D’you understand ‘line of credit’? Well, you see red for U.S. economy


This graphic from Demonocracy.info shows how large a stack of F$100 bills is to add up to F$100 million. The banking sector easily creates money through the lending process without taking the trouble to print it on strips of paper.

Our discussion of money, or what passes for “money” today, has concerned itself so far primarily with coins and currency, which most people regard as the “ultimate“ money.

Although credit cards are widely used to make payments, they are slightingly referred to as “plastic money.” (It is amusing to hear this term of gentle derogation applied to credit cards by people who find no problem swallowing the term “paper money.”) If money were once again to be some material thing, plastic would probably be a better choice than paper; it’s more valuable and durable. But in fact, neither plastic nor paper is now, or ever has been, money.

Until recently, checks were used to settle the majority of debts in this country, but even checks are not regarded as money. This is probably because a check can be refused. It might, after all, be “bad.“ The time has come, I think, to talk about checks, to see what they represent, and what can make one check “bad“ and another check “good.”

When you deposit your paycheck for, say, F$1,000 at your bank, does your bank send an armored truck and a guard to your company’s bank to obtain the F$1,000? Were you to “cash“ the check, would you receive one thousand standard units of money — whatever that might be? Of course not. What checks transfer is a record of the issuing bank’s liability.

In other words, your paycheck is a written notice that your company’s bank owes you one thousand. When you deposit that check in your own account or it comes in via direct deposit, it becomes your bank’s which then owes you the thousand. Should you cash the check, you will receive Federal Reserve “Notes,” which are “obligations” of the United States.

In that case, Uncle Sam would then owe you the thousand, but you can press your claim no further since Uncle’s IOUs are “legal tender” and are thus capable of settling the debt which they themselves represent. Thus, there’s not much point in bothering to cash your check, especially when checks are accepted by just about everybody.

Where do the numbers on these checks come from? They do not represent, as we know, any tangible material which had to be dug from the ground or extracted from the sea or air. You can transfer the numbers from one person to another by writing checks or tendering your debit card, but how do new numbers enter circulation? The answer is: as a loan. You may have naively assumed that when banks lend “money” they lend numbers already on “deposit” in their institutions. No. The literature of the Federal Reserve System — which is free for the asking, by the way — explains how it works.

Money creation starts at your bank

“The actual process of money creation takes place in commercial banks,” says the book Modern Money Mechanics, from the Chicago Federal Reserve Bank. To create, of course, is to make from nothing, and that is precisely the sense in which the word is to be understood. The booklet I Bet You Thought — from the New York Federal Reserve Bank — spells it out in detail.

“Commercial banks create checkbook money whenever they grant a loan, simply by adding new deposit dollars to accounts on their books in exchange for the borrowers IOU.” So you see, if you go the bank to borrow F$5,000 for a new automobile, the bank will not lend you F$5,000 already there on deposit. No, it will take your IOU for F$5,000 and simply add that number to your balance, which you can then spend. But the F$5,000 must be repaid with interest. This is in striking contrast to gold and silver money, which had to be dug from the earth and refined before being coined and entering circulation interest free. A citizen bringing precious metals to the mint received coins of equivalent amount in return (less a small amount, called seignorage, for the service) which meant that new money (gold and silver coin) was then entering circulation, but not as a loan to be repaid with interest.

In our present system, there is no provision for new money to come into being — save as a loan.

Thus, every “dollar” in your checking account — or anyone else’s — is originally borrowed. And the source of such “dollars” — their creator — is the commercial banking system. Think for a minute of the consequences of such an arrangement.

Compare modern money with rain. The rain falls from its only source, the clouds. Once on earth, it ends up in many places: “on deposit” in lakes and oceans, “in circulation” in rivers and streams, and eventually it returns, via evaporation, to the sky. There is a balance between the amount leaving the earth via evaporation and the amount returning as rain. Were that not the case, we would end up either flooded or a desert. Suppose now that the only source of rain, the clouds, were to regard the rain which fell upon the earth as a loan, to be repaid with interest.

In other words, more water would have to evaporate than was provided by rainfall. How could earth return to an only source more than it was given? That is the question to ask regarding our money. How can the borrowers of the country return to the banks more than was borrowed? Principle, after all, was borrowed. But principle plus interest must be returned. How can this be done? It can’t.

New dollar trailed by cloud of interest payment requirements

Or can it? Maybe there’s a way.

I’ve got it! Let’s borrow the money to pay the interest. And that, my friends, is what is done. The fact that interest must be borrowed is not apparent because it is not the borrower of the principle who borrows the interest.

