Wednesday February 5th 2020
By Joe Hill
One of the central issues of our time is the issue of money creation. Money is one of, if not the most, influencing factor of our lives. Almost everyone makes life changing decisions based on money. Should I change jobs to make more money? Can I afford to make less money? Can I handle this debt? How can I pay this debt? How can I save more? Many teenagers today think about post secondary education in terms of what they should study to eventually earn a high paying income, and not in terms of their passions or interests. Many adults will focus on climbing a career ladder, chasing higher salaries, regardless of their feelings towards the actual work being done. All of this to chase pieces of paper and numbers on a screen. Well, not just paper and numbers, but the determining factor of our lives. Will I eat or will I starve? Will I have a home? Will I have heat and water and electricity? The cost of living costs money. Money is our master.
And yet, if you were to ask the average person, or yourself, ‘do you know where money comes from?’ – most can’t give an answer that approaches reality. How can a slave not even know or see their master?
Guttural reactions to this question, where does money come from, might give answers such as, ‘the mint’ or ‘the treasury’. Government simply makes the money and people use it. Physical currency however only makes up a tiny portion of the money supply. The majority, some 95% to 99%, is in the form of digital accounting entries. And these entries are not made by a mint or treasury.
More ‘educated’ minds might say the government issues a bond at a fixed rate of interest which matures at a future date, say 10 years, and investors purchase the bonds to fund new government money. This is incorrect as well, as this would only be a transfer of existing money from investors to government. Nothing new has entered the system, the economy could never grow, and we know it does.
In actuality, the majority of the money in our global economy is created by private banks through the issuance of debt. This is how the majority of the money in our economy is created.
When a person looking to buy a house walks into a bank seeking a $500,000 loan, the bank does not take $500,000 from their reserves and lends it to the person. The bank simply enters a credit of $500,000 into the person’s account, thus creating new money and expanding the economy. Many economics students don’t know this because it’s not generally taught in economics programs. If you’re skeptical, let’s see what the financial establishment has to say on the matter.
Here on the Bank of England’s website, their economists state that, “Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. The reality of how money is created today differs from the description found in some economics textbooks. Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.”
Further along the authors continue, “One common misconception is that banks act simply as intermediaries, lending out the deposits that savers place with them…Saving does not by itself increase the deposits or ‘funds available’ for banks to lend. Indeed, viewing banks simply as intermediaries ignores the fact that, in reality in the modern economy, commercial banks are the creators of deposit money…[R]ather than banks lending out deposits that are placed with them, the act of lending creates deposits – the reverse of the sequence typically described in textbooks.”
This information is quite startling when first consumed, and horribly depressing as it digests. But maybe this information is wrong. Maybe the Bank of England economists are misinformed. What do other sources have to say?
The Bank of Canada states in an article (now removed) on their website that, “Commercial banks and other financial institutions provide most of the assets used as money through loans made to individuals and businesses. In that sense, financial institutions create, or can create money.”
From the Canadian Library of Parliament, two government economists write, “It is important to note that money is also created within the private banking system every time the banks extend a new loan, such as a home mortgage or a business loan. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money…Most of the money in the economy is, in fact, created within the private banking system.”
The European Central Bank states on their website, “Commercial banks can also create…money, i.e. bank deposits – this happens every time they issue a new loan.”
If by now the admission of economists speaking on behalf of these major financial authorities isn’t enough, we can also simply look at balance sheets to find the truth. If loans were truly backed by a matching reserve, bank reserves should equally match loans.
The Bank of Canada’s most recent statistics report of monthly average chartered bank assets is stated as $3.3 trillion across non-mortgage loans, business loans and mortgages, as of November 2019. Meanwhile during the same month, the Bank of Canada only reported $25.8 billion in reserves by Canadian financial institutions. This means that of the $3.3 trillion in loans by Canadian banks, only 0.78% are backed by reserves. If this seems low, one can now get a better understanding of why central banks are participating in ‘quantitative easing’ to provide ‘liquidity’ to private banks – alas, that discussion will be saved for another article. This microcosm look at Canada can be extrapolated to the macro global system, simply refer to Reserve Requirement law in each varying country and you’ll get a similar picture.
It is important to also not get confused and believe deposits, some $2 trillion as noted by the Bank of Canada statistics report, are ‘reserves’ backing loans – they are not. As the Bank of England states, “[B]road money is a measure of the total amount of money held by households and companies in the economy…Broad money is made up of bank deposits…97% of the amount currently in circulation…Bank deposits are simply a record of how much the bank itself owes its customers. So they are a liability of the bank, not an asset that could be lent out.” As almost all new money starts as debt, deposits for banks are in actuality a record of existing debt, not what we commonly believe as a store of value. “A related misconception is that banks can lend out their reserves”, states the Bank of England. “Reserves can only be lent between banks, since consumers do not have access to reserves accounts at the Bank of England.”
