Published on May 7, 2016
“Some of the biggest men in the United States, in the field of commerce and manufacture, are afraid of something. They know that there is a power somewhere so organized, so subtle, so watchful, so interlocked, so complete, so pervasive, that they had better not speak above their breath when they speak in condemnation of it.” – Woodrow Wilson, former President of the United States. “Each and every time a bank makes a loan, new bank credit is created – new deposits – brand new money.” – Graham F. Towers Commercial Banks create money in the form of demand deposits, when they make loans to households or companies. When a bank makes a loan, a deposit is created at the same time in the borrower’s bank account. In that way, new money is created as a bookkeeping entry, with the loan representing an asset and the deposit a liability on the bank’s balance sheet. The Bank of England explains this process: “In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.” So where does money come from? In the United States, it comes from the Federal Reserve. When the U.S. government decides that it wants to spend another billion dollars that it does not have, it does not print up a billion dollars. Rather, the U.S. government creates a bunch of U.S. Treasury bonds (debt) and takes them over to the Federal Reserve. The Federal Reserve creates a billion dollars out of thin air and exchanges them for the U.S. Treasury bonds. So why does the U.S. government go to all this trouble? Why doesn’t the U.S. government create the money itself? Those are very good questions. One of the primary reasons why our system is structured this way is so that wealthy people can get even wealthier by lending money to the U.S. government and other national governments. Over the centuries, the ultra-wealthy have found lending to national governments to be a very, very profitable enterprise. But wait. There is a problem. Because the U.S. government must pay interest on the Treasury bonds, the amount of debt that has been created by this transaction is greater than the amount of money that has been created. So where will the U.S. government get the money to pay that debt? Well, the theory is that we can get money to circulate through the economy really, really fast and tax it at a high enough rate that the government will be able to collect enough taxes to pay the debt. And the creators of the Federal Reserve understood this as well. They understood that the U.S. government would not have enough money to both run the government and service the national debt. They knew that the U.S. government would have to keep borrowing even more money in an attempt to keep up with the game. That is why the Federal Reserve is a perpetual debt machine. The Federal Reserve central bank was created to trap the U.S. government in an endlessly expanding debt spiral from which there is no escape.