Making Money and Losing It

Ever wonder why you just can’t “get ahead”? Well, it’s all part of the larger scheme of things. Oh, I know, some folks do get ahead in one way or another and to one extent or another. But only the very few – the less than one percent – really make money and keep it or even accumulate enough wealth to leave a sizable inheritance to their children. The number of Americans literally living from hand to mouth has grown astoundingly high, especially since the ascendancy of the new financial elites with the deregulation of financial markets. To understand it all we have to step outside of our ordinary ways of thinking about money, value, and our lives.

In a moral economy, things would be different. But that’s not where we live. Our economic system has devolved from open competition of individual entrepreneurs in wide open environments, to a closed system of centralized economic growth in denial of limits. The perpetual-growth economy is controlled by giant investment banks and hedge funds and runs on debt-based money. That means money is created by debt itself.

On first thought that doesn’t make much sense; money is supposed to represent value, not debt. But that is not how it has been set up ever since the private central banks were given control, indeed ownership, of the creation of money. Instead, money is a product of the strange relationship between the nation and its private bankers. The Federal Reserve System was established as the “lender of last resort.” in 1913. This was meant in part to respond to fiscal crises such as the financial panic of 1907. The other part was a quiet takeover of the money system by the big private investment banks.

Making Money by Indebting a Nation
Some argue that the creation of the Fed as an independent agency was in fact a takeover of the function of a national central bank by the private bankers of the time. That view has significant historical validity. Though chartered by the U.S. Congress, the Federal Reserve System consists of twelve tax-exempt regional Federal Reserve Banks organized and operated as private corporations. Most importantly, the Fed was given control over the creation and lending of money.

Absurd as it sounds – and ever so costly –the national currency is not created by the Treasury. The Treasury only acts as a printing shop for the Fed. In effect, the Fed is a private banking cartel that lends to the government and to member banks the money it creates by generating public debt. So, to conduct its operations, the government has to “borrow” money from the Fed, which sells Federal Notes and Bonds to represent that debt. The U.S. Treasury can only offset that debt by collection of income taxes and other revenue. A lot of technicalities in this process obscure the basic fact that the right of the nation to produce its own money was high jacked by the biggest banks – “members” of the Fed – back in 1913. That has cost us all dearly ever since.

The Federal Reserve issues Federal Reserve Notes and Bonds. These draw interest for the buyer and charge the government, in whose name the Fed issues these debt instruments. So, the money the government ‘spends’ is owed to those institutions which ‘buy’ from the Fed the bonds and notes that signify the debt. One might say that the Fed is a “free rider” middleman. This process indebts the government – that is, the people – for all the currency, whether paper or electronic, that the Fed issues as part of its monetary policy.

Perpetuating Public and Personal Debt for Fun and Profit
The government becomes indebted in its turn to the ‘creditor’ institution or nation that bought the bond, for its face value plus any interest that accrues over time. The Fed is owned by its member private Big Banks, which have a sweet deal we’d all love to get a piece of but never will. The Fed issues credit to the Big Banks, say a billion dollars, and the Big Banks in turn loan out many multiples of the billions it ‘borrows’ from the Fed. Since the crash of 2008, the deal has been especially sweet, since the Fed charges a near zero interest rate. The Big Banks get to charge market rates for multiples of the funds borrowed for next to nothing. Huge profits beget huge bonuses for bank executives, not to reward some kind of executive performance, but for their just ‘being there.’

We should all be so lucky. But we are not. The average person, small business, or even not-so-well connected corporation has to borrow from the institutions run by the financial elite – the Big Banks – in order to initiate a major project of whatever kind. That borrowing had to be paid back with interest, so that whatever is done with the money has to “earn” more money than was borrowed in order to pay back the loan. That is often not easy. Just paying a mortgage seems to take forever. Even at a “reasonable” interest rate for a thirty year mortgage, most folks “pay back” more than double what we originally borrowed.

But in any case, what most people don’t understand is that the result of all this is that more money is always owed than is “out there.” If every loan requires repayment plus interest, where does the interest come from? Well, from “profit” or from wages, if the borrower is lucky. But that profit or wage comes from money already in circulation; that money in circulation was also created as debt. So, the only way for all money owed to be paid back is for more debt to be created, releasing more dollars into the money supply, paying off prior debt.

Reaching the End Game
Sound like a Ponzy scheme? If it does, that means you are paying attention. It is essentially no different than a Ponzy scheme. The whole house of cards stands on a perpetual expansion of debt that enables previous debt to be paid and the system to continue. That is only one of the reasons why the debt based economics of endless growth cannot ultimately be sustained. Debt cannot be expanded indefinitely.

There is another reason the debt-based growth economy cannot continue indefinitely. As with any exponential scheme of expansion, the limits of its environment eventually constrain it from continuing. That is where we are today with reference to “capitalism as we know it” and the material limits of the planet earth.