The United States Federal Reserve, in response to the 2008 global economic crisis, ballooned its balance sheet and took on a program of massive money creation, in their reasoning, to provide ‘liquidity’ to failing banks. In this 60 Minutes interview with Ben Bernanke, the chairman of the Federal Reserve at the time, Bernanke openly admits to this ability to create money out of thin air. “It’s not tax money, the banks have accounts with the Fed, much the same way you have an account in a commercial bank, so to lend to a bank we simply use the computer to mark up the size of the account that they have with the Fed. So, it’s much more akin, although not exactly the same, but it’s much more akin to printing money than it is to borrowing,” explained the former chairman.
There’s a reason Henry Ford was once quoted as saying that if the general public knew how the financial system worked, there would be a revolution in the streets tomorrow. The perversity of this reality is immediately obvious. If a bank can create money out of thin air, and issue it as a debt to a person or government, with interest, (as it does in record numbers) then why on earth should anyone have to go out into the economy, sell their labour, and earn enough money to pay it back?
Now, some might argue and say: there needs to be some way to create new money so the economy can grow. When raw material or undeveloped land is laboured over and becomes productive, there needs to be a corresponding representation of that new value which has been introduced, which would be new money. To this, I wholeheartedly agree. However, when the powers of money creation are in the hands of the privileged few, and not in the hands of the democratic populace, then what we have is a theft of the highest order.
All acts of money creation are inflationary – increasing the money supply is the definition of inflation. Inflation is not inherently good or bad; in many instances it is necessary. Inflation only becomes good or bad, lending or theft, once the product of inflation (new money) has been distributed or used in some way.
This article from 2013, notes that during the first two years post the Great Recession, “the top 1 percent of [American] households by income captured 121 percent of all income gains…They became 11.2 percent richer while the bottom 99 percent got 0.4 percent poorer.” What is never explained in the thousands of articles which have been written about these repeating statistics in the last 12 years, is how this is possible.
The only way to understand the growing income inequality is by inflation. It has nothing to do with ingenuity, productivity or physical conquests of bootstrap lifting.
Imagine an economy where the total money supply is $1000, and imagine one person controls $500 of the total money supply, one person controls $250, and many people control $1. Now suppose a new $500 is added to the money supply so that the new total supply becomes $1500. What happens to all the market participants? Well, the one person with $500 would see their control over the money supply drop from 50% control to 33%, a decrease of 16.7%. The person with $250 would see their control drop from 25% to 16.6%, a decrease of 8.4%, and the people with $1 would see their control drop from 0.1% to 0.06%, a decrease of 40%. In this example we can see that inflation always punishes the poorest members of society the hardest. The richest will never lose more than the poorest during inflation.
Now suppose that the new $500 is not created in some vacuum and left untouched by the existing market participants. Imagine the new $500 is created by the one person who already has $500, and they decide to give themselves $400 of the new $500, and they give $100 to the person with $250, and nothing to the people with $1. So now the economy has grown from $1000 total supply to $1500 total supply. The person with $500 now has $900, the person with $250 now has $350, and the people with $1 still have $1. The new distributions would see the person with $900 increase their control over the money supply from 50% to 60%, the person with $350 would see a decrease in their control from 25% to 23.3%, and the people who still only have $1 would still see a decrease from 0.1% to 0.06%.
Simply through inflation control by the powerful, the richest in this example gain 10% control of the money supply, the ‘middle class’ person barely notices their 1.7% decrease, and the poorest are obliterated by their 40% loss in value. This thought experiment demonstrates two powerful lessons of inflation. First, it shows that in it’s proper context inflation is in reality a ‘loan’ from the poor to the broader society. When a commercial bank is earning a profit via inflation, they’re literally taking value from anyone that isn’t benefiting from this monetary expansion, which is almost always the poorest people, statistically. This reconceptualization shows that bank profits from inflation are never earned, only made possible by this ‘loan’, theft, of the poor. And finally, this example shows the true insidious nature of inflation, as on the surface nothing happened to the poorest, they still have their $1. The paper in their hand didn’t change, nor did the number in their bank account. Yet through this alchemical process their $1 became 60 cents. And if these market participants lived in a highly propagandized society where lies dominate the mainstream media, reality is obfuscated or omitted in educational institutions, they will never know their $1 became 60 cents. They will simply wander through life wondering why every year things cost more and more. And maybe some of the poor will read and learn and say, look at inflation destroying the value of our money! And the middle aged, middle class person will say, what are you talking about? I haven’t noticed any change. If this thought experiment seems unrealistic, maybe we should move back to reality.
