Banks and “Money”
If a bank lends ten dollars and charges a dollar interest, then the borrower must repay $10+1. No problem if the monetary system contained $100,000,000 of non-debt based money to begin with. The borrower can obtain an extra dollar somewhere from the pool of permanent money circulating in the economy to repay his loan.
However, contrary to what most people think, when the bank “lends” the $10, it doesn’t come out of the $100,000,000. It is “credit”. The borrower’s promise to repay (the signed loan document) is used to justify creating $10 of bank credit (borrower debt) in a bank account. That “credit” is indistinguishable from the permanent money, and so it is in effect money, too. This is what people mean when they say, “Banks create money”. It is true; they do.
Now, temporarily there exists $100,000,010, and gradually as the loan is repaid, the amount reduces back down to $100,000,000, the credit is extinguished and only the permanent money remains once again. But, one dollar has changed hands from the non-financial world to the financial world. At the end of the loan period, there is $100,000,000 permanent money again, $99,999,999 + $1 paid in interest to the bank.
Sounds pretty benign, eh? The problem is that the mathematics looks radically different when the modern fractional reserve banking system is examined. Without getting into all the gory mathematics, which in my experience most people cannot stomach without first downing a quart of expresso or Jack Daniels first, depending on their favorite vice, let it suffice to say that some permanent money exists in the system, but it is relatively insignificant. That bank “credit” money now makes up 97%-99% of all money and permanent money makes up maybe 1%-3% of all money.
Let’s say $75 trillion exists, and 2% is permanent money. That’s $73.5 trillion dollars worth of bank credit, and $1.5 trillion of permanent money. I would be willing to bet there isn’t that much permanent money, but it doesn’t really matter. Close enough.
People are paying interest on $73.5 trillion of bank credit. The credit created the principle, but not the interest. So, the people must fight over the $1.5 trillion of permanent money to get the interest needed to make payments on their loans. Let’s just say the average interest rate of all loans is 5% per year. That’s $3.675 trillion per year, out of $1.5 trillion of permanent money. It is not possible.
So, what do the banks do? Lend more money, of course, so people can go deeper into debt but at least they can still make their loan payments. Does that sound like a pyramid scheme? Of course it does. That is why the pyramid is on the one dollar bill. It is one big inside joke. Once this system is in place, gradually indebtedness grows until bank credit displaces permanent money as the dominant form of money, and people and Government become permanently indebted to the banks. The banks own us individually and our Government, too.
Inflation and Economic “Growth”
There are important consequences, side effects, as well to the creation of credit-money by banks. One is inflation. The fact that banks must keeping lending in ever greater amounts causes what is called “monetary inflation”, or “debasing of the currency”. It’s inflation of the money supply or taking the money off the basis of permanent money (debasement). That is one kind of inflation. But, there are two kinds of inflation. The second kind of inflation is “price inflation”. That is what everyone perceives as general price levels: of housing, cars, food, gas, rent, labor, etc.
Roughly speaking, there is an equivalency between money supply and general prices. All else being stable, if money supply increases, so do general prices. But, economies are dynamic. Not all else remains stable. If the money supply increases, general prices do not necessarily rise; it is possible that population and productivity rise as well. In that case, the increase in the money supply may be spread out over a greater number of people, products and services, and equivalency between money supply and general prices is maintained.
That is why Government and Wall Street are fanatical about and obsessed with “economic growth”. With monetary inflation an inherent part of the banker’s credit-based money system, economic growth is absolutely necessary to compensate for their pumping up of the money supply. Otherwise, it would become that much more obvious how basically fraudulent their system is.
Now, bankers are like everyone else, greedy when it comes to money and wealth. They tend to over-reach. When they lend more money, the existing money in circulation becomes worth less due to the first kind of inflation, but some of that loss in value can be hidden by population and economic growth. They cannot stop that kind of inflation. It’s how their system works, mathematically. But, sometimes they can hide it with “growth”.
The bankers and politicians, too, have learned a little trick though. Lending more money does tend to stimulate the economy, temporarily, so they ALWAYS lend even more, especially in an election year. A problem is, although a boost in credit does tend to goose the economy, the greater the ratio of credit to permanent money, the less effect each boost in credit has. Even with real economic growth, year after year, they still expand the bank credit (debt-based) money supply too much, and we consistently get price inflation as well as monetary inflation . That is why a dollar has lost 95%-97% of its purchasing power by various estimates since 1913, the establishment of the Federal Reserve.