Wednesday, February 02, 2011

Banking and Money

By Richard E. Noble

Despite comments to the contrary by John Kenneth Galbraith in his book,” Money: Whence it Came and Where it Went,” I have found Money And Banking very perplexing. Mr. Gaibraith said that money was very simple and that anyone could understand it. I don’t think so. Not only that, I have come to the conclusion that the whole Banking thing was a scam, almost, from the beginning. Let me explain my confusion.

In the beginning, there came about the first Bank. This first bank was basically a vault. People who had accumulated large amounts of gold, and silver got tired of trying to hide it under the floor boards of their cabins, or in a secret place behind the fireplace. So, when they heard that some guy had opened up a Bank where they could put their gold and silver and have it guarded and protected, they were very pleased.

These wealthy people with surplus gold and silver took their money down to this Bank and “deposited” it. The Bank owner gave these people a receipt. This receipt was a certificate of deposit. It affirmed that “So and So” had “X” amount of gold or silver stored in this Bank. Up until this point everything seems to be on the up and up.

The people who had the receipts began to trade these receipts as if they were actually gold or silver. This became accepted as legal and legitimate by most people. To have this certificate of deposit in your possession was as good as having the actual gold or silver. Up to this point I think everything is still legitimate. This next evolution is where things begin to go haywire.

The man who owns the Bank has a bright idea. He thinks that it is a shame to have all this gold and silver sitting in his vault when there are so many good, trustworthy people out there in the world who could put it to good use – and would be willing to pay for that opportunity. He talks with his certificate of deposit holders and suggests to them that if they would be willing to loan out their accumulated assets, instead of paying a service charge for the privilege of having their gold and silver protected in his vault, they could actually receive a dividend.
This is, in my opinion, where everything goes coo-coo. Without getting into the obvious problems involved in the recording of assets and debits and who has what, and just sticking to the basic principles involved, I see a big problem here.

The problem stated simply is this: Mr. Jones has deposited, $1,000 in gold. He has a certificate to prove it. Mr. Smith has borrowed Mr. Jones’ $1,000 and he has a loan contract to prove it. But the Bank now has nothing in its vault but a promise. Now this all would have been okay if Mr. Jones understood that until his loan was paid back by Mr. Smith, he didn’t have access to his $1,000 anymore. But as we all know, this did not turn out to be the eventual case.

So, as time rolled on and people deposited money and others borrowed that money, the Bank recorded assets into the millions, and all the while it could really not have a cent or an once of gold in its vault. The Bank could have nothing but a ledger full of promises and no gold at all. When you think about all of this it begins to sound like that old Abbot and Costello routine – quick here’s two tens, gimme a five.
So, was all of this legal?

Well, legal or not legal, most people didn’t really understand what was going on. And because of this lack of understanding, we had Jimmy Stewart standing on the top of the counter at his local bank trying to explain to the bank customers that there was nothing wrong in the fact that the bank had no money to give to its depositors.

Jimmy explained that the depositors money had been reinvested in their own communities. This knowledge satiated the riotous crowd in the movie. That fact really didn't solve the problem but it made the depositors feel better. Today even this is no longer true. Depositors invest in American banks. American banks invest in the stock market which invests in the global economy or directly overseas.

American savings are thus being used to support overseas competitors. Americans are paying for their country's financial undermining, it appears to me.

In the movie everyone understood what Jimmy was saying, but in real America nobody got it. They called this phenomena “The Bank Run.”

The Bankers tried everything that their cleaver little imaginations could come up with, but nothing seemed to work – the people still didn’t get it – and one might ask: What was there to get?

Banks got together and formed coalitions. They each kept a percentage of their deposits in reserve and if one of their coalition experienced a run – they ran to its rescue with bags of money in temporary loans. This worked for awhile for small runs, but when large numbers of people began to panic about the whereabouts of their life’s savings, whole coalitions were “bank-rupted.”

So, at this point, we have a good many problems with Banks. This problem could have been solved by not allowing banks to loan out other people’s money; or by turning a bank into some sort of investment fund – like the stock market – where the risks were explained to the depositors and they were given the choice to participate or not participate. I would have to say that what the banks were doing if not illegal, it was certainly morally suspect. They were promoting the unsubstantiated notion that they had people’s money when, in truth, they did not. This is similar to the well known Ponzi scam today. There was another guy by the name of Say – but he was not as obvious as Ponzi.

Ponzi’s idea was to get people to invest in him today on the promise of a large return on their investment tomorrow. The fact is that he had no investment program whatsoever and he simply manipulated the large sums of money coming in with staggered payments going out. As long as more money was coming in than was going out, Ponzi was rich and his investors were happy. The whole thing became a matter of bookkeeping.

Now you might say that the bank is not a Ponzi scam because it has legitimate investments. This is true, but if those legitimate investments prove to be unreliable then you have the same situation as with Ponzi, nevertheless. Then we have borderline elaborations on Ponzi – gold mines out west, swamp land in Florida, the Panama Canal fiasco, and last year’s failed corn crop.

