The following is a fireside chat between a banker and his son. He is explaining how international banking works.
Son: How does a bank create money?
Father: Loans!
a. Credit cards,
b. car loans,
c. mortgages,
d. business and personal lines of credit,
e. international letters of credit,
f. government bonds,
g. merchant banking stock underwriting,
h. other sophisticated financial instruments such as debentures, futures, derivatives and options.
Son: So in other words, banks make money out of thin air! That sounds inflationary.
Father: If it was not destroyed, it would indeed cause inflation.
Son: OK then how does a bank destroy that money?
Father: Loan repayments!
Son: What are the main ways then that money generally comes into existence?
Father: Two ways – cash and debt:
a. Cash issued by governments such as the Bank of Canada or the US Department of the Treasury and distributed by banks.
b. Loans issued by banks to governments, businesses and consumers
c. Bonds underwritten by banks and deposited with either governments (i.e. municipal, state and federal) or businesses (i.e. corporate bonds) as a means of “financing” capital projects or ongoing operations.
d. New issue of stocks, typically underwritten by a merchant bank – generally referred to as merchant banking.
e. Other exotic financial instruments that are only used by “high finance.”
Son: So what about cash; how does cash come into existence?
Father: Cash is “manufactured” by governments. Banks can’t create cash. It is not intended to be destroyed until it is worn out.
Son: So banks don’t make money off of cash?
Father: No, banks want as little cash in circulation as possible because cash has the potential to create a phenomenon known as “velocity of money.”
Son: What’s that?
Father: Consider the following example. A hotelier owes a restaurant owner $100, the restaurant owner owes a baker $100, the baker owes a prostitute $100 and the prostitute owes the hotel owner $100 for a room. A man comes into town who has been driving all day. He is tired and hungry but only 4 hours from home. He’s not sure he can make it home today. He goes to the hotel and puts $100 down on a room but tells the hotelier he may not be staying the night. It is a deposit to hold a room. He then goes to the restaurant to eat. The hotelier quickly pays the restaurant owner who in turn pays the baker who in turn pays the prostitute who in turn pays the hotelier. The traveler is refreshed by his meal so he tells the hotelier he wants his money back and the hotelier promptly obliges. That $100 just settled $400 in debt. That is velocity of money at work.
Son: You said earlier that we want as little cash in circulation as possible; why?
Father: Well if the above scenario happened with credit, then they would all owe the banker instead of each other. They would all settle their debt with the bank and that would cancel the $100 out of existence. The other three remain on the hook. Get it?
Son: That’s brilliant! Another question… How does cash come into circulation?
Father: Governments order the printing of money from a manufacturer. The manufacturer sends it to the offices of a mint. The mint circulates the money to banks who hold the cash in trust. When you come into the bank and ask for cash, the teller takes that money and gives it to you. Everything is accounted for. You do notice that your withdrawal slip has a line entry for cash, right? You spend your money at a store, the store then typically deposits your cash with their bank at the end of the day. The truth is that most of the cash is sitting idly in banks. Velocity of money sucks for bankers so we like it that way.
Son: OK, then what does the bank do with the deposited cash?
Father: They decide if the money is too worn out, damaged or dirty to use and then either hold it to give to another customer later or send it back to the mint to be destroyed. Good riddance!
Son: So then not all the cash the government mints is in circulation then. How much of that cash is in circulation?
Father: Only as much as there is “demand” for. The government always knows how much money has been issued but not all of it is in circulation. Technically, they can create as much cash as they want. Nobody can say exactly how much is in circulation and how much is sitting idly in a bank. It is safe to say though that there is generally enough cash available to meet demand. If the general public thought there was a “shortage” of cash, it would likely cause a run on banks. For banks, cash is a necessary evil to keep up appearances and keep the sheeple asleep.
Son: Is there enough money to meet the demand if everyone wanted to cash out of their bank accounts?
Father: Most definitely not!
Son: Then how much cash is there?
Father: It would be safe to say that there is not more than 1/1000th of the money available to redeem as cash. Most money changes hands as electronic transactions within and between banks. It all happens in computers and across networks.
