Start
If two parties instead of being a bank and an
individual were an individual and an individual,
they could not inflate the circulating
medium by a loan transaction,
for the simple reason that the lender could
not lend what he didn't have, as banks can do...
Only commercial banks and trust companies can
lend money that they manufacture by lending it.
Professor Irving Fisher, economist
in his book "100% Money" (1935)
The study of money, above
all other fields in economics,
is one in which complexity is used to
disguise or to evade truth not to reveal it.
John Kenneth Galbraith economist, author
The issue which has
swept down the centuries
and which will have to be fought sooner
or later, is the people versus the banks.
Lord Acton (1834-1902),
English historian
Money as Debt II
Promises Unleashed
Anybody here want lemonade?
For a job well done!
You kids are real go-getters!
It's time we opened
some bank accounts...
so you can put your
money to work for you!
We'd like to open bank accounts please.
We're just like grownups!
Yeah, we have our money in the bank!
Maybe your first experience of putting money in
the bank wasn't quite as hard warming as this...
but odds are years later, you still refer to
the balance showing on your bank account...
is being your money in
the bank, but it isn't.
If we had a deposit box in the bank, the
valuables we put in it are still ours.
We're just renting secure
space to store them.
In common usage, the word "deposit"
means to set something down.
But the use of the word "deposit" to
refer to a bank account is misleading.
The bank deposit is in reality a loan.
With the amount in our bank account really
indicates is how much money the bank owes us.
It's a record of the bank's promise to pay
us money not the money we deposited itself.
The difference is important.
The truth is when we hand the contents
of piggy bank to the bank teller...
our money becomes the bank's
money to do with it as it pleases.
All the money in the bank is the
bank's money, none of it is ours.
That's why the bank pay us interest,
we have loaned the bank our money.
This may seem to be a
semantic distinction.
We know, we can go to the bank at any time
and take our money out in cash if we want to.
But the distinction is not
semantic nor is a trivia.
The distinction is crucial.
What happens if banking affects everyone
and yet few of us know anything at all...
about how banking really works?
The entire world economy now runs on
a system of credit provided by banks...
and when that credit system
breaks down, everyone suffers.
Defaults, foreclosures, bankruptcies,
bank failures, gov't bailouts.
To make things worse, the explanations for
these break downs offered by the experts...
never look at the root cause.
Namely that other than cash and coins which
make up just 1-5% of money in circulation...
all the money in existence today was
created as the principal of a bank loan
with the banks requiring
principal+interest as so called repayment.
Not only does this make the existence of money
entirely dependant on the existence of bank credit.
It makes the system as a whole bankrupted by design as
total debets (principal+interest) exceed total assets
from the moment the first
loan document is signed.
As the global banking system
staggers towards worldwide collapse...
more and more people are realising they can no longer
ignore the realities behind banking as it is practiced today.
Many have lost their homes and jobs due
entirely unastainable practises of money lenders.
It's time people understood money and the pressing
need to fundamentaly change the way it works.
Clarifying what the words used in
banking really mean, is the first step.
Now that we know that a deposit
is in truth a loan to a bank
the next question is what is a
loan that we take out from a bank.
When we sign for a loan, we give the bank a
pledge to pay the amount of the loan plus interest.
In return the bank credits our account
in the same amount as the so-called loan.
When we speak of the bank is having
put the loan money into our account...
in reality the only thing the bank puts into
our account is its promise to pay the money.
What has actually happened
is an exchange of promises.
Neither party has delivered anything to
the other except matching pledges of debt.
So who's the borrower
and who's the lender?
The terms loan, lender and
borrower are all misleading.
The truth is, the two parties
have traded promises to pay and...
in the process created something
called bank credit or checkbook money...
that can be legally spent as money.
Bank credit can be spent because we in our innocence
notice that each time we deposit into our account...
it increases our balance
by the same amount.
In fact, unless we put something
in our account would be empty.
Thus, it's a natural assumption that money
in an account is money someone put in.
The account is a promise
to pay not the money itself.
In fact, a promise always indicates
the absence of the item promised.
Otherwise why does it
need to be promised?
Now, because all bank
accounts are promises to pay...
the bank and the borrower can
simply exchange promises and...
in the flash of few key strokes a positive
balance appears to the borrower's bank account...
with no anyone putting
an existing money in.
Now, you know the real source
of what we called a bank loan.
Commercial banks create checkbook
money whenever they grant a loan,
simply by adding new deposit dollars in accounts
on their books in exchange for a borrower's IOU.
Federal Reserve Bank of New
York, I Bet You Thought, p.19
How different would it be if two parties just got
together in a basement with a printing press...
and created new money that way?
We intuitively understand the act
of fraud called counterfeiting.
In printing fake hundred dollar bills, the
counterfeiters also create new money out of thin air.
Money give us the ability to purchase
the real goods and services of the world.
It's clear that the counterfeiters have created
new ability to purchase real goods and services...
without giving anything in exchange
except the fancy piece of paper
Counterfeiters get
something for nothing...
directly at the expense of whoever
gets caught with the counterfeit money.
And if the counterfeit money is not discovered, it
dilutes the money supply, stealing from everyone.
Counterfeiting is a serious crime
and it is easy to understand why.
It's cheating on a basic social
agreement, "Thou shalt not steal".
But taking a loan from a bank also
creates new purchasing power...
however instead of being considered a form of
theft, it is the very basis of our monetary system.
Banks lend by creating credit. They
create the means of payment out of nothing.
