How Money Works

I have never yet had anyone who could, through the use of
logic and reason, justify the Federal Government borrowing
the use of its own money. … I believe the time will come in
this country when [the public] will actually blame you and
me and everyone else connected with the Congress for sitting
idly by and permitting such an idiotic system to continue.

- U.S. Rep. Wright Patman (1893–1976), Chair, House Committee on Banking and Currency

12-year old Victoria Grant explains why her homeland, Canada, and most of the world, is in debt. April 27, 2012 at the Public Banking in America Conference, Philadelphia, PA.

Introduction

The few who understand the system will either be so interested in its profits or so dependent upon its favors that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending….will bear its burden without complaint

- Rothschild Brothers, 1863

Our existing global economic / monetary system is one of those things that is ubiquitous and yet a complete mystery at the same time. Daily we hear the financial rhetoric as we glance by the financial section of the news. We glean reports about falling or rising interest rates and stock markets, even though we may be clueless to their true meaning.

We all use money in our day-to-day life. Indeed, it has become such an indespensible part of modern life that most of us cannot live without it. Yet, very few of us have bothered to look beyond our basic daily functions such as spending it, paying off a loan or receiving our paycheque. Quite frankly, the common man and woman are too busy staying afloat to pay attention to any issues beyond survival. We do not even understand the most basic things about money…..such as how it is made. Many still have a tacit assumption that the monetary system is operated by decent and smart people who are looking out after our best interests and may be surprised to learn the truth.

This ignorance of the actual nuts and bolts of the financial system by the common man and woman works in favor of the financial elite. As long as the majority remain silent and complacent, we cannot fight for freedom and financial, economic and monetary reform. If we cannot clearly see our own enslavement to debt, fighting to be free will never even cross our minds. Fortunately, movements such as Occupy Wallstreet  are like an alarm bell waking up the giant 99% at the bottom of the debt-based money system, which some have described as a 300 year old Ponzi scheme.

It is critical that we demystify money now. It is not an understatement to say that the very future of human civilization may depend on it. We all need to have a clear understanding of how the current economic system, combined with weaknesses that do not safeguard against the darker side of  human behavior has led to the perfect storm of crisis that we face.  It is even more important to know that if we do not reform it, it can lead to a collapse of the global economy and plunge humanity into a crisis of unparalleled magnitude. We stand at a crossroads; we have the ability to create a prosperous and democratic world but we must arm ourselves with knowledge and act with compassion.

It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.

- Henry Ford

It is vitally important that we all come to understand the truth about our how our monetary system operates because it is this current system which ensures ongoing inequity and environmental degradation. Once you see the internal mechanics, you will see that it fundamentally operates in a manner which is opposite to community prosperity and you will begin to see that without monetary reform, there is no possibility of solving the complex problems which now threaten human civilization.

Educational Documentaries on our Monetary System

Education is the first step towards liberation.

Click here to watch excellent documentaries that will educate you on our money system. Only when you become educated will you understand how money creates the world of scarcity we all live in.

Positive Money is a UK organization that educates people how the money system works. They have developed excellent educational material for global citizens.

We are trapped, too much money and we have inflation but reducing our debt reduces the money supply 

Do banks make credit or money? 

The nature of debt

 

Gar Alperovitz Explains How Big Banks Run the World – at Your Expense

This is an excellent article written by acclaimed monetary reformist, historian, writer, political economist, local currency activist and founder of The Democracy Collaborative, Gar Alperovitz.  It explains how the money system works and why it is inherently bad for the common person. It was 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.

(Ten times as much is not a magical number; it is what the Federal Reserve Board currently allows for transaction accounts of more than $71 million [it is 3 percent for $11.5 million to $71 million, and zero for accounts of less than $11.5 million. It could be more; it could be less.])

Let’s stop for a moment, however, to consider something far more important: I started out this little essay by saying that “the recent public banking conference offered a message that is at once so simple – but also so bold – it is hard for most Americans to stop long enough to understand how their thinking has been corralled by the masters of finance – in ways far, far, far more insidious and powerful than even the latest financial crisis suggests.”

The above has, in fact, all simply been background for the big story: Think again about the fact that the Federal Reserve Board (like any central bank in any country) simply “creates money” out of thin air or authorizes it to be created by banks (by, among other techniques, setting or altering the amount banks have to keep on reserve).

Moreover, it can also decide what interest rate it will demand for the money it lends out when banks need additional reserves to meet requirements – including, if it likes, zero or near zero. (Currently banks can borrow short term from the Federal Reserve Board at three-quarters of one percent – i.e. 0.75 percent.)

Why, you might ask, doesn’t the Federal Reserve Board simply “create” money (as it does all the time) and lend it at 0.75 percent to the government (rather than let the banks do it) to pay for important public goods and to settle its debts? (Our bridges are falling down; not a bad thing in which to invest.)