Son: This means that most of the money in existence is simply an entry in a bank’s electronic ledger then, doesn’t it?
Father: Why yes!
Son: Don’t banks charge interest on the money they loan?
Father: Yes, of course.
Son: So where does that money come from?
Father: It is not issued when a loan is issued. That money is taken from the pool of money already in existence – mostly money that is in a bank’s ledgers.
Son: Are you telling me that a bank issues a dollar as a loan of some form and then demands repayment of more than that without actually creating the interest money itself?
Father: Why yes, just so!
Son: Well this means that over time all the money will transfer from circulation to the banks themselves, won’t it?
Father: Why yes! That is why the financial services sector has grown so big. When you go into any city, what name is on most of the sky scrapers? When you see a construction project billboard, there is usually a bank declared as the financer of the project in addition to the company building the project. Show me a business that can remain solvent without an operating line of credit! But that said, banks do make a modest contribution. All the money a bank spends on operations is spent into the economy so in that way it partially returns to the economy some of the interest money it takes in.
Son: Well if that is so, then how can the economy remain viable? It is little more than a funnel sweeping all the wealth of nations into the coffers of banks.
Father: That’s a very good question. The thing that keeps the wheels of the economy turning is an ever-increasing pool of loans.
Son: That reminds me of Wimpey in the Popeye cartoon; “I’ll gladly pay you later for a hamburger today.” It’s a game of musical chairs. There have to be losers. If more money needs to be paid back than there is money in circulation, then how is that possible? It doesn’t seem right. Isn’t this the classical definition of a Ponzi scheme?
Father: Now you’re catching on. That is what fundamentally causes bankruptcies. It is a Ponzi scheme operated for the benefit of the banks and their shareholders. It works because of the confidence the users of banking services have in us. But the problem is even worse than it seems. Consider anything that is offered for sale – goods or services. Every single thing offered for sale has a price. That price is comprised of money paid out as wages to employees, earnings to business owners and dividends to shareholders. But there are always additional costs that the price is made up of:
a. Depreciation on capital equipment
b. Raw materials
c. Buildings
d. Land
e. Transportation
f. Utilities
g. Put simply – all other costs other than wages, earnings and dividends.
Let A be the money paid out as wages, earnings and dividends. Let B be all other costs. PRICE = A + B. This is called the A + B Theorem. Now think about it. Can A pay for A + B? Impossible right? There is a built-in shortage of money in our economic system. Every single business contributes to this shortage – generally referred to as the GAP. Most people don’t get this because it was not taught to them in schools. This is the wool bankers pull over the eyes of the sheeple. They suffer from what they don’t know that they don’t know. It is such a big secret that even most bankers don’t know!
Son: So this is a train-wreck of an economy where everyone – governments, businesses and consumers - is ultimately headed for bankruptcy. Aren’t bankruptcies bad for everyone including banks?
Father: Actually, bankruptcies are good for all but the bankrupt as long as there are not too many all at once.
Son: How so?
Father: For the banker, the creditor needs to offer collateral so they hand that over in a bankruptcy; thus the banker is made whole. The loan was issued at very little cost or risk to the bank so the collateral is all gravy. To society, this is extra money remaining in circulation to be used to pay banks their interest! Once the good times return, banks sell foreclosed property at full price and make a tidy profit windfall. We attach a negative stigma to bankruptcies though because if everyone went bankrupt all at once, we couldn’t maintain the fractional reserve and that would put all the banks out of business.
Son: So what happened in 2008 with the banking crisis?
Father: That scared the hell out of all the bankers because the failure of such a huge bank as Lehman Brothers would have caused a cascade of bankruptcies that would have brought all the banks down. It really was too big to fail – too big for the other banks! TARP was the perfect solution because it bailed out all the other banks without disturbing the debts owed and it put the entire liability on the taxpayer. It would have actually been better for all but the banks if the TARP money was just given by apportionment to everyone because that would have stimulated the economy. Send the money to Main Street instead of Wall Street. But this would have resulted in the settlement of many bank loans. Lehman would still fail and there would have been more bank failures and business bankruptcies; but the money put into circulation would have ended up as additional reserves in banks, so most banks and businesses would have recovered. The economic recovery would have been much more robust also. Of course, it would have still kicked the can down the road with yet more debt with nothing really solved.