If you know anything about population growth, you recognize that a seemingly small percentage rate of growth after a few generations results in a very large number of people. From our current world population of around seven billion, growing at a moderate rate, we will soon have a population that by anyone’s measure cannot be sustained on one planet. One additional fact is important. A relatively small proportion of world population participates in the industrial growth economy but everyone else – of course – wants to. That is why more and more people everywhere find it increasingly difficult to “get ahead.” The game is almost over; it has reached its limits. Current world financial instabilities are symptoms. Economies with social purpose must replace mindless growth for the purpose of concentrating wealth in fewer and fewer hands.

Another way is possible and necessary. Money is inherently a public good. It is an inherent right of the nation itself to maintain sovereignty over its monetary system. The central banking system should be nationalized and subjected to public policy rather than be driven by private profit for financial elites in opposition to the public interest. Then, money could be based on credit, properly invested in the public interest, and thereby eliminate most of the false public debt it has caused by having been privatized.

Global Capital, Illusions of Wealth, and the Walking Dead

Any genuine scientific analysis of the trajectory of global capital is hard to find. Economic history is rife with ideological stories of “wealth creation,” “capital formation,” and the mythical “invisible hand.” What is capital? What is wealth? What is money? Well, they are all pretty much taken for granted in most economic thinking – conveniently so for the financial elite. On top of that, economics itself has been dominated by the ideology of the power elites that dominate society. Little room is left for science. International finance and the ‘wealth of nations’ are managed in very strange ways – I describe them below in a highly condensed sketch.

Global Capital and Central Banks
Put as succinctly as I can, during the industrial age finance (the management of capital) has gradually become globalized. But it was not international trade that spurred the emergence of a global financial network of banks. It was more a matter of the most powerful banks forging a network of control over the monetary systems of nations. In fact, industrial development and the human misery that has accompanied unprecedented wealth have always involved a struggle between public and private control of money and banking.

Each historical example of public banking and sovereign control of national currencies has been accompanies by prosperity and stable prices, then followed by an assault on public authority by private banking. Usually, this has led to the “privatization” of what is in its essence a public utility: money and banking. Benjamin Franklin explained to the British parliament how the Pennsylvania and other colonies were funding their economies by issuing credit in the form of paper script not “backed” by gold or silver to stimulate commerce, leading to unexpected colonial prosperity. Soon King George banned colonial script, and Parliament passed a Currency Act, requiring all taxes to be paid in gold or silver, forcing them to borrow from the Bank of England at usurious rates. That put an end to colonial prosperity based on public credit and gave a strong impetus to revolution.

Numerous other examples, from Canada to New Zealand, Lincoln’s “Greenbacks,” etc., eventually let to a cartel composed of the central banks of each nation, each privately owned and coordinated by the Bank for International Settlements (BIS) in Geneva, itself owned by the central banks. The International Monetary Fund (IMF) and World Bank (WB) impose financial requirements and lend to ‘developing countries’ in support of the interests of global capital in dominating national economies.

So, the currencies and banking requirements of nations are controlled by the private international banking cartel. The control of national economies in the interests of central banks, causes booms and busts in their pursuit of bank profits and control of national economies. Today, each central bank is largely controlled by its relationships to the cartel. Governments take a back seat to the whole of global finance, and their economic and monitary policies are subordinate to the global capital markets controlled by the BIS, the IMF, and the WB, all operated in the interests of the banks, not nations.

Illusions of Wealth
Most of the ‘highest values’ of modern economic ideology are buzzwords for the mechanisms by which the Big Banks control national economies and extract vast amounts of “wealth” from them.

“Free Trade,” for example, is actually the freedom of giant corporations and the giant banks that finance them to exploit labor internationally and avoid any responsibility for environmental damage they do in the nations in which they operate. “Financial innovation” is actually the various schemes of the Big Banks to extract phantom wealth out of the banking system by ‘packaging’ debt into complex derivative instruments from which additional fees and profits are squeezed, and risk externalized.

It is all built on a system of debt-based money, that is, money created out of debt through double-entry electronic bookkeeping when a bank makes a loan. Banks are allowed to lend much more money than they have ‘on reserve.’ The money they lend is thereby created “out of thin air.” They can borrow even more from the central bank – the Federal Reserve in the U.S. – at very low rates and lend it to their customers at much higher rates. Remember, the Fed is owned by its member banks.

It’s a great big illusion. Why? Because the creation of money is not related to actual economic activity in the real world. Of course, lending does occur for actual production of goods and services for the economy, but the money and banking system I am describing here operates independently and in addition to the real world of investment in the economy itself. In the past couple of decades the phantom-wealth ‘economy’ has expanded to the point where it accounts for a much larger share of the GDP than before. Yet, it contributes nothing to the real economy. Despite massive “quantitative easing,” little of the vast funds released to the Big Banks have reached down into the real economy. Contrary to the dominant ideology, you could do away with these “too big to fail” banks and nothing much in the real world would be missed.