Ralph M. Hawtrey 1879-1975 former
secretary of the British Treasury
How do one form of creating new money
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?
What have they got to lose?
The answer to that question is that
banks differ from counterfeiters...
in that the banks are legally allowed to create
new money but only by certain rules of accounting.
Banks can only create money by entering a
borrower's payments and collateral as an asset...
on the positive sign of the ledger
balanced on the negative side by the loan...
or what the banks call the deposit
liability created by the bank.
When the borrower defaults on the payments, the asset
pledged as collateral is siezed by the bank and sold.
In a declining market where
repossession is most common,
the new lower value of the asset
doesn't cover the bank's liabilities...
which were based on the
previous higher value.
This shows up as a
loss on the bank books.
When foreclosures are rampant as in
a collapsing real estate market...
much of the value of the banks collateral
simply evaporates as home prices drop...
exposing the bank to huge losses.
In truth it's all just numbers
created out of thin air.
But banks must adhere to the
dictates of these numbers...
and the coincequences of bank
arithmitic gone wrong can include:
economic standstill,
social disentegration...
total financial chaos,
lawlessness, starvation and war.
Those who live by numbers
can also perish by them...
and it is a terrifying thing to have
an adding machine write an epitaph.
George J.W. Goodman best-selling
author, The Money Game (1968)
However for the purposes of
understanding the anatomy of a loan,
we shall assume that the
system is still functional...
and all three of the loans we
were looking at will get paid.
The end result is that none one dollar
of existing money has changed hands...
but 30.000$ of new bank credit has been
created and spend into the money supply.
And each of the three banks gets to
collect interest on 10.000$ of it.
Is creation of this brand new 30.000$
really an act of fraud like counterfeiting?
The obvious difference is that
the banking system is legal...
regulated by goverment and disciplined by
the courts to follow the rules of accounting.
Another difference is that
there is no obvious victim...
like the person getting
caught with a counterfeit bill.
Banks argue that the buyer and the seller both got
what they wanted and agreed to, so where's the fraud?
And if there was a fraud, who lost out?
To detertant that let us list
who got what out of the deal.
The borrower got the item he desired
on terms he willingly agreed to.
He may curses decision later as he
strungles to make the interest payments
or he may live happily ever
after thankfully got the loan.
The seller got an
increase in bank credit...
which she's been conditioned since childhood
to think of as her money in the bank.
She's confident that she'll able
to spend it in turn and she will.
So as far as the seller is
concerned she's been paid in full.
She's happy.
So who if anyone suffered
as a result of the deal?
Is there another party to this
transaction, we've overlooked?
Well, there is also the bank that gets to
collect interest on promise to pay money.
That's the business there're
in and usually do very well by.
And anyone else?
Well where did the car come from?
It came from the world of real things.
Natural resources, energy and
labor were expended to produce it.
What if we consider the hidden
party to be society at large...
and the natural world from
which all things ultimately come.
Because the brand new bank credit
money didn't just sit there.
It got spend into the general
circulation in the real world.
It's the real world that ultimately gets
the new money in exchange for its car.
This new money might
stimulate new production,
temporarely enlarging the economy,
making lots of people happy.
In fact it often does, as most bank
credit comes into being as a home mortgage,
stimulus for the residential construction
industry, a big provider of good-paying jobs.
However after its initial productive
use, this newly created money,
more basically just
dilute the money supply,
reducing money's purchasing
power by a very small amount.
So in contrast to counterfeiting where
the loss occurs to specific victims
here the loss is born by us all...
because the real substance of the loan
(car) was extracted from the economy at large
by a slight loss in the
value of everyone's money.
"The decrease in purchasing power
incurred by holders of money...
due to infation imparts gains
to the issuers of money."
St. Louis Federal Reserve
Bank, Review, Noov 1975, p 22
To continue our comparison of
bank credit with counterfeiting,
counterfeit cash eventually gets
detected and removed from circulation,
causing a direct loss
to whoever accepted it.
There is of course no guarantee
of how much will be detected,
nor any prescribed
schedule for its removal.
Bank credit is also removed
from circulation over time...
because as bank credit is paid back, the
principal part of every payment is extinqueshed.
Now remember that almost all the money
in existence today is bank credit.
Therefore almost every dollar that passes through
our bank accounts has a schedule appointment...
to one day be paid as a principal payment
on a bank loan and siezed to exist.
On top of the principal
are the interest payments...
which will become bank income
much of which will be recycled...
into the economy as interest to
depositors and other bank expenses.
So it's not immediately apparent that...
that there is a loss to someone as a result
of bank credit being withdrawn from circulation
the way there is with counterfeit cash.
But if we look closer, we
find an interesting situation.
We don't need anything more
than fundamental arithmetic...
to understand the power that lies
in controling the money supply.
And the way it is currently designed total debt
must constantly expand or the system collapses.
Whenever the rate of debt money creation falls
behind the rate of debt money destruction...
the total amount of
money in use will shrink.
This is called deflation because the money
supply is shrinking, like a deflating balloon.
The result is less money relevant
to the goods and services available.
With less money around to pay for them
the prices of goods and services go down.
At first this sounds like a
good thing and it could be...
if money were not created
as debt at interest.
For anyone not in debt, deflation would
be like a general divident on money...
paid in good and services of our choice.
It would be as if money were the people's stock
in their own prosperous company, their nation.
People wouldn't have
to demand a pay raise.
If a nation were more productive as
a whole thus deserving of a raise,
everyone would benefit automatically
by having their money buy more.
