Money as Debt

Economic Issues - Monetary Economics

The Past and how we got into this Monetary System

There is a fundamental truth about money and debt which few people know and even fewer believe that something should be done about it.
Josef Hasslberger
Rome, Italy
September 1999
The Problem
We are quite aware of the problem, it is in plain sight, it is the solution that escapes us, probably because we think the problem is so big we cannot solve it. Now the problem is, that neither governments nor the vast majority of people have money. Maybe that sounds like an exaggeration but if we think about it some more, it is the gospel truth. Governments, whether liberal, socialist, conservative, democratic, whatever you may call them, do not have money. They are taxing us to death and yet they are making debts. And most of them are already so deeply in debt that there seems to be hardly a hope to pay off what was borrowed. A sizeable percentage of all taxes collected, different from country to country but in every case considerable, goes towards "debt service" (that is what the government calls the paying of interest on it's debt), before even discussing the "budget", which really is only about how to spend the rest. As far as people go, I don’t think you have to look very hard to see families struggling to make ends meet, even though there is no lack of willingness to work. Sometimes both man and wife have a job; family life and children suffer, and in many cases there still is barely enough to pay the bills and take a holiday. You might say that that’s quite normal, it has always been like this, and nothing can really be done about it. — You see? That is exactly what we are programmed to think. The problem is there, but it is so big and so prevalent in everyone’s life, and it is such a "complicated" problem, that we must leave the solution to the "experts".
Right? No — wrong!

The cause?

Now that we have recognised that there is a problem, we must take the next step. That is, we must find the cause. One thing we cannot do is to turn to the "experts", because if they knew, they would have told us long ago and something would already have been done to remedy the appalling state of affairs.?
It is not that the cause is unknown. A few people and a couple of organisations try desperately to inform us about it. Only — they do not have access to the public media, and if they had such access, and started an effective information campaign, chances are that they would meet an ugly fate.?

I suppose you are getting impatient to know what that cause might be, and whether it is something that we can, as simple citizens of the earth, act upon. It is no good finding the cause of evil if it is something that nobody can do anything about. You might as well have saved your effort for something more rewarding or more pleasing.?

Without beating around the bush, here is the hot potato: Money is being created not by our governments, but by a private monopoly run by the (private) banking corporations.?
It is as simple as that.?
How so, you might ask, and why would this be a problem?
Let's deal with one thing at a time.

The creation of money
It would seem natural, that money is created by the State, and in fact most Central Banks seem to be owned by the State and run by it. I say "seem" because, to all intents and purposes, it is an apparency. They are almost constituting a "fourth power" in addition to the three legally constituted and well known "traditional" powers, legislative, executive and judicial.

When the State needs money, it does not order the Central Bank to credit some money to the treasury’s account. The State has only two ways to obtain money. One is taxation of it's citizens, the other is borrowing from the banks.
When the Central Bank issues money, this is done in the form of a loan. The State has to borrow this money, and must promise to repay it, with interest.
The same is true of course for a private person who needs money borrowing from a commercial bank. The bank is happy to loan, as long as you can show you have security, and promise to repay with interest.
How can the banks "create" money? That is a good question. Is it not the State's printing office that prints all the banknotes?
Banknotes, when they are printed, are considered the property of the Central Bank. They are not given to the State to spend, but are brought into circulation against a corresponding debt. Anyone wanting some of those notes to spend, has to "buy" them by giving up some of their credit. And in any case, most of the money in circulation (more than 90%) is not banknotes but "credit".
When you go to your bank asking for money, the loan you get is created right there in your bank. The "money" consists of figures on your bank account, and it can be spent writing checks, giving an order to transfer or drawing the cash. Banks only have to have a small percentage of their loaned-out money actually available. The rest can be paid out just by moving some figures from one account to another. The important thing to know: Money is created just by inserting some numbers into a computer.
In practice, it works like this: For every 10.000 a bank gives out as loans, 1000 or 2000 have to be deposited at the central bank. That means, if a bank collects 100.000 in deposits, it could keep 10.000 for liquid cash, put 90.000 into deposit with the central bank, and it is then allowed to create 900.000 of fresh money just by writing the figures on someone’s accounts!
In the case of the government needing money to spend, the procedure is slightly different, but the result is the same. The government has to issue papers that promise interest and repayment. Those papers are "bought" by the banks, who "sell" them to their wealthy clients, or who may also keep them, and the government gets credited an equivalent sum of money.
The irony here is that the government, who should by rights be the issuing authority of the money that circulates in the country, has to borrow the money from privates (through the bank) and that is has to pay interest for this.
Now we start to see why the government never has money, and why much of our taxes go "off the top" of the budget, towards debt service.

The diabolical mechanism

What happens, when a debt gets repaid? Now this is interesting. The interest on the debt is of course the property of the bank. The amount that was loaned out and has now been paid back is destroyed. Just as it was "created" it is now "uncreated" or destroyed at the moment of extinction of the loan. So your bank can create money out of substantially nothing, it can cash in the interest, and then it can uncreate that money, having subsequently the possibility of repeating the cycle with another willing customer.
If you ever wondered where the banks get the money to buy the best and largest buildings in town, here is the explanation!
If this seems unjust, wait for the diabolical part.
An economy needs money so that goods and services can be exchanged. If there is too little money goods will remain unsold, prices will fall and we call this deflation. If the scarcity of money becomes serious, eventually the economy will go into recession, that is, production comes to a halt, people lose their jobs, misery starts to reign. So it is very important that the amount of money in circulation is at all times sufficient for people to buy the goods and services that are being offered.
If on the other hand, too much money is available, inflation, which is a general rise in prices that diminishes the "buying power" of money, is the result. Inflation is as undesirable as deflation, and it would be best if money were stable in it's buying power.
At this time, government has only indirect means, to assure such stability, because it is the banks who can determine how much credit to create.
Also with the government unable to create it’s own money, the only way to make sure there is enough money to buy the goods that are on offer, is to continue taking loans! Of course that means to continue to pay interest! That is why governments never have enough money, and why we have to be taxed to the limit of endurance to pay for debt service, in addition to all other government expenditures. Diabolical indeed. A private money issuing monopoly run through Banking corporations: first of all the "central banks" and then, in a chain, all the other banks to follow. It is our banking laws that allow banks to create credit themselves, instead of money being issued by the government, for the people.

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