October 27, 2015
WHEN reading about our $60 trillion national debt or the escalating figures for consumer indebtedness, what is your first reaction? Do you think, “We’ve got to stop spending!” or “Our government is giving our future away to welfare deadbeats and bureaucrats?”
If these are your very first thoughts, let me respectfully suggest that you don’t understand our monetary system.
When you see those mounting figures for indebtedness, the first thing you should think is:
“We are the victims of a colossal swindle. Something is wrong, not with us, and not with welfare recipients, but with the system.”
Indeed over-indebtedness is inherent to our financial system. We can never collectively emerge from what is in effect debt slavery, from cycles of boom and bust, and from the centralized power of high finance which controls public opinion, politics, government and business, we can never emerge from these burdens without significant monetary reform and a new philosophy on the nature of economic life.
But first we have to come to grips with the problem. And there is a major problem. Yes, we deplore Communism and Socialism. But Capitalism as it exists is ruinous too. That’s not because a market economy is bad. That’s not because profit, investment or private ownership are bad. That’s not because Capitalism makes some people rich. These things are good. The problem is two-fold: a monopoly of credit in private, profit-making hands and the inability in the modern economy, which benefits from centuries of labor-saving innovation, for income from labor and savings to match the costs of production. These defects in the system are causing misery in a world that actually can produce enough goods and services to give people, all people, the basic necessities and free them from crushing fear for the future.
Our financial system is out of touch with reality. Our usurious monetary system is strangling family life, but it doesn’t have to be that way. Someday people will, let’s hope, look back on this era as they now look back on the pagan slavery of Ancient Rome. They will wonder how people ever could have put up with such widespread financial oppression, with its attendant social conflict, and how they were ever fooled into thinking they benefited from what the writer E. Michael Jones calls “state-sponsored usury.”
Let me offer some background from a few critics who have stated the problems. I’ll return to the subject in future posts with more from those who have studied these issues and suggest solutions you don’t hear about from our politicians or the mainstream media.
First, most people don’t understand how money is created and circulated. Though Congress is vested by the Constitution with the power to create money, it is actually created by private banks who then loan it out at interest:
Little known fact: All money is debt. All money is loaned into existence. Banks create (90%+ of all) money by making a “Reserve Requirement” deposit with the Federal Reserve. If a bank deposits $1 million with Federal Reserve, with a 10% Reserve Requirement it can loan out $10 million by simply typing it into the computer into an account. This is called Fractional Reserve Banking. Federal Reserve also works as a lender of last resort when the banks that loaned out 10x more than they have deposited, get a ‘run on the bank’ and can’t come up with the money– when more people are pulling it out than they have available. Federal Reserve protects the system that allows lending out what one does not actually have. Federal Reserve is also a private bank, privately owned and not responsible to the Government, or anyone, except possibly its 300 private share holders.
This might sound confusing, but money-creation is not taught in schools, therefore many completely lack the concept of how the system works. [Democracy Info, “Federal reserve Money Printing Failure.”]
M. Oliver Heydorn, Ph.D., a philosopher on economics, writes:
Let it be restated for the umpteenth time if need be: banks do not lend their customers’ deposits; they are not intermediaries between savers and borrowers. Instead, they are creators of the deposits which they lend, invest, or otherwise spend into existence. How is this accomplished? Quite simply by an act of the will involving accounting ledgerdemain, the confirmation afforded by legal sanctions, and the regulations demanded by good business practice. In accordance with the principles of double-entry bookkeeping, the creation of credit generates both assets and liabilities on a bank’s books. Credit that is held on deposit in a bank, regardless of its origin via a loan, investment, or bank operating expense, is accounted as a liability, while the loan, securities, or bank property, etc., are regarded as assets.
The “Monopoly of Credit” is therefore the monopoly which private banks, or the private banking system considered as a whole, exercises over the creation and issuance of credit. And, since the vast majority of the money supply at any given point in time exists in the form of bank credit (that figure tallies at over 95% in developed nations), the banks’ ‘credit-monopoly’, is a near total ‘money-monopoly’.
This Monopoly of Credit is really the private usurpation of collective resources. E.S. Holter, whom like Dr. Heydorn, wrote as an advocate of Social Credit economics, about which I will have more to say in the future, said in 1934 :
Although by the Constitution the power of issuing money is vested in Congress, most of our money is really created and issued as credit through the banks. As individuals we are wont to think of a bank deposit as representing actual funds placed with a bank for safe- keeping by the depositor. But this is far from being the case. In the main, deposits are created by the loans made by the banks themselves, and even individual deposits as above described are only the redeposit of deposits which originated in loans. “Every bank loan creates a deposit and every repayment of a bank loan destroys money.” When a banker agrees to make a loan of, say, $100,000 to a producer, he writes the figures in the bank’s ledger and from the moment the transaction is completed the producer is in possession of a brand-new deposit upon which he can draw any sum, up, of course, to $100,000. As the borrower draws his checks, this sum is money to him and to the community. And it is new money created by the bank’s action in making the loan. It is an absolute addition to the community’s stock of money, for the new deposit which has been created does not lessen the amount of any existing deposit. The situation is not altered if the loan is made on collateral security, for these securities in the form of stocks, bonds, mortgages, etc., are not drawn upon in any way for the creation of the $100,000. In fact they remain completely unaffected by the new money, and for all the use the bank makes of them, beyond locking them up in its vaults, the producer might have kept them in his desk at home.