Since the 2008 financial crisis, there have been many estimates and studies looking at the Federal Reserve’s money creating activities, Orwellianly dubbed ‘quantitative easing’. One of the most important, was an audit of Federal Reserve activity conducted by the Government Accountability Office, which found that the Fed had created $16 trillion to support banks globally. Some notable recipients were: Citigroup who received $2.5 trillion, Morgan Stanley who received $2 trillion, Merrill Lynch who received $1.9 trillion, Goldman Sachs who received $814 billion, JP Morgan Chase who received $391 billion, and Lehman Brothers who received $183 billion. As chairman of the Federal Reserve at the time, Ben Bernanke told former Congressman Alan Grayson, this is all possible under, “Section 14 of the Federal Reserve Act…This particular authority has been used numerous times over the years.” To which Grayson noted, “Virtually the entire amount that’s reflected in your balance sheet went out starting in the last quarter of 2007.”
Who were the players deciding to create this money and deciding where it would go? United States Secretary of the Treasury at the time, Hank Paulson, played a key role. Hank Paulson was also the CEO of Goldman Sachs before becoming Secretary of the Treasury. Goldman Sachs received $814 billion. Federal Reserve of New York Class B Director at the time, Richard Fuld, played a key role in deciding which banks to support. And he decided to support the financial institution of which he was at the same time Chairman and CEO, Lehman Brothers, to the tune of $183 billion. Federal Reserve of New York Class A Director at the time, Jaime Dimon, played a key role. He was also CEO of JP Morgan Chase at the same time, and during secret meetings of Federal Reserve directors decided to give the company, of which he was also CEO, $391 billion. Jaime Dimon has also been in the news recently for netting at cool $31.5 million in salary for 2019, telling a struggling bank teller who works for his company that she could have his job some day (the implication being her suffering is justified as it comes with the opportunity of riches), and proclaiming that socialism will lead to an ‘eroding society’. Ironic, Jaime!
Allowing the sacred and rarified powers of money creation to be left in the unaccountable hands of an elite few will only lead to servitude and tyranny for the common many. In fact, it has already led to servitude and tyranny.
These powers of money creation and their consequences extend beyond the individual but to the republic of individuals as well, the representation of generational struggles towards a prosperous and harmonious whole. As of 2018, global governmental debt stood at $66 trillion. This is money created out of thin air and ‘loaned’ to governments from which people must toil in perpetuity to assuage and tribute their financial overlords. Moving to the microcosm, take Canada as an example.
In 1993, Canada’s Auditor General issued a report stating that from 1867 until 1992 Canada had accumulated a total debt of $423 billion. Of this $423 billion, “$37 billion represents the accumulated shortfall in meeting the cost of government programs…The remainder, $386 billion, represents the amount the government has borrowed to service the debt created by previous annual shortfalls.”
When a government is in ‘surplus’ this means they are fully meeting their interest obligations for the current fiscal year and when a government is in ‘deficit’ this means they are borrowing money to make their due interest payments on the national debt. So what this report is saying, is that from 1867-1992 Canada had accumulated $386 billion in net debt, simply due to compounding interest. ‘Borrowing’ $37 billion to pay for things such as roads, schools, and health care, cost Canada $386 billion in standing debt to that time, not including all the interest paid as well over those years. Economists such as Ellen Brown estimate Canada has paid over $1 trillion in interest, again, so the government could get $37 billion. Simply making interest payments on the national debt represents the third largest item on the federal budget every year in Canada. In 2018-2019 Canada paid $23.6 billion in interest, 7.3% of all budgetary expenses. It is important to remember, this is also during a time of historically low interest rates. What will happen when the Money Masters call for ‘belt tightening’ (another euphemism for the destruction of social wellbeing)? This dominating paradigm of political economy, established by a trilateral cooperation between private enterprise, government and the academy, has cemented a global system of totalitarianism. What would Canada look like with an extra $1 trillion to support their population of less than 38 million? Would homelessness still exist? In further articles we will discuss the nature of the Money Masters’ whip, and how democracy is subverted by their far reaching tentacles. As citizens facing global, total environmental destruction, we must first shake the immoral and vaporous shackles which bind us. This means dissolving the lies of debt. Only then can democracy return.