However this is definitely not the
effect, deflation has in a system...
where money comes in the
form of interest pairing debt.
More than 95% of all money currently in
existence is in the form of debt to banks.
Promises to pay with interest added.
And as we have seen the principal
is created but not the interest.
Due to the time delay between
money's creation and its repayment...
and the recycling of interest
turnings as bank operating expenses,
most of us can keep our part payments
while the money supply is increasing.
However if the money supply
or total debt is decreasing,
money becomes harder to
earn due to its scarcity...
and fixed payments
become harder to meet.
For those heavilly in debt, the money
shortage can become catastrophic.
The entire world economy
rests on the consumer;
if he ever stops spending money he doesn't
have on things he doesn't need we're done for.
Bill Bonner, author, publisher and
columnist on economics and money
Unfortunately the psychological effects of falling
wages and prices rapidly accelerate the process...
as borrowers, including large businesses,
lose confidence in being able to repay loans.
So they don't sign up for any.
Without new loans to replace old loans,
the money shortage rapidly gets worse resulting
in a decrease in jobs and purchasing power...
even in the midst of the abundant
resources and productive capacity.
This disastrous spiral in math
makes mass foreclosures inevitable.
Prices plumet as noone
wants to spend their money.
Shrinking values destroy the
value of loan collateral...
causing banks to ride off huge losses.
Some even close their doors.
Consumer and business
confidences is lost.
Rampant economical and
social disfunction follows.
"With the monetary system we have now,
the careful saving of a lifetime
can be wiped out in an eyeblink."
Larry Parks, Executive Director, FAME
This disastrous spiral
cannot be turned around...
unless the goverment creates new money
itself or goes deeply in debt to private banks
in order to create enough new money to
reorganise and rejuvenate the economy.
The most familiar example of this
is the stock market crush of 1929.
The psychological follow of the stock
market collapse resulted in less borrowing...
and thus less new money.
The Federal Reserve did nothing to
correct the resulting deflation...
and by 1932 the money supply
had been reduced by a third.
Countless people were
evicted from their homes...
because the money to make their
mortgage payments simply siezed to exist.
Then in 1932, Franklin Roosevelt
became the US President.
Roosevelt's "New Deal" set out to restore
the economy by restoring the money supply.
To counter the money shortage, Roosevelt
borrowed from the private banking system.
Factories started hiring again.
But only when the war arrived,
theres suddently no shortage of jobs and funds
available to do what was necessary for the war effort.
It was the money expended on WWII
that ended the great depression.
The war also resulted in 50
million deaths worldwide...
and led to a new hostile
international balance of power...
with its intended arm's
races, mounting debts
and sweeping social and
technological transformations.
When a goverment is dependent
upon bankers for money,
they and not the leaders of the
goverment control the situation,
since the hand that gives
is above the hand that takes.
Money has no motherland;
financiers are without patriotism
and without decency;
their sole object is gain.
Napoleon Bonaparte
I wouldn't go to war again as I have done to
protect some lousy investment of the bankers.
There are only two things
we should fight for.
One is the defence of our homes
and the other is the Bill of Rights.
War for any other reason
is simply a racket.
Major General Smedley
Darlington Butler USA (1881-1940)
There is nothing left now for us
but to get ever deeper and deeper
into debt to the banking
system in order to provide
the increasing amounts of money the nation
requires for its expansion and growth.
Our money system is nothing
better than a confidence trick...
The "money power" which
has been able to overshadow
ostensibly responsible government is
not the power of the merely ultra-rich
but is nothing more or less than
a new technique to destoy money
by adding and withdrawing
figures in bank ledges,
without the slightest concern
for the interests of the community
or the real role money
ought to perform therein...
to allow it to become a source of
revenue to private issuers is to create,
first, a secret and illicit arm of government
and, last, a rival power strong enough
to ultimately overthrow all
other forms of government
...an honest money system
is the only alternative.
Dr. Frederick Soddy. Nober Prize winner (1921)
author of Wealth, Virtual Wealth and Debt
The cycle of economic boom and bust
is commonly called the business cycle.
As if were a natural occurence like
the hydrological or carbon cycle.
These natural cycles are
ultimately driven by the sun.
But what is it that
drives the business cycle?
One answer is the supply of money...
and as we've seen, the supply
of money is dependent on loans.
So let's look at what happens during
the lifetime of an individual loan.
We've seen how bank credit is nothing
more than the bank's promise to pay,
which the bank is created on its books to
balance the borrower's promise to pay...
...that it has received.
The bank's promise to pay is usually
spent on some real good or service...
and allowed to circulate,
making the efficient exchange of goods
and services easier to accomplish.
As a medium of exchange
today's promise to pay money...
is unsurpassed in its
usefullness and flexibility.
However, because no money is
created to pay the interest...
a seemingly impossible
situation is created.
On the face of it, if borrowers had to
pay the interest they owe all at once,
they would have to fight it out for
a limited sum of existing money...
that was very much less
than the total owned.
The percentage that would be unable to pay
off their loans would be simple to calculate.
However, interest is usually
paid over time not all at once.
If this interest incomes recycled
into the general economy as spending,
it can be available to
be earned repeatedly.
Once we understand this, the question of whether
interest is actually unpayble becomes more perplexing.
Is there such a thing as a
sustainable system of lending...
that does not produce
mathematically inevitable defaults?
In the middle ages, usury
meaning charging interest...
or any form of making gain solely from
having money was condemned as a sin.
While the justification was
moral, the reason was practical.
