Every day countless millions of transactions are facilitated with money. Why do
we need money? How does it get into “circulation?" Who puts it there? Who
creates money? And on what basis? Is it the government? If not, why not? Who is
it? And how do they know how much to “print?" What if they add too much or too
little to the economy?
TThree chapters of my book How To Profit From The
Coming Great Depression , are devoted to these questions. Most people are
shocked when they first learn about our “fractional reserve" money system, which
has sewn within it the seeds of its own destruction.
First of all, we
need money because the barter system is too unwieldy. If you are a building
contractor and I am a potato farmer, and I want you to build me a house, how am
I going to pay you? How many potatoes can you and your family eat before they go
rotten?
Clearly we need something that represents both houses and
potatoes. But note that that does not make money a resource in itself. It is
merely a vehicle for transferring the value of resources from one person to
another. There are natural resources, both under the ground and above it, and
there are human resources – labor and intellect. Put these together and man can
produce. But although money may be used to value and transfer these resources,
money is not a resource itself. Those who control money really want the
resources that money represents.
Centuries ago things like gold and
silver were used as money, before we had notes and coins like today. Remember
the old western movies where highwaymen would hold up the stage coach and people
would have to hand over all their valuables? Why, on earth, would people carry
their gold and silver with them? Because they had nowhere else to put it.
This created an opening for the goldsmiths, who were the forerunners to
our modern day bankers. They built large, secure vaults and allowed people to
deposit their precious metals in these safes. In return they gave people
“receipts" confirming the amount of gold held on their behalf. In time people
began trading with the receipts rather than the gold. Today these receipts are
called banknotes.
But that’s not all the goldsmiths did. They even paid
interest to those who had deposited gold in their vaults (e.g. 3%), but then
lent the gold out to others (in the form of more receipts) at say 6%. That’s how
they covered their costs.
In time the goldsmiths noticed that nobody
ever came back to collect their gold, and not all being honest, began to lend
out more in new “receipts" than was represented by the gold in their vaults. In
time there was ten times as much “money" in circulation as there was gold in the
vaults.
That’s exactly how our money system operates today. For every
dollar you deposit in a bank, the bank lends out about ten dollars. Money is
created by banks – out of thin air! All money comes into existence by way of a
bank loan. Less than 5% of it is ever converted to notes and coins. Most of it
is never anything but a balance on a computer at the bank.
A hundred
questions come to your mind. Right? They are all answered in my book.
Why do I say the system has sewn within it the seeds of its own
destruction? It has a use-by date. That is why we have an economic depression at
least once each century. It is not a question of if the system implodes. Only
when it implodes.
Let’s say you borrow $100,000 from the bank (which
takes security over your real estate worth $150,000). But you have to pay back
$110,000 with interest added.
Where does that other $10,000 come from?
You will have to get it from someone else. Where will they get it? What’s the
only way money comes into existence? They will have to borrow it from a bank.
Can you see how in our debt money system it is not possible for everyone
to pay their debts? Some have to go bankrupt. And as money is sucked out of the
system in interest by the banks, money supply is reduced. The only way it can be
replaced is with more borrowed money. So debt must rise exponentially. Can you
see now why we have a debt bubble and why there is no solution to it other than
a massive purging, with all of the horrific deflationary economic consequences,
not to mention social dislocation that will come with it?
How can you
protect yourself from these consequences?
The Graham Dyer Newsletter has not missed a month’s publication since July 1983. His track record for forecasting is the envy of many, including the 1987 stock market crash, the demise of the Japanese economy and stock and real estate markets in the 1990s, the bull market for bonds from 1989, and the real estate boom this decade. His book is entitled:
“How to Profit from the Coming Great Depression." If you want to know the pitfalls of investing as well as the opportunities, Graham Dyer’s world class work is a must read.
» left by dan ashmore from ohio (1 year 246 days ago.)
What does the bank do with the interest? They pay it to their shareholders... who either invest it, lend it, or spend it on goods and services. They can gain no utility from meaningless bits of magnetic data on their banks computers.
