Secrets of Money, Interest and Inflation
by Rudo de Ruijter,
Court Fool.info
Money plays a big role in our life. In society too, nearly everything is determined by money. It is strange, that only few people know the juggling tricks, by which money originates and disappears again.
Most people see, that money becomes worth less all the time, but they don’t know, that this is caused, in the first place, by the money system itself. Also the eternal chase for economic growth and the always increasing working pressure in industrialized countries, are caused by the money system.
Money can also serve for oppression, for instance of the Third World countries, or be the motive for wars, like the one against Iraq. Would you like to take a small tour behind the scene? Welcome to the circus of the money-jugglers!
Exchanges, a primary need
People need each other’s products and services. They use money to exchange among each other. Of course, it would be nice if money provided an honest medium of exchange. But this is not the case. Money loses value all the time.
Money does not belong to the state
Most people believe, that money is created by the state. However, most governments have little or no say over their country’s money supply. Bankers have taken over this power. They have turned this medium of exchange into a lucrative way of taxing the population by collecting interest. Bankers permanently collect interest on nearly all the money in the world.
Money is created by commercial banks
Commercial banks continually create money for loans. They do so simply by typing numbers into the bank accounts of borrowers, who then can spend it as if it were actual banknotes. Today the vast majority of all money only exists as numbers in bank accounts. By law, these numbers have the same value as banknotes and coins.
Each commercial bank is allowed to create new money this way. Behind the scene, hidden from the customers’ eyes, then starts the lucrative juggling act with other people’s money. In fact, the amounts that have been typed into the accounts are comparable to bad cheques.
The bank itself does not have the money. When the borrower spends the typed amount by writing a cheque or a payment order, the bank will use other people’s money to pay for it. Unseen, this money is taken from the deposits and savings accounts from other customers. You can’t notice it.
The numbers on your deposit and savings accounts remain unchanged. And by the time you want to dispose of your money again, there will be some loan that will be paid back to the bank, so you will never know about it. In many countries the minimum reserve banks must keep is fixed by law. (Often something like 10 percent.) Most of the times these reserves are then kept by the country’s central bank.
Because banks use other people’s money to back the new money they lend out, the amount of new money they can create, is limited. In practice around 90 percent of all money on deposit and savings accounts is used to back new money.
However, the money on deposit and savings accounts is also money that has been juggled out of the banker’s hat once. So, new "money created out of nothing" is backed by already existing "money created out of nothing". But as long as nobody notices, the juggler gets applause. Let us have a look at the consequences.
The merry-go-round of loans
Loans have a hidden effect. When the borrower spends the money, the receiver will deposit it at his bank. This bank, thanks to this deposit, can issue new loans. These loans too, will be spent and become deposits at a following bank. And so on. Of course, at each new level a bank collects interest. It is a vast merry-go-round of money creation, which inflates the total amount of money in the country.
Each time when loans, issued by one bank, arrive as deposits at a following bank, a new round of loans can start. The scheme also applies, when the money of a loan is spent and comes back as a deposit at the same bank again.
If there were only one bank in the country, it would quickly become obvious, that this bank is continually creating new money by issuing loans, and picking up the created money again as deposits, issuing new loans again, picking up the money again, and so on.
So, the effect of the merry-go-round is that banks together create more loans and collect more interest all the time. It inflates the money stock by many times. But do we, or the banks, get richer from this?
Banks create more money, but they don’t magically create more goods to buy. When people have more money, but there is still the same quantity of stuff to buy, prices will simply go up. Each unit of money becomes worth less. That is called inflation.
So, when banks put more money into circulation, the value of each unit of money goes down. And that is also true for the interest they collect. When they issue 10 times more loans and inflate the money stock by 10 times, the interest they collect is worth 10 times less too.
Competition assures inflation
Most countries have only one official currency, but multiple commercial banks issuing the money. And although these banks together do not get much richer from inflating the money-stock, they still do so. The only reason for this is the competition among them. Although competition sounds healthy, when we speak about normal enterprises, competition among banks means lending out as much money as possible and thus maximum inflation.
For each bank competition is just a battle to collect more interest and to increase its market share and benefits. The bank with the best results will grow quicker than the others and, in the long run, will be able to eat his competitors.
The gap between rich and poor
Not everyone can borrow the money he wants. When lending money, banks demand collateral they can seize if the borrower defaults on his payments. People with sufficient collateral can obtain loans and invest easily. Big corporations even pay less interest. The demand for collateral works as a continual widening of the gap between rich and poor.
For societies this is a permanent looming danger. As banks and not governments decide about loans, governments can only try to mask the social cracks, but will not be able to heal nor prevent them.
Loans for investment and consumption
An effect of loans all borrowers know too well, is that the principle amount has to be paid back with interest. The entrepreneur borrowing money for investments will have to generate extra income to pay this interest. Loans for investments are not only a cash-cow for bankers, but can also contribute to more economic activity. Making loans available for investments would be the useful role of the banks for society.
On the contrary, loans for consumer spending normally do not contribute to more consumption. It is true, that thanks to consumer credit, the purchase of an article takes place earlier. However, this advantage is offset by a longer period of decreased purchase power of the consumer. The consumer must not only earn the money for his purchase, but also for the interest. Therefore he will purchase less consumption goods with his wages. When the consumer pays the interest to the bank, only a part of this money will become wages of bank employees and only part of these wages will be spent on consumer goods. So, credit for consumer goods rather leads to a decrease in total purchases of consumer goods.
Where does the money go?
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