Two great mysteries dominate our lives: Love and Money.
"What is love?" is a question that has been endlessly explored 12.5
in stories, songs, books, movies, and television.
But the same can NOT be said about the question "What is money?"
It's not surprising that monetary theory hasn't inspired any blockbuster movies.
But it was not even mentioned at the schools most of us attended.
For most of us, the question "Where does money come from?" 16.5
brings to mind a picture of the mint printing bills and stamping coins.
Money, most of us believe, is created by the government.
It's true
but only to a point.
Those metal and paper symbols of value we usually think of as money
are, indeed, produced by an agency of the federal government called the Mint.
But the vast majority of money is not created by the Mint.
It is created in huge amounts every day by private corporations known as banks.
Most of us believe that banks lend out money that has been entrusted to them by depositors.
Easy to picture.
But not the truth.
In fact, banks create the money they loan,
not from the bank's own earnings, not from the money deposited,
but directly from the borrower's promise to repay.
The borrower's signature on the loan papers is an obligation to pay the bank
the amount of the loan plus interest,
or, lose the house, the car, whatever asset was pledged as collateral.
That's a big commitment from the borrower.
What does that same signature require of the bank?
The bank gets to conjure into existence the amount of the loan
and just write it into the borrower's account.
Sound far-fetched?
Surely that can't be true. But it is.
To demonstrate how this miracle of modern banking came about, consider this simple story:
The Goldsmith's Tale
Once upon various times, pretty much anything was used as money.
It just had to be portable and enough people had to have faith
that it could later be exchanged for things of real value like food, clothing and shelter.
Shells, cocoa beans, pretty stones, even feathers have been used as money.
Gold and silver were attractive, soft and easy to work with.
so some cultures became expert with these metals.
Goldsmiths made trade much easier by casting coins,
standardized units of these metals whose weight and purity was certified.
To protect his gold, the goldsmith needed a vault.
And soon his fellow townsmen were knocking on his door
wanting to rent space to safeguard their own coins and valuables.
Before long, the goldsmith was renting every shelf in the vault 52.5
and earning a small income from his vault rental business.
Years went by and the goldsmith made an astute observation:
Depositors rarely came in to remove their actual, physical gold, 54.5
and they never all came in at once.
That was because claim checks the goldsmith had written as receipts for the gold,
were being traded in the marketplace as if they were the gold itself.
This paper money was far more convenient than heavy coins, 57.5
and amounts could simply be written,
instead of laboriously counted one by one for each transaction.
Meanwhile, the goldsmith had another business.
He lent out his gold charging interest.
Well, as convenient claim check money came into acceptance, borrowers began
asking for their loans in the form of these claim checks instead of the actual metal.
As industry expanded more and more people asked the goldsmith for loans.
This gave the goldsmith an even better idea.
He knew that very few of his depositors ever removed their actual gold.
So, the goldsmith figured he could easily get away with lending out claim checks
against his depositors' gold, in addition to his own.
As long as loans were repaid, his depositors would be none the wiser, and no worse off.
And the goldsmith, now more banker than artisan,
would make a far greater profit than he could by lending only his own gold.
For years the goldsmith secretly enjoyed a good income 71.5
from the interest earned on everybody else's deposits.
Now a prominent lender, he grew steadily richer than his fellow townsmen 72.5
and he flaunted it.
Suspicions grew that he was spending his depositors' money.
His depositors got together and threatened withdrawal of their gold 74.5
if the goldsmith didn't come clean about his newfound wealth.
Contrary to what one might expect, 75.5
this did not turn out to be a disaster for the goldsmith.
Despite the duplicity inherent in his scheme, his idea did work.
The depositors had not lost anything. 77.5
Their gold was all safe in the goldsmith's vault.
Rather than taking back their gold, 78.5
the depositors demanded that the goldsmith, now their banker,
cut them in by paying them a share of the interest.
And that was the beginning of banking.
The banker paid a low interest rate on deposits of other people's money 81.5
that he then loaned out at a higher interest.
The difference covered the bank's cost of operation and its profit.
The logic of this system was simple.
And it seemed like a reasonable way to satisfy the demand for credit.
However this is NOT the way banking works today.
Our goldsmith/banker was not content with the income remaining 86.5
after sharing the interest earnings with his depositors.
And the demand for credit was growing fast, 87.5
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 vaults,
he could lend out claim checks on gold that wasn't even there!
As long as all the claim check holders didn't come to the vault at the same time 92.5
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 95.5
was too outrageous to believe,
so, for a long time, the thought did not even 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 banker's loans 98.5
and his ostentatious wealth did trigger suspicions once again.
