Column #28 IS THE “NATIONAL DEBT” A REAL DEBT?

(Week 5 - Thursday, Aug. 28)

When we talk about a “national debt,” does this expression refer to money that actually exists, is loaned out for a time, and is then paid back? Is it “real” in the dictionary or common-sense use of the term “debt”? I would offer a description of two outwardly similar loan transactions, and perhaps through them we can discern the answer to the question.

(1) – A Loan from a Friend:

Suppose I needed to borrow some money, say $1,000. I might approach a personal friend and ask for a loan. He checks his bank account to see if he has the money to lend, and makes an assessment of whether I am likely to pay him back. Let us suppose that he has the money and is willing to lend it, but on one condition; that I agree to pay him more than I borrow (i.e. interest on the loan). After all, is he not foregoing the use of that money for a year, and is there not a risk that I might not pay it back?

We agree that he will lend me $1,000, and I will pay him back the $1,000 principal of the loan, plus a $200 interest charge (for a total of $1,200) at the end of a year. He writes up an I.O.U. on a slip of paper, and I sign it. He then writes a check for $1,000 out of his account, and hands it to me.

At the end of the year when I give him the $1,200, he marks the I.O.U. “paid,” and the loan is deemed by both of us to be satisfied.

(2) – A Loan from a Bank:

Now suppose that instead of borrowing the $1,000 from my friend, I decide to go to a bank. After all, is that not what banks are for? I approach the banker and ask for a loan. Like my friend, he checks what he has in his accounts, but not because he is planning to loan me any of that money. Instead, his intention is to create the money he will “loan” to me out of “thin air” by virtue of his authority as a banker. The reason he checks his accounts is to make sure that he has enough money “on reserve” to create the new money according to the “fractional reserve formula” by which he is governed.

He makes an assessment of my “creditworthiness,” and the loan is “approved.” We agree that he will lend me $1,000, and after a year I will pay back the $1,000 principal amount of the loan, plus a 20% interest charge ($200). He writes up a contract which states that I promise to pay back the loan, and I sign it. He then writes a check for $1,000 out of his authority to create money, and hands it to me.

At the end of the year when I pay him the $1,200, he marks the loan contract “paid,” and the loan is assumed by us, and deemed by the legal authorities, to be “satisfied.”

On the surface there are many similarities between these two transactions. In fact, the operative words of the discussion (“loan,” “interest,” “debt,” “payback” and “satisfaction”) are used in what appears to be identical ways. If one filmed each session, except for the incidental settings (one across a kitchen table and the other a banker’s desk), one would be hard pressed to detect any substantive difference between the transactions.

My experience has shown that when people go into a bank and borrow money, they generally assume that they are involved in an upfront common-sense transaction (like with their friend), whereby the banker is loaning them some money that he will no longer have on deposit in his bank for a time, and that he therefore needs the interest charge to compensate for the risk that he will not be paid back, and further, that when he is paid back all the conditions of the loan will have been satisfied without any residual debt to the borrower, banker or society as a whole. This is mistaken all counts.

If we carefully track the steps of the bank loan transaction we can see that:

● It was not essentially a process to “loan” money, but to create it.

● The banker did not charge “interest” on the “loan” because he was “at risk” of losing something substantial that he had entrusted to the “borrower.” Rather, the compounding “interest” charge was a fee that he was privileged to attach to the principal of the “loan” as the agent of a private banking system that had acquired the power to control the terms by which society would gain the use of its own money.

● This “loan” at “interest” is not a “debt” in any true meaning of the word. The money created and issued was done so out of a prerogative of sovereignty that was unlawfully (in my view) appropriated from the social order of which the borrower is a part. How can we the people be “in debt” for borrowing something that rightfully belongs to us, with an attached compounding “interest” charge to boot?

By logical extension then, the “national debt” is not a real debt.

I would hasten to stipulate that I am not in any way advocating the tearing down of the banking system, or even defaulting on the “national debt.” Rather, I would redeem it, the banks, and the nation’s financial life, by returning the way this country creates, issues and regulates money to sound principle. This, I can imagine, may sound strange now, but the idea will be fleshed out as we go.

Richard Kotlarz
richkotlarz@gmail.com

The complete set of columns from this series is posted at the following websites.
http://economictree.blogspot.com/
http://www.concordresolution.org/column.htm