The answer is: It certainly could do that, in theory. In fact, it has been doing something close to this recently using a fancy term, the origins of which I won’t bother you with. The term is “quantitative easing” – but all it means is that the Federal Reserve Board “creates” money and buys up government bonds from the banks – and, then, the banks in turn lend to the government and the government pays its debts (or buys airplanes, or schools, or bridges and roads, or anything it decides it wants to buy or spend money on ….).

The banks, of course, make a nice profit on this as “middlemen” between the Fed and the government.

If you have been watching closely, you will now begin to see why the Public Banking conference’s message is pretty dramatic: What is the big deal about deficits when the economy is stagnating? Why doesn’t the Federal Reserve Board simply “create money” (as it does all the time anyway) and lend it to the government via the banks and then have the government put people to work by investing the money (building bridges and roads and schools, for instance)? Two things then happen: the economy gets going and more tax receipts come in to help pay off the debt (of newly created money). Yes, of course, if this went too far, inflation could become a concern. So, it is important not to go too far.

Even more interesting – much more interesting! – if the law were changed – or we acted as we did in part during World War II and, for instance, Canada acted between 1938 and 1974; – it would be possible for the Fed to lend directly to the government, bypassing the bank “middlemen” who make their profit by selling bonds to the Fed and investing the money in the government.

Moreover – watch this very, very closely – since by law the Federal Reserve Board turns over almost all its profits (i.e. all interest) to the government even now, the loans would cost the government literally nothing if things were done in the simple, straightforward way (or if a “public bank” were set up that operates just the way private banks are run today, including making profits for the owners – who in this case would obviously be the public – i.e. the government).

(One rough estimate offered by the Public Banking people is that had the United States done what they are talking about over the last 24 years, the amount saved on interest payments on the national debt would have been roughly eight trillion dollars – and the economy might also have been moved out of recession. Whatever the number might be in a careful statistical analysis, it is very, very large indeed.)

There is a rough parallel in all this with the way student loans used to be handled and are handled now. For a substantial period, the banks provided some loans to students that were guaranteed by the government, adding a mark-up for their profit. In 2010, Congress decided to eliminate the middleman and the government now simply makes the loans directly at lower cost.

But, of course, we don’t allow ourselves to follow the straightforward path outlined above or suggested by the student loan program changes. Indeed, to even suggest the Public Banking strategy is to suggest a horror of horrors, since one of the biggest money makers for the banking industry would be on the chopping block.

And the banking industry – especially its Wall Street branch – plays a very powerful and rough political game opposing anything or anyone who tries to “uncorral” the thinking of the public.

Nonetheless, that is the direction that was opened up for serious discussion at the Public Banking conference. First steps first, of course. We currently have one “public bank” in the United States, the 93-year-old Bank of North Dakota. Since 2010, seventeen states have considered legislation to create banks based in one or another way on this model. Ellen Brown, the leading theorist behind the movement – along with many participants – urges the value of such banks on their own terms in that they help small businesses, farmers, home-owners, students and others.

But, down the line, the big payoff is to get us thinking much more carefully about the way the world really works, and why. Once you start thinking about how money is created and who gets to use that power and for what purpose, some very, very interesting questions indeed begin to follow.

To be sure, the story gets more complicated when you bring in global trade, finance, the Chinese, and so forth: A serious move in the way posed by the Public Banking people would have major implications for global finance, and the role of the US – and the US dollar – in the global system.

But this, too, is one of the purposes of taking such proposals seriously – and the importance of starting a far-reaching new debate not only about money and the US system, but the fragility of the entire superstructure of global finance these days.

(By the way, one estimate is that roughly 25 percent of the world’s banking systems allow central banks to extend credit directly to governments; another 37 percent allow short-term advances. These include some of the fast charging so-called “BRIC[S]” countries such as India and South Africa, as well as Malaysia, the United Arab Emirates, Israel and Japan.)

If you want to have some fun with this – before you get angry at the rip-offs – take a look at the video of 12 year-old Victoria Grant explaining the same thing for Canada. There is a reason why it went viral and has been seen by more than a million people.

The Federal Reserve Bank….A License to Print Money

There is one business segment that has power over all others…the system of reserve banks, who led by JP Morgan had worked for decades to position  themselves  to become the official money printers for the government and charge them interest for paper, places banks at the pinnacle of control, above governments.

Such a system is now coming home to roost with out-of-control campaign funding  making a mockery out of democracy. Eminent American philosopher John Dewey once described politics as “the shadow cast on society by big business,” warning that “attenuation of the shadow will not change the substance.”