Some borrowers started to demand real gold instead of paper representations. 99.5
Rumors spread.
Suddenly, several wealthy depositors showed up to remove their gold. 100.5
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 & silver 102.5
to redeem all the paper he had put into their hands.
This is called a "run on the bank" and is what every banker dreads.
This phenomenon of a "run on the bank" ruined individual banks and,
not surprisingly, damaged public confidence in all bankers.
It would have been straightforward to outlaw the practice of creating money from nothing.
But the large volumes of credit the bankers were offering 107.5
had become essential to the success of European commercial expansion.
So, instead, the practice was legalized and regulated.
Bankers agreed to abide by limits on the amount of 109.5
fictional loan money that could be lent out.
The limit would still be a number much larger 110.5
than the actual value of gold and silver in the vault.
Quite often the ratio was 9 fictional dollars to 1 actual dollar in gold.
These regulations were enforced by surprise inspections.
It was also arranged that, in the event of a run,
central banks would support local banks with emergency infusions of gold.
Only if there were runs on a lot of banks simultaneously
would the bankers' credit bubble burst and the system come crashing down.
Over the years, the fractional reserve system 118.5
and its integrated network of banks backed by a central bank
has become the dominant money system of the world. 119.5
At the same time, the fraction of gold backing the debt money
has steadily shrunk to nothing.
The basic nature of money has changed.
In the past, a paper dollar was actually a receipt 122.5
that could be redeemed for a fixed weight of gold or silver.
In the present, a paper or digital dollar 123.5
can only be redeemed for another paper or digital dollar.
In the past, privately created bank credit 124.3
existed only in the form of private banknotes, 124.6
which people had the choice to refuse
just as we have the choice to refuse someone's private cheque today.
In the present, privately created bank credit 126.5
is legally convertible to government issued "fiat" currency,
the dollars, loonies and pounds we habitually think of as money.
Fiat currency is money created by government fiat, or decree, 128.5
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, 131.5
then how much money exists?
In the past, the total amount of money in existence 132.5
was limited to the actual physical quantities
of whatever commodity was in use as money. 133.5
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. 135.5
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- 136.5
- the total level of debt.
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 139.5
vary from country to country and from time to time.
In the past, it was common to require banks to have 140.5
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 142.5
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 consist of two things:
the amount of government-issued cash or equivalent 145.5
that the bank has deposited with the central bank,
plus the amount of already existing debt money the bank has on deposit.
To illustrate this in a simple way….
let us imagine that a new bank has just started up and has no depositors yet.
However the bank's investors have made a reserve deposit 149.5
of one thousand one hundred and eleven dollars and twelve cents
of existing cash money at the central bank. The required reserve ratio is 9:1.
Step 1: The doors open and the new bank welcomes its first loan customer.
He needs $10,000 to buy a car.
At a 9:1 reserve ratio, the new bank's reserve at the central bank, 153.5
also known as "high-powered money",
allows it to legally conjure into existence 9 times that amount, 154.5
or $10,000 on the basis of the borrower's pledge of debt.
This $10,000 is not taken from anywhere. 155.5
It is brand new money simply typed into the borrower's account as bank credit.
The borrower then writes a check on that bank credit to buy the used car.
Step 2: The seller then deposits this newly created $10,000 at her bank.
Unlike the high-powered government money deposited at the central bank, 158.5
this newly created credit money cannot be multiplied by the reserve ratio.
Instead it is divided by the reserve ratio.
At a ratio of 9:1, a new loan of $9,000 can be created on the basis of the $10,000 deposit.
Step 3: If that $9000 is then deposited by a third party, 161.5
at the same bank that created it, or at a different one,
it becomes the legal basis for a third issue of bank credit, 162.5
this time for the amount of $8100.
Like one of those Russian dolls, where each layer contains a slightly smaller doll inside, 163.5
each new deposit contains the potential
for a slightly smaller loan in an infinitely decreasing series.
Now, if the loan money created is not deposited at a bank, the process stops.
That is the unpredictable part of the money creation mechanism.
But more likely, at every step, the new money will be deposited at a bank,
and the reserve ratio process can repeat itself over and over until 168.5
almost $100,000 of brand new money has been created within the banking system.
All of this new money has been created entirely from debt, 169.5
and the whole process has been legally authorized by the initial reserve deposit
of just one thousand one hundred and eleven dollars and twelve cents, 170.5
which is still sitting untouched at the central bank!
What's more, under this ingenious system, the books of each bank in the chain must show
that the bank has 10% more on deposit than it has out on loan. 172.5
This gives banks a very real incentive to seek deposits in order to be able to make loans,
supporting the general but misleading impression that loans come out of deposits.
