AN ANALOGY TO EXPLAIN THE FRAUDULENT NATURE OF MONEY CREATION BY BANKS

First, the comment that I'm responding to:

Sugar1:
"Sure every bank is in business to make a profit. If you have a business don't you expect to make a profit. I sure wouldn''t call it fraud if you did. Get your head on straight!"

The analogy:

Of course I don't begrudge anyone their profit. But suppose the way I made a profit was by producing sugar pills (i.e., a placebo) that I was allowed by law to sell as a cancer treatment. Suppose that I could just crank out sugar pills with nothing in them but ordinary sugar, but the government allowed me to market them as a cancer treatment with ingredients besides sugar that have been proven to treat cancer. In fact, the government supports my marketing claim that the pills are useful for treating cancer. I wouldn't have to pay for any research on cancer treatments, I wouldn't have to pay to have any medicines developed that actually treat cancer.

Let's further suppose that the government required all cancer patients to buy my pills from me, even though they're just sugar pills, or placebos. And no one else can make these pills but my company. And so I make obscene profits off my simple sugar pills that cost almost nothing to make. Would you find that at all objectionable? Shouldn't you call that fraud, even though it's all nice and "legal?" I should think so.

But that is no different than what is being done with the money supply. The money created by banks is equivalent to my sugar pills--it costs nothing to produce, everyone in the country must use it, and no one else is allowed to produce it. Just like my sugar pills are not in any way a cancer treatment--but the government says it is--money created by banks is not in any way real money, the kind that is derived from labor and productivity. But the government says it is real money and that we must treat it as such. This fake money is fraudulent, then, even though it is legal.

MY UNDERSTANDING OF HOW BANKS CREATE MONEY OUT OF THIN AIR

Written today for Hattiesburg American forum:

1. A new bank opens and has no deposits. Bill, the new bank’s first customer, deposits $1,000 in the bank.

2. For some reason, the bank doesn’t receive any other deposits.

3. However, Jane comes in and wants to borrow $1,000 from the new bank.

4. The bank loans Jill $1,000 and opens an account in her name because under current reserve requirements (that went into effect 1/1/09) a bank with deposits of $10.3 million or less does not have to keep any money in reserve.

5. The bank deposits $1,000 in Jill’s new account. The bank is now allowed to say it has $2,000 in deposits, even though Bill is the only customer who has deposited money that originated from outside the bank. Also, if Bill wanted to come in and take out his $1,000, the bank would be obligated to give it to him.

HERE’S WHERE THE FRAUD BEGINS

6. Jim comes in and he also wants a $1,000 loan. The bank says “No problem,” opens an account for Jim, and deposits $1,000 into Jim’s new account.

7. The bank has now loaned out $2,000 even though they have only received $1,000 that originated outside the bank (namely, Bill’s deposit of $1,000).

8. Thus, the bank has created $1,000–a 100% profit off of Bill’s original deposit. The bank has not performed any useful work to create this $1,000. They are merely allowed by law to do this.

9. The bank also is allowed to charge interest to both Jill and Jim. In Jim’s case, the bank did not receive any new money to fund his loan, so Jim has been lent phantom money–money that did not previously exist until he agreed to pay it to the bank over time.

10. Now the bank can say it has total deposits of $3,000, all because of Bill’s original $1,000 deposit.

11. Mary comes in and wants a $3,000 loan. The bank can give her the entire amount because they still have less than $10.3 million in deposits. They open an account for her and deposit $3,000 into it.

12. Meanwhile, no one other than Bill has deposited any money that originated from outside the bank

13. The bank is now allowed to say it has $6,000 in deposits and has created $4,000, all due to Bill’s original deposit of $1,000. Jill, Jim, and Mary are now all indebted to the bank for their respective amounts PLUS interest. The only one of the three who could conceivably be said to have received “depositor’s money” was Jill.

14. Don’t forget, the bank is still obligated to give Bill his $1,000 anytime he asks for it. Even if the bank did give the money to Bill, it would not cancel the loans to Jill, Jim, and Mary even though the bank would no longer have even the original $1,000 that allowed the bank to be able to “lend” “money” to Jill, Jim, and Mary.

15. Also, if Bill does come in and withdraw his $1,000, the bank is not obligated to share one cent of the 400% + profit it has made from his $1,000 deposit.

16. One last thing: Jim and Mary have literally been charged (via interest) for creating money for the bank. In other words, the bank did not actually have on hand the money to loan to Jim and Mary. But the promissory notes signed by Jim and Mary allow the bank to treat future repayment as real money in the here and now. So even though Jim and Mary are literally funding the amount of their loans, which is a favor to the bank, the bank is charging them Jim and Mary money to do them this favor. And only at the end of the term of the loan will the bank then have the money they “loaned” to Jim and Mary. Therefore, many “loans” from banks aren’t “loans” in any commonly understood sense of that word–they are favors done for the bank by customers that banks charge the customers for doing for them.

This sounds like it can’t be real, but that’s exactly what the Federal Reserve tells us that banks do. The big question to ask after realizing that this is how the system works is: Why do we allow banks to do this but not ordinary citizens? Why are banks allowed to use money as only profit whereas it is only debt for ordinary people? Why do we allow banks the privilege of charging us for funding our own “loans?”

If this doesn’t strike you as an outrage, then nothing will.