is created is so simple that the mind is repelled."
Money is loaned into existence. Conversely, when loans are paid back,
There is a federal rule that allows banks to loan out a proportion, a
fraction, of the money they have on deposit to others. In theory,
banks are allowed to loan out up to 90% of what people have on deposit
with them. Because banks retain only a fraction of their deposits in
reserve, the term for this process is "fractional reserve banking."
John Kenneth Galbraith. He taught at Harvard University for many years
and was active in politics, serving in the administrations of Franklin
D. Roosevelt, Harry S. Truman, John F. Kennedy, and Lyndon B. Johnson;
and among other roles served as United States Ambassador to India
He was one of a few two-time recipients of the Presidential Medal of Freedom.
Leaving aside for now where this money comes from, suppose a person
walks into town with $1000, and, luckily, a brand new bank with no
deposits has just opened up. The $1000 is deposited in the bank, and
now the person has a $1000 asset (their bank account) and the bank has
a $1000 liability (the very same bank account).
Now, there's a rule on the books, a federal rule, that allows banks to
loan out a proportion, a fraction, of the money they have on deposit
to others. In theory, banks are allowed to loan out up to 90% of what
people have on deposit with them, although, as we'll see later, the
actual proportion is much closer to 100% than 90%. Nonetheless,
because banks retain only a fraction of their deposits in reserve, the
term for this process is "fractional reserve banking."
Back to our example. We now have a bank with $1000 on deposit, and
banks do not make money by holding on to it – rather, they make their
living by borrowing at one rate and loaning at a higher rate.
Since any bank can loan out up to 90%, the bank in our example manages
to locate a single individual that wants to borrow $900.
This borrower then spends that money by giving it to another person,
perhaps his accountant, who, in turn, deposits it in a bank. Now it
could be the same bank, or a different bank, but that really doesn't
change how this story gets told at all.
With this new deposit, the bank has a fresh $900 to work with, and so
it gets busy finding somebody who wants to borrow 90% of that amount,
And so another loan, this time for $810, is made, which gets spent and
redeposited in the bank, meaning that a brand new, fresh deposit of
$810 is available to loan against. So the bank loans out out 90% of
$810, or $729, and so it goes, until we finally discover that the
original $1000 deposit has mushroomed into a total of $10,000.
Is this all real money? You bet it is, especially if it's in your bank
account. But if you were paying close attention, you'd realize that
what we've actually got here are three things. First, we've got $1000
held in reserve by the bank, $10,000 in total in various bank
accounts, and $9000 dollars of new debt. The original $1000 is now
entirely held in reserve by the bank, but every new dollar, all $9,000
of them, was loaned into existence and is "backed" by an equivalent
amount of debt. How's your mind doing? Is it repelled yet?
You might also notice here that if everybody who had money at the
bank, all $10,000 dollars of them, tried to take their money out at
once, that the bank would not be able to pay it out, because, well,
they wouldn't have it. The bank would only have $1000 hanging around
in reserve. Period. You might also notice that this mechanism of
creating new money out of new deposits works great…as long as nobody
defaults on their loan. If and when that happens, things get tricky.
But that's another story for later.
For now, I want you to understand that money is loaned into existence.
Conversely, when loans are paid back, money 'disappears.'
We left out something very important here, and that is interest. Where
does the money come from to pay the interest on all the loans? If all
the loans are paid back without interest, we can undo the entire
string of transactions, but when we factor in interest, there suddenly
isn't enough money to pay back all the loans.
Is Our Money "Owed" money?
● Robert H. Hemphill of the Atlanta Federal Reserve Bank answered that
question when in 1936 he said: "Someone has to borrow every dollar we
have in circulation, cash or credit."
● "The dollar is based on credit and every dollar in existence represents a
dollar of debt owed by an individual, a business firm, or a government unit."
[From A Primer on Money, U.S. Congress, House, Committee on Banking
and Currency, Subcommittee on Domestic Finance, 88th Congress, 2nd
Session, Government Printing Office, 1964, page 23.]
