Monday, 16 June 2008

FILM: Money as Debt

"The process by which banks create money is so simple that the mind is repelled."
John K Galbraith (Canadian economist, 1908-2006)

If you're like me you've probably never asked yourself how banks 'create' money. Similarly you probably didn't realise that 'creating' money was something banks did. Well, they do.
Everytime you take out a loan from a bank it 'creates' money. It does so by simply writing the money into existence in your account. The bank stakes little when it does this. It literally creates the money out of thin air. Yet you, who must labour to pay back the loan, plus the interest, may lose your car, your house, or whatever else it was you used to back the loan if you cannot keep up the payments.

Can it really be that simple? Yes, it really is. The common and understandable fallacy is to think that banks lend money which they already have in their possession. They don't. They create money in the form of debt. Money is debt. Indeed if there was no debt, there would be no money for anyone to spend. 'If this is news to you', the film notes, 'you are not alone'.

“The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented...If you want to continue to be slaves of the banks and pay the cost of your own slavery, then let bankers continue to create money and control credit.”
(Sir Josiah Stamp Director, Bank of England 1928-1941, reputed to be the 2nd richest man in Britain at the time)

Money as Debt is a clear and insightful 47min animated film about money, debt and our quite ludicrous banking system. It was made by Canadian artist Paul Grignon. It explains how our banking system came to be what it is today; how each and every one of us are in one way or another enslaved by it; how the 'central banking system' is doomed ultimately to collapse (its design makes this inevitable); and the film also offers some real solutions for change.

For more information about the film including a full transcript, references, endorsements and a wealth of quotes, see the Money as Debt website. Watch the film below or on google here.

On the eighth day God created the banker

In the beginning there was - a goldsmith. The paper and coins that we call money today originated from receipts written by the goldsmith for gold that people deposited in his vault. Crucially the paper recepits written by the goldsmith were not 'money' and were not thought of as 'money'. The money was the gold. The paper was just that, paper, a receipt.

One day the goldsmith had an idea. He realised that since he was the only one who knew what was in his vaults he could write out paper receipts for gold that he didn't actually have. Since he made interest on gold deposited in his vaults, this new scheme would allow him to earn interest on entirely ficticous gold. Meet the banker.

Fiat currency

'Fiat' means by 'official sanction' or decree. So 'fiat currency' is money created by the sanction of government.

Fractional reserve requirements

In the past the total amount of currency in existence was limited to the total amount of gold in existence (or whatever physical stuff was used to back the currency). As such, in order for more money to be created, more gold had to be mined. However since our currency is not backed by gold - or indeed anything at all - the only real limit to the amount of money in circulation is the amount of debt that can be created by banks. Fractional reserve requirements are a somewhat arbitrary limit set by government on how much debt or money banks can create.
For example, on a fractional reserve requirement of 9 to 1 a bank with an initial deposit of £1,111 can make a loan of £10,000. This £10,000 is brand new money, brand new debt. Today - as a result of lobbying by banks - fractional reserve requirements of 20 and 30 to 1 are not uncommon.
Time lag
It's only the time lag between the moment when debt (or money) is created and the time when it must be repaid that keeps the shortage of money from catching up and bankrupting the entire system.
"One thing to realize about our fractional reserve banking system is that, like a child’s game of musical chairs, as long as the music is playing, there are no losers."
(Andrew Gause, Monetary Historian)
Other quotes

"I am afraid that the ordinary citizen will not like to be told that banks can and do create money...And they who control the credit of the nation direct the policy of Governments and hold in the hollow of their hands the destiny of the people"
(Reginald McKenna, former Chairman of the Board, Midlands Bank of England)

“Thus, our national circulating medium is now at the mercy of loan transactions of banks, which lend, not money, but promises to supply money they do not possess.”
(Irving Fisher, economist and author)

"Permit me to issue and control the money of a nation, and I care not who makes its laws."
(Mayer Amschel Rothschild, International Banker)

"Everyone sub-consciously knows banks do not lend money. When you draw on your savings account, the bank doesn't tell you you can't do this because it has lent the money to somebody else."
(Mark Mansfield)

“Money is a new form of slavery, and distinguishable from the old simply by the fact that it is impersonal, that there is no human relation between master and slave.”
(Leo Tolstoy)

“None are more enslaved than those who falsely believe they are free.”

"Once a nation parts with the control of its currency and credit, it matters not who makes the nations laws...Until the control of the issue of currency and credit is restored to government and recognised as its most sacred responsibility, all talk of the sovereignty of parliament and of democracy is idle and futile."
(William Lyon Mackenzie King)


runaheadofme said...

Excellent piece of writing here!

Wasn't it Hamilton who was behind the whole concept of "debt as money" when the U.S. was founded? The British Empire operated that way already, of course, but I think it was Hamilton's insight that got the U.S. off on that track, created the Federal Bank as separate from the Treasury and so forth.

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