told that banks can and do create money… And they who control the credit of the nation direct the policy of Governments and hold in the hollows of their hands the destiny of the people.”
— Reginald McKenna,
past Chairman of the Board, Midlands Bank of England
Once the borrower signs the pledge of debt, the bank then balances the transaction by tapping in a matching debt to the borrower. From the borrower’s point of view this debt becomes loan money and because the government allows this debt of the bank to the borrower to be converted into government fiat currency everyone has to accept it as money. So, without the loan or mortgage document the borrower signed the bank would have nothing to lend. Thus, banks do not lend money they create it from debt. And because debt is potentially unlimited so is the supply of money. It turns out that the opposite situation will also be true. No debt, no money.
The big problem here is that for long term loans such as mortgages and government debt the total interest far exceeds the principal. So unless a lot of extra money is created to pay the interest it means a very high proportion of foreclosure and a non functioning economy. To maintain a functioning society the rate of foreclosure needs to be low and so to accomplish this more and more new debt money has to be created to satisfy today’s demand for money to service the previous debt. But of course this just makes the total debt bigger and that means more interest must be repaid resulting in an ever escalating and inescapable spiral of mounting indebtedness.
Isn’t it astounding that despite the incredible wealth of resources, innovation, productivity that surrounds us almost all of us, from governments, to companies, to individuals are heavily in debt to bankers? If only people would stop and think, how can that be? How can it be that the people who actually produce all the real wealth in the world are in debt to those who merely lend out the money that represents the wealth? Even more amazing is that once we realize that money really is debt we realize that if there is no debt there is no money.
Money used to represent value, now it represents debt. In the past, the total amount of money in existence was limited to whatever commodity was recognized. For example, for more gold or silver money to be created, more gold or silver had to be found and mined from the Earth. Now, new money is created as debt whenever money is loaned by a bank. It is axiomatic, therefore, that the total amount of money that can be created is only limited by the total amount of debt.
That is what our money system is. If there were no debts in our money system, there wouldn’t be any money.”
— Marrine S. Eccles,
Chairman and Governor of the Federal Reserve Board
If this is news to you, you are not alone. Most people imagine that if most debts were paid off the state of the economy would improve. It is certainly true on an individual level. Just as we have more money to spend when our loan payments are finished we think that if everyone were out of debt there would be more money to spend in general. But the truth is the exact opposite: there would be no money at all. There it is– we are totally dependent on continually renewed bank credit for their to be any money in existence. No loans mean no money, which is what happened during the great depression. People were encouraged to invest in the stock markets, buying on credit, or “margin,” as it is called. This was a deliberate and purposeful plan by The People Who Control Everything to transfer wealth away from the upper- and middle-classes. The false euphoria that duped the populace into investing was a carefully concocted scheme to lure the average American into a false reality of a manipulated stock market. When The People Who Control Everything determined the timing to be correct, they “pulled the plug,” so to speak, on credit. This dried up the money supply so that brokers had to initiate what is known as a “margin call” on their customers. This act increased the requirement for an investor’s equity in the stocks and bonds that they purchased on margin, or credit, so that if they has paid, for example, 10% down on a stock, they would have to ante up an additional sum in order to keep the stock. This sum was high enough so that the average investor could not afford to keep the stock, so it would have to be sold. The resulting mass sale plummeted the price of most all stocks, resulting in a loss to the investor of their original investment, and would often see them in the negative. When money supply shrank drastically, as there was also a 27% reduction in the supply of loans from 1929-33.
Money– in this case called credit– is actually just like any other commodity such as gold, silver, or, for that matter, a bushel of corn or a barrel of oil. The (unwritten) “law” of supply and demand applies in all instances. That is to say that as the supply of money or credit is increased or decreased (called “expansion” or “contraction,” respectively), the value similarly rises and falls, just like anything else.
So if governments and banks can just create money out of thin air, then how much money exists? Fast forward to the early 21st Century and you will see that much the same set of circumstances occurring, but first, a word from our sponsor:
The Federal Reserve System of Central Banks
Seal of the Board of Governors of the Federal Reserve System cleverly crafted to look like an official United States Government-type seal
At a secret the scheme for what is now known as the the Federal Reserve Bank, the “Fed,” to which it is sometimes referred, was concocted by a group of bankers and corrupt politicians in November of 1910, some of them came together at the Jekyl Island Hunt Club on Jekyl Island, Georgia. What were they hunting? The biggest prize of all, the absolute and complete control of all the money in America which means control of all America and with it the power to make slaves of all the people. So secret was this meeting that the participants referred to each other only by their first names, lest their treachery be revealed to the public.
