What Is Money?

What Is Money?

By Richard Greaves

   

 It is simply the medium we use to exchange goods and services.

    Without it, buying and selling would be impossible except by direct exchange.

    Notes and coins are virtually worthless in their own right. They take on value as money because we all accept them when we buy and sell.

    To keep trade and economic activity going, there has to be enough of this medium of exchange called money in existence to allow it all to take place.

    When there is plenty, the economy booms. When there is a shortage, there is a slump.

    In the Great Depression, people wanted to work, they wanted goods and services, all the raw materials for industry were available etc. yet national economies collapsed because there was far too little money in existence.

    The only difference between boom and bust, growth and recession is money supply.

    Someone has to be responsible for making sure that there is enough money in existence to cover all the buying and selling that people want to engage in.

    Each nation has a Central Bank to do this - in Britain, it is the Bank of England, in the United States, the Federal Reserve.

    Central Banks act as banker for commercial banks and the government - just as individuals and businesses in Britain keep accounts at commercial banks, so commercial banks and government keep accounts at the Bank of England.

TODAY’S "MONEY"... CREATED BY PRIVATE INTERESTS FOR PRIVATE PROFIT.

    "Let me issue and control a nation’s money, and I care not who writes it’s laws." Mayer Amschel Rothschild (Banker) 1790

    Central banks are controlled not by elected governments but largely by PRIVATE INTERESTS from the world of commercial banking.

    In Britain today, notes and coins now account for only 3% of our total money supply, down from 50% in 1948.

    The remaining 97% is supplied and regulated as credit - personal and business loans, mortgages, overdrafts etc. provided by commercial banks and financial institutions - on which INTEREST is payable. This pattern is repeated across the globe.

    Banks are businesses out to make profits from the interest on the loans they make. Since they alone decide to whom they will lend, they effectively decide what is produced, where it is produced and who produces it, all on the basis of profitability to the bank, rather than what is beneficial to the community.

    With bank created credit now at 97% of money supply, entire economies are run for the profit of financial institutions. This is the real power, rarely recognised or acknowledged, to which all of us including governments the world over are subject.

    Our money, instead of being supplied interest free as a means of exchange, now comes as a debt owed to bankers providing them with vast profits, power and control, as the rest of us struggle with an increasing burden of debt....

    By supplying credit to those of whom they approve and denying it to those of whom they disapprove international bankers can create boom or bust and support or undermine governments.

    There is much less risk to making loans than investing in a business. Interest is payable regardless of the success of the venture. If it fails or cannot meet the interest payments, the bank seizes the borrower’s property.

    Borrowing is extremely costly to borrowers who may end up paying back 2 or 3 times the sum lent.

    The money loaned by banks is created by them out of nothing – the concept that all a bank does is to lend out money deposited by other people is very misleading.

MONEY CREATED AS A DEBT

    We don’t distinguish between the £25 billion in circulation as notes and coins (issued by the government) and £680 billion in the form of loan accounts, overdrafts etc. (created by banks etc,).

    £100 cash in your wallet is treated no differently from £100 in your current account, or an overdraft facility allowing you to spend £100. You can still buy goods with it.

    In 1948 we had £1.1 billion of notes and coins and £1.2 billion of loans etc. created by banks – by 1963 it was £3 billion in cash and £14 billion bank created loans etc.

    The government has simply issued more notes and coins over the years to cover inflation, but today’s £680 billion of bank created loans etc. represents an enormous increase, even allowing for inflation.

    This new "money" in the form of loans etc, which ranks equally with notes and coins – how has it come into existence?

"The process by which banks create money is so simple that the mind is repelled." Professor. J. K. Galbraith

This is how it’s done…. a simplified example...

    Let’s take a small hypothetical bank. It has ten depositors/savers who have just deposited £500 each.

    The bank owes them £5000 and it has £5000 to pay out what it owes. (It will keep that £5000 in an account at the Bank of England – what it has in this account are called its liquid assets).