The Walking Dead
The unbridled global capitalist system has no natural constraints, except the finite supply of energy and other resources. It is in the early but rapidly accelerating stage of near-death. Unless it is radically transformed, quickly, the extinction of the human species from which it emanates, will be its final constraint. That will depends upon whether or not the illusions of global finance capital continue beyond the tipping point of ecological and societal collapse. In either case, it is already the walking dead.

The National Debt and Deficit Scam

Ever wonder why the richest nation in the world, the U.S., has become a “debtor nation”?  Oh, but they’ve already told you.  It’s those politicians, especially the ‘liberal’ ones who just spend too much.  You know, those “tax and spend” liberals.  Well, I’m no apologist for the liberals.  I agree with Chris Hedges that the liberal class of politicos is essentially dead.  They still talk some about their concerns for the “middle class” and “working people,” but their actions reflect the same servility to the rich and powerful as do the ‘conservative’ — the misuse of that term is a whole other story — Republicans who have been cutting taxes on the rich and shifting the costs of plutocracy to the poor for decades.  So, we sure have a clue as to why we are in so much debt.

The Banksters’ Coup

The history of money and banking is far more interesting than any economics course on the topic.  It is long and complicated, but the essence of how current economies have become debt-based can be condensed to some key elements in the struggle between the public purposes of money and credit, and money-lenders’ efforts to control the issuing of money and renting that money for profit.  A nice summary of the key historical events can be read in Ellen Brown’s latest book, The Public Bank Solution: From Austerity to Prosperity.  In that book she also explains effectively why we — both people and government — are all in such debt, but need not be.

The international private banking cartel was started with the Bank of England around the time of the American Revolution.  Ultimately, the Federal Reserve was formed in the U.S. as a private banking cartel, owned by its member private banks.  The Federal Reserve Act of 1913 was passed under great pressure from the major private banks in the U.S.  It ceded sovereign authority for creating money to the Big Banks we know so well today.  That raises important questions that are rarely discussed in public.  What is money if not a public utility for making the exchange of goods and services effective?  Why should a public utility be controlled by a private cartel?

Money, Sovereignty, and the Public Interest

Numerous examples of public banking throughout history demonstrate that for achieving public purposes, public banks are more effective than private banks.  But rather than argue the details of why — Ellen Brown’s book does that quite well — let’s look at purpose and principle.  Banks are a necessary part of any economy.  An economy is a crucial component of any operating society.  The public has an inherent interest in banks being operated to serve public purposes, primarily the management of the creation and circulation of money as the means for making economic exchange work and facilitating public projects.

Money is a public good; indeed, it is a public service.  Contrary to the mythology foisted on the people, the value of money exists in its movement.  Furthermore, it is a process, not a thing — its value is in what it represents, not what it is [paper, wooden tallies, gold, etc.].  And what it represents is credit.  Stored in a vault it means nothing… except in the illusions of whoever controls the vault.  Banking has become the epitome of the illusory game of acquisition of wealth.  From the perspective of the citizen, however, the circulation of money is the means by which the people are able to sustain themselves over time.  If “we the people” are sovereign, then why is not the monetary system owned by the public?  But on to the main point.

The Debt and Deficit Scam

Simply put, because it gave up its sovereignty over the creation of money to the private banking cartel, the government borrows money from the Federal Reserve (central bank), which it created and gave the power to create money.  Where does the Fed get the money it loans to the government?  Why, out of thin air of course!  An entry is made on an electronic ledger and money is created and loaned to the very entity — the government — that allowed that ledger [of the private banking cartel] to exist.  A federal debt is created.  How counter-productive — stupid — is that?  The only interest this proess serves is that of the concentration of wealth in the hands of the banksters.

Well, it’s very productive for the banksters.  After all, its free money to be lent out and for interest to be collected upon.  Wow!  We could all use some of that kind of deal.  Free money to loan out and make more money on.  Now, project that process into the whole economy and think of the result.

The underlying absurdity is that by structuring debt in that way, it can never be repaid.  Only by continuing to expand the economy to allow more loans can the principle and interest on existing loans continue to be paid.  With the recent financial collapse due to uncontrolled speculative manipulation of mortgage lending, the system was exposed for the Ponzi scheme that it is.

Is There a Way Out?

The Banksters are just too powerful to stop directly.  The financial elite virtually runs the federal government.  But, as they said in the 1960s, “What if they gave a war and nobody came?”  Several lines of action are possible.  The Bank of North Dakota — the only public bank in the nation — is a model of what states might accomplish.  But municipal and county owned banks can also be formed.  Local movements for local public banking are developing.  Meanwhile, take your money out of those Big Banks and put it into your local credit union.  Divestiture worked to stop apartheid in South Africa.  It is starting to work to turn around the carbon economy.  It can be a big part of the great transformation of banking from a private extractive industry to a set of public institutions serving the public interest.