Hardly a day goes by when I do not get a posting or read an article by somebody complaining about the government “creating” money and thereby causing inflation. Now, the people who write these articles are absolutely correct about there being too much money created; they are absolutely wrong about who creates it. Only 5% of the money in circulation is created by the government; the rest is created by the banks. And if that were not astounding enough, even more astounding is how they create it: They create it out of thin air, out of nothing.
Most of us believe that when we get a loan from a bank, the bank is lending us money that comes from the depositors. But this is not true. The banks lend out 10 times the amounts on deposit. Where does this extra 900% come from? From nowhere. They just make an accounting entry and create the money. This means that all money is debt, and that without debt there would be no money.
Look at your dollar bill. At the top is says “Federal Reserve Note.” This has several implications. One, a “note” means that it is a debt. When you buy a home or a car on credit you normally sign a “note” for the loan. The dollar bill is exactly like that. The second thing about this is that the Federal Reserve Bank is not, as most people believe, a department of the federal government. Rather, it is a privately-owned bank. Or rather, 12 privately owned banks. These banks are owned by all of the federally chartered banks. The president does appoint the chairman of the board of the Fed Banks governing body and seven of the directors, and the law gives the FedBank certain powers. But for all that, it is a privately owned and operated system of banks.
Look to the left of Washington, and you will see the stamp of one of these 12 banks. That is to say, that it is one of these private banks, and not the government, that issued that particular dollar (The stamp has been removed from the new issues of higher denominations, but the system works the same way.) Up until 1913, that stamp would have borne the name of your local bank, rather than the local federal reserve bank, but the system is the same.
By having the power to create money from nothing, the banks have tremendous influence and control over the economy, and indeed over political life as well. Most people have difficulty believing that this is the way money works. As Marshall McLuhan noted, “Only puny secrets need protection; Big discoveries are protected by public incredulity.” And it is certainly hard to believe that all money is debt, created out of thin air by a private group with no responsibility towards the public good. Further, it is obvious that such a system must be (and is) unstable, one that requires constant “bail-outs,” bail-out that the government has no choice but to perform if the entire system is not to collapse.
No of what I have said here is particularly controversial. Any economist, of whatever stripe or ideological bent, will, if pressed, admit that this is the way money works. Few, however, will face the implications. Indeed, the whole subject is usually pushed to the back burner; like the dead mouse in the kitchen, it is considered gauche to bring the subject up in public. Therefore, the subject of money remains a complete mystery to the general public. Yet, no other issue affects them in their daily economics lives as does this one. It is important that each of us understand it.
Paul Grignon has brought up the subject; he has put together an interesting film on this topic. It is 47 minutes long, but it is well-worth your time. You can view this film at
http://silverbearcafe.com/private/moneyasdebt.html. I think it is important to take the time to view this film, and even to buy it and share it with your friends and neighbors.