Thursday, October 30, 2008


(Week 12 - Thursday, Oct. 30)

In the previous two columns I suggested that nether the "loan" from a private bank by which money is created and issued, nor the "debt" that results, are what the words would purport to mean by the dictionary or common sense meaning of the terms. Moreover, I questioned the very legitimacy of both concepts as they are used in this particular transaction.

Attached to the "debt" is a fee, commonly called "interest", that compounds over time until the "loan" is "paid back". The charging of this "interest" fee is commonly attributed to "the cost of money", but the phrase is not justified. The "cost" in real terms is essentially the small effort it takes to lift the pen and write the check.

If a private person had a checkbook out of which he was able to write checks for any amount with no requirement that there be funds somewhere to draw upon, and, further, he chose to "loan" the money so conjured to people who simply did not have that privilege, would it be proper to say that a compounding fee attached to the use of such funds constitutes a "cost of money" to the person writing the check? While a modest incidental levy might be justified, an "interest" charge can assume such proportions that it can total more than the principal amount of the "loan" itself; often a multiple thereof. It can even result in a revolving-door payment on the "debt", with the principal of the "loan" not being retired at all. Can the fact that a particular group has been awarded control of the spigot that dispenses the economic life's blood of society as a whole be attributable to anything but a disparity of privilege?

Money is the most vital element of the commons. How can it be justified for a private corporation to possess the franchise to create it, while everyone else is obliged to pay a heavy tribute for its use?

But, I hear it said, banks are businesses, and like other businesses they are obliged to pay their expenses and earn a profit. This is true, but most of the expenses of banking are covered by the many fees they charge for their services that are not related to "interest". Why, then, are they justified in tacking on an additional compounding surcharge that requires that the money they create out of essentially nothing be "paid back" in quantities that are often multiples of the amount "loaned"?

Others will say that if banks did not charge "interest", what would be the incentive for them to loan out "their money"? They are not loaning out their money; they are "loaning" ours (i.e. the public's). We should be turning the question around and asking, what is the incentive for We the People to "borrow" at "interest" money that is already ours to create? I would add, why are we not asking this question in sufficient numbers to put the monetary issue on the political agenda?

To be complete, I would note that there are banks that do indeed loan out money on deposit. They are generally referred to by specialized names, such as "savings banks", "savings-&-loans" or "credit unions". What are commonly identified as a "banks" within the Federal Reserve System create new money using funds on deposit (called "reserves") as a baseline from which, within the rules of a mathematical (fractional reserve) formula, they are permitted to create new money to "lend".

The Federal government (i.e. We the People through the Federal government) is supposedly in "debt" to the Federal Reserve for a sum that is currently in excess of $10 trillion dollars. Over a period of time, it will cost the government that much and more in "debt" service payments just to avoid defaulting on the "loan" (without ever reducing the "debt"). Will the Fed really have incurred a "cost" of $10 trillion dollars (as measured by what was needed to cover material expenses and employee wages) in servicing the paperwork on the amount "loaned"?

In the private sector a "loan" of $500,000 might well be sufficient to compensate the architect, suppliers, tradesmen and other necessary contributors to the building of a large house, but does it really cost another $1,000,000 dollars ("interest" and fees) over the period of the "loan" (mortgage) merely to manage the paperwork?

Clearly, there is a grossly disproportionate charge for actual services rendered at the very least. In reality a virtually culture-wide denial is happening in matters of money that is effectively camouflaged by euphemistic language and dubious patterns of thought, which, in turn, have become the words and phrases that we as individuals and as a civilization have available to think with.

What needs ultimately to reckoned with is that, due to the compounding "interest" fee attached to bank "loans", the "debt" of society to the banking system can never be "paid off". Again, to be complete, it is technically possible for the "debt" to be satisfied if the "investors" who bought up the "debt" contracts generated by the banks all forego retaining the "interest" payments collected, and return the money as gifts to the social order. In fact, there is some of this that goes on, mainly in the name of philanthropy, but it is hardly the reason that motivates the majority of the gamblers in the monetary casino. Practically speaking, the "debt" that is attached to the public money supply is unpayable.

How then can our children ever "pay" it? More on that tomorrow.

Richard Kotlarz

The complete set of columns from this series is posted at the following websites.