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95% of money is created by private banks
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190908 -
Crisi - They make it out of nothing by giving out loans, but they make us pay these loans back with interest.

The financial crisis has been in the headlines for a little more than a year now since it kicked off with the subprime mortgage loan imbroglio in the United States, and a lot has been written with varying degrees of accuracy and precision to explain how specific aspects of this crisis have come about. However, not so much has been published, and certainly never in the mass media, about how the current financial system’s need for exponential growth is the underlying cause of the speculative bubble and hence of the very crisis itself, in addition to being directly linked to the energy and food crises. Thus I would like to take advantage of this opportunity to discuss not the credit crisis but instead the background to it, which shows how the current financial system is an enormous fraud on ordinary working people while at the same time being a danger for the sustainability of life on our planet. This will bring us to an understanding of the role played by the banks as the main culprits for the whole situation.

Read: System breaks

The history of creating money

The origins of the banking business go back to when gold was the real currency and as such was kept by goldsmiths in their storage facilities. Because gold was very heavy and hard to move around, money in circulation consisted of shares in this metal money. One day goldsmiths realised that they could charge interest on loaning out these shares, and by way of compensation began paying a lower rate of interest to the people who had deposited the gold; in that way the banking business started out in Europe.

This system had the drawback that the possibility of loaning out money was obviously limited by the quantity of gold in circulation. Hence the goldsmiths, now turned into bankers, invented the fractional reserve system under which only a part of what has been lent out needs to be kept in reserve. Or to put it another way, based on real money, money is created out of nothing in a proportion that, bearing in mind that people will not all take their money out at the same time, does not create problems for the bankers when they have to reimburse deposits. This proportion used to be around 10%, in other words 10 units in circulation for each real gold unit in the reserve.
This increase in the money supply favoured trade expansion, and nation states, once they discovered it, decided to regulate rather than ban it. To control the risk entailed by the possibility of it becoming known that there was not enough money available to give back their deposits to everyone, the system of central banks was set up which would hold additional gold reserves so that they could give loans to the other banks in times of crisis.

Creating money nowadays

Over time the system of central banks and fractional reserve has become the dominant one worldwide: the gold which was the backing for the money supply diminished until in 1971 the gold standard was abandoned, in other words gold was no longer to be used as the real basis for money.

Even though this fundamental aspect of the monetary system changed, the central banks and the fractional reserve system remained in place but with reserves that consisted solely of banking account entries created at some time by the central banks; these are reserves which stand for money but which are not guaranteed by any money which has a material basis. This completely changes the nature of money because it means that everything that we currently have in circulation comes from nothing and thus is purely contractual; it has value simply because everyone agrees that it does.

Read: Don´t cry for the USDollar

Money which is created today is basically created by means of loans, in other words in the shape of debt, whether that debt be public, commercial, foreign or held by individuals. But that is not all; when the debts are paid off, this money disappears which means that the financial system has a tool it can use either to increase or to reduce the money supply.

Money is created by the central banks and the private banks. Only between 3 and 5% of the money supply has been created by the central banks; the rest has been created by private banks by means of loans and (increasingly) through complex systems of financial speculation.

Nowadays, the creation of money is only limited by regulations which set out the conditions under which the banks can lend money and how they have to balance the accounting entries in their balance sheets in order to do so.

In the case of the European Union, the European Central Bank (ECB) regulation which binds the banks states that the minimum reserve they must hold is 2% of their total deposits; the other 98% they are free to lend and invest. Money deposited for a term equal to or greater than 2 years is not subject to this regulation and may be invested in its entirety. The relevant text is to be found in article 4 of Regulation (EC) no. 1745/2003 (ECB/2003/9).

States and the private creation of money

f money is no longer gold (which was the justification for creating the system of commercial banks and central banks as the institutions responsible for safeguarding gold and turning it into the money supply), how is it that it is still the case that only the banks can create money? And why do they only do it as debt which has to be repaid to them with interest?
To put it another way: why do national governments have to pay interest to their central banks in order to finance public spending, when this is money that the national governments could directly create themselves when they implement this spending?
Perhaps the only logical answer that comes to mind is that the banks in fact control governments and not the other way round.

Mayer Rothschild, member of the most powerful European dynasty of bankers, is remembered amongst other things for saying the following:
“Give me control of a nation's money and I care not who makes the laws.”.

Interest and the need for exponential growth

When a bank gives out a loan, it is creating money with the principal of the loan but not with the interest which the bank will charge to the debtor during the lifetime of the loan. Given that the entire money supply is created as debt with interest, we might conclude that the money to be used to pay the interest on the debt simply does not exist.
So how is it that the financial system has survived for so long? Basically for two reasons.

1. Because it is financed by growing indebtedness, that is to say the money supply has to constantly grow in order to pay the interest on debts and avoid the collapse of the system. This means that the system is constantly urging everyone to take out more and more debt, starting with mortgage holders before moving on to consumers who are offered quick and easy personal loans and credit cards, and finally ending up with companies and States. We are thus talking about exponential growth in both the economy and the despoiling of the Earth’s natural resources.

2. Because there are some who do not pay off the principal of the loan and only make the interest payments. This is the case with the public debt of the most powerful countries and the debts of influential companies and institutions which enjoy privileged conditions; and probably it is also true of all policy and credit card instruments in which the principal is not paid off and the contract is normally automatically renewed each year ad infinitum.

At any event, this shows us the extent to which the financial system actually needs growing indebtedness, and how the increase in mortgages and in consumer loans is linked to the maintenance of the current financial system.