In a fixed money supply like gold,
anyone systematically rolling over
all of their loan money at interest...
would soon end up with all the money.
This problem was a big
factor in the ruining of Rome.
Private accumulations of gold
forced the government to make coins,
made of base metals
instead of the real thing.
Debased currency led to failing
confidence and ultimately decline.
The lesson was well learned.
For the next 1.000 years, the Roman catholic church
declared collecting interest on a loan to be a sin,
punishable by excommunication.
In some countries, the penalty
for practising usury was death.
Is charging interest really a sin?
Well today it seems very reasonable
to charge for the use of money.
There is a simple and
unavoidable problem with doing so.
Unless money lenders spend every
penny of interest they receive...
in such a way that the borrowers can earn it
again, the borrowers are going to come up short...
regardless of their hard
work and personal virtues.
Someone will default simply
as a result of the arithmetic.
This is easy to picture where there
is a fixed money supply like gold coin.
As long as all of the coins taking in as interest
are spent so that the borrowers can earn them
the same coins can be used to
pay the interest over and over.
The lender can profit by buying
real things with this coin
but the coin itself must be spent,
not lend or removed from circulation.
Leaving aside any moral considerations,
this arrangement would be sustainable.
However if the interest coins
are relend at interest...
or removed from circulation by hoarding,
there would be an inherit shortage of coins
with which to pay off the aggregate debt.
The situation is escentially no different
in our current debt based system.
As we have seen, nowadays virtually every
dollar comes into existence as debt...
with a scheduled appointment to be extinqushed
as a principal payment on a loan that created it.
Thus, for all borrowers to be able to make
their payments of principal plus interest...
...two things must be true.
The dollar created as the principal of the loan
must be available to be earned by the borrower...
in order to make the principal
payment that extinqushes that dollar.
And every dollar the borrower
pays to the bank as interest...
must also be available to be
repeatedly earned by the borrower,
so that it can be paid as
interest again and again.
There is a common theory
undoubtebly popular with lenders...
that because the bank spend the
interest turnings as operating expenses,
interest to depositors
and shareholders dividends,
There is in fact enough money released
back to the community to make all payments.
However like the idea of absolute
shortage this is an over simplification.
Picture what happens if someone else such as
you or I or an institutional non bank lender...
obtains this dollar and then
lends it out at interest.
Well, now that same dollar is
simultaneously owed to two lenders...
and theres two simultaneous
interest charges attached to it.
In addition, if this dollar is loaned,
repaid and reloaned by the secondary lender...
it is not available to pay off the
principal of the loan that created it,
except as an other loan.
So, can we borrow from Peter to pay
Paul and borrow from Paul to pay Peter?
This gets interesting.
We can, however each time money is borrowed there is
an interest charge added it, that also must be paid.
If all added interest charges can
be earned, all payments can be made.
On this basis many economists and
defenders of the current system...
claim there can never be a shortage
of money and all payments can be made.
But this seems to be a false assurance.
For instance, if secondary lenders
capture some of the money...
needed to retire the loan that created that
money the original loan can never be retired.
The deficiency will have to be borrowed over
and over for ever, each time at interest.
Each deficiency would be cumulative, adding to an
ever building total of debt that can never be paid off.
And it stands to reason that for each added
interest charge in the system as a whole,
something extra is demanded of
the system as whole to pay for it.
This affects everyone: producers,
governments and consumers.
For producers that something extra must be
raised through higher prices or more sales.
However, competition for more sales usually requires
lowering prices necessitating even more sales...
and leads to over production
and saturation of the market.
The end result can be job losses,
plant closures and bankrupcies.
For governments that something
extra is raised by increasing taxes.
But increasing taxes drains
money for the productive economy,
resulting in reduction in the
collective ability to pay taxes...
which then necessiates increase government
borrowing and additional interest charges.
For consumers, something extra can
mean getting an additional job...
or borrowing to pay past debts or paying
off debt over longer periods of time.
However, competition for jobs tends to lower
wages and paying over the longer periods of time...
adds enormously to the
amount of interest owned.
And of course borrowing to pay off past debts
is like trying to fill a hole with more hole.
And that is the situation,
we find ourselves in today.
Producers can't sell more because
consumers can't afford to buy.
Governments are cutting taxes not raising
them, hoping to stimulate consumer demand...
and consumers real incomes are limited and even
falling due to competition for a limited number of jobs.
Therefore any increase in the total amount of interest
charges within the monetary system as a whole...
will result in a genuine
shortage of money.
This is because the real productive economy is
limited by the availability of nature's resources.
The productive economy
exists to serve actuall needs
It simply cannot keep pace with the demands
of the artificial financial economy...
which is an unlimited
appetite for profit...
and which operates with no regard for
the natural limitations of the real world.
Endless growth will take care of it...
The theory that there is always enough money to
pay the interest has a certain elegant simplicity.
However by the very nature
of the assertion to be true,
it has to be a 100%
true. This is impossible.
For one thing secondary
lenders who are not banks
do comprise a significant
proportion of lenders.
And they add their interest charges to
money that already bears an interest burden.
Beyond that, we have a cultural expectation:
everyone with money expects it to generate more.
Money that needs to be spent to made available
to be earned by its original borrower...
is instead lended at
interest or invested for gain.
Therefore, we can conclude that the
two conditions that must be true...
for all borrowers to be able to make their
payments of principal plus interest...
and thus permenately discharged their debt, those
conditions are not met by the current system.
Nowhere in the current system is there any restriction
or relending money that was created as a loan.