Banks have gone out of business, over the years, because they were outright Ponzi scams with no investments at all; because they made false claims about their investments; because they made legitimate investments that failed. But the problem that bothered bankers was not the morality of their initial idea but what to do about banks that made good investments but were driven out of business by a sudden lack of confidence on the part of their depositors – the bank run. How they could have their cake and eat it too. Clearly a bank could not loan out its money to entrepreneurs and still have it on hand to return to its depositors on demand.

Now, it is at this point that the system has become an impossibility. It clearly and simply does not work, and there is no solution. You can not loan out the money and still have that money readily on demand for the depositors. This is impossible. One thing can not be in two places at the same time.

But, this slight-of-hand idea was so advantageous to society because it provided money for investment, expansion and growth, that those involved in profiting from this idea wanted to devise an acceptable method for promoting what was clearly an impossibility. And thus has evolved today what we call the central banking system – and here in the U.S. – “The Federal Reserve.”

So far this system has served to perpetuate and impossible idea. For example, if when Mr. Ponzi had run into his short fall – the point at which his payments going out were greater than his payments coming in – J. P. Morgan or the Rothchilds saw in his scam enormous long term potential and therefore decided to loan him money to carry him over his temporary cash flow problem, the Ponzi scam may have continued indefinitely. But, it would have finally collapsed when Ponzi had finally reached the saturation point. That point being when there was just not enough money available in the world to make the interest payments on all of his promises. In effect Ponzi’s system was a “Designed to Fail” system.

The Central Banking System is similar but much more sophisticated and self-perpetuating. The Central Banking System does not create money from nothing as many people suggest. If it did then this system would self-destruct when the supply of money exceeded the world’s ability to absorb the funding. Would this ever take place considering expanding populations and expanding economic growth throughout the world, and product diversification and artificial demand creation for “wants” in addition to needs? Maybe not.

Inflation is simply the release valve on this money generating steam boiler. If the supply of money comes onto the world faster than the population and the various demand growth factors – you will have inflation. If inflation is allowed to grow too fast or without proper regulation then the bubble of public confidence could burst and economic collapse would be the result.

But this is not the situation which exists with the Central Banking System concept. This present system is based on debt creation. Governments borrow via a system of notes and bonds which are handled for a fee by their Central Banking systems. The central banks collect the vigorish. They handle the sales for the government for a fee – vigorish. [The vigorish is not the problem when we talk of the National Debt. The problem with the National Debt is the interest being collected by the Bond purchaser. The Federal Reserve Bank is just the salesman for the government bonds. It charges a small “commission” which is negligible.]

As I see it this system has more potential points of destruction than does the politically unappealing Creating-Money-from-Nothing System. This system can also destruct from the same causes stated in the non-debt creating system mentioned above. But in addition to this possibility this debt system can also self-destruct from other factors.

It can also self-destruct when and if the interest payment on the created debt obligations becomes greater than the government’s money supply sources. This would be much the same as if your basic payment on your credit card exceeded your income.
Will that ever happen? I don’t know. The inflation safety valve would compensate or, as above, explode due to lack of public confidence. And, of course, there is that same notion of infinite world economic expansion as mentioned above. And then, of course, the government can simply keep creating more and more debt even to pay impossible debt.

How long could such a process go on?

I don’t know. But paying debt with added debt can only go on for so long, before something negative would happen.

The vigorish could also become a problem. In other words the Central Banking fee could become so bloated as to create a debt problem in itself. In other words, the cost of the loan transaction could eventually outweigh any gain from creating the debt in the first place. Right now that fee is 7% as I understand it. If due to inflation that cost were to escalate to 20% or 30%. But by that time the monetary system would probably have already collapsed due to inflation. So maybe that is a specious argument.

An added problem with the Central Banking System is that it has been partnered by the various national governments of the countries who have such systems – which may be every country in the world as far as I know. So instead of the banking system backing itself up via a conglomerate of banking institutions and becoming the bank of last resort for all banks – as is the claim – the government becomes the bank of last resort. The problem here is that in such a system if the bankers decide that they are tired of making money “the old fashioned” way and they would rather do it the easy way. They can simply steal their depositor’s funds, and loan them out by fraudulent and deceptive transactions and then petition the treasury to fund them out of their financial difficulties.

To put this simply, if an unscrupulous banker or group of bankers can figure out a method of divesting their banks of its capital yet still create what appears to be a legitimate paper trail of investments, they can double their personal wealth rather cleverly, simply by ripping-off their Federal or National Government.

The same thing can be done on an international basis via the IMF and the World Banking System. And I am of the opinion that this type of thing has already been done several times over – not only in the historical past, but in the recent past. And it can work both ways in a world system. Not only is it possible for the world banking system to bankrupt individual nations if it so chooses; it is equally possible that cleaver national bankers can swindle the world system. [I think that this technique was used in the U.S. S&L failure and the Commercial bank failure; and in the recent stock market crash; and most recently in the real estate boom and bubble. It is my personal opinion that this is the current method for bankrupting the U.S. Treasury. It began seriously under Reagan and has been escalating under every succeeding Republican administration.

And what is the answer to all of this?

I don’t know.

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