Hence in general terms everyone is in debt, and the only difference is between those who have to pay back their debts and those who do not.

The banks and the real estate bubble

While it would have been unthinkable 15 years ago to give a mortgage to be paid back at more than 15 or 20 years, this upper limit has been deliberately doubled by the banks and savings banks up to the current position of 35 or 40 year mortgages. With this simple and at the same time wicked decision, the banks have both made possible and brought about the rise in the price of housing since by increasing people’s ability to go into debt, they have thereby increased the prices which we are able to pay.

This has benefited the banks because with mortgages they have been able to create money and collect enormous quantities of interest with very low levels of delinquency thanks to housing being a basic need. The rise in prices has also caused an exorbitant increase in the profits of the main building firms and real estate agencies in Spain, and thus also in the profits of the banks and especially the savings banks as they are the main shareholders in most of these companies.

Inflation as silent theft of our purchasing power

By creating money and then charging interest on it, the banks are creating inflation; in other words they are increasing the amount of available money without at the same time expanding the supply of goods and services. If you increase the money supply two-fold without a simultaneous and proportionate rise in the quantity of products, you do not become twice as rich; as the same quantity of goods is on offer, their price also doubles.

This over creation of money which we are obliged to use affects everyone (whether or not we are customers of banks), and when this privilege is held exclusively by a group of private institutions, we might come to the conclusion that this is legalised theft by means of which money loses value all the time that we have it. Taken together it means that an enormous sum has been stolen.

Moreover, inflation also serves to close the circle as it means that money only has one place in which it can easily seek refuge from its loss of value, and that place is a bank. Thus people, and especially those who are savers, are forced to protect themselves from the reduction in the value of money by looking for the shelter of a bank, which with this new deposit will be able to create yet more money and produce more inflation so that the wheel never stops turning. Inflation traps our money in the banking system and is the finest incentive that the system has for attracting deposits.

One of the consequences of this process is the dispossession of pensioners. Retired workers find that, even though they have spent their whole lives working, when they do retire their pensions provide only rapidly diminishing purchasing power. It is precisely at the age at which they should be able to enjoy the fruits of all their labours that they find they have least disposable income.

International financial theft.

Finance is also involved in international trade, which means imports and exports of commodities and manufactured goods. If a country has a negative balance of payments, in other words it pays more for what it imports than it receives for what it exports, it will not be able to buy everything it wants but instead will fall into debt.
Foreign debt is therefore a consequence of the trade deficit of a country’s companies and government in its international balance of payments.

Ever since the Second World War this international trade has basically been carried out using US dollars, and since 1971, when the gold standard was abolished, the US Federal Reserve (the Fed) has had complete freedom to add or stop adding to the quantity of dollars in circulation as it is neither accountable to anyone nor does it have to give any sort of guarantees. The same is pretty much true of US private banks with the only limitation being the fractional reserve that they have to maintain. Thus by controlling the creation of dollars, a financial minority (it should be remembered that the Fed is a private organisation) controls the value of international trade relations. In this way the US can buy everything it wants from abroad, while other countries take on debts which they then have to pay off. The international powers take advantage of this debt in order to force debtor countries to open up their borders to goods and financial speculation, thus enabling the rich and powerful to pick up their production of merchandise and natural resources at absurdly low prices.

Money has been and remains a means whereby certain financial powers can appropriate all the natural and human resources of the planet.

Infinite growth vs. finite planet

This financial system depends on more and more money being given in loans. The loans in the end have an environmental impact as people use them to buy a car, to travel, to expand a factory facility or to build houses amongst other things. Thus this system of economic growth by means of loans depends on the constant and growing conversion of natural resources into CO2 and waste. Hence at a time when we are reaching the limits of growth in energy production due to the decline of oil and when the output limits of many mines are also being approached, it seems safe to conclude that this system created more than 300 years ago on the basis of expanding credit cannot continue in the way that we know it today.

This reflection coincides with a major global financial crisis, so we are prepared to ask the question: Does the current crisis mean the end of a financial system based on growth?

Wars and finance

You will perhaps not be surprised to learn that behind all wars there is the interest of the armaments industry in selling more weapons and pocketing lots of money. The generation of needs when previously they did not exist is common practice in modern-day capitalism: whether they be weapons, new TV sets, video surveillance systems or domestic electrical appliances, you will always find major commercial interests behind them.

Less well-known among the public at large is the use of wars by the world of finance. Banks use wars in at least two fundamental ways. Firstly, the astronomic financial expenditure that is generated by war enables the financial powers to take control of the countries which are fighting; the latter will spend many years paying for the foreign debt that they have taken out as can be seen in the cases of Nicaragua, the Philippines, Nigeria, Cameroon, Ivory Coast and Zaire. Then in second place, wars in which the leading world powers such as the USA take part make it possible to create a large quantity of money in the shape of public debt on which only interest is paid and which serves to provide the system with the liquidity it needs.

The war in Iraq has enabled American banks to create 3 trillion dollars since it began. This has been the cost of the war for the United States and it is also the amount by which the country’s national debt has risen over the same period to stand now at around 10 trillion dollars. This is money which is not paid by the citizens of the United States but instead by people all round the world through inflation.

References for further reading:

  • Capitalismo (financiero) global y guerra permanente. El dólar, Wall Street y la guerra contra Iraq. Ramon Fdez Duran, Virus Editorial

  • Money as debt: animated video about how the monetary system works:

  • Documents, books and articles about the way the monetary system operates:

  • A digital news bulletin: another way of thinking about economic events:

  • Forums for debating and learning about the financial and real estate bubble:


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