Those who attended were: Senator Nelson Aldrich (former Senator and Vice-President Nelson Rockefeller’s maternal grandfather); A. Piatt Andrew, Economist and Assistant Secretary of the Treasury; Frank Vanderlip, President of the National City Bank of New York; Henry P. Norton, President of Morgan’s First National Bank of New York; Paul Moritz Warburg, a German who was partner in the New York banking house of Kuhn, Loeb Co.; Benjamin Strong, an aid to J. P. Morgan.
Paul Warburg was credited as the architect of the bill which was passed by Congress and signed by traitorous Woodrow Wilson. It was entitled the Federal Reserve Act of 1913. Enacted by a Congress clearly without a quorum in either Chamber and on Christmas Eve during the holiday recess, America once again had a central bank but this time they had placed America under an absolute dictatorship. President James Garfield had insight into this situation:
It must be realized that whoever controls the volume of money in any country is absolutely master of all industry commerce.”
In the pockets of the big bankers. President Woodrow Wilson signed the Federal Reserve Act into law.
Garfield, an advocate of a bi-metal monetary system (the use of both silver and gold as money instead of fiat currency called bimetalism) was assassinated in 1881 after only 200 days in office.
Few people are aware today the history of the United States since the Revolution in 1776 has been in large part the story of an epic struggle (i.e., depressions, inflations, bank panics, war, infiltration, media ownership, mass deception, assassination, “education”) to get free and stay free of control by the European international banks. This struggle was finally lost in 1913 when President Woodrow Wilson signed into effect the Federal Reserve Act putting the international banking cartel in charge of creating America’s money.
I am a most unhappy man. I have unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated Governments in the civilized world, no longer a Government by free opinion, no longer a Government by conviction and the vote of the majority, but a Government by the opinion and duress of a small group of dominant men.”
— Woodrow Wilson,
President of the United States 1913-1921 (after signing the Federal Reserve Act)
The Federal Reserve has been creating a completely unnecessary national debt ever since its inception in 1914. In simple terms, the Fed creates money as debt, as mentioned above. They create money out of thin air by nothing more than a book entry. Whenever the members of the Fed make any loans, that debt money is our money supply. The United States went bankrupt in 1938 because of this system. It took the Fed only 25 years to bankrupt the USA. Can you imagine how little time it would take these vultures to bankrupt a developing nation? The American people are paying about $300 billion dollars a year in interest to this phony organization. When you look in the Washington, D.C. phone book, you will not find the Federal Reserve in the Government section as they are a private concern.
The United States went bankrupt in 1938 because of this system and will go bankrupt again unless the Federal Reserve is eliminated. It took the Fed only 25 years to bankrupt the U.S. and it will do so again unless and until the banking industry is subjected to meaningful regulation and enforcement. Can you imagine how little time it would take these vulture to bankrupt a developing nation? They are doing so today with the international versions of the Federal Reserve: the World Bank and International Monetary Fund. The American people are paying about $300 billion dollars a year in interest to this phony organization. Don’t believe me you say? Just look in any telephone book in any city where there is a Federal Reserve Bank you will not find the Federal Reserve in the Government section because they are a private business, just like Walmart or, for that matter, Federal Express.
The Federal Reserve stopped reporting on the basic supply of money, called M3 on March 23, 2006, according to Wikipedia. Why? This is because they had another little scheme brewing. The Federal Reserve once again had increased the supply of money and reduced the interest rate that it charged its member banks. This resulted in a credit “boom” not unlike what had happened in 1929, excepting that this time it was not stocks and bonds that were used to entice the public, but real estate, called the real estate “bubble.” Practically anyone could obtain a loan, with little or no proof of income or any other substantiation that it could be repaid, which was the most illogical risk, from any lender’s prospective. Why was this allowed to continue? Well, The People Who Control Everything had figured out a was to consolidate this bad debt and, of course, make even more money on it.
