People really have a funny opinion about banks. They think somehow they’re great conservative institutions – after all, they have a lot of money and they spend some of it decorating their bank buildings in a very serious décor; bankers usually dress well, they wear suits and ties, and they have serious expressions on their faces.
In fact – when you really look at what banking is as it’s practiced today – it’s one of the greatest scams. We’re talking about the fact that the banks create money out of nothing, and then they collect interest on it. Now that’s the basic scam. When a bank loans you money that money doesn’t exist prior to your walking into the bank. The banks can do things now that were you and I to do them we’d go to jail.
Here’s how it works. Let’s say that the government needs to have much, much more money to spend than it is taking in in taxes. Politicians like to spend money because the more they spend for benefits, for the voters, the more votes they get.
How can you spend more money than you take in?
The answer is very simple: you borrow it. Well, that’s the same with you and I – if we want to spend beyond our income, if we have some credit we can go to the bank and borrow money. Well, that works for a while but sooner or later the loan has to be paid back plus interest. And so, you and I can do that only for very short periods of time. But in the case of the government, it’s unlimited amounts of time.
Let’s say the Federal government wants to borrow some money, more than it’s taking in in taxes. So the first thing it does is it goes to the open market, and it offers to borrow the money from individuals like you or me, or from institutions, corporations, other countries and so forth. People loan money to the Federal government in return for bonds or Treasury notes, or bills, depending on the length of time the loan has to be repaid. So now the government has more money than it takes in in taxes. Now, just like you and I, however, the time comes when that money has to be paid back, plus interest. Lo and behold, when that happens they still don’t have enough money to pay for what they want to do through taxes. So now, they have to go and borrow some more money to cover the original loan plus the interest that’s due. And this process goes on, over and over and over again, and we have this phenomenon called the rising national debt – it just goes on forever. There is no limit to what the politicians are seemingly able to borrow.
Now, the money that comes from the private sector – you and me and savings institutions, retirement plans, other countries, and so forth – that money is already inexistence but there’s never enough of that. They need more – the government needs more than what they can get from people who already have money to lend to them. And so now, the spillover comes when they want more than they can get that way they go now to the Federal Reserve System. And by prior agreement, the Federal Reserve will create whatever amount of money is necessary at that point.
So the Treasury official goes to the Federal Reserve and says: “Ok, I need another billion dollars today. We didn’t take enough in taxes to cover this, and not enough people in the private sector loaned us the extra money, so we need more money. We need another billion dollars, please.” And the Federal Reserve says, “Ok, here it is.” And the Chairman of the Federal Reserve writes him a check – of course, that’s figuratively speaking, it’s all done by computer, but let’s just imagine the Chairman of the Fed writes a check to the Federal government for a billion dollars. The government now has that check, deposits it into its own checking account, and begins to write drafts against it. And this money that was given to the Federal Reserve did not exist before that point. It was created completely out of thin air, just the same as if the Federal government had gone to the printing presses and printed it. But in this case they didn’t, they went to the banks and got a loan.
And it gets so complicated that people don’t understand it, so they think somehow it’s wrapped up with the banking system, therefore the money must have existed prior to that when in reality it did not. So that’s how money comes into existence for the government. They can always rely on their partner in the Federal Reserve to create whatever amount may be necessary for them, so they don’t even have to go to the private sector to borrow it. It’s just guaranteed to be available anytime.
If we just stop there as many do, “my, isn’t that terrible, that they create money out of nothing for the government and the government pays interest,”.
That takes care of the government, why are the banks in this thing?
Well, lets follow that money, that was created out of nothing for the government and see where it goes. It goes into the private banking system. Let’s take $1000, for example, that has been paid to a postal worker who delivers our mail. He’s working for the Federal government. Now, he’s got $1000 in a pay check that came out of that billion dollars that was created out of nothing and presented to the Federal government. So now we’re just going to trace a thousand dollars of it that comes to the postal worker. He’s got a paycheck now, he doesn’t imagine that that money didn’t exist a moment ago or yesterday, and he doesn’t care, it looks like a good check to him – banks will accept it, everybody will cash it. So he takes it down to his local bank at the end of the street there and deposits it into his account.
Now if I were a president of that particular bank that got that deposit, I could in a sense go to the people out there in the bank lobby and say: “Attention, everybody, I have some good news. This gentleman here just deposited a thousand dollars into our venerable bank.” And that’s good news, because a lot of people in the bank are there to borrow money, so they know when the bank has money to loan that usually means lower interest rates. So somebody might ask me, “well, how much did this person deposit?” And I would say, “he deposited $1000.”
And then this person would say: “Well, that’s not enough, I want to borrow $9,000 on this car I’m looking at, and $1000 isn’t going to cut it.”
And I would have to say when he’s talking to the depositor in the bank, “don’t worry about it, this banking business is more complicated than you can possibly imagine. We can lend you the $9,000, even though we only had $1000 deposited.”
And if anybody asks how is that possible, the answer is: “don’t worry about it, it’s possible, it’s legal, we can do it. We create the extra $9,000 out of thin air. The $1000 is deposited and we can create up to $9,000 on every $1000.”
And that money literally comes out of thin air, at the time the loan is made. That means for every billion dollars that’s created out of nothing for the Federal government to spend, an additional $9 billion is created by the private banking system out of nothing to loan to people like you and me and corporations and so forth. Now, we use that money for our purposes – the bank doesn’t benefit from that money, they loan it to us. But we pay the bank interest on that money just as though it was real money that existed that somebody was sacrificing. We really think we’re borrowing money that somebody has put into the bank on deposit, and the interest rate is justified because we have to pay that person for the sacrifice he made of making that money available to us, when in fact the money was created out of nothing. And so we are paying interest on nothing. That is how all of our money comes into existence. And if that isn’t a scam, what is?
Via A Second Look at the Federal Reserve
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