Nor is there any obligation upon banks to
make their profits from interest available
to be earned by borrowers enabling
them to extinqushed their debts.
Quite the opposite, banks invest
these profits to make further profits.
And it's not just the banks
that cause the problem.
Anyone who takes their ball of money and starts
rolling it like a snowball to make it bigger,
does so with the expence of borrowers
who will not find that money available...
to pay their debts except as more debt.
And of course, those rolling the
biggest snowballs pick up the more snow.
As the same goes, the rich get
richer and the poor get poorer.
Money needed by borrowers in the lower
realms of working and productive economics,
moves upstairs to play in the casino
world of abstract financial profit...
and that's a world where transactions
are little more than gabling on numbers...
in an effort to achieve higher numbers.
They've little or nothing to do with
providing the necessities of life.
Today the largest volume of
money by far is changing hands...
in where as best described
as the gabling economy.
The foreign exchange markets, the derivatives
market and the rest of the financial instruments...
being played by banks and investment
funds for as much profit as possible.
For example the volume of trade on
the world's foreign exchange markets...
In just one week exceeds the total volume of world
trade in real goods and services during an entire year.
This money is in continous
play by speculators...
looking to make winful profits
on currency fluctuations.
It exists but only in
the gabling economy.
So how unpayable is the ubiquitous
interest burden in actual fact?
That could only be deternaned with certainty
by tracking all of the money in the world.
With over six billion people earning,
spending, borrowing and lending...
the world's money flows are at least
as complex as the flows of the ocean.
They are impossible to know.
But the direction is
pretty clear and simple.
And it's the same old story,
the rich are taking increasingly
more money into the gabling economy...
where ordinary borrowers have
almost no chance to obtain it.
And the only way the system can stay
solvent is to create more money...
and as money is created as debt,
the only way to create more money is to
create more debt in every way possible.
Including ridicously easy credit for unquelifed borrowers,
massive government expendures on security and war
and bailouts of insolvent banks.
What are you going to do about it?
How does the individual loan cycle relate to the
boom and bust phenomena known as the business cycle?
The individual loan cycle
can be described like this:
First there is economic stimulation
because of initial spending,
this is followed by inflation because new
money basically just dilute the money supply...
and eventually inflation
is followed by deflation...
as loan repayments grantually extinguish the
principal removing that money from circulation.
As long as the individual loan cycle dont
match up, these cycles can smooth each other out.
This creates a fairly stable money
supply that leads to fairly stable prices.
Although continous growth of the money
supply is required at least in part...
because as you recall the money to
cover the interest was never created.
This is the model on which
our economy is currently based.
Avoiding deflationary spirals and keeping inflation
at a level that doesn't upset people's applecards
constitutes the art of
managing the economy...
which is rather narrowly defined as
achieving so-called price stability.
However a look at the purchasing power of US
dollar in real goods over the last century...
instantly reveals what the so-called
price stability has really meant.
The dollar has clearly lost
almost all its value (96%)
...and is continuing to
do so at a rapid pace.
So, price stability is
not being achieved...
and one hardly needs a degree in psychology
to understand how human nature itself...
would turn the individual loan cycle into the
collective phenomena of the business cycle.
The simple reason being that if
one person sees great prospects...
and is doing well borrowing and expanding,
others would have a confidence to do the same.
Beyond the merely psychological effects, if one
business is expanding on the basis of credit,
its suppliers and distributers will
find it necessary to do so as well...
or lose that business
to someone who will.
The same herd effect would occur for a gloomy
look and a company in credit contraction.
Thus, is entirely predictable that individual loan cycles
would have a built in propensity to line themselves up...
rather than be randomly distributed and when they do,
we see largest scale cycle called the business cycle...
emerging directly from the cummulative
of effects of individual loan cycles.
So to sum up, one could say that out of the exchange
of promises made by the bank and the borrower...
society gets chronic inflation and interdependency
on banks for increasing infusions of money...
to pay ultimately
impossible interest payments.
This results in an inescepable treadmill
of accelerating debt and depriciating money.
The only alternative being a deflationary collapse
of the economy followed by social chaos or war.
This eminently unhealthy situation filters down
through society weaking harm on every level.
We are like addicts...
but the fix is not more and more
heroin, it's more and more credit money.
And eventually our collective ability to borrow
and repay so much credit becomes exhausted.
This then creates the need for constant
expansion of credit into new markets.
In essence creating a fiscal imperative to drive everyone
in the world further and further into debt for ever.
In US this constant debt expansion has
led to a total credit market debt in 2008
of more than 53 trillion dollars which is about five
times the total annual income of the entire country.
So is the world at large happy about
its end of the loan transaction?
Probably not.
But the world at large has very little
awareness of where these problems originate.
The illusive system of counterfeiting
and hidden control that is modern banking.
And how about the banks? How of the
bank's fair has resulted of the system?
Well first, by putting up only a
small fraction of the money they lend
the banks have obtained a river of income from
interest payments on consumer loans and mortgages.
Second by using their credit powers to acquire a
large portofolios of corporate and government bonds
banks collectively appropriate
control over government and industry.
And thirdly, due to the inevitable
defaults and foreclosures,
the banks gain legal title to a
lot of real property the world over.
And finally, if the worst happens.
If borrowers default on mass
causing the banks large losses
the government is forced to rescue the
banks with multi-billion dollar bailouts...
to save the financial system.
And what are these bailouts
financed with? You guest it.
More tax payer debt.