The financial instruments that they concocted to do this were called Credit Default Swap (CDSs) and Collateralized Debt Obligations (CDOs) the idea behind which was to share, or aggregate, loans on the theory that in such a “pool” of loans, the risk of bad debt would be minimized by amortizing the bad loans among many investors, not unlike how an insurance company operates. The only problem was that mostly ALL the loans were of dubious origin. Most of the Credit Default Swaps were sold to European banks, with the sellers knowing fully well that they were next to worthless. But not unlike any other Ponzi Scheme, the pyramid soon came crashing down with the resulting financial debacle in 2008 the results of which are still being felt as I write this rant. Congress and Presidents George W. Bush and Barack H. Obama pass legislation known as “Quantitative Easing,” and which came euphemistically to be known as the bank bailout. Most of these monies went to European banks ostensibly to stave off massive bank failures, but in reality to prevent prosecutions of the perpetrators of this fraud. So what we had was the United States the same old scenario: the United States Treasury borrowed money from the Federal Reserve Bank, at interest, and then gave BACK to the Federal Reserve to give to the (mostly) European banks. The massive indebtedness from these transactions can NEVER be repaid; it is mathematically impossible. What will– and is as I write this rant– is that our economy will suffer to the point of collapse; the middle class will eventually be eliminated altogether (a goal that The People Who Control Everything have long sought); and will result in massive hyperinflation.
Wealth Cannot be Destroyed
Wealth, that is to say your value, albeit perhaps too minuscule to deem to be what you might consider “wealth,” cannot ever be destroyed. Do not confuse this term with tangible assets such as your home or furniture, which can be destroyed by fire, flood, theft, or an irate spouse. Wealth in this instance means the value of your intangible assets. The basic premise is that wealth is always transferred, which means that when you lose, somebody else wins. If you were to purchase some shares of a corporation and those shares went down in value, for whatever reason or reasons, someone else somewhere along the financial chain has benefited from your loss.
On a larger scale, all of the stock market crashes (1901, 1906, 1916, 1919, 1929, 1930, 1937, 1939, 1973, 2000) were all caused by some form of manipulation. Why? Because for the thousands who lost money, many more (on a non-par ratio, to be sure) benefited. If you read my rant on The Dollar, you will discover who benefited on some of those occasions. The old axiom, “Follow the money” applies!
Changing the System
If it is the fundamental nature of the system that causes the problem tinkering with the system cannot ever solve those problems. The system itself must be replaced. Many monetary critics call for a return to gold based money claiming that gold has a long history of reliability. They ignore the many scams that can be played with gold: shaving coins, debasing the metals, cornering the all of which were practiced in ancient Rome and contributed to its fall.
Some advocate silver as being more abundant than gold and therefore more difficult to corner. Many question the need to bring back precious metals at all since commodity money distorts the value of the commodity, is easily stolen, and the supply cannot be controlled beneficially. It is a certainty that paper, digital, plastic, or more likely bio-metric ID money would be the real medium of trade with the same potential for creating unlimited debt money we have now. Beyond that if gold again became the sole legal basis of money those who had no gold would suddenly have no money.
Other monetary reform advocates have concluded that greed and dishonesty are the main problems and that there may be better ways to create an honest and equitable money system than returning to silver or gold. Inventive minds have proposed a variety of alternate ways to create money. Many private barter systems create money as debt much as banks do, but it is done openly and without charging interest (i.e. Local Exchange Trading System – LETS). An example is a barter system in which debt is expressed as pledges of hours of work. All work being valued equally at a dollar figure that then allows hours to be equated with a dollar price of goods. This kind of money system can be set up by anyone who and devise a way to do the accounting and find willing and trustworthy participants. Setting up a local barter money system even if it were little used now would be prudent emergency planning for any community.
Monetary reform, like electoral reform, is a big topic and one that requires a willingness to change and think outside the box. Monetary reform again like electoral reform will not come easily because of the enormously powerful interests benefiting from the existing system will do their utmost to maintain their advantage.
Now that we have seen that money is just an idea (i.e. symbolic, commodity, receipt for commodity, bogus receipt, fiat (gov’t cash), debt (bank credit), debt (pledge)) and in reality money can be whatever we make it here’s one very simple alternative monetary concept to consider. This model is based on systems that have worked in the past in England and America. Systems that were undermined and destroyed by the goldsmith bankers and their fractional reserve system. To create an economy based on permanent interest free money, money could simply be created and spent into the economy by the government, preferably on long lasting infrastructure that facilitates the economy, such as roads, railroads, bridges, harbours, and public markets. This money would not be created in debt but would be created as value that value being in the form of whatever it was spent on. If this new money facilitated a proportional increase in trade requiring its use it would cause no inflation whatsoever.
