When you go to a bank and borrow money you probably think the bank loans you the money out of its deposits. This may have been the situation originally, but this is certainly not the case today. Banks are allowed, by governments, to loan 15- 17 times the amount they hold as deposits. "Credit that can be accessed by credit card, overdraft cheque or bank loan represents nothing more than a bank's promise to pay. Credit money exists only as numbers in bank computers…When someone borrows from a bank, perhaps taking out a housing loan, the bank records in the borrower's account the debt that must be repaid with interest, and in return provides a bank cheque to the borrower or direct to whoever he is purchasing the house from. The bank cheque is bank created credit, not backed up by the bank's own money nor anyone else's” (1) Deposits consist not just of coins and bills, as you might think, but also the credit of previous loans. Thus “ banks are able to build a mountain of credit based on earlier credit until it amounts to 95% of all money” (2)
As bizarre as it may seem, banks thus “ increase the money supply by creating money out of nothing” (3)
Of course, we, both as individuals and tax-payers, are forced to pay interest to the banks for our personal loans and government debt. Aside from the costs of processing a loan, which would include some kind of insurance to cover the minority who cannot pay up, the banks receive high interest payments for essentially doing nothing. Governments, or mutual aid systems, could simply loan out the money at cost, and the extra payments to the banks could be completely avoided.
More than 150 years ago, Proudhon realized that workers and farmers had their own in-built collateral. For workers, it was the amount of labor over a given time period, for farmers, the crop or harvest. Hence, there was no need to have collateral in gold, bills or property, nor was there any reason, other than government preventing it from occurring, for farmers and workers to create money and loan it out to each other thru a mutual banking system. For the longest time banks ignored the workers and poor farmers, but with the rise of consumer society came a realization that a bundle could be made loaning money to these here-to-fore ignored customers. Our collateral is our labor, but the banks reap the benefit.
Government debt, and remember the right-wingers howling about it as you read on, need not occur at all. Remember, credit is created out of nothing. Governments go to the banks, borrow the money, then print the money that has been credited to them by the banks. The tower of debt grows thru interest payments to the banks. Governments could simply cut out the middleman-banks and loan themselves the money at cost, i.e., the cost of printing those dollar bills. “when the State found itself short of money raised from taxes then -- instead of printing Treasury Bonds, selling them to the banking and non-banking sector in order to raise money, and then having to pay them back when they become due, and with interest attached, and with money that has been raised from taxpayers and the sale of even more Bonds -- it could simply create the money required "out of nothing", in the way that banks create money today, and spend it into society as public revenue.” (4)
The fact that governments don’t do this and instead run up huge debts thru interest make me highly suspicious. I am drawn to the conclusion that government debt is a fraud, that it has been deliberately created by the financial institutions and corrupt politicians as a means of milking the public. Now recall those right-wingers yelling about the need to pay off the debt and cutting social services in the process. If they were sincere about the debt, they would try to get rid of the middleman, and since they don’t, they must be part of the racket.
1, 2. 3. From http://dkd.net/davekidd/politics/money.html