● "Few understand that all our money arises out of debt and IOU operations. .
.The banking system as a whole can do what each small bank cannot do: it
can expand its loans and investments many times the new reserves of cash
created for it, even though each small bank is lending out only a fraction of
its deposits." Economics, An Introductory Analysis by Professor Paul A.
Samuelson. (Best selling college economics textbook of all time, c1948.)
● "Our supply of money. . .is the result of creating money as loans based on
the total reserves in the banking system." Money in the Economy, Federal
Reserve Bank of San Fransisco, 1981.
In Our Current Debt based money system:
● Money is created as loans and thus represents debt
● The interest associated with this debt/money is NOT created as
money when bank loans are made. The interest can only be paid
if additional loans are created as money.
● This means there is never enough money in the system to pay
bank interest without creating more debt, so this interest is
● In this type of money system TOTAL debt grows exponentially
and will eventually become unpayable once new debt/money
creation can no longer be supported.
● Because money is "extinguished" as loan principals get paid off,
attempts to pay off the debt set up a money shortage which
triggers demand for more borrowing just to preserve the money
WHAT we use for money is not nearly as important as HOW that
money is brought into circulation.
We currently have private BANK FIAT – NOT GOVERNMENT
FIAT – money, meaning that the banking system creates our money.
In other words we have private bank credit, or interest bearing loans,
serving as money, and it is why we have increasing levels of national
(or public) debt.
If the government created our money we would have NO PUBLIC
DEBT. However, we MIGHT have lots of inflation if no attention
were paid to the rules and principles of monetary science and the
process of extinguishment. But if this were to be done, we would have
a true, inherently stable "money of exchange."
The Federal Reserve
● Not a bank. Acts as a "banker's bank".
● Currently functions as the "de facto" leader for central banks around
the world, all of which are coordinated by the Bank of International
Settlements in Switzerland
● A privately owned cartel with a corporate structure
● Creates money (U.S. Legal tender) by buying government, or other
types of securities, through Open Market Operations with money it
does not have – but is allowed to "create out of nothing." The Fed
provides our currency by buying it, at the cost of production (less than
four cents a bill, regardless of denomination) from the Bureau of
Printing and Engraving. It then issues the money at face value to
commercial banks as needed, by reducing that bank's "reserves" at the
Fed by the same amount. (The profit on the difference between the
cost and face value of the bills is called seniorage.)
● Helps commercial banks create ten times (or more) in "debt money"
through the Fractional Reserve Expansion System.
● Has never been fully audited and makes policy decisions in private with
only partial minutes of meetings released 3 weeks later. Verbatim
minutes are never released, nor are they kept.
Principles and Rules of Monetary Science
● Debt "free" money systems can be governed mathematically and
codified into law
● Money is a public utility, rightly createable through law alone
● Monetary authority is the exclusive power to create and destroy
● Monetary authority is the supreme power in civil government,
because money commands resources
● Money [as in paper money] can have no value of itself, but
serves as a valid and indispensable representation of whatever
development and productive capabilities exist in the economy
● The QUALITY of money lies exclusively in its stability in relation
to the value of goods and services
● For more see The Truth in Money Book by Thoren and Warner
AND here is Abraham Lincoln, from the Abstract of Lincoln's
Monetary Policy as certified by the Library of Congress:
● The Government should create, issue, and circulate all the
currency and credits needed to satisfy the spending power of the
Government and the buying power of consumers.
● The privilege of creating and issuing money is not only the
supreme prerogative of the government, but it is the
Government's greatest opportunity to create abundance. . .
● By the adoption of these principles, the long-felt want for a
uniform medium will be satisfied. The taxpayers will be saved
immense sums of interest. . . .
● The financing of all public enterprises, the maintenance of stable
government and ordered progress, and the conduct of the
Treasury will become matters of practical administration. . .
Money will cease to be master and become the servant of
humanity. Democracy will rise superior to the money power.