“The study of money, above all other fields in economics, is one in which complexity is used to disguise truth 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
Maybe your first experience of putting money in the bank wasn’t quite as heartwarming as this. But odds are, years later, you still refer to the balance showing on your bank account as being your money in the bank. But it isn’t.
If we have a deposit box at 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. A bank deposit is in reality… a loan. What the amount in our bank account really indicates is how much money the bank owes us. It is 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 our piggy bank to the bank teller, our money becomes the bank’s money to do with as it pleases. All of the money in the bank is the bank’s money. None of it is ours. That’s why the bank pays 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 it trivial. The distinction is crucial. What happens in 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.
To make things worse, the explanations for these breakdowns 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 plus interest as so-called “repayment”. Not only does this make the existence of money entirely dependent on the existence of bank credit, it makes the system as a whole bankrupt by design, as total debits, principal plus 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 realizing they can no longer ignore the realities behind banking as it is practiced today. Many have lost their homes and jobs due entirely to the unsustainable practices of moneylenders. It is time people understood money and the pressing need to fundamentally 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 this so-called loan. While we speak of the bank as 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 is the borrower and who is the lender? The terms loan, lender and borrower are all misleading. The truth is that 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 will be empty. Thus it’s a natural assumption that money in an account is money someone put in. Uh-uh. 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 just promises to pay, the bank and the borrower can simply exchange promises and, in the flash of a few keystrokes, a positive balance appears in the borrower’s bank account without anyone putting existing money in.
Now you know the real source of what we call 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 $100 dollar bills, the counterfeiters also create new money out of thin air.
Money gives us the ability to purchase the real goods & services of the world. It’s clear that the counterfeiters have created new ability to purchase real goods & services without giving anything in exchange… except a fancy piece of paper. Counterfeiters get something for nothing, directly at the expense of whoever gets caught with their 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. How did one form of creating money out of thin air become a crime, and the other become standard business practice and the source of almost all our money? For this is what has happened.
To understand how, we need to look at the history of the laws governing commerce, but before that, we need to understand the logic of the loan process itself.
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 a 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.
We’re probably all familiar with what happens next. The bank gets the borrower to sign an agreement in which the borrower promising to pay the bank the amount of the loan plus interest or, in default, surrender to the bank the object that is to be purchased with the loan. This is done countless times every day all over the world, but there’s a problem. How can the borrower pledge as collateral something that 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
neighbour’s car as collateral?
Of course not, because you know very well that I have no legal right to give you my neighbour’s car no matter how much I owe you. But, if instead, I promise to buy my neighbour’s car with the $10,000 you lend me, the situation is different. You might agree to lend me the $10,000 believing I will 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 the car. This sequence of events problem could be very simply avoided. You could buy the car and then sell it to me.
The bank could 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 at interest? Well… the answer to that question is also very simple. It’s 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.