Our Time To Stand

Sunday evening

Carlotta Carbuyer decides she’s going to buy a new car within the next couple days. Wally Weddingpayer needs to borrow a whole lot of money by mid-week to pay for his daughter’s wedding.

Monday morning

It’s Monday morning, and Congress just got their hands on $1 billion created by the Fed earlier in the day. Time to spend it! So, Congress writes checks out of the U.S. Treasury, one of which is made payable to Avery Averageguy, who scrubs the Capitol steps once a month, in the amount of $1,000.

Tuesday morning

First thing Tuesday morning, Avery deposits his $1,000 check into his account at Friendly Local Bank. And what fortunate timing for FLB, because as of closing time Monday, it was “loaned up,” meaning it had lent against all of its deposits and couldn’t make another loan.

Ah, but now that Avery has deposited his $1,000 check, Friendly Local Bank can – POOF! – reach into thin air and pull out $10,000, just in time to lend to Carlotta Carbuyer, who’s coming in this afternoon to apply for a car loan of just that amount. It seems that Friendly Local Bank has comic book superpowers similar to the Fed’s, but on a smaller scale. For every $1 that FLB has on deposit, it can – POOF! – create $10 out of thin air, provided there’s someone asking to borrow it (more on that later). Not a bad gig, if you can get it!

Tuesday afternoon

So now along comes Carlotta, who wants to buy a $12,000 car from Carter’s Cars. She has $2,000 for a down payment but needs to borrow the remaining $10,000. No problem. She has good credit and has been banking at Friendly Local Bank for many years, so on Tuesday afternoon she goes to see her loan officer there. Carlotta fills out a loan application, the loan officer checks her credit, approves the loan, and soon Carlotta has a loan. That doesn’t sound so bad, does it? But let’s take a closer look:

Our friends at Friendly Local Bank don’t have the $10,000 to lend. But they do have three things that allow them to create the $10,000:

1. Avery Averageguy’s deposit of $1,000, which hasn’t yet been lent against.
2. A customer, Carlotta Carbuyer, who wants to take out a loan.
3. The government’s blessing.

Without any one of these three things, Friendly Local Bank couldn’t create money. But armed with all three, our friends at Friendly Local Bank are able to simply POOF! the $10,000 into existence, and after a few dozen keystrokes, Carlotta’s account balance is $10,000 more than what it was (minus, perhaps, a loan fee). By the way, the newly created money doesn’t even exist as paper currency. Instead, it exists only as a digital entry in Carlotta’s account.

Tuesday evening

Carlotta goes to Carter’s Cars, writes a check for $10,000, and drives away in her new car.

Wednesday morning

Carter Carseller, the owner of Carter’s Cars, deposits Carlotta’s $10,000 check into his business account at Seriously Safe Bank. You’ll never guess what that entitles Seriously Safe Bank to do. Right! Seriously Safe Bank can reach into the air and – POOF! – create $100,000. That is, provided they have a borrower.

Wednesday afternoon

Wally Weddingpayer ambles into Seriously Safe Bank and applies for a $100,000 loan to pay for his daughter’s wedding. Does it matter that the bank doesn’t have the money? Of course not, because the bank has something better than money. It has the comic book superpower of creating money! And that’s just what SSB does. The take what was Carlotta’s $10,000, which didn’t exist just a few days ago, use it to POOF! $100,000 into existence, then lend that $100,000 to poor Wally. At interest, of course.

We told you it was an oversimplification

While the Sunday-to-Wednesday scenario described above is an oversimplification, it does give the novice an idea about how money is created. Banks don’t actually lend ten times the amount of a deposit right after the deposit is made. Here’s why: Within a few days of Carter Carseller depositing Carlotta Carbuyer’s check, Seriously Safe Bank will present the check to Friendly Local Bank for payment, and FLB better have the money. Likewise, the $100,000 that Seriously Safe Bank lent to Wally Weddingpayer will soon make its way back there.

Here’s the theft

So . . .

Carlotta is happy because she got the car loan and the car. The folks at Carter’s Cars are

happy because they made a sale. Our friends at Friendly Local Bank are happy because they get to collect interest on $10,000 they created out of thin air! So who’s unhappy? Almost no one, and that’s the problem. But the American people should be furious!

But all of us should be furious about this arrangement, because every time someone gets a bank loan, the money that the bank creates money out of thin air makes its way into the economy and causes all the money already in existence to be worth less. Of course, no one particular loan can have much an affect on the rest of us, but taken as a whole, this system of money creation eventually will have a disastrous effect.

This simple story helps make it clear: For Connie Stutions’s tenth birthday, her aunt gave her a $20 bill with written instructions on it that it was to be used to buy a leather-bound edition of The Children’s Guide to the Constitution from Patriot Bookstore. Great! That’s just what Connie wanted, and the book was priced at exactly $20. (In our story, Connie lives in Oregon, where there is no sales tax.) Except one thing: Connie misplaced the $20 bill and didn’t find it until she after had graduated from high school and was packing her belongings to go off to college. But she knew her younger brother wanted that same book, so she headed to Patriot Bookstore to buy a copy. Only now, of course, the price of the book was $25. Why? Certainly there were several contributing factors, but the main reason was that the value of the money went down during the intervening years, because more and more and more was always being put into circulation. And the more there is of something, the less it is worth.

Lesson 5