Photo Credit: Toban Black LIKE THIS ARTICLE ? Join our mailing list: Sign up to stay up to date on the latest Visions headlines via email. Originally published at Truthout. The recent Public Banking conference held in Philadelphia offered a message that is at once so simple - but also so bold - it is hard for most Americans to pause long enough to understand how profoundly their thinking had been corralled by the masters of finance - in ways far, far, far more insidious and powerful than even the latest financial crisis suggests. To understand what has happened, however, you first have to take a minute to shake a few cobwebs out of your brain about "money" - and how it is created and by whom and for whose benefit.

Photo Credit: Toban Black

 

Originally published at Truthout.

The recent Public Banking conference held in Philadelphia offered a message that is at once so simple - but also so bold - it is hard for most Americans to pause long enough to understand how profoundly their thinking had been corralled by the masters of finance - in ways far, far, far more insidious and powerful than even the latest financial crisis suggests.

To understand what has happened, however, you first have to take a minute to shake a few cobwebs out of your brain about "money" - and how it is created and by whom and for whose benefit.

Money is "created"? Yes, obviously so - or did you imagine there is some fixed pile of "money" some place that exists once and for all and for all times?

Think about it: If that were true, it would be impossible for the economy ever to change and grow. If the "money supply" were not increased over time, the original economy of, say, 1776 - which served about 2.5 million Americans - would still define the amount of "money" we would have to work with today.

(And yes, going back further, if money were not increased - i.e. "created" - the amount that existed even in a far smaller economy prior to 1776 would be all there was and is, even down to today.)

* * *

Once you realize money must be and is regularly created and expanded, then the interesting questions begin to occur - like "How is it done?" and "Who benefits from it?"

Step One: Most people think of "money" as something real, something that is kind of like gold or silver or anything that has intrinsic value. Allowing for a very, very few minor exceptions, that is simply not what "money" is.

"Money" in the real world is a piece of paper (or electronic version of the same) that is a promissory note - a promise to pay you - that legally must be accepted by anyone to whom it is given to settle a debt. Behind this promise is the federal government in two very big ways: First, the government itself stands behind the promise as the party that will pay what it says it will pay on the piece of paper. Second, the government ensures that everyone must accept this promise if the piece of paper is handed over when you buy something or settle a debt.

So, money is a promise to pay? Yes and that is all it is - but that is huge, especially when backed and enforced by the government.

Once you fully grasp this simple truth, things get very, very interesting:

Some "authority" must have the power to issue or authorize the issuing of "promises to pay that must be accepted" - i.e. to "create" money. In the United States that "authority" is called the Federal Reserve ("the Fed").

And yes - because the economy does, in fact, get bigger over time - the Federal Reserve Board must have a way to create more money (more promises to pay) as time goes on. It does this all the time. In the modern era, it does it via computers issuing - literally out of thin air, via nothing more than accounting entries - promises to pay that are called "dollars."

The Federal Reserve uses these to buy up securities owned by banks - and then these newly created "dollars" are deposited in the banks' reserve account at the Fed.

Again, yes, created literally out of thin air. (Otherwise the money supply wouldn't expand and we would be back in 1776 ...)

* * *

Now things start to get very interesting indeed: Banks have the legal right to lend more than the amount of "dollars" they actually keep in their vaults or at the Fed (their reserves) - roughly ten times more these days. So, for instance and simplifying a bit, let's say that Bank A has $1,000 in deposits. So long as it keeps $100 on reserve, it can lend out $900 to the public.

 

But this is only the beginning and here's where the real action is and how the game is played: that $900 is now multiplied throughout the banking system. Note carefully the word "multiplied." Bank A loans the money to individuals, businesses and perhaps other banks. Then, these people deposit the money in another bank (or they spend it and someone else deposits it in another bank). Though in the real world, it would go to many banks, for simplicity assume for the moment it all goes to Bank B. Now, Bank B has $900 in "new" deposits and (keeping 10 percent in reserves as required) it can now lend out another $810. And if this is deposited in Bank C, in turn that bank can keep 10 percent and lend out $731 ($810-81). Ultimately, when the process is completed the initial $1,000 permits the creation of (again, yes, out of thin air) $10,000.

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