Whereas the 9 to 1 ratio reigned at the beginning of banking
regulation, today in some banks, ratios are as high as 20 to 1 or 30 to
1, and frighteningly, some banks have no reserves at all!
The bottom line is that banks can create as much money as we can borrow!
One wonders how individuals, banks, governments, and other entities can
all be in debt at the same time, owing astronomical amounts of money.
This question is answered when we consider that banks don't lend actual
money; they create it from debt, and since debt is potentially
unlimited, so is the supply of money.
But what is so wrong
with this scheme? Hasn't it been working all these years? Actually,
there are several things very wrong with it.
The first issue
is that the people who produce the real wealth in the society are in
debt to those who lend out the money in that society. Moreover, if
there were no debt, there would be no money.
Most of us have
been taught that paying our debts responsibly is good for ourselves and
for the economy. We imagine that if all debts were paid off, the
economy would improve. In terms of individual debt, that's true, but in
terms of the overall economy, the exact opposite is true. We are
continually dependent on bank credit for money to be in existence-bank
credit which supplies loans. Loans and money supply are inextricably
connected, and during the Great Depression, the supply of money
plummeted as the supply of loans dried up.
Secondly, banks
only create the amount of the principal of loan. So where does the
money come from to pay the interest? From the general economy's money
supply, most of which has been created in the same way.
A
visual image is helpful. Imagine two pools of water-one full and one
empty. The pool with water in it represents the amount of the principal
of a loan; the empty pool represents principal plus interest. The pool
of principal has only a certain amount of water in it, so that it can't
possibly fill up the other pool of principal plus interest. The rest of
the water needed to fill the pool doesn't actually exist and has to be
acquired from somewhere.
The problem is that for long-term
loans, the interest far exceeds the principal, so unless a lot of money
is created to pay the interest, a lot of foreclosures will result. In
order to maintain a functional society, the foreclosure rate must be
low, so more and more debt must be created which means that more and
more interest is created, resulting in a vicious and escalating spiral
of indebtedness. Furthermore, it is only the lag time between the time
money is created to the time debt is repaid that keeps the overall
shortage of money from catching up and bankrupting the entire system.
It takes only a few second of reading the headlines of the financial
pages during this month, August, 2007, to notice that foreclosure rates
and lag time are threatening to meltdown the entire U.S. economy. The
preferred method of the Federal Reserve and central banks addressing
this calamity is, yes, you guessed it: to create more debt. The
lowering of interest rates in recent years, the bombardment of credit
card applications we find regularly in our mailboxes, the red ink in
which the United States government is drowning are all an attempt to
stave off the collapse of the entire system.
Can any sane
human being believe that this situation can persist forever? What is
the inevitable outcome of a fiduciary game of musical chairs? Monetary
historian, Andrew Gause, answered this question:
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.
And finally, a system based on
fractional reserve banking is, to say the least, not sustainable
because it is predicated on incessant growth. Perpetual growth requires
perpetual use of resources and the constant conversion of precious
resources into garbage just to keep the system from collapsing.
Grignon suggests that in order to begin addressing and resolving the
nightmare of money as debt, we must ask four pivotal questions:
•1) Why do governments choose to borrow money from private banks at
interest when governments could create all the interest-free money they
need themselves?
•2) Why create money as debt at all? Why
not create money that circulates permanently and doesn't have to be
perpetually re-borrowed in interest?
•3) How can a money
system, dependent on perpetual growth, be used to build a sustainable
economy? Perpetual growth and sustainability are fundamentally
incompatible.
•4) What is it about our current system that
makes it totally dependent on perpetual growth? What needs to be
changed to allow the creation of a sustainable economy?
A
crucial assumption that must be questioned is the practice of usury or
the charging of interest for lending money. Grignon asserts that it is
a moral and a practical issue because it necessarily results in lenders
ending up with all the money, particularly when foreclosures happen.
Not only is debt deplorably profitable for lenders in terms of interest
and service charges, but when borrowers cannot pay, as in the case of
housing foreclosures, lenders walk away with the proceeds. In a recent
article "
Panic On Wall St.",
Andrew Leonard explains how obscenely advantageous subprime and liar
loans have been for lenders and provides damning evidence to support
the long-time assertions by Catherine Austin Fitts that the
housing bubble has been engineered by centralized financial systems.
In a transformed economy, which I do not anticipate happening in the
twenty-first century, banks would exist as non-profit services to
society-lending without charging interest at all. But, as Grignon says,
if it's the fundamental nature of the system that's causing the
problem, then tinkering with the system can't solve the problem. It
must be replaced.
One solution might be the replacement of
paper dollars with precious metals, which of course, could once again
become cumbersome and inconvenient, unless the economic system had
experienced collapse and digital and paper transactions were no longer
possible.
Perhaps the best solution offered by "Money As
Debt" is the creation of locally-based barter money systems in which
debt is repaid by hours of work valued at a dollar figure.
Additionally, government spending on infrastructure, not using borrowed
money, would also create value locally and nationally.
The
Federal Reserve banking cartel has been shrouded in secrecy and lack of
information among the American people regarding its creation and
functioning. One American president appeared to have understood it very
well:
Whoever controls the volume of money in our
country is absolute master of all industry and commerce...when you
realize that the entire system is very easily controlled, one way or
another, by a few powerful men at the top, you will not have to be told
how periods of inflation and depression originate.
~James Garfield, 20th President Of U.S.
Assassinated, 1881
"Money As Debt" is not only a must-see for any American who wants to be
politically and economically literate, but is particularly crucial for
high school and college students to see in order for them to understand
how the money works in the United States. Yet we should not assume that
the film's simplicity of presentation ranks it as less than adult
because most adults in this nation are clueless regarding the
connection between money and debt.
I personally hold no hope
of changing the money/debt system which is truly the
eight-hundred-pound gorilla in the American economic landscape. What I
do envision, and what must happen, in my opinion, is its total
collapse, whether gradual or sudden, so that the transformation and
relocalization of the nation's economic system will be possible, which
it is not in the current milieu. However, what we are presently
witnessing in the bursting housing bubble and credit crisis may well be
the beginning of the end of "money as debt."
Suggested Reading:
The Creature From Jekyll Island, by G. Edward Griffin
Secrets Of The Temple: How The Federal Reserve Runs The Country, by William Greider
Writings 
Anyone who hasn't watched "
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