If government spending did cause inflation there would be two courses of action available. Inflation is equivalent in effect to a flat tax on money. Whether the money goes down in value by 20% or the government takes 20% of the money away from us the effect on our buying power is the same. Viewed this way inflation in the place of taxation might be politically acceptable if well spent and kept within limits. Or, government could choose to counter inflation by collecting tax money that it then takes out of use, thus reducing the money supply and restoring its value.
To control deflation which is the phenomenon of falling wages and prices the government would simply spend more money into existence. With no competing private debt money creation, governments would have more effective control of the nation’s money supply. The public would know who to blame if things went wrong. Governments would rise and fall on their ability to preserve the value of money. Governments would operate primarily on tax money as it does now but tax money would go much further as none of it would be required to provide interest to private bankers. There could be no national debt if the federal government simply created the money it needed. Our perpetual collective servitude to the banks through interest payments on government debt would be impossible.
The Invisible Power
What we have been taught to believe is democracy and freedom has become in reality an ingenious and invisible form of economic dictatorship. As long as our entire society remains utterly dependent on bank credit for its supply of money, bankers will be in the position to make the decisions on whom or what industry gets the money they need and who doesn’t.
The power of this system is deeply ingrained and so is the educational and media silence on the subject. Years ago, Canadian Deputy Prime Minister, Paul Hellyer, surveyed scores of non-economists both highly educated professionals and common sense people on the street and found that not one of them had an accurate understanding of how money is created. In fact it’s probably safe to say that most people, including the front line employees of banks have never given the matter a moment’s thought. Have you?
There is no way around this but to default on these loans, causing the credit worthiness of the United States Dollar to plummet even further, The absolutely only way to resolve this would be to nationalize the Federal Reserve Bank. This was always problematic because of the Fifth Amendment to the U.S. Constitution. You may have thought that “taking the Fifth” only applied to your right to self incrimination, but the Fifth Amendment also contains a clause meant to protect private property from illegal seizure (without adequate remuneration) by the government. The very last part reads:
…nor shall private property be taken for public use, without just compensation.”
But The People Who Control Everything have made an egregious faux pas! In their hasty greed, they allowed the Courts to liberally interpret this clause, to the benefit of governments. Let me explain.
In June 2005, the United States Supreme Court decided an important case involving the meaning of “public use” in the Fifth Amendment. In Kelo v. City of New London, the Court, voting 5 to 4, upheld a city plan to condemn homes in a 90-acre blue-collar residential neighborhood. New London plans to give the land to a developer for $1, with a 99-year lease, to build a waterfront hotel, office space, and higher-end housing. Justice Stevens, writing for the Court, found this donation of property to a developer to be a “public use.” Stevens said that the Court’s jurisprudence gave government “broad latitude” to determine what uses might be “public.” In a concurring opinion, Justice Kennedy indicated that the Court still stood willing to review on constitutional grounds takings that are arguably simply the city favoring one private owner over another, rather than takings based on a good faith analysis of the public interest. Angry property rights advocates reacted to the decision by suggesting that local governments consider condemning the homes of justices in the majority and turning them over to private developers for construction.
Having said that, the United States could simply declare the Federal Reserve Bank(s) to be a National Asset and compensate the “owners” with– guess what?– Federal Reserve Notes, of course. This could possibly also force the disclosure of the unknown owners of the Federal Reserve, which has also been a closely guarded secret.
Better still would be to use their own laws against them, such as the various organized crime statutes, such as the Racketeer Influenced and Corrupt Organizations Act, commonly known as the RICO Act, which has been misused and expanded upon by the law enforcement industrial complex to the point to where it is used more against individuals that it is against organizations. The Federal Reserve System fits all of the defining criteria for a RICO suit. I might parenthetically add that the law permits a private RICO suite to be brought by any person or organization who has standing to bring such a suit. I might also note that I organized such a lawsuit against a large communications corporation some years ago and settled it favorably.
And a final way of using their laws against them would be the so called “Patriot Act(s),” on the basis of the ubiquitous national security. Not unlike the RICO statutes, prosecutors, along with complicit judges, have expanded the Patriot Act way beyond the scope and purpose of its publicly stated intent.
Of course, under our now non-existent right to free speech, I am now considered a so-called “Domestic Terrorist,” even though I am advocating the legal use of the courts to right this wrong.