Consider the case of an automobile manufacturer who borrows millions to retool for new models. If he doesn’t have the cash on hand to pay the retooling, where will he obtain it to pay the interest? The principle, which he would have to pay in any case, is simply “deferred income.” But the extra cost — interest — he will simply add to his other costs and pass along to the consumer. The consumer, in turn, will borrow to buy the car, and he will borrow more than would otherwise be necessary because of the added cost of interest. Thus, the consumer borrows to pay the interest owed by the automaker. The consumer, in turn, will pass along the cost of his borrowing in demands of higher wages because of the “increased cost of living.” The higher wages will be paid by the employer raising his costs to his customers, who will, in many instances, meet those higher costs by — borrowing. But each new borrowing becomes principle — to be repaid with interest.

With endless rollover, will anyone ever be repaid?

Now perhaps you understand why gold is referred to in banking circles as a “barbaric relic.” Anyone could obtain it and place it into circulation as money without paying tribute to a bank. Modern money, on the other hand, represents a debt which cannot, as a whole, be paid — ever. The continuous “rolling over” of the debt by borrowing to refinance keeps the public in perpetual thralldom to the creators of money. The mounting debt (or money supply, depending upon how you view it) means mounting interest, however, and more and more of the country’s productivity is being expended just to make interest payments. What will happen when the total productivity of America is not enough to meet interest due?

Here’s another thought about money creation: were you to borrow ten thousand for a year, you might pay one thousand in interest. Were you to borrow one thousand, you might pay one hundred in interest. In either case, what you “borrow” is merely a number added to your account by the bank — a fact which the banks themselves freely admit. That number represents nothing whatever owed or risked by the bank. Do you think that for writing the extra “0” (10,000 instead of 1,000) the banker is entitled to nine hundred more in interest? How much does it cost to write “0?”

Checking in

Before leaving the subject of checkbook and debit card money, or bank liabilities, we should examine the difference between a “good“ and “bad“ check. Once again it is largely a matter of geography. A “good” check transfer numbers written in a bank by a banker making a loan. A “bad“ check transfers numbers written anywhere else by anyone else, creating interest-free money. In other words, should you take a deposit slip and write a number on it, that number is simply a doodle. But if the banker initials it and approves it, it is “money“ which you have just borrowed! You can spend it. Were it not for the participation of the bank, there would be no distinguishing between “good“ and “bad“ checks.

Suppose, for example, that you had a checking account which “contained“ ninety-nine “dollars.“ You wrote a check for one hundred. A merchant gave you one hundred “dollars“ worth of merchandise for your check. And instead of taking that check to the bank, he endorsed it and spent it like cash at the store of a merchant who trusted him. This merchant, in turn, endorsed the check and used it as “money“ also. You can see that this check is perfectly “good“ until the last holder, with no more room on the check for further endorsements, takes it to the bank. At this time the check is discovered to be “bad“ — although, of course, it is 99% good. Even a single number created by a non-banker renders “bad“ an otherwise blameless check.

Good zeroes, bad zeroes

Isn’t it ironic? A “bad“ check transfers numbers not written by a banker — hence bankers will not honor it. A “good“ check, on the other hand, transfers numbers drawn from thin air by a banker, who will therefore accept it and issue currency in return. The currency, of course, is an IOU of the federal government. The “goodness“ or “badness“ of that IOU — Federal Reserve Note — cannot be tested by presenting it for payment, because it is legal tender and will “pay“ itself. Thus, to be “good,“ everyone else’s IOUs must be payable in Uncle’s IOUs which are not payable in anything. Sure gives Uncle — and the banks which get his IOUs for nothing — an advantage.

If the notes (or IOUs) of Chrysler Corp., for example, were a legal tender, do you think Chrysler could have found itself on the brink of bankruptcy? Why should Chrysler have to redeem its notes with currency (IOUs) or “good“ checks (liabilities of banks) when neither the banks nor Uncle Sam have to redeem their “obligations“ at all? Where is equal justice under the law? Of course, one of the debts which drove Chrysler to the wall was the burden of interest on money created with the stroke of a pen by bankers.

But the “money“ created and lent by the bankers was — debt! Don’t you wish your debts were money?

Dr. Paul Hein, a retired ophthalmologist who lives in Ballwin, Mo., has always had the keenest eye for the misdoings of our betters on a fundamental point of economics. That is, their printing of unbacked paper notes that pretend to be lawful, valuable dollars and which promise nothing except the ruin of the federal republic. Dr. Hein is the author of a favorite book about economics, All Work and No Pay; Life Saving Lessons in Modern Money, and was president of the Monetary Realist Society.  He is married and father of four children.

Source: Demonocracy.info has tremendous graphics suggesting the size of the federal debt and the obligations of the federal government and its central bank, the Federal Reserve System. A picture of why we are boosters of local economy.

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