It is really quite an
achievement to pull this off...
and without most of the
victims even being aware of it.
If you're now thinking
there ought to be a law...
well, there is a whole body of
law that makes all of this legal.
So how did a system like
this ever become the law?
To answer that we go back to
England in the mids 17th century.
When plunder becomes a way of live for a
group of men living together in society,
they create for themsevles in the
course of time a legal system...
that authorizes it and a
moral code that glorifies it.
Frederic Bastiat 1801-1850
political economist
With the development of better ships
and the new explorations they allowed...
...trade was expanding rapidly.
In order to carry out commerce especially
over great distances and lengths of time...
written contracts were becoming more and
more important and more sophisticated.
Under english common law
had been long established
that a contract could only been enforced if
something of real substance has changed hands.
A transfer of goods or rights in property
was the real stuff of the exchange...
and that was what the court
would evaluate for fairness,
not just the words on the document.
A contract under which there had
been no exchange of consideration,
meaning real goods or rights in
property was deemed to be empty...
and was therefore not
enforceable by the court.
So a contract in which a
borrower say pledged a car...
he does not own in exchange for
a bank's promise of payment...
would not even qualify as a contract.
No common law court would enforce it.
As well, in the event of a dispute
over a contract under common law,
only someone who had actually provided
consideration to the transaction,
in other words, only someone who delivered
the goods had the right to sue in court...
for fullfilment of the
contract by the other party.
This right was not
transferable to a third party.
When early traders went off personally
on expenditions with trade goods...
they bought those goods at home
with their local currency...
and would sell them for foreign
currency in the distant destination.
They would then buy foreign
goods with the foreign money,
bring those goods home and sell
them for the local currency.
Pretty simple.
But as trade became more sophisticated,
traders became more inclined to stay home...
and just hire ships to
carry out deliveries.
This gave traders the freedom to import cargos
of foreign goods from different sources...
than in the destination to which
their home goods had been exported.
Thus, a problem was created.
The exported goods had been paid for with foreign coin,
the value of which needed to be spent somewhere else.
Moving money as coins entailed
a high risk of theft...
as well as the near certainty of partial loss
by currency conversion in a different land.
This problem of payments from a distance
was overcome by the use of bills of exchange.
A bill of exchange was a signed
order from a payer to an adressee...
demanding that the adressee pay a certain specified
sum of money to the person identified as the payee.
These were secured by signature...
and they could not be acted upon in court
by anyone other than the original parties.
Thus, they're have no use to a
thief or any other third party.
You probably recognize that these
were the precursors of checks.
I the payer instruct the bank
the adressee to pay the payee,
a person named on the check
a certain sum of money.
This was all well and good for transactions
among parties who were known to each other.
The bill of exchange was used merely as a way
to order payment in coin at a distant location.
But merchants soon wanted more flexibility, they
wanted to be able to use bills of exchange...
to reconcile payments among many
merchants in many locations...
using bills of exchange
like money itself.
For this to work, bills of exchange had to be
assignable to and enforceable by third parties.
As we shall see, this was the moment in legal history
that gave sanction to the banking system we have today.
A third party who might have honoursly
purchased a bill of exchange...
several steps remove from
the original exchange...
could not be expected nor would have the
right to show up in a common law court...
and defend the validity of
the contract and collect on it.
This made third party bills of
exchange an unacceptable risk.
So, in order to be able to use bills of exchange as a
convenient and guaranteed third party payment system,
essentially equivalant to money,
the common law practise had to be
set aside regarding bills of exchange.
In England, by a series of legal
decisions from 1664 to 1699...
this problem for commerce was remedied by making
bills of exchange enforceable by third parties.
If a third party had purchased a bill for
valueable consideration and in good faith...
having no apparent reason to suspect fraud or some
deficiency in the right of the seller to sell it,
then the bill automatically became good and
enforceable by the court against the signer.
What did this change mean?
It meant essentually that any bill of exchange
would be consider legitimate once it was sold.
Bills of exchange and all other subsequent
types of signed promises to pay...
with the notable exceptions of checks
became transferable and enforceable in court.
Just what the merchants wanted.
Now debt contracts could be sold like things and
transacting business would be a whole lot easier.
Not only that, it opened up a whole new market for
profit seekers, trading in bills of exchange themselves.
The marketing of debt was born.
The change in the law had
another affect as well.
It made it possible to trick or even force a person
into signing a legally binding promise to pay...
and then if that promise were purchased by a third
party for real consideration and in good faith...
it would be enforceable
against the signer in court.
Ultimately, this became one of the foundational
principles of the uniform commercial code...
which governs the conduct of business in
the US and by extension in most of the world.
The entire taxing and monetary systems
are hereby placed under the U.C.C.
US Federal Tax Lien Act of 1966
Think about it. If we buy a stolen laptop from a guy on the
street, we're guilty of receiving stolen goods, a criminal offence.
Doesn't matter if we paid on with money
and were unaware the goods were stolen.
The court will restore the
goods to the rightfull owner.
We as purchasers, innocent or not, lose our
money and may even be charged with a crime.
But if we buy a loan contract from a banker
and give him real value for it in good faith...
it doesn't matter that the loan contract may
have come into existence under false pretenses.
Whoever signed it, is required by
commercial contract law to pay up...
and the courts will
enforce the obligation.
Today, debt contracts come in a myriad of forms,
including and especially loans and mortgages.
It's significant to know that just as these
common law restrictions were been removed,
the brand new Bank of
England was been established.
The first banks were state-authorized
to create money out of thin air.
