“All of the perplexities, confusion, and distress in America arises, not from the defects of the Constitution or Confederation, not from want of honor or virtue, so much as from downright ignorance of the nature of coin, credit, and circulation.”
- John Adams, former President of the United States
A number of years ago, it was reported that the Canadian deputy prime minister surveyed scores of individuals, both highly educated professionals and common people on the streets and found that not one of them had an accurate understanding of how money is created.
In fact, it’s probably safe to say that most people including the front line employees of banks have never given the matter a moment's thought.
Have You?
For most of us, the question “where does money come from?” brings to mind a picture of the mint… money most people believe is created by the government. This is partially true as our coins and paper dollars we usually think of as money, are indeed produced by an agency of the federal government called the mint. But the vast majority of money - more than 95% of all the money currently existing int he world - is NOT created by the mint or the government at all, but rather, it is CREATED in huge amounts every day by private corporations called BANKS in the form of loans and mortgages.
Most of us believe that banks lend out money that has been entrusted to them by depositors. Easy to picture, but not the truth. In fact, banks CREATE the money that they loan, not from the bank’s own earnings or the money already deposted, but directly from the borrower’s promise to repay.
The borrower’s signature on the loan paper is an obligation to repay the bank the principal of the loan plus interest or lose the item the loan was used to pledge as collateral - the car, the home, or other item of value. What does the same signature enable the bank to do? The bank gets to conjure into existence the amount of the loan and just write it into your account.
In fact, banks are allowed to CREATE from nothing and lend out 9 dollars for every 1 dollar on "deposit", where deposits include previously created loan money! So, you deposit $1000 into your savings account and receive a small amount of interest for "lending" your money to the bank. In return, the bank gets to create $9000 out of nothing and loan it to someone else at a much higher interest rate.
Sound far-fetched? Surely, this cannot be the way it actually works. But it is! Banks don't loan their own money at all, they create it when you sign the loan document. Then they get to charge you interest on money that they created out of nothing while you pay back the principal. Pretty good deal, hugh! If an individual does the equivalent of this, it is called counterfeiting and is a federal crime. Yet, banks practice this "activity" every day, completely protected by the government and legal system.
This system has a name - the fractional reserve banking system - and over the past 300 years, it and and its integrated network of banks backed by a central bank has become the dominant money system of the world.
Have you ever wondered how everyone – governments, businesses, corporations, and individuals – can all be in debt at the same time and for such astronomical amounts? Have you ever questioned how there could be that much money out there to lend?
Now you know. There isn’t. Banks do not lend money. They simply create it from debt and because debt is potentially unlimited, so is the supply of money and commensurately, the amount of debt.
More on debt and interest in my next post!
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