The Creation of Money And Illusion of Wealth

by Joshua on June 8, 2009 ยท 10 comments

Greedy Banks Create Inflation

Greedy Banks Create Inflation

Our money was once valued by the worth of goods, but today it is our goods that are valued by their worth in money. Banks create money out of thin air by loaning it into existence. Increasing the money in the market creates inflation. This also means the system is required to continually grow in order to offset this inflation.

Money is not a real object, its value is abstract, and controlling large sums of it is imaginary wealth. We have given the power over our currency to private companies – they are greedy black holes, constantly starved for more. The good news for them is they can create more money. The bad news for us is that they can create more money.

Money is a tool, to be used in exchange for goods and services. The value of our currency is a conceptualized ideal that we all agree upon. For example, let’s say you can buy a watermelon for a dollar. The seller bases the value of his watermelon at a dollar on the assumption that another person will value dollars in a similar way. He can then buy some grain for the equivalent value with the dollar instead of trading his watermelon directly for grain.

“Money only has value if everyone can use it.”

Thus, currency acts as a medium to exchange goods and services instead of direct barter. It’s value is agreed upon by a consensus in the community. As Herman Daly and Joshua Farley describe it, “the value of a dollar, then, is the virtual wealth of the community divided by however many dollars are in circulation.” (Ecological Economics) Think about that as we talk about inflation…

Inflation

The value of money in our current system can be changed by the consensus (such as loosing or gaining trust in the dollar), but also by the total amount of currency in a market (how many dollars are in the world). If a watermelon is currently valued at one dollar, and suddenly there are more dollars in circulation, then as the number of dollars increases the cost of a watermelon rises as well. The watermelon might now cost two, three, or four dollars. The value of the watermelon hasn’t changed, only the value of the dollar. This is basically how inflation works.

There are many ways to mitigate inflation. The largest means of fight inflation is to make the market larger. Back to our original example, if you increased the number of watermelons with the increase in the number of bills, you would not experience any value changes. The Federal Reserve employs another method of slowing inflation: by altering interest rates. This is essentially encouragement for the banks to loan less money (or consumers to take out fewer loans), creating less new money in the market. (We’ll talk about money creation shortly)

The Fed has a few other things up its sleeve, though rarely uses them due to the disruption it can cause. One is increasing the reserve requirements – that is the amount the bank must keep on reserve versus the amount it lends. Generally the reserve requirements today are very low, but for simplicity we can assume they must keep 10% on reserve. So, for every $100 deposit they can loan out $90 of that money to someone else. This minimum is rarely changed, because of the far-reaching effects of changing it (and because the Fed is partly controlled by the banks that would be effected by it).

Another weapon of the Fed is to buy or sell government securities, in effect removing or adding money to the market. This is done, but not anywhere approaching a scale to compete with the creation of new money by private banks. Why would they compete with themselves, anyway?

Private Banks Control Our Public Money

Who controls the creation of our currency? The Government? They print the money, but most of our money is digital. Actually, 90% of our money is created through commercial banks by being loaned into existence. (Daly & Farley) Take the example displayed in the Summer 2009 issue of Yes! Magazine (emphasis added):

“You earn $100 and put it in the bank and then…. The bank keeps $10 in it Federal Reserve account…. Then loans Susie $90, at interest. Susie deposits the $90 in her bank. That bank keeps $9 and loans Joe $81, at interest.

See how it all adds up – for the banks. You have $100 in your account. Susie has $90 in hers. Joe has $81. There’s now $271 total in accounts that you and Susie and Joe can spend, and it all came from your $100 deposit. The banks have created an additional $171 by loaning it into existence.

Imagine this money trick over and over. If you do this operation 50 times, that $100 turns into $995.25 – $885.25 in loans, and your original $100. Mad Math: If those loans are for one year at 10% interest, the banks will make $88.53. They they’d only been able to loan your $100, they’d make $10.”

Most money is subject to interest as a price of existence. As we gain interest on savings (or charge interest on debt) we are gaining new money in the market. What happens when more money is placed in a market? Inflation. How can we control inflation? Grow!! If our market grows at the same rate, there is no inflation. We have to grow in order to meet the demands of the greedy banks. Remember, inflation is caused by the banks making money out of nothing for their profit and at our loss.

More over, as the demand to borrow increases in boom times so does the money through the creation of so many new loans and the interest they accrue. These bubbles are created by the increasing amount of money being added to the market. The bubbles are popped when loans are foreclosed, causing the money supply to contact during a recession. Since the adoption of these monetary policies we have experienced many boom-bust cycles. These occur in part by banks creating large sums money out of thin air.

Real Wealth for Phantom Wealth

This is a major point in argument for the steady state economy and against the current, neoclassical economy. Money is a tool created to simplify and improve our exchanges, thereby improving our life. We value real things like food, water, clothing, and family – real wealth; yet we try so hard to hoard small pieces of paper in big piles instead of the actual goods. This is what David Korten calls “phantom wealth,” not real wealth. We are trading real wealth for phantom wealth.

Once we believe the lie that money is “real” wealth, we infer that it is also a storehouse of real value. However, if you have a dollar today that is worth one apple, yet tomorrow the inflation causes that apple to cost twice as much – the “real wealth” money in your pocket just decreased in value without any exchange of real, physical goods or services. The apple didn’t change, remember, just the abstract worth of the dollar.

Daly and Farley talk about this in their textbook Ecological Economics:

“It is a collective illusion. Yet individuals voluntarily hold money instead of real assets, and they behave as if money were a real part of their individual wealth, even if they understand that collectively it is only ‘virtual’ or illusory….

The only possible explanation is that if those who produce nothing are earning, through speculation, more money that entitles them to more real wealth, then those who actually do something must be becoming entitled to increasingly less wealth.”

A Public Service Should be in Public Hands

We are diluting the real value in our system, throwing more money on bank executives, which entitles them to a larger share of real wealth. The real wealth they are stealing from us (those who contribute actual goods and services to the world) by speculating on imaginary numbers. They contribute nothing to increasing our well being, but in fact harm us, yet we reward them.

Money is a public service, created to improve our ability to make exchanges. Money should be a service provided by our government (the one run by its people). The power of the creation of money should rest in the hands of a public agency, not a for-profit commercial bank.

We as a community have decided to let the creation of money rest in the hands of privately owned banks. We as a community need to change were the power is stored and return it to our elected government. There are many ways of doing this:

In a steady state economy, banks are held to 100% reserves and make their profit from fees for things like withdrawals, transfers, checks, et cetera. In a steady state economy banks do not have the power to create money, they exist to serve their purpose: hold money, provide transactions, and secure our holdings. We need this change, let’s make a sustainable world with a steady state economy!

Don’t forget to: Write to your congressman, join supporting political movements, and VOTE!

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