Posted 10 years ago on Oct. 5, 2011, 9:03 p.m. EST by sfcharles
from San Francisco, CA
This content is user submitted and not an official statement
Here is my attempt to describe the basics of our monetary system. All comments are welcome.
We have a system in which money is created as debt. Banks are given the privilege of creating money when they get a deposit. They can ultimately create nine times as much debt money (loans) as what they have on deposit. This is called fractional reserve banking. This is where most of our money comes from. Another portion of the dollars in the system is created directly by the Federal Reserve Bank (the Fed), which is a consortium of private lenders.
Thus, the vast majority of the money that is circulating in the system is debt created by lending institutions, and that debt requires repayment along with interest payments. When the principal is fully repaid, that money essentially 'disappears' from the system. The bank can then create more money as another loan, if it has adequate deposits and decides to make the loan.
If that bank and others like it stop lending, then the amount of money circulating in the economy shrinks. The government and/or the Federal Reserve Bank may then choose to intervene through programs designed to inject money into the system. The Fed can attempt to encourage banks to lend through various easings. The Fed can also directly increase the money supply by purchasing Treasury bonds/bills from the government. When the Fed purchases Treasuries, it creates the money to buy them out of thin air - it prints the money. The government then must pay the Fed back for its loan, both in principal and interest. This arrangement is the result of the Federal Reserve Act of 1913, which was supposed to prevent boom and bust cycles in the economy. It took the power to create currency and regulate its value out of the hands of the government (which is where the Constitution says it rests) and put it into the hands of the Reserve Bank.
When the government injects money into the system through spending programs, it funds them through additional taxes or by issuing Treasuries, which are essentially IOUs with interest payments. When it issues Treasuries it goes into debt, and has to later make interest payments on that debt. It pushes the actual payment of that debt into the future. The US Treasury does not have the direct ability to increase the money supply to pay for government programs. This power rests solely with the Fed. Treasuries can be purchased by nearly anyone: US citizens, corporations, foreign entities, the Chinese government, or the Fed.
All of the money that is created as debt, including Treasuries and bank loans, requires interest payments. In order for the entire banking sector of a whole nation to successfully collect those interest payments, the GDP of that nation must grow, or there must be more money circulating in the system ('inflation') or some combination of the two. There's no other way around it, if the banking sector is to survive and profit. The majority of that should be economic growth if the bankers really want to profit.
Have you ever wondered why a perpetually growing economy is considered a good thing? In fact, a geometrically growing economy will run out of resources at some point, and by definition it harms our environment at an ever-increasing rate. Shouldn't we just aim to have a steady-state economy with full employment and stable population levels where people live their lives to the fullest? Doesn't that sound like a worthy goal as a society?
The answer to all this is that lending at interest depends on a perpetually growing economy, and the American monetary system is particularly vulnerable to this. Increasing production and increasing population levels both grow GDP, generally speaking. So we are trained to believe that the economy needs to grow in order for us to be OK individually. In fact, this is true in the present system: if the economy does not grow, interest payments are not made, then banks stop lending, and then the money supply contracts. When money becomes scarce, people stop buying, then companies stop producing, then people lose their jobs.
While the Fed chair is appointed by the President, the Fed itself is a collection of private bankers that does not really answer to any of the three branches of the Federal government in any formal way. And that collection of private bankers profits from the interest payments that are made by the government on Treasuries that the Fed buys with the money it created out of thin air.
A start would be a system in which private bankers were not financially rewarded for creating money to lend to the government to buy US Treasuries. The Reserve Bank could become a part of the Federal government, or the US Treasury could take on the Bank's role and regain the power to create money.
More complete solutions will be more radical and will require that we change the way the entire banking and monetary system works. A system in which the banks create money and then lend it at interest must ultimately be replaced with one that is sustainable, in which most money is created as something other than debt.