    Sid, an entrepreneur, now approaches the bank for a £5000 loan to help him to set up a business.

    This is granted on the basis of repayment in 12 months - plus 10% interest – more on that later.

    A new account is opened in Sid’s name. It has nothing in it, nevertheless the bank allows Sid to withdraw and spend £5000.

    The depositors are not consulted about the loan. They are not told that their money is no longer available to them– The amounts shown in their accounts are not reduced and transferred to Sid’s account.

    In granting this loan, the bank has increased its obligations to £10,000. Sid is entitled to £5000, but the depositors can still claim their £5000.

    If the bank now has obligations of £10,000, then isn’t it insolvent, because it only had £5000 of deposits in the first place? Not exactly..

    The bank treats the loan to Sid as an ASSET, not a liability, on the basis that Sid now owes the bank £5000.

    The bank’s balance sheet will show that it owes its depositors £5000, and it is now owed £5000 by Sid. It has created for itself a new asset of £5000 in the form of a debt owed by Sid where nothing existed before - this on top of any of the original deposits still in its account at the Bank of England. - it is solvent - at least for accounting purposes!

    (At this stage the bank is gambling that as Sid is spending his loan, the depositors won’t all want to withdraw their deposits!)

    The bank had a completely free hand in the creation of this £5000 loan which, as we shall see, represents new "money", where nothing existed before. It was done at the stroke of a pen or the pressing of a computer key.

    The idea that banks create something out of nothing and then charge interest on it for private profit might seem pretty repellent. Anyone else doing it would be guilty of fraud or counterfeiting!

New "money" into the economy...

    Sid’s loan effectively becomes new "money" as it is spent by him to pay for equipment, rent and wages etc. in connection with his new business.

    This new "money" is thus distributed to other people, who will in turn use it to pay for goods and services - soon it will be circulating throughout the economy.

    As it circulates, it inevitably ends up in other people’s bank accounts.

    When it is paid into someone’s account which is not overdrawn, it is a further deposit - Sid pays his secretary £100 and she opens an account at our hypothetical bank – it now has £5100 of deposits.

    If we assume for a moment that the remaining £4900 ends up in the accounts of the original depositors of our hypothetical bank, it now has another £4900 in deposits - £10000 in total if the depositors have not touched their original deposits. In practice much of it would end up in depositors accounts at other banks, but either way there is now £5000 of new "money" in circulation.

    Thus in reality, all deposits with banks and elsewhere actually come from "money" originally created as loans – (except where the deposits are made in cash – more on cash very shortly).

    If you have £500 in your bank account, the fact is someone else like Sid went into debt to provide it.

The key to the whole thing is the fact that :-

    Cash withdrawals account for only a tiny percentage of a bank’s business.

    Bank customers today make almost all payments between themselves by cheque, switch, direct debit or electronic transfer etc. Their individual accounts are adjusted accordingly by changing a few figures in computer databases – just book keeping entries. No actual money/cash changes hands. The whole thing is basically an accounting process that takes place within the banking system.

THE ROLE OF CASH

    The state is responsible for the production of cash in the form of notes and coins.

    These are then issued by the Bank of England to the high street banks - the banks buy them at face value from the government to meet their customers’ demands for cash.

    The banks must pay for this cash and they do so out of what they have in the accounts which they hold at the Bank of England – their liquid assets. Their accounts are debited accordingly.

    The state (through the Treasury) also keeps an account at the Bank of England which is credited with the face value of the notes and coins as they are paid for by the banks. (This is now money in the public purse available for spending on public services etc.)

    This is how all banks acquire their stocks of notes and coins, but the cash a bank can buy is limited to the amount it holds in its account at the Bank of England – its liquid assets.

    As this cash is withdrawn by banks’ customers, it enters circulation in the economy.

    Unlike bank created loans etc, cash is interest free and can circulate indefinitely.

Read much more about this here