By Sue Peters
By law, every time a private commercial bank lends to a borrower, all the bank is doing is creating a deposit in the borrower’s account. The bank never takes funds from one account and lends it out to a borrower. The bank always creates the deposit in the borrower’s account. It’s called bank credit.
Our economy runs on a money supply. If there is no money, the economy stops, as it did in the 1930s Great Depression. Today, the only government-issued money found in the money supply is a small amount of coins. The vast majority is bank credit. Even our paper currency, known as Federal Reserve Notes, is issued by the banking system, not the government.
So, what’s so bad about having bank credit for a money supply?
First, bank credit is created for profit. The banks charge interest. Therefore, interest is being charged on our money supply, and accumulates for the banks every day without stopping. This explains why banks have gotten so powerful and are the foundation of a huge financial system wielding power over us.
Second, the bank credit system causes immense inequality. The bank-created loan deposit is a bookkeeping entry in an account. As the borrower repays the loan, the balance grows smaller. When fully repaid, the balance is zero. The bank-created deposit is gone, but so is our money supply! Therefore, to have a money supply, the banking system must continuously make loans. To put it another way, our economy requires that people and businesses be in debt and pay interest to the banking system. Over time, financial institutions become wealthier, while working people become poorer.
Third, the bank credit system causes recessions and depressions. If the amount of bank loans starts to shrink, the money supply shrinks. The real economy cannot function smoothly and there is a recession. People are put out of work. If the amount of bank loans is reduced drastically, the recession becomes a depression. Lots more people are put out of work.
Fourth, the bank credit system cripples our democratic government. When our government needs more money than it collects in taxes, it must borrow. Today, our national government is twenty-three trillion dollars in debt, requiring hundreds of billions of dollars in interest to be paid yearly to the owners of that debt. Who are the owners? There are various groups of creditors around the world, but the sector with the largest share of the debt is the private banking system—the commercial banks and the twelve Federal Reserve Banks. They have captured our government; this is literally true. The largest funding to political candidates in the U.S. comes from the financial sector—the banks.
Fifth, since the banks decide who gets loans, they decide who will be funded. Look around. Who is being funded? Weapons manufacturers, pharmaceutical corporations, agribusiness, real estate bubbles, stock and bond markets (and similar enterprises). Do we need this kind of world?
The bank credit system empowers the banking system, impoverishes the working class, cripples our government, and undermines the democracy that could make life just and fair.
Sue Peters had a 37-year career in technology—writing, analyzing, and designing data processing systems. She’s been an active member of several monetary reform groups.
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