Sunday, August 3, 2008

Column #6 Recap of Private Bank Loan Transaction

(Week 1 -Saturday Aug. 2)

In Col. 3 I posed the query, "Where does our money come from?", and then suggested that for greater specificity the question could be broken down into three parts. These can now be answered concisely:

(1) What is the procedure by which dollars are created? – Dollars are created in the moment a banker "writes the check" to, or credits the account of, a person who is in the process of borrowing money from a private bank. The principal sum of the "loan" is newly-created money.

(2) How do they enter into circulation? – These newly-created dollars enter into circulation when the person who takes out the loan spends the money for whatever purpose the loan was taken out for.

(3) Who controls the process? – The money creation process is controlled by a private banking system.

In Col. 4, "The Problem of Interest," I made what to many must seem to be, at least a bold, perhaps an outlandish assertion that the attachment of a compounding "interest" fee to the basic private bank loan transaction by which our money is created and enters into circulation constitutes "the very engine of the economic trauma we are facing at the present time." This point can also be described in three parts:

(1) Within the present system, there is attached to the issuance of money a compounding "interest" charge. By the terms of the basic bank loan transaction, the money to repay the principal sum of the loan was created and issued, but the money to pay the "interest" was not.

(2) This leads to a situation whereby the money to make the "interest" payments can only come from (be taken out of) the outstanding principal balance of other people's loans still in circulation.

(3) This creates the effective necessity for people in the economy as a whole to go deeper into "debt" (i.e. borrow and spend more money into circulation) on a continuous basis in order to make the principal payments on old "debt," keep up with the demand for ever-compounding "interest" payments, plus maintain enough money in circulation to have an adequate money supply.

Finally, in Col.5, I offered an answer to the question, "Where Does Our Money Go?" when we make a payment on a loan we took out from a private bank. I said that the bank divides the payments received into two parts. Again, this process can be summed up in three points:

(1) One part of the payment is applied to retiring the principal sum of the money borrowed. This money is extinguished, and no longer exists.

(2) The other part, the payment on the "interest", is not extinguished, but passes into the account of a speculator who has purchased the contract by which the loan was secured (the contract signed by the borrower).

(3) The speculator who buys the contract, typically, is not interested in returning the money to circulation within the public money supply, which he could do by simply spending his profit from holding the loan contract. Rather, he elects to "re-invest" the money. That is to say, he holds it out of circulation until he finds someone who is willing to borrow his money at still more interest. The new borrower, then, will spend it back into the monetary stream.

This "re-investment" can take on many guises (which we will talk about as these columns unfold). In any case, the net effect is to cause the "debt" burden against the money supply to grow, without increasing the size of the money supply. As these "interest"-payment dollars are loaned back into circulation there are no new dollars created and spent into the money supply, but these "interest"-payment dollars have thereby been transformed into new "debt". The resulting shortfall in the money supply in relation to the "debt-load" it is obliged to support eventually forces someone to go to a bank to borrow-&-spend more money into circulation, which, in turn, initiates a whole new round of the private-bank-loan, debt-money-creation process.

While for simplicity I am describing this cycle in terms of an isolated case, it is a process that happens millions of times daily, and is causing the nation's, and now the world's, economy to sink ever further under a crushing "debt" burden. I have never found this described in any explicit way in the media. In fact, I have found it very difficult to find an explicit description of what is happening in academic offerings, yet the way money is created at present is the very engine that is driving our economic distress. I would suggest that we will never see what lies behind the headlines unless we understand the nature of the money-creation-by-private-bank-loan transaction.

If I seem to belabor this point, I ask the reader's patience. I feel that the relatively small amount of time spent in coming to an understanding of how our money is created and controlled will pay great dividends in arriving at an understanding of what we are seeing in the news. I thank you for your considerate patience.

Beginning Monday, I will return more explicitly to the financial stories appearing in the media, but this time with the basis for a new way to talk about them. Hopefully, a deeper truth about what they are saying about our economic lives will be revealed. Whether or not this proves to be so is, ultimately, up to the reader. I welcome any questions, thoughts and commentary.

My sincere thanks for your thoughtful consideration,

Richard Kotlarz

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