Recall that money is simply a substitute for weath (some combination of labor and real capital); the banks cannot create more money than is needed to carry the value of existing capital and labor combinations. If they do, the value of each monetary unit will be reduced to maintain a sum total of currency value equivalent to the sum total of wealth value. The total quantity of dollars grows only as they are demanded to support the conveyance of value. This is where monetary policy, including debt markets come into play, since they use market expectations of future value creation (recombinations of labor and real capital) to set the quantity of money in circulation.
The financial system only fails to function when these markets fail to function properly (as is the case with opaque instruments like CDOs). This is why the proper role of the government as protector of the interests of it's citizens is to regulate the debt markets. It has failed to do so, and we are seeing the results of that. Respond to this comment
The interest that the banks collect is still borrowed money. Whether invested, lent, or spent, it is money in the hands of the banker which was created by loaning it to a borrower, and then taking it back to be spent. So indeed, it is created "out of air". This is the most basic nature of money supply growth which does indeed reduce the value of the monetary unit. Monetary policy can not prevent this, it can only manage it. The idea that the "Bank" is a separate entity from its "owners" is misleading. The shareholders are the bank.
All money is borrowed. There is no way around it, nor has a better way been developed that I know of.
There are those who would question that it is the role of the government to regulate debt markets.
Many would say that it is the role of the government to guarantee the value of money coined by its authority. This is a different thing altogether though. The U.S. government gave up this responsiblity by creation of the Federal Reserve Bank, and finished the abdication of responsiblity giving up a gold price fix around 1971.
Try this. Make a plot of the price of gold in U.S. dollars from 1800 to today. An easy section to look at is from 1870 to 1970. In that 100 years, the price of gold in U.S. dollars barely doubled. Then look at 1970 to now, just short of 40 years. In that time the price of gold has risen twenty fold. Now that does not really mean that gold is of more utility now. What it really means is that gold is still the same gold. But the dollar is just one twentieth the value now as 1970.
For me, I was in high school then. It means that a $20 bill now buys the same stuff (about) as a single dollar did then. It also means that we have all had a reduction in earning power and standard of living. I was able to work part time, at the local grocery store for $1 per hour. Check around. See how many teenagers are working at the local grocery store now, making $20 per hour? You won't even find full timers getting that. They get more like $7 an hour. So grocery store jobs (and all others) are paying just 1/3 real value of what they did in 1970, when the US government gave up on guaranteeing money. What has happened? Well, besides loss of value, the U.S. economy is not creating real value (hard goods) to support the money supply growth. This is a big problem.
How big?
When my parents bought a house, a "normal" American could buy a house for about one year's earnings of a single "breadwinner" of the house.
When I bought a house (1978) it took a years earnings of two full time workers, husband and wife.
Today, in most parts of the country, a new REAL house (not condo) will run around $300,000. Now, who knows any typical young couples who's income for a year totals anywhere near $300,000?
Something is screwed up. It is not "the government". WE are the government.
» left by John Smitty from Torrance, CA (254 days 23 hours ago.)
I predicted the fall of Ron Popiel!
Hey guys/gals, I got here by typing,"where does" internet explorer save internet files. Instead I saw google suggest, 'where does money come from' and saw that 30 million people had hit the same phrase.
Now after seeing a scary video a while back on the subject and finally understanding this very well written explanation I am getting worried.
If gold is losing twenty times it's value in twenty years then it's probably not the best investment. The more prices are driven up the more it will ultimately be devalued in scale long term. Have you been noticing these cash for gold and gold envelope send you're broken and unwanted jewelry ads pasted accross the TV. Well that's pretty damn horifying!
If everyone panics, pulls their money out of the bank and converts it to gold, then when the dollar fails and they at least have something to trade with but at what rate? Will you be able to buy a mansion for ten bars of gold?
Will you be able to stay there with all the thugs and vandals looting the neighborhood? Taking over gas stations and stripping grocery stores of all their goods...
Should we start saving canned food in the garage? Food prices are suspiciously climbing faster and faster.
At least you can eat it for years whereas you can't eat paper money.
OMG, I think those kooks were right all along!
Three words of advice, "Buy a Gun!"
*I heard another myth is that the earth is overpopulated.
Some guy says that you can give every man woman and child a 1/4 acre in Australia and it still won't even be full; with the rest of the earth uninhabited.
How's that for a mindfork! What if it's true...what about the dumping of phony money into the economy...won't it only make things worse? Ughhh!
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