Column #5 Where Does Our Money Go?

(Week 1 - Friday Aug. 1)

Two days ago, in Col. 3, we examined the question "Where does our money come from?" I described a the classic bank-loan process whereby the banker actually creates the money "loaned" when he "writes the check" (or credits the borrowers account with new funds), and then the borrower puts the money into circulation when he spends it for whatever purpose he took out the loan to satisfy.

Yesterday, in Col. 4, we examined the "problem of interest." That is, I described how the total outstanding principle balances of all loans from the banking system constitute the money supply with which we conduct our business, and that, in the aggregate, the money to pay back the principal sum of the all these loans is thereby available. I also pointed out that the money needed to make the "interest" payments was never issued, and so can be obtained only by subtracting it from the outstanding principal balances of other people's loans. This creates a situation whereby for people to continue to repay their loans, make their "interest" payments, and keep in circulation an adequate money supply, those participating in the economy must as a whole go continually deeper into "debt." If that fails to happen within the present system, we all face a catastrophic contraction of the money supply.

The subject for today is, "Where does our money go?" Our money circulates between the participants in the economy until we make a payment on our loan from the bank. When received at the bank, this payment is divided into two parts. A certain portion is applied to the principal sum originally borrowed; i.e. it is credited toward the retirement of the debt. The bank created this money "out of thin air," and it is extinguished "back to thin air." It no longer exists.

The part of the payment applied to the interest, however, is not extinguished, but is credited to the account of the "owner" of the "debt." This is to say, it is paid to whoever bought the rights to the "mortgage" (or whatever contract secured the loan). Typically, banks gather up ("bundle") the contracts, and sell them to speculators who have an interest in being the beneficiaries of the "interest" payments. These "interest" payments constitute the "profit" on the speculator's "investment," and they are deposited in speculators accounts.

Technically, this "interest"-payment money has not been withdrawn from circulation, and so cannot strictly be said to have been subtracted from the money supply. Indeed, it could be freely spent (or gifted to someone) by the investor, and in that way reenter the money supply, where it would still be available to pay back the principal balances on outstanding loans.

In practice, though, by far the majority of investors in "debt-paper" or "debt-instruments" (as such mortgages or other debt contracts might be called) are not interested in spending the profits. Their purpose is to turn them into still more money. Typically, they will withhold the money they collect from interest payments out of general circulation, until, that is, someone offers to borrow it from them ("at interest," of course). This can take many forms (direct lending, buying municipal bonds, buying the rights to more loan contracts, etc.), but in any case it means that this money will re-enter circulation with more "debt" attached to it.

Now we have the same money supply, but an additional "debt"-payback obligation has been added to it. Of course, there is not only one borrower's "interest" payment that is being transferred into and re-lent out of the accounts of monetary speculators, but everyone's. Eventually the entire money supply is run through this interest-payment-converted-to-more-debt mill. Those that have money to "invest" in this particular way (not all investment money fits this description) get richer, and the relatively poorer folks who are working for a living and paying their bills continue going deeper into debt. The "interest" charged on bank loans is (under the current system) the main engine of unearned wealth transfer in the society, and the problems unleashed thereby are written in the dire financial headlines of our morning newspapers.

Richard Kotlarz
richkotlarz@gmail.com