Money As Debt

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"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 better not speak above their breath when they speak in condemnation of it."

~Woodrow Wilson, former President of the United States

"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

"The process by which banks create money is so simple the mind is repelled."

~John Kenneth Galbraith, Economist

"Permit me to issue and control the money of a nation,

and I care not who makes its laws."

~Mayer Amschel Rothschild, Banker

Money as Debt

Debt

Two great mysteries dominate our lives: love and money.

"What is love?" is a question that has been endlessly explored in stories,

songs, books, movies, and television.

But the same can NOT be said about the question "What is money?"

It's not surprising that monetary theory hasn't inspired any blockbuster movies.

But it was not even mentioned at the schools most of us attended.

For most of us, the question "Where does money come from?"

brings to mind a picture of the mint printing bills and stamping coins.

Money, most of us believe, is created by the government.

It 's 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

of the federal government called the Mint.

But the vast majority of money

is not created by the Mint.

It is created in huge amounts every day

by private corporations known as banks.

Most of us believe that banks lend out money

that has been entrusted to them by depositors.

Easy to picture.

But not the truth.

In fact, banks create the money they loan,

not from the bank's own earnings,

not from money deposited,

but directly from the borrower's promise to repay.

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,

whatever asset was pledged as collateral.

That's a big commitment from the borrower.

What does that same signature require of the bank?

The bank gets to conjure into existence

the amount of the loan

and just write it into the borrower's account.

Sound far-fetched?

Surely that can't be true.

But it is.

To demonstrate how this miracle of modern banking

came about, consider this simple story:

The Goldsmith's Tale

Once upon various times,

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,

even feathers have been used as money.

Gold and silver were attractive,

soft and easy to work with.

so some cultures became expert with these metals.

Goldsmiths made trade much easier by casting coins,

standardized units of these metals

whose weight and purity was certified.

To protect his gold, the goldsmith needed a vault.

And soon his fellow townsmen

were knocking on his door

wanting to rent space to safeguard

their own coins and valuables.

Before long, the goldsmith was renting every shelf

in the vault and earning a small income from his vault rental business.

Years went by and the goldsmith made an astute observation:

Depositors 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.

Meanwhile, the goldsmith had another business.

He lent out his gold charging interest.

Well, as convenient claim check money came 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 removed their actual gold.

So, the goldsmith figured he could easily get away

with lending out claim checks against his depositors' gold,

in addition to his own.

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,

would make a far greater profit

than he could by lending only his own gold.

For years the goldsmith secretly enjoyed a good income

from the interest 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.

His depositors got together and threatened withdrawal of their gold

if the goldsmith didn't come clean about his newfound wealth.

Contrary to what one might have expected,

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 safe in the goldsmith's vault.

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.

And that was the beginning of banking.

The banker paid a low interest rate on deposits

of other people's money that he then loaned out at a higher interest.

The difference covered the bank's 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 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.

But his loans were limited

by the amount of gold his depositors had in his vault.

That's when he got an even bolder idea.

Since no one but himself knew

what was actually in his vaults,

he could lend out claim checks on gold

that wasn't even there!

As long as all the claim check holders didn't 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 enormously wealthy

on the interest paid on gold that did not exist!

The idea that the banker would just create money out of nothing

was too outrageous to believe,

so, for a long time,

the thought did not even occur to people.

But, the power to just invent money went to the banker's head

as you can well imagine.

In time, the magnitude of the banker's loans and his ostentatious wealth

did trigger suspicions once again.

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