Now, unless all the successive loans were deposited at the same bank,
it cannot be said that any one bank 175.5
got to multiply its initial high powered money reserve almost 90 times
by issuing bank credit out of nothing.
However, the banking system is a closed loop, 177.5
bank credit created at one bank becomes a deposit in another, and vice versa.
In a theoretical world of perfectly equal exchanges, the ultimate effect
would be exactly the same as if the whole process took place within one bank.
That is, the bank's initial central bank reserve of a little over eleven hundred dollars
allows it to ultimately collect interest on up to $100,000 the bank never had.
If that sounds ridiculous, try this. 182.5
In recent decades, as a result of steady lobbying by the banks,
the requirements to make a reserve deposit at the nation's central bank 183.5
have all but disappeared in some countries
and actual reserve ratios can be much higher than 9:1.
For some types of accounts, twenty to one and thirty to one ratios are common.
And even more recently, by using loan fees to raise the required reserve from the borrower,
banks have now found a way to circumvent reserve requirement limitations entirely.
So… while the rules are complex the common sense reality is actually quite simple.
Banks can create as much money as we can borrow.
Despite the endlessly presented mint footage, 193.5
government-created money typically accounts for less than 5% of the money in circulation.
More than 95% of all money in existence today was created
by someone signing a pledge of indebtedness to a bank.
What's more, this bank credit money is being created and destroyed 196.5
in huge amounts every day,
as new loans are made and old ones repaid.
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 203.5
to be paid out in this government currency.
Thrirdly, government courts enforce debts.
And lastly, governments pass regulations to protect the money system's functionality 205.5
and credibility with the public
while doing nothing to inform the public about where money really comes from.
The simple truth is that
when we sign on the dotted line for a so-called loan or mortgage,
our signed pledge of payment, 209.5
backed by the assets we pledge to forfeit should we fail to pay,
is the only thing of real value involved in the transaction.
To anyone who believes we will honour our pledge,
that loan agreement or mortgage is now a portable, exchangeable,
and saleable piece of paper. It is an IOU.
It represents value and is therefore a form of money.
This money the borrower exchanges for the bank's so-called loan.
Now... A loan in the natural world means that the lender must have something to lend.
If you need a hammer, my loaning you a promise to provide a hammer I don't have 217.5
won't be of much help.
But in the artificial world of money, a bank's promise to pay money it doesn't have,
is allowed to be passed off as money and we accept it as such.
Once the borrower signs the pledge of debt, 222.5
the bank then balances the transaction by creating,
with a few keystrokes on a computer, a matching debt of the bank to the borrower.
From the borrower's point of view this becomes "loan money" in his or her account,
and because the government allows
this debt of the bank to the borrower to be converted to government fiat currency,
everyone has to accept it as money.
Again the basic truth is very simple.
Without the document the borrower signed, the banker would have nothing to lend
Have you ever wondered how everyone... 230.5
governments, corporations, small businesses, families
can all be in debt at the same time and for such astronomical amounts?
Have you ever questioned how there can be that much money out there to lend?
Now you know. There isn't.
Banks do not lend money.
They simply create it from debt.
And, as debt is potentially unlimited, so is the supply of money.
And, as it turns out…
the opposite situation is also true.
Isn't it astounding, that despite the incredible wealth of resources,
innovation and productivity that surrounds us,
almost all of us, from governments to companies to individuals,
are heavily in debt to bankers!
If only people would stop and think - How can that be?
How can it be that the people who actually produce all of the real wealth in the world
are in debt to those who merely lend out the money that represents the wealth?
Even more amazing is that once we realize that money really is DEBT,
we realize that if there were no debt there would be no money
If this is news to you, you are not alone.
Most people imagine that if all debts were paid off, 252.5
the state of the economy would improve.
It's certainly true on an individual level.
Just as we have more money to spend when our loan payments are finished,
we think that if everyone were out of debt, there would be more money to spend in general.
But the truth is the exact opposite. There would be no money at all.
There it is... We are totally dependent on continually renewed bank credit 257.5
for there to be any money in existence.
No loans, no money - which is what happened during the Great Depression,
the money supply shrank drastically as the supply of loans dried up.
That's not all. Banks create only the amount of the Principal.
They do no not 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 the Interest
is the general economy's overall money supply.
But almost all of 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 other 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 is clearly impossible for everyone to pay back the Principal plus the Interest
because the interest money does not exist.
This can even be expressed by a simple mathematical formula.
The big problem here is that for long term loans such as mortgages and government debt,
the total Interest far exceeds the Principal.