The new laws fit in perfectly, making the new bank's
empty contracts enforceable against the so-called borrower.
The bank hath benefit of interest on all
moneys which it creates ouf on nothing.
William Paterson
founder, Bank of England
Those who've discovered the true
nature of their own bank loans...
and have attempted to challenge the validity
of their debt contracts in modern courts...
have discovered to their dismay that this commercial
contract law is still the bedrock defence of money as debt.
The bank would have sold the original loan
agreement to a third party for value...
and even though that third party is
often just a sister company of the bank,
all that matters to the judge is who posseses the
document, what it says and whose signature is on it.
The bank's failure to inform the borrower
about the true nature of the loan contract...
and the absence of any actual money
loan on the bank's part is not relavant.
So, to conclude our investigation...
it appears that modern banking practise
rests on several dinstict violations of...
common law, common sense
and natural justice.
The first violation is the fraud the borrower commits, by
pledging as collateral property, the borrower does not yet own.
and the bank is complicit, as it knowingly accepts the
fraudulent pledge, as backing for the credit it creates
The second violation, is the failure of the
bank, to disclose the true nature of the contract
The bank calls it..a LOAN.
Leading the borrower to believe...
the he or she is receiving
a loan of existing money
But the bank knows full well, that it has provided a brand
new promise to pay, simply typed in, on a computer screen.
A promise that a bank knows it
will probably never have to fulfill
Thirdly, the loan
agreement should be invalid.
Because impossible
contacts are legally invalid
The bank is creating an impossible contract, because the conditions
required to guarantee that the borrower's have the opportunity to pay off
the principal, plus interest are NOT met. Unless the system
enforces 100% recycling of both principal and interest
which emphatically does NOT. Some borrowers
are going to default and lose their collateral
simply due to the
systemic shortage of money
The fourth violation, is the violation
of natural law, by the law of contracts.
Which confers automatic legitimacy of title on any contract, if
the contract is sold to a third party for valuable consideration
This violates the principle that one can not
give better title to someone than one has.
But perhaps, the biggest fraud of all...
is that most of the people, who produce
the real wealth of the world, are in debt
and in risk of losing everything they
worked for, to bankers who fabricate money...
out of mere promises to pay
and where does this leave us?
We are hostages, in an economy,
that must grow faster and faster
to keep up with an ever growing money supply
or the entire system collapses in ruin.
The money system as currently
structured, refuses to recognize
that the real economy is limited by
the capacity of the planet to provide
the raw materials and waste
disposal services the economy needs
The planet is finite and
therefore it should be obvious
that the economy can not grow
in an accelerating pace for ever
Our current money system, runs
like the bus in the movie "Speed"...
It could not slow down or the bomb
planted on the bus, would go off
and our situation, is even worse,
because the rate of debt creation
must forever accelerate or
the entire economy crashes.
The notion that infinite, perpetually
accelerating growth is possible...
is a great fallacy of modern economics
its a fatal delusion, born of greed.
An economic, social and environmental crash of
unprecedented proportion is surely inevitable.
In this monetary system is utterly and
hopelessly incapable of adapting to it.
No wonder monetary reformers around the world, insist that the
entire monetary system needs to be rebuild, from the ground up.
"Banking doesn't involve fraud, banking IS fraud."
Tim Madden, Monetary Historian & Consumer advocate
So what is the solution?
One idea, as many people suggest, is to return
back to days where money was backed with gold
Gold they argue is the true money,
because its inherently valuable
The underlying principle here, is that money is
valuable due to its scarcity, as gold is scarce.
There's a general rule, those who hold this view of money,
also believe that money, should exist independent of government.
Another school of thought,
diametrically opposite,
is that the creation of money, should be
the exclusive prerogative of governments
Government, which represents all the people, should
spent money into existence, in the public interest..
thus backing the currency,
with what is was spend on
having taken back the power to
simply spend money into existence...
government would never need to
go into debt or pay interest
Off course governments spending without
limit, will result in a worthless currency
to prevent inflation, money
would also need to be extinguished
This could be accomplished using a wide variety
of taxes, resource royalties and user fees.
Government spending and taxes would therefore be interdependent
and would equal each other in a perfect equilibrium
However, the goal of taxation
is to achieve price stability..
as the government would have no need
for tax revenues, in order to operate.
Over the centuries, both the gold based system and
various government credit money systems, have been used
But the gold based system,
prevailing well into the 20th century.
This wasn't because government
credit money did not work
It did, withing the country itself,
where it was accepted in payment of taxes.
But until the invention of
modern currency exchanges..
international trade had
to be carried out in gold
In addition, gold has almost a supernatural
fascination for humans for a very long time
We have been conditioned for millennia, to think
of money, in terms of portable inherent wealth.
As in gold coin.
However, this is not the
only way to think of money
Nor, in the era of runway debt
money, is it any longer accurate
Money is, at its root an idea. An idea that humans invented, in
order to transform simple subsystems into complex civilizations.
Thus the development of money, that
made possible specialization of labor
and the indirect exchange
of goods and services
Through out money's evolution, direct barter, to standard trade
goods and on to standard coins, to paper promises of precious metal..
to digital promises of paper cash and now
to digital promises to pay digital promises
Throughout this long evolution, the prevailing idea has always been to
achieve greater flexibility by using secure and convenient promises to pay..
instead of money itself.
The problem with promise to pay money, has always
been that it provides a golden opportunity to cheat
To create more promises, than there is
real stuff, to back those promises up.