Son: It seems inevitable that if the spiral of debt is ever-increasing and never decreasing, debt exhaustion is inevitable where no matter how low the rate of interest, nobody will want to borrow. Their balance sheets will simply be unmanageable. What do you do when you owe more installment debt than you have income? Bankruptcies everywhere becomes inevitable. We seem to be approaching that tipping point now. Eventually a parasite destroys its host and both die.
Father: How do parasites survive? They find another host! Can you say China? Can you say BRICS?
Son: This means that the only constant in the international economy, if it is to continue to operate without eventually collapsing, is ever-increasing debt. Everyone is collectively just kicking the can down the road and doing exactly what Wimpey does. The debt is ultimately unpayable. It is inevitable that the first-world nations are destined to collapse first unless something is done. Why do we hear about bank failures then? What’s up with that?
Father: If it lends out money that creditors refuse to repay, then the “loan” which is treated as both an asset and a liability becomes a pure liability. If the economy is bad and the collateral can’t be liquidated for enough to cover the loan balance, the bank has a problem. You see, banks have different ledgers than consumers, governments and businesses.
Son: I don’t understand. What is the difference?
Father: Everyone except banks keep what is called General Ledgers. It has five columns: 1) Line item, 2) unique transaction identifier, debit, credit and balance. Every transaction is either a debit or credit and that decreases or increases the balance. Banks keep what are called Double Entry Ledgers where every debit is a credit and every credit is a debit. The sum of debits always equals the sum of credits. Both ledgers must be kept in balance to remain “honest.” If the books go out of balance more than the reserves balance, the bank becomes “insolvent.”
Son: It is clear to me that for entities operating with General Ledgers, when the balance becomes zero the entity is insolvent because they are broke, but double-entry bookkeeping looks like a zero sum game. How can the bank go broke?
Father: That is a great question! If there were no other rules of the game, then technically, they never would go broke. Since they have the “authority” to create loans, then all they would need to do to cover a defaulted loan would be to create an offsetting journal entry to balance it. But there is a “rule” called fractional reserve that says a bank must always have 10% of its deposits as reserves at all times in a separate account. This means that if more than 10% of their loans go bad, they will become insolvent because they won’t have sufficient reserves to back the rest of the outstanding loans. There is no balancecolumn with double entry journaling. A bank’s balance column is its reserves. It is 10% of the debits and it must always be kept in a separate account.
Son: What about Canada? Didn’t Prime Minister Brian Mulroney eliminate the fractional reserve there?
Father: Yes he did. They implemented other rules but I think it can be safely said that in Canada, it would be very difficult to declare a Canadian bank insolvent.
Son: This double entry bookkeeping sounds like a fraud to me. How can a debit be a credit at the same time? It makes no sense.
Father: Well look at it this way. It’s all just a game that we have all made up and the rules are what we have all collectively agreed to follow. If we all collectively decide to change the rules, then the rules will be changed. My Dad once asked me, “Son what do you consider a fair deal?” I couldn’t really give him a good answer because I had never thought about it. He then asked me, “If two parties come to an agreement they are both satisfied with, then isn’t that a fair deal?” I said I suppose so. Then I thought about it some more and it occurred to me that there were deals I had agreed to that I later regretted and I said so. He asked me what I did about it. I told him I demanded that we change the terms of the deal. “Exactly!” he said. It’s all just agreements. It’s not real like a tree or a car or a banana are real. We can have a shortage of bananas but there will never be a shortage of something fictional like money unless we deliberately rig the game that way.
Son: So what you are saying is that as long as people agree to live within the present rules, they will be taken advantage of until they come to the realization that they are getting a bad bargain?