So unless a lot of extra money is created to pay the Interest,
it means a very high proportion of foreclosures, 284.5
and a non-functioning economy.
To maintain a functional society the rate of foreclosure needs to be low.
And so, to accomplish this,
more and more new debt money has to be created
to satisfy today's demands for money to service the previous debt.
But, of course, this just makes the total debt bigger.
And that means more interest must ultimately be paid, resulting
in an ever-escalating and inescapable spiral of mounting indebtedness.
It is only the time lag between money's creation
as new loans and its repayment
that keeps the overall shortage of money from catching up and bankrupting the entire system.
However, as the bankers' insatiable credit monster gets bigger and bigger,
the need to create more and more debt money to feed it becomes increasingly urgent.
Why are interest rates so low?
Why do we get unsolicited credit cards in the mail?
Why is the US government spending faster than ever?
Could it be to stave off collapse of the entire monetary system?
A rational person has to ask:
Can this really go on forever? Isn't a collapse inevitable?
Money facilitates production and trade.
As the money supply increases, money just becomes increasingly worthless
unless the volume of production and trade in the real world grows by the same amount
Add to this the realization that when we hear that the economy is growing at 3% per year,
it sounds like a constant rate. But it is not.
This year's 3% represents more real goods and services than last year's 3% 310.5
because it is 3% of the new total.
Instead of a straight line as is naturally visualized from the words,
it is really an exponential curve getting steeper and steeper.
The problem, of course, is that perpetual growth
of the real economy requires perpetually escalating use
of real world resources and energy.
More and more stuff has to go from natural resource to garbage every year
...forever, just to keep this system from collapsing
What can we do about this downright scary situation?
For one thing, we need a very different concept of money.
It's time more people ask themselves and their governments four simple questions.
Around the world, governments borrow money at interest from private banks.
Government debt is a major component of total debt 324.5
and servicing that debt takes a big chunk of our taxes.
Now, we know that banks simply create the money they lend…
and that governments have given them permission to do this.
So the first question is…
why do governments choose to borrow money from private banks at interest
when government could create all the interest free money it needs itself?
And the second big question is:
Why create money as debt at all?
Why not create money that circulates permanently and
doesn't have to be perpetually re-borrowed at interest in order to exist?
The third question:
How can a money system that can only function with perpetually accelerating growth
be used to build a sustainable economy?
Isn't it logical that perpetually accelerating growth and sustainability are incompatible?
And finally:
What is it about our current system 339.5
that makes it totally dependent on perpetual growth?
What needs to be changed to allow the creation of a sustainable economy?
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 346.5
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, the idea of making money from money 353.5
is held as an ideal to strive for.
Why work when you can get your money to work for you?
However, in trying to envision a sustainable future, it is very clear
that the charging of interest is both a moral and a practical problem.
Imagine a society and economy that can endure for centuries because,
instead of plundering its capital stores of energy, 358.5
it restricts itself to present day income.
No more wood is harvested than grows in the same period.
All energy is renewable: 360.5
solar, gravitational, geothermal, magnetic and whatever else we discover.
This society lives within the limits of its non-renewable resources
by reusing and recycling everything. And the population just replaces itself.
Such a society could never function using a money system utterly dependent 363.5
on perpetually accelerating growth.
A stable economy would need a money supply 364.5
at least capable of remaining stable without collapsing.
Let's say the total volume of this stable money supply 365.5
is represented by this big circle.
Let us also imagine that moneylenders must actually have existing money to lend.
If some people within this money supply begin systematically lending money at interest,
their share of the money supply will grow.
If they continually re-loan at interest all the money that gets paid back 369.5
what is the inevitable result?
Whether it is gold, fiat or debt money doesn't matter.
The moneylenders will end up with ALL of the money.
And after the foreclosures and bankruptcies are all filed, 372.5
they will get all the real property too.
Only if the proceeds of lending at interest were evenly distributed among the population
would this central problem be solved.
Heavy taxation of bank profits might accomplish this goal.
But then why would banks want to be in business?
If we were ever able to free ourselves of the current situation,
we could imagine banking run as a non-profit service to society,
disbursing its interest earnings as a universal citizen dividend,
or lending without charging interest at all.
If it is the fundamental nature of the system that causes the problems,
tinkering with the system cannot ever solve those problems.
The system itself must be replaced.
Many monetary critics call for a return to gold-based money, 392.5
claiming that gold has a long history of reliability.
They ignore the many scams that can be played with gold:
shaving coins, debasing the metal, cornering the market,
all of which were abundantly practiced in ancient Rome, and contributed to its fall.