But is there a way, to make tha exchange of actual money,
just as secure and convenient, as the promise to pay system.
Now there is.
Digital money, convenient and secure is now a
possibility, because of new encryption technologies.
Works like this. Imagine taking the serial number
off a dollar bill and dispensing of the paper.
What do you have? A digital dollar.
A digital dollar. that can now be electronically transferred around
the world , just as easily and securely, as a promise to pay dollar.
However!! and this is a big however.
The digital money, while being entirely
electronic, is also like a metal coin.
It can never be in two places at once
Thus, the multiplication of promises can be prevented ,
by insisting on actual payment in cash, paper or digital.
We don't even need to keep this digital cash in a bank, as it
provides its own safekeeping and can be transferred by internet
An instantly transferable digital money, could perform
intelligent functions, far by anything money was capable before
For instance, with simple math, programmed in,
money could be made to calculate its own value.
Eliminating human speculation, manipulation
and error. Would that be something.
In the mean time, efforts are already underway to
reform the monetary system, through legislation.
Initiatives, like the monetary reform act and American
monetary institutes monetary act, have already been written...
prescribing in detail, how to return the power
to create money exclusively to government..
and thus limiting banks to lend existing money,
just the way most people imagine it works now.
Well, differing in detail, all such reform proposals, in what
ever country they originate, always advance the same simple idea.
The benefits of money
creation belong to the public.
At present, money is created not for the benefit
of society, but for the profit of private banks.
Banks like to create enormous amount of money from our debt, because the
more we borrow into existence, the more interest the bank gets to collect..
and the richer the bank becomes.
In the process the banks gain more control over
everyone, individuals, industry and government alike.
Abundant money too often leads to speculative
asset bubbles that make insiders rich...
but as we have witnessed, these bubbles, inevitably burst
under the unbearable weight of ever increasing interest demands.
The losers are many, including governments. Already burden with huge debt
and shrinking revenues, governments are forced to add trillions to that debt
in order to rescue the banks, that are the cause of
the problem. Other wise we would have no money system.
Its an absurd situation and a tragic one, considering
that governments could instead create the money itself..
and spent it interest free on infrastructure,
education, universal health care.
and most of that debt free money will enter the economy as wages,
circulating to all levels of society for everyone's benefit.
This kind of abundant money, will fund a re-invigorated,
productive economy, in which the savings of the people
could fund honest loans
of real existing money.
At its root, money is a means
by which we exchange real value.
Without real value in the
world, money is nothing.
As we have seen, its the real world
that makes the loan, NOT the bank.
We the people, in conjunction with the material blessings
of the natural world, are the source of all real wealth.
Therefore money creation and its benefits
belong to the public, not to private bankers.
And what about interest?
As we have seen, interest
posses an arithmetic problem.
And its a problem that can
only be solved in three ways.
1. Defaults and foreclosures
2. Perpetual growth of the money supply
or the preferable and only other solution,
a 100% recycling of interest as spending
But such full recycling, can only be accomplished by
nationalizing the banking industry, in the public interest.
For example, interest earnings from public service
banking can be paid to all, as a citizens dividend.
or it could be used to fund government in place of taxes,
as it was done successfully in colonial Pennsylvania
And that's one instance of a society that
organized its monetary system differently.
There always been alternatives
and there are alternatives now.
What the evolution of
money really teaches us..
is that the real measure of money value
is very simple, its usefulness as money
There are several different
ways to create useful money.
For instance, money can simply be an
individual's private promise to pay.
A pledge of one's own product or service, as in such
community currencies,as the LETS system or time dollars
Thousands of these community currencies
already exist, in circles of trust...
where members can be counted on to honor
the credit they issued for themselves
In such community currencies can be a life saver, in the event
of a catastrophic collapse of the conventional banking system.
When money shortages or hyperinflation,
disrupt trade and bring economic standstill..
a working community currency
can sustain a local economy.
Are such proposals radical? You bet.
But there are unprecedented
challenges before us.
No longer can exponential growth
allow us to sustain a monumental debt..
that must ever increase to prevent a house
of cards collapse of the whole system.
Increasing wealth disparity, crushing debt , failing banks
and social and environmental catastrophes, are what we face..
unless we radically change course
We must transform our monetary system, to one that
can adapt, to future that we can now clearly foresee.
To begin, we must explore monetary system designs,
that can deal with wide spread economic shrinkage...
without inducing massive
foreclosures and bankruptcies.
But what can you do right now??
Right now, there are people and organizations around
the world, that understand the problems and the injustice
of today's monetary system. And you can join them in
their effort, to bring about a fundamental changes we need.
Its time to talk to our friends. The financial
crisis is the ultimate teachable moment
When bankrupt banks have to be bailed out by the governments, the banks
where formerly lending to, the contradictions, the fraud and the fatal flaws
of the current system...
are laid bear for all to see.
But the solutions, are
there to see too, if we look.
We can not afford business as usual, making
adjustments to the current system, would not save us.
The changes we need to make are radical
and dedicated to the good of all..
not the profit and control of the few.
To make these changes, we must leave behind
our old-moded assumptions and misplaced faith.
We must face the challenge
of a complete transformation.
Reality calls!
"Money does not pay for
anything, never has, never will.
It is an economic axiom as old as the hills. that goods and
services, can be paid for only with goods and services."
-Albert Jay Nock Memoirs
of a Superfluous Man (1943)
"Only when the last tree has died and the last river has been poisoned
and the last fish been caught will we realize we cannot eat money."
- Cree Indian Proverb