Father: Exactly!
Son: So this is why the government, business and consumer debt is ever increasing and never shrinking.
Father: Why yes! That is exactly so. Governments have not had balanced budgets with no debt at any point in their existence. Consumer and business debt has rarely decreased year over year and the long-term trend has only been ever-increasing debt. The most prosperous businesses are the ones with the biggest lines of credit. Most of the people who look prosperous are actually in debt up to their ears. Very few people truly understand the banker’s golden rule - that he who has the gold makes the rules. The lender is master over the borrower. Most people are debt slaves. They owe more than they own. If they stop working for even 90 days, most people would lose everything. That is how homeless people become homeless. Once someone sinks to this level, they rarely recover unless there is someone to help them start again. The only way to not be a debt slave is to be financially independent. Because of the way the money game is rigged, very few can achieve it. If it appears that a large number of people are going to achieve financial independence, we pull the plug on them. The few that do make it – guys like Bill Gates and gals like Opra – get invited to the club. If they refuse to join, we take them out if they start to cause trouble.
Son: How do you take out the little guys who prosper?
Father: If bankers stop lending, the expansion of the money supply stops. People keep paying their debts and this retires more money in a deflationary spiral. When things get really tight, businesses and governments get distressed. Demand for loans – desperate money - increases so we jack up interest rates – ostensibly to cover risk. All those people who were rich get bled when their cash flow is interrupted by a bad economy and their surplus money finds its way back to the banks. When the pain gets bad enough, we open the loan spigot. It’s generally referred to as economic booms and busts. Banks create them.
Son: What is all this talk we hear on the news about the occasional government balanced budget, deficits and surpluses? Bill Clinton and Ronald Regan had them.
Father: Any good salesman knows that it’s all about words and how you present things. We rarely talk about debt. We talk about deficits instead.
Son: What is the difference?
Father: A debt is how much money you owe. A deficit and surplus are measurements as to whether you went farther into debt or closer to solvency. Deficit bad, surplus good. All the bankers care about is that there is a debt paying interest and that debtors can afford to make their payments.
Son: That’s hilarious! I recently read that credit card companies refer to people that always pay off their cards and have zero balances as “Deadbeats.” Now I understand. They are deadbeats to the credit card companies because they don’t make any money. They are a liability.
Father: Exactly!
Son: So let me get this straight. The game of money is rigged so that the only party that wins is the banker. That is like a parasite feeding off its host.
Father: That’s right! My father used to show me two hands and say to me “Sharks (left hand) and food (right hand). What are you?” So let me ask you, what do you want to be when you grow up?
Son: A banker! OK let me ask you a new set of questions about the other side of this coin. It is obvious that banking is bad for everyone except the bankers but that most sheeple have simply not caught on. What happens to banks when the entire world has been bled dry by the parasitic system?
Father: If you read the Protocols of Zion written 100 years ago by an unknown banker or bankers, they envisioned a world where they - the powers that be - “come clean” and admit to what they did. Then they offer a king of the world – a New World Order government - who will make all the merchants of the world pay for all taxes as the primary beneficiaries of commerce and the public will not need to pay taxes. That wouldn’t work today.
Son: Why not?
Father: In a word, robotics. The truth is that we only need 10% of the work force to meet 100% of our economic production requirements. If we eliminate all make-work projects, planned obsolescence, war and the military industrial complex; and at the same time we standardize production of everything to maximize efficiency and product life expectancy, then much less of the work force will be engaged in wasted efforts. It will result in even less workforce needed and pollution will effectively be eliminated. If people don’t have a job, how will the production of an economy be consumed? The best solution I have seen was proposed by C. H. Douglas almost a century ago but his ideas were not well received because he failed to create a comprehensive economic model that everyone could understand. He is the guy who created the A + B Theorem I mentioned earlier and he called his economic model Social Credit. Bankers saw the danger of his proposals so they used their considerable influence to discredit him. It worked, although there are still people to this day who have kept his ideas alive. But he still hit closest to the mark of a workable solution.
Son: How so?