Some advocate silver, it being more abundant than gold 396.5
and therefore more difficult to corner.
Many question the need to bring back precious metals at all.
No one wants to go back to carrying heavy sacks of coins to go shopping.
It is a certainty that paper, digital, plastic or more likely biometric ID money
would be the real medium of trade 400.5
with the same potential for creating unlimited debt money we have now.
Beyond that, if gold again became the sole legal basis of money, 401.5
those who have no gold would suddenly have no money!
Other monetary reform advocates have concluded 402.5
that greed and dishonesty are the main problems,
and that there may be better ways to create an honest and equitable money system 403.5
than returning to silver or gold.
Inventive minds have proposed a variety of alternative ways to create money.
Many private barter systems create money as debt much as banks do,
but it is done openly and without charging interest.
An example is a barter system in which debt is expressed as pledges of hours of work,
all work being valued equally at a dollar figure
that then allows hours to be equated with the dollar price of goods.
This kind of money system can be set up
by anyone who can devise a way to do the accounting
and find willing and trustworthy participants.
Setting up a local barter money system, even if it were little used now,
would be prudent emergency planning for any community.
Monetary reform, like electoral reform, is a big topic,
and one that requires a willingness to change and to think outside the box.
Monetary reform, again, like electoral reform will not come easily
because the enormously powerful interests that benefit from the existing system
will do their utmost to maintain their advantage.
Now that we have seen that money is just an idea and that, in reality,
money can be whatever we make it;
here is one very simple alternative monetary concept to consider.
This model is based on systems that have worked in the past,
in England, and America,
systems that were undermined and destroyed by the goldsmith-bankers
and their fractional reserve system.
To create an economy based on permanent, interest free money,
money could simply be created and spent into the economy by the government,
preferably on long-lasting infrastructure that facilitates the economy,
such as roads, railroads, bridges, harbours, and public markets.
This money would not be created as debt.
It would be created as value, that value being in the form of whatever it was spent on.
If this new money facilitated a proportional increase in trade requiring its use,
it would cause no inflation whatsoever.
If government spending did cause inflation, there would be two courses of action available.
Inflation is equivalent in effect to a flat tax on money.
Whether the money goes down in value 20% 437.5
or the government takes 20% of our money away from us,
the effect on our buying power is the same.
Viewed this way inflation in place of taxation 439.5
might be politically acceptable if well spent and kept within limits.
Or, government could choose to counter inflation 440.5
by collecting tax monies that it then takes out of use,
thus reducing the money supply and restoring its value.
To control deflation, 442.5
which is the phenomenon of falling wages and prices,
the government would simply spend more money into existence.
With no competing private debt money creation,
governments would have more effective control of their nation's money supply.
The public would know whom to blame if things went wrong.
Governments would rise and fall on their ability to preserve the value of money.
Government would operate primarily on taxes as it does now, 448.5
but tax money would go much, much further
as none of it would be required to pay interest to private bankers.
There could be no national debt
if the federal government simply created the money it needed.
Our perpetual collective servitude to the banks 451.5
through interest payments on government debt would be impossible.
What we have been taught to believe is democracy and freedom has become,
in reality, an ingenious and invisible form of economic dictatorship.
As long as our entire society 458.5
remains utterly dependent on bank credit for its supply of money,
bankers will be in the position to 459.5
make the decisions on who gets the money they need and who doesn't.
Few people are aware today that, the history of the United states, 474.5
since the Revolution in 1776
has been in a large part, the story of an epic struggle
to get free and stay free of control by the European international banks.
This struggle was finally lost in 1913,
when President Woodrow Wilson signed into effect the Federal Reserve Act,
putting the international banking cartel in charge of creating America's money.
The power of this system is deeply ingrained. 491.5
So is the educational and media silence on the subject.
Years ago, a Canadian Deputy Prime Minister surveyed scores of non-economists,
both highly educated professionals and common sense people on the street
and found that not one of them 494.5
had an accurate understanding of how money is created.
In fact it is probably safe to say that most people, 495.5
including the front line employees of banks,
have never given the matter a moment of thought.
Have you?
The modern money as debt system was born a little over three hundred years ago,
when the first Bank of England was set up
with a royal charter for fractional lending of gold receipts at a modest ratio of 2:1.
That modest ratio was just the proverbial foot in the door.
The system is now worldwide, 506.5
creates virtually unlimited amounts of money out of thin air,
and has almost everyone on the planet 507.5
chained to a perpetually-growing debt that can NEVER be paid off.
Could it have all happened by accident?
Or is it a conspiracy?
Obviously, something very BIG is at stake here.
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