Money As Debt II: Promises Unleashed Page #2

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out of thin air become a crime...

and the other becomes standar business

practise and the source of almost all our money?

For this is what it happened.

To understand how, we need to look at the

history of the laws governing commerce.

Before that we need to understand

the logic of the loan process itself.

Anatomy of a Loan

The Motive

The borrower wants to purchase an item but doesn't

have the funds to do so at the present time.

However the borrower does have confidence

in having sufficient funds over time...

to pay both the original price of

the item and the interest on the loan.

So he goes to a bank to arrange a loan.

The borrower is capable of making a

credible promise of money in the future.

But otherwise at this moment he comes with

empty pockets, that's why he needs the loan.

The Method

We propably all familiar

with what happens next.

The bank gets the borrower

to sign an agreement...

in which the borrower promises to pay the

bank the ammount of the loan + interest

or in default surrender to the bank the object

that it is to be purchased with the loan.

This is done countless times

every day all over the world.

But there is a problem.

How can the borrower pledges collateral

something the borrower does not yet own?

If I wanted to borrow 10.000$ from you

to go on a luxury cruise to Europe...

would you accept my

neighbours car as collateral?

Of course not, because you know very well that I

have no legal right to give you my neighboor's car...

...no matter how much I owe you.

But if instead, I promised to buy my

neighboor's car with the 10.000$ you lend me...

...the situation is different.

You might agree to lend me the 10.000$

believing that I would buy the car...

and will pledge it as collateral for the

loan, once I obtain legal title to it.

However, until the transaction is completed your

10.000$ loan cannot be secured by title to a car.

The sequence of event's problem

could be very simply avoid it.

You could buy the car

and then sell it to me.

The bank can do it this way too.

If the borrower commits to the bank to buy the item

why doesn't the bank just buy it with its own money...

and then sell it to the borrower

on time payments and interest.

Well, the answer to that

question is also very simple.

Its because the bank, like the borrower,

has come to the transaction with empty pockets.

The bank fulfills its part of the so-called loan

transaction by creating an account for the borrower.

The truth is the so-called borrower has funded

his own account by fraudulently pledging a car,

he does not yet own as collateral.

And the bank, the so-called lender

hasn't put up any existing money at all.

And if all goes well, it never will.

Acceptance of the Fraud

The borrower believes the new numbers in his

account now represent his money in the bank.

He like the rest of us doesn't understand the

difference between existing money and a promise of money.

If you gonna spend it,

what does it matter?

So now, the question is: Will the seller of

the item accept the bank's promise to pay?

Well, some people may hold out for cash. Most will say yes to

a check or an electronic funds transfer from the buyer's bank.

Why? Because the seller

knows from experience...

that she can deposit the check at her bank

and it will increase her account accordingly.

So, what happens next?

Balancing the Promises

Well obviously the buyer's bank now owes

the seller's bank the amount of the loan.

So, you might be thinking isn't this

where the money comes out of deposit.

The bank's promise to pay the borrower has

just been transformed by the transaction...

into a promise to pay

the seller's bank instead.

So now the buyer's bank has to transfer some of

its existing money to the seller's bank, correct?

Yes, but probably only

a small proportion.

In over the long term, as long as the

bank gets its fair share of deposits...

the net amount of existing money, the bank needs

to cover its loans can theoretically be zero.

How?

Well, imagine first that the seller has

her account at the same bank as the buyer.

She deposits the buyer's

check into her account.

All the bank has to do to

complete the transaction...

is reduce the buyer's account by the same

amount and increases the seller's account.

As both accounts are just promises no

existing money is involved in doing this.

What is the end result?

The bank has created bank credit for

the borrower to the sum of 10.000$.

The borrower has bought the car that it

existed in the world of real things...

and the seller now has

that bank credit of 10.000$.

Thus, a brand new claim upon 10.000$

worth of real goods of value...

was accomplished with absolutely zero

dollars of the bank's or anybody else's money.

On top of that, the bank gets to have

all the so-called money paid back...

by the borrower's on his toil plus

interest or the bank gets the car.

Magic like this is

usually seen on stage.

So now let's examine what happens if the

seller deposits her check in a different bank.

Won't that require a transfer of existing bank

funds from the buyer's bank to the seller's bank?

Perhaps.

But it will almost certainly never

be anywhere near the whole amount...

because in effect, the banking

system functions as one bank.

To illustrate let's add another

transaction to this senario.

That same day, the seller's bank made

a similar loan to a little old lady...

who bought a mega home theatre system.

The electronic store deposited

her check at their bank.

The electronic store's bank made a similar loan

that was deposited at the original borrower's bank.

And when all the various balances were settled

the banks didn't owe each other anything.

And even if there were differences, they would have

been just a small portion of the total credit created.

So, at this point we can say that although banks dont

actually lend their depositors money as most of imagine

they still need deposits to make loans.

This is because banks need

incoming credit from other banks...

to asset their own credit

being deposited at those banks.

As long as banks keep their outgoing

credit balanced with incoming credit,

they're free to make new loans and thereby

keep creating brand new credit money.

None of it will ever have to

come out of the bank's pockets.

The bank is free to invest its own

funds in corporate and goverment bonds...

and whatever other

instruments the charger allows.

If one draws a diagram of the

situation it looks like this.

The interest, goverments and corporations

pay the banks on their bonds is paid by us.

We pay it as a portion of our taxes and we pay it in

the price of all the goods and services that we buy.

And there is another thing

passed on to us as well

And that's the risk that the bank will go broke

and not be able to honor its promises to pay.

Now you may wonder, how can a bank go broke if

it doesn't put any money up in the first place?

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