Father: I can think of two ways to solve the problem of our mathematically unbalanced economy:
h. Create a system like the one proposed by Professor Frederick Soddy almost a century ago. He called it national economy. That system outlaws banks creating money out of thin air and requires them to hold depositor money in trust against loans. Instead, governments will spend new debt-free money into circulation to start the chain reaction of the velocity of money. If there is too much money in circulation then prices will rise. The solution is for government to tax the surplus money out of existence. If there is too little money in existence, the government spends more new money into circulation. He proposed creation of a new government ministry – similar to the Bureau of Weights and Measures – to collect metrics on sales prices and incomes to determine if the economy is either inflating or deflating. Money supply can increase if production and consumption increase but if anything deviates from the expected mean, adjustments are needed.
i. The second solution is to let banks continue to issue money out of thin air but keep an accounting of every business’ A & B costs and sales so that the B shortage of money can be calculated. That gap shortage can be equitably distributed to everyone by apportionment to fill the gap – a dividend or payment for their share of society’s plunder. Businesses, governments and consumers will continue to borrow money from banks at interest – the banker’s profit – and that will tend to cover the B costs. After all the A money continues to circulate. When businesses settle their loans through sales, governments settle them through tax receipts and consumers settle them with their incomes; the bankers will retire the money and thus create our gap problem. The problem will be met head on by the dividend.
Son: So which proposal do you like best?
Father: I think Soddy’s proposal suffers from two fatal flaws. It has no mechanism to equitably distribute the fruits of society and it fails to address the problem of robotics. People need incomes to consume. Douglas’s proposals solve the problem elegantly. Because banks would continue to create and destroy money, the shortage would be continuously produced. That shortage occurs every single time a good or service is created. That continuous shortage can be converted into a continuous stream of social credit instead of our present continuous stream of ever-increasing government, commercial and consumer debt.
Son: So would this dividend be enough for people to live off of? After all, if only 10% of our population is needed, then on average, people would only spend 10% of their lives working.
Father: Look at the national statistics. Nobody has ever collected the numbers we would need to gather to make this work – specifically each business’s A and B costs – but we can get a rough estimate by looking at a nation’s GDP (i.e. the price it achieved for the sale of all its goods and services) and the reported personal incomes. Here are some graphs that show Canada and the USA gap in 2008.
This amounts to about $17,000 per year for every man, woman and child – or about $70,000 per family household. Is that enough to live a modest but comfortable life? Will that take a person to retirement through sickness and health? This is certainly better than is offered by any nation on earth today.
Son: I see a problem with all this liesure. If most people don’t have to work, won’t that result in boredom, increase in crime, drug and alcohol abuse, and a generally unhappy population?
Father: Perhaps for some people but in general I don’t think so. Parents will have more time to raise and educate their children properly, painters will paint, musicians will make music, adventurers will go on adventures, readers will read, writers will write, inventors will invent, businessmen will bring products to us that will enrich our lives, explorers will explore, those with a compassion for their fellow man will give of themselves in that area, the curious will learn, the sick will convalesce in peace, the old will age gracefully and in security and society will generally become richer in the final analysis. In any case, it has never been like this anywhere in the world at any time so we can’t say for sure what would happen. There have been a few experiments conducted in Canada and India where people in small communities were given a modest guaranteed income and the community was much improved as a result.
Son: OK here is another problem. What about trade with nations? Today every economy is engaged in a “race to the bottom” where each is trying to debase the value of their currency in order to gain a favorable balance of trade. If every nation is a net exporter, then that is mathematically impossible. For every winner, there must be a loser. This is the classical definition of trade wars. If one nation has a social credit economy, how will they be able to trade with another nation that operates like today?
Father: Great question. We need to return to first principles first. Why does anyone trade? They want to get something they need in exchange for something they have. This implies some obvious preconditions:
a. I don’t want to give up something I have in short supply and can’t easily obtain.
b. I will make anything for myself that I can to minimize how much of my own stuff I must give up to get something I need. In other words, it is best to be self-sufficient.
c. If there is something I need, I will give up that which I have in greatest surplus that is also of value to the trading partner.
