WHAT IS DEBT?
Debt is what you incur when you borrow against
future income: when you spend today what you don’t yet have, by promising
to pay it back later. In our modern system, you not only have to pay it back,
you also have to provide the lender with additional income in the form of “interest”.
Most cultures and religions, both ancient and modern, have held that interest
is heinous, calling it usury and at least severely limiting the rates that can
be charged if not banning it altogether. From the moral perspective, this is
because of the transfer of wealth that interest engenders: those who can least
afford to lose money, and who must work very hard to acquire the money for repayment,
are the very people who pass it along to others who are doing nothing to earn
it. There is one more insidious aspect to interest, and to understand it, we
must first understand how money is created.
A little history: Our system, referred to as the 'fractional reserve' system, evolved from the business practices of goldsmiths during the 1700s and 1800s. Often, the goldsmith was the only person in town who had a safe secure enough to store gold. You can easily imagine how difficult it was to use gold as your currency for trade; it was heavy, it was hard to make change, and it exposed the person carrying it to risk, risk of theft and risk of injury or death during robbery. Goldsmiths began to issue receipts for the gold that people gave them to store within the secure confines of their safes. At any time, the holder of a receipt could turn it in and get back their gold.
The goldsmiths quickly discovered that only a fraction of the people ever returned for their gold. This meant that the goldsmith could issue receipts for more gold than they actually held in their safe, thereby 'creating' money. Today's banks are allowed to use the same principle. While we may believe that when the bank loans us $30,000 to buy a new car that the money would otherwise be sitting in a vault somewhere gathering dust, in truth the bank only has less than 10% of the money that it lends to us. The remainder is merely an accounting entry into our account, predicated on our signed agreement to repay the borrowed funds with interest.
Today we are using the eighth monetary system in America since our country was founded. It is called the Federal Reserve System, often referred to simply as “the Fed”. Many people believe that the Fed is an arm of the national government. It is not; it is a private bank, despite the .gov at the end of its website URL. When it needs to 'print' paper currency, dollar bills, it does use the government's printing press. But it buys the bills from the federal printer for the cost of printing, and then loans them to other banks or to the government itself.
Our common sense tells us that when we approach the local bank and ask for a loan to buy a car or a home, the bank has the money sitting in a vault somewhere, and decides we are credit worthy and gives some of it to us. It turns out, this is wrong. Our system operates under this premise: no debt, no money. Money is created out of thin air anytime a bank makes a loan. This happens in one of two ways: first, anytime a bank makes a loan, more than 90% of that money did not exist prior to it ending up in the borrower’s account. For example, let’s say you want to borrow $30,000 to buy a new car. You approach your bank, and the bank agrees that you are creditworthy and loans you the money. In order for the bank to put the $30,000 into your account so that your check or debit transaction are good, the bank needs to have less than $3,000 “in reserve”. You go to the dealer and buy your car, the $30,000 transfers from your bank to the dealer’s bank, and now the dealer’s bank can loan more than 90% of the $30,000 to someone else. This continues until nearly 10 times the original loan amount has been lent to others. Second, the Federal Reserve loans money to other banks, charging what is called the “overnight” interest rate, so that the borrowing banks can meet their reserve requirements. In the real world, although the system is supposed to be structured so that banks can only lend amounts based on what they hold in reserve, banks lend to whomever they can and worry about the reserves later. Actually, a “snapshot” is taken every night at midnight of the banks’ reserves: if they are insufficient, then the bank borrows from other banks or from the Fed, in order to be sufficiently covered. Curiously, if a bank has too much in reserve, it can deposit that money in the Fed, earning a higher interest rate than they pay for borrowing: this makes it lucrative to borrow at the overnight, less than 1% rate, and then place the borrowed funds in the bank’s account earning a few percent for nothing. This is why the bank bailouts didn’t solve the financial crisis in 2008: banks didn’t loan the money to risky citizens, they earned interest on it from the safe Fed instead.
Please move to “Why is debt essential to this monetary and economic system?” next.
lding relationships that will one day come back to serve us in our own time of need? Wouldn’t this way of doing business, following a debt jubilee, make your heart sing?