 The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in inequity and born in sin . . . . Bankers own the earth. Take it away from them but leave them the power to create money, and, with a flick of a pen, they will create enough money to buy it back again. . . . Take this great power away from them and all great fortunes like mine will disappear, for then this would be a better and happier world to live in. . . . But, if you want to continue to be the slaves of bankers and pay the cost of your own slavery, then let bankers continue to create money and control credit

- Sir Josiah Stamp, director of the Bank of England and the second richest man in Britain in the 1920s. Speaking at the University of Texas in 1927

Our present economic system is based on Fiat money, that is, on a medium (paper) which has no intrinsic value of it’s own and which is not backed by anything of intrinsic value other than the legal support of the government. It’s only use is exchange for goods which can be used. It wasn’t long ago when paper money was referenced to the gold standard, but that changed with Richard Nixon severed the Bretton Wood agreement in 1971. Since that time, we have had a purely elastic money system not tied to any fixed commodities. The Federal Reserve, a collection of private banks, has basically had free reign to control this elasticity by printing money and injecting it into the economy (via commercial banks) at its own discretion to create credit and try to stimulate economic activity (growth). Such a debt-based money system which depends on continual growth in order to sustain a money supply goes against the finite ecological systems that we inhabit.

Money systems are thousands of years old. Yet, to properly understand the current economic system, we need go back no further than Benjamin Franklin and his involvement in the British Colonies in the Americas which, through a war of independence became the United States of America. From this time, the money system established in the new colonies evolved through a series of milestone events to become the dominant fractional based money system used throughout the world today.

 

 Economic Woes explained in 2 minutes by Robert Reich

 

The startling truth is that our economic system is fatally flawed and the continuous exploitation of this flaw by those elite few who have worked their way to the top of the heap have resulted in a system about to implode upon itself, leaving the entire world population as casualties. How can governments claim to be responsible when they allow Trans National corporations, banks and financial institutions to gamble in Derivatives where losses of these bets can accumulate and exceed the GDP of the entire planet? There is simply no logic to explain this and no policy that can excuse it.

These same systems have not been reformed and the citizens of this global community need to urgently understand the economic system so that we can predict the great changes coming our way if we are to survive them.  We need to know our enemy if we are going to defeat it. Economic evolution cannot solve a problem when the system itself is fundamentally flawed; it will require an economic revolution, a paradigm shift which will replace the current monetary system with a new and more just one. An excellent start is to view the series of videos on this page. On the next page, Ellen Brown explores our debt-based money system further in her book Web of Debt. Economist of the Austrian school Detlev Schlicter provides revealing insights of the existing Elastic, Fiat paper money system in his book author of Paper Money Collapse .  Another great series that ties the current economic system with energy and the environment is from Chris Martenson’s Crash Course.

After you’ve listened to Ellen Brown, Delev Schlicter and Chris Martenson’s well researched perspectives, you may find yourself  thoroughly depressed so you mustn’t stop. Continue on to the next page, A New Economic Paradigm to catch a glimpse of a workable economic model being developed by alternative, sustainable economists that allows the human species to prosper without continuous growth and operates within the limits of a finite planet. As we try to find the path to humanities future, we are coming to realize that it must be a holistic one that no longer leaves out compassion.  For such an economic paradigm shift to become truly sustainable, it must also be accompanied by a personal, psychological, moral and spiritual transformation, as alluded to in the Vision page of this website.

It is well enough that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.

- Henry Ford

The research study The Network of Global Corporate Control is the first to clearly elucidate the relationships between a small number of  Trans National Companies and many other companies in the world. Their pervasive shareholdings and power networks allow the decisions of these few companies to effectively and largely determine the course of the global economy. This power imbalance effectively takes the decision-making ability out of the hands of billions of people the world over. Moreover, these decisions are usually made in secret, with no obligation to disclose to the general public. For Trans National Corporations, it is fairly safe to guess that these decisions are usually made out of self-interest to satisfy shareholders, not the publics interest and therefore not to the general benefit of mankind.

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The 1% count on the ignorance and apathy of the 99% to remain in power.

- JGVW

On the surface, the Occupy Wallstreet movement is a barometer of public dissatisfaction against Wall Street voodoo.  Below the surface, however, it is a rebellion against the inherently flawed global, debt-based, Fiat monetary system whose narrow measure of wealth is GDP.  Contrary to mainstream media’s potrayal, the Occupy Wallstreet is not a movement without a message. Instead, it is a reflection of the predictable crisis caused by a debt-based monetary system which allows exponential accumulation of debt.  If that debt is allowed to continue, it will naturally be limited by debt that is impossible to service and the whole system will implode. The fact that OWS is leaderless and has degenerated due to anarchistic elements is entirely predictable. The mainstream medias focus on these elements is a red herring and cannot be grounds to dismiss the unprecedented public concerns already raised. People around the world are upset and are empowering themselves using the only means available to them. They are making a statement which the media cannot ignore and sending a direct message to the financial elite whose combined mismanagement over time have directly led to this crisis. Even if the OWS movement disintegrates tomorrow, it has already served its main purpose by putting into the minds of the 99% the absolute urgency of economic, monetary and financial reform. It’s up to all of us to now take that fight forward by educating ourselves.

To really understand the depths of the power structure we are fighting against, it is important for every citizen of the world to educate him or herself on the way the international monetary system works. Knowledge is power and ignorance is NOT bliss. In fact, it is precisely due to the ignorance and apathy of the 99% that we have allowed the 1% to do as they please while it is due to the ignorance and unbriddled greed of the 1% which has caused them to make the mistakes that have  precipitated this global crisis.