What then is the banker’s inducement to create such loans? The answer is, of course, profit, as must necessarily be in the case of all private business institutions. The banker believes that, at the end of a certain stated period, the money that he has loaned the producer will be repaid with a fixed interest. Now, it is interesting to observe, that aside from collateral security, the real basis of such loans is the banker’s belief that the producer will produce some commodity that the consumer will want to consume. In this way the banker expects the producer to be enabled to recover through the sales of his products the money with which to repay his loan. Without the faith in the community’s ability to produce and consume, never a penny of bank credit would be lent. In other words it is upon the strength of the community’s capacity to produce, deliver and consume goods that bank loans are created. Notwithstanding this fact these credits, extended to producers, become not only for the producer but also indirectly for the consumers, debts to the banking system, because the producer in order to repay the bank must recover in prices not only the current cost of producing his article but also all capital or overhead costs. Such procedure is patently absurd—that the banks should charge the community for the use of its own credit, although it is the banks that make the profit out of the use of this credit. [The ABC’s of Social Credit, E.S. Holter]
Indebtedness is perpetual because while banks create the principal for those loans, they do not put the money for the interest on those loans into circulation. It must come from somewhere. It must come from further indebtedness. Furthermore, the costs of production under current accounting methods are always higher than income through wages, salaries and dividends. This allows the private banking monopoly on credit to dominate and ultimately strangle economic life. Interest-bearing loans make up for the shortage of money.
I will close here with another lengthy quote from Dr. Heydorn:
[S]tandard banking practice (involving the cycle of the creation and destruction of credit via loans and their repayment) in combination with standard conventions governing industrial cost-accountancy result in the build-up of costs and hence prices in the industrial system at a faster rate than incomes are simultaneously being distributed to consumers in the form of wages, salaries, and dividends. More specifically, real capital (i.e., factories, machines, equipment, etc.) bear accountancy costs (such as capex and opex charges) that are charged into the flow of prices, but are not distributable as current income to consumers. The prices of goods on sale would be automatically balanced with consumer buying power if the financial system accounted the process of production accurately and always represented increases in prices with a corresponding increase in consumer purchasing power. Unfortunately, it does not do this; it is not self-liquidating.
The only way to fill this gap under the existing financial system is to rely on governments, and/or businesses, and/or consumers to obtain new, additional money from some source. Loans for increased production (AKA economic growth), whether private or public and whether needed or not, increase the rate of flow of incomes to consumers without, in the same period of time, increasing the flow of prices. Since there is a time-lag between investment and the appearance of the resulting production on the market, such activity can temporarily compensate for the deficiency in consumer purchasing power. The other option is to have consumers supplement their incomes directly by contracting consumption loans or making use of overdrafts of various kinds. In all of these cases, the economy’s need for an increase in the money supply can only come by way of the private banks since the prerogative of creating commercially traded bank credit belongs to them.
This puts the private banks in a very enviable and commanding position. Since the banks claim the ownership of the financial credit that they create (this is implicit in the act of lending it), they are ipso facto asserting ownership over the real credit (which they did not create). This, in itself, wouldn’t constitute much of a practical problem if there were no recurring gap between prices and incomes. The existence of the gap renders the implicit claim to ownership a huge problem, however, because it allows the banks to appropriate the factor of production that is primarily responsible for the gap, i.e., society’s real capital, for their own benefit and at the expense of the common citizen. Access to the surplus flow of goods and services that the real capital makes possible can only be granted viaadditional government, corporate, or consumer loans from private banks; and thus, such access will only be granted on terms that will deliver an unjustified host of benefits (increases in wealth, power, and prestige) to the private banks.
In sum, the gap in the price system provides the opportunity for the banks to exercise financial control over society’s surplus production. It allows them to assert themselves as the chief beneficiaries of the real capital. Since they did not create the real capital, this assertion is nothing less than a usurpation. It is this dispossession of the rightful owners of the real capital (the common citizens) that constitutes the greatest evil inherent to the private banks’ ‘monopoly of credit’.
The costs of allowing a self-serving private monopoly to fill the gap are extremely heavy. Instead of enjoying an abundance of needed goods and services alongside increasing leisure from an economic system that is socially equitable, environmentally sustainable, and internationally concordant, we are hounded by the paradoxes of poverty in the midst of plenty and of servility in place of freedom, by the recurring cycle of boom and bust, by continual inflation (both cost-push and demand pull), by economic inefficiency, waste, and sabotage, by forced economic growth, by an ever-increasing mountain of societal debt that is, in the aggregate, unrepayable, by heavy and often increasing taxation, by social conflict, by forced migration, by cultural dislocation, by environmental degradation, and by international economic conflicts leading to military conflicts and war, etc.
[To be continued…]
— Comments —
Terrific book on the subject: Killing the Host by Michael Hudson.
Some of it is clownish because he is a former Marxist with one foot still in that camp, but his marshalling of facts is worth wading through. He also published article at Unz.com.
I enjoy your posts, thanks for all your work.
Lydia Sherman writes:
The only person who could put a stop to this is a president, and a very brave one, who will take away the federal reserve and make congress issue money without usury.
Posted by Laura Wood in Uncategorized