Our goldsmith banker was not content with the income remaining after sharing the interest earnings with his depositors, and the demand for credit was growing fast as Europeans spread out across the world. But his loans were limited by the amount of gold his depositors had in his vault. That’s when he got an even bolder idea. Since no one but himself knew what was actually in his vault, he could lend out claim checks on gold that wasn’t even there. As long as all of the claim check holders didn’t come to the vault at the same time and demand real gold how would anyone find out. This new scheme worked very well and the banker became enormously wealthy on the interest paid on gold that did not exist. The idea that the banker would just create money out of nothing was just too outrageous to believe. So for a long time the thought did not occur to people.
But the power to just invent money went to the banker’s head, as you can well imagine. In time the magnitude of the bankers loans and his ostentatious wealth did trigger suspicions once again. Some borrowers began to demand real gold instead of paper representations. Rumors spread. Suddenly several wealthy depositors showed up to remove their gold. The game was up. A sea of claim check holders flooded the street outside the closed doors of the bank. Alas the banker did not have enough gold and silver to redeem all the paper he had put in to their hands. This is called a run on the bank. And it is what every banker dreads.
“I am afraid that the ordinary citizen would 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 Government and hold in the hollow of their hands the destiny of the people” -Reginald McKenna past Chairman of the Board, Midlands Bank of England
Banks can only practice this money system with the active cooperation of government. First, governments pass legal tender laws to make us use the national fiat currency. Secondly, governments allow private bank credit to be paid out in this government currency. Thirdly government courts enforce debts. And lastly governments pass regulations to protect the money system’s functionality and credibility with the public while doing nothing to inform the public about where money really comes from.
“Thus our national circulation 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 & author
We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money, we are prosperous; if not, we starve.
We are absolutely without a permanent money system. When one gets a grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. – Robert H. Hemphill, Credit Manager Federal Reserve Bank, Atlanta, Georgia.
That’s not all. Banks create only the amount of the principal. They don’t create the money to pay the interest. Where is that supposed to come from? The only place borrowers can go to obtain the money to pay interest is the general economy’s overall money supply. But almost all that overall money supply has been created exactly the same way… as bank credit that has to be paid back with more than was created. So everywhere there are borrowers in the same situation frantically trying to obtain the money they need to pay back both principal and interest from a total money pool which contains only principal. It’s clearly impossible for everyone to pay back the principal plus interest, because the money doesn’t exist.
At one time charging any interest on a loan was called usury and was subject to severe penalties including death. Every major religion forbade usury. Most of the arguments made against the practice were moral. It was held that money’s only legitimate purpose was to facilitate the exchange of real goods and services. Any form of making money from simply having money was regarded as the act of a parasite or of a thief. However as the credit needs of commerce increased the moral arguments eventually gave way to the argument that lending involves risk and loss of opportunity to the lender and therefore attempting to make a profit from lending is justified. Today these notions seem quaint. Today making money from money held as an ideal to strive for.
“The modern day banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in iniquity and born in sin. Bankers own the Earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough money to buy it back again…
Take this great power away from them and all great fortunes like mine will disappear, and they ought to disappear, for then this would be a better and happier world to live in.
But, 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
Also see Money as Debt II