This topic is very important, and central to the theme of ‘Investing’. To understand the concept of ‘Money as Debt’, one needs to understand how the ‘International Fractional Reserve Banking System’ works.
The history of the Federal Reserve System in the US is also important to understand how the world economies work. The central banks of most countries follow very similar fractional banking systems that are governed by the Bank of International Settlements (BIS). The top bankers in the world run the BIS. Thus their fates are tied to the fate of the US dollar and the US economy.
“Each and every time a bank makes a loan (or purchases securities); new bank credit is created — new deposits — brand new money.”
(WALTERS, Graham F, 1939), Director, Bank of Canada
Over the years, the fractional reserve banking system and its integrated network of banks backed by a central bank has become the dominant money system of the world. At the same time, the fraction of gold backing the debt money has steadily shrunk to nothing.
Money used to represent VALUE – Money now represents DEBT
The basic nature of money has changed.
In the past, a paper dollar was actually a receipt that could be redeemed for a fixed weight of gold or silver. In the present, a paper or digital dollar can only be redeemed for another paper or digital dollar.
In the past, privately created bank credit existed only in the form of private banknotes, which people had the choice to refuse just as we have the choice to refuse someone’s private check today. In the present, privately created bank credit is legally convertible to government issued “fiat” currency, the dollars, the loonies (Canadian dollars) and the pounds we habitually think of as money. Fiat currency is money created by government fiat, or decree, and legal tender laws declare that citizens must accept this fiat money as payment for debt or else the courts will not enforce the obligation.
So, now the question is… If governments and banks can both just create money, then how much money exists?
In the past, the total amount of money in existence was limited to the actual physical quantities of whatever commodity was in use as money. For example, in order for new gold or silver money to be created, more gold or silver had to be found and dug out of the ground.
In the present, money is literally created as debt. New money is created whenever anyone takes a loan from a bank. As a result, the total amount of money that can be created has only one real limit – the total level of debt.
“The process by which banks create money is so simple the mind is repelled.”
(GALBRAITH, John Kenneth, 1975), Economist
Governments place an additional statutory limit on the creation of new money, by enforcing rules known as fractional reserve requirements. Essentially arbitrary, fractional reserve requirements vary from country to country and from time to time. In the past, it was common to require banks to have at least one dollar’s worth of real gold in the vault to back 10 dollars worth of debt money created.
Today, reserve requirement ratios no longer apply to the ratio of new money to gold on deposit, but merely to the ratio of new debt money to existing debt money on deposit in the bank. Today, a bank’s reserves consists of three things: the amount of government-issued cash that the bank has in its vault, the amount of credit it has with the central bank, and the amount of already existing debt money the bank has on deposit.
“Permit me to issue and control the money of a nation, and I care not who makes its laws.”
(ROTHSCHILD, Mayer Amschel), International Banker
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