Given these basics, the next consideration is how to ensure that I as a nation get a fair deal. My trading partner will be most interested in dumping goods on me to gain a favorable trade balance but I am most interested in just getting the thing I am most short of. I will give up as little as possible while they want to get rid of as much as possible. Sounds like a win-win to me. Eventually they will wake up to the realization that getting rid of their wealth only makes them poorer and giving it to us cheaply will only make us richer.
Son: When I think of all the schemes and scams that have ever occurred, banking is unquestionably the biggest scam ever foisted upon humanity. I have to ask you father. Why do you continue to promote and defend this system?
Father: That is easy. I get something for nothing, I control a great deal and I compel my fellow man to serve me. I am a king and a king maker. If everyone is self-sufficient, nobody will perform any more service than is necessary to preserve or increase their standard of living. Cleaning my toilets, washing my clothes and generally doing my bidding is no longer going to be a necessity of society as the means of one’s bread. In other words, I am selfish. Besides, sheeple are so stupid that if bankers like me did not lead them by the nose, they would be worse off than they are now.
Son: I don’t agree. That is entirely self-serving. So what will happen if I blow the whistle on you?
Father: Easy. You die.
Son: What if I wait for you to die, get my inheritance and then blow the whistle?
Father: Easy. You die. Did you think it will be me who will kill you? Oh no, no, no! Other bankers will kill you. We are the ultimate organized crime syndicate on planet earth. We are the government that rules the government. We are the invisible hand. We will not change until we are FORCED to change. There is merit in the assertion that we are banksters. We are!
Son: Wow! That’s pitiful. Even you are a slave. If you wanted to change your mind and help your fellow man, they would kill you too!
from Dean, social crediter
| Dean dean.crsatellite at gmail.com | |||
| to | social-credit at googlegroups.com |
Hi Ellen,
Some months back, you challenged me to come up with an explanation for the lay person that could easily be understood. I think I have done it. The following is a dialog between a bankster and his son – teaching him the ropes. If this was done in the form of a cartoon, compelling comic visuals could be tied to each statement that would make the story easily understood. Here is the narrative. If there is anyone who can help with the art side, that would be awesome. It could even be set to a video. This is basically a script. Let me know what you think. If you want to publish it, that would be great too.
Let me know what you think:
Comments from Oliver Heydorn:
I'm glad that you grant the "locked in" aspect of the problem, i.e., some producer credit contributes to the flow of prices when spent, but does not get into consumers' pockets as income.
Now, you write: "The money that is borrowed to build a factory and is canceled out when repaid is irrelevant;"
Well no, it is not irrelevant because when that money was spent it created a factory that has a price value on it. Thus, the capital loan has to be paid and the factory has to be depreciated so that it can be replaced. When the owner of the factory tries to "sell" the factory to the public by charging for it in the costs of the goods he produces for consumers over 10, 20 years, there will be no money to automatically cover the cost if it has already been used (or its equivalent) to pay down the capital loan. An example that is frequently used in SC literature is this: let us say that the workers in the example get the whole 100,000 (which they don't in practice) and then the company issues shares. Let us then assume that the workers are well off so they use that 100,000 received in wages to buy the shares. The company has its 100,000 again and uses it to pay down the capital loan. Poof! Money and debt cancel each other out of existence. The company will now charge 10,000 a year into prices (for ten years let us say) in order to recover the cost of the factory ... but where is the money to come from? Hence the need for additional money which, under the existing system, can only come from bank debt and only on the condition that it directly or indirectly engenders additional economic activity and growth for the sake of distributing additional incomes. It's a mad world.
I should of course add that, according to SC theory, a net increase in savings by consumers or a decision on the part of consumers to re-invest savings also aggravate the purchasing power deficiency that may manifest itself at any given time.
Mobilisation:
In French:
http://desiebenthal.blogspot.ch/2015/12/projet-de-loi-dapplication-de-monnaie.html