COMMON BELIEFS ABOUT MONEY

1. Banks lend money that has been deposited with them. The belief is false. Banks create new money when they make loans. (See Modern Money Mechanics published by Federal Reserve Bank of Chicago, page 6. "Of course, they [banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created.") (emphasis added.) Money that is deposited in savings accounts is dormant itself, not in circulation, but is money that was orginally created as a loan. Reserves are lent as checks or deposit entries which enables an expansion of the money supply as a multiple of reserves—currently, about fourteen times the reserves. When loans are repaid, money is extinguished. (See Modern Money Mechanics for full details of the expansion and contraction process.)

Money on deposit in savings accounts is money that was created as a loan. As it lies dormant in a savings account, interest on the loan that created the money, or other money that was created by a second loan that was used to pay off the first loan, draws compound interest. The result is exponentially increasing debt in all sectors of the economy that can never be paid off without radical monetary reform.

That banks lend depositors’ money is a myth, but the belief that they do is one of the most common and intellectually pernicious economics myths. The myth is constantly repeated by ignorant or deceptive journalists, academicians, and politicians. The myth is supported by ignorance, doublethink, and denial.

2. The government prints money. The belief is a half-truth. The Bureau of Printing and Engraving prints Federal Reserve Notes for the Federal Reserve. The Federal Reserve pays a price for the notes, owns the notes, and issues them to member commercial banks for the convenience of bank customers who want them. Federal Reserve Notes are symbols of debt created out of nothing by the Federal Reserve when it purchased government securities. That is why they are called notes—they are debt banknotes, but they have been declared legal tender by statute law. Federal Reserve Notes account for only a tiny fraction of the legal, transactional U. S. economy. The government currently prints no money for itself. (See 4. below.)

3. The Federal Reserve is an agency of government. This belief is a half-truth. The Federal Reserve is certainly a creation of U. S. statute law passed by Congress and signed by Presidents. Congress and the President have full Constitutional authority to alter or abolish the Federal Reserve. However, in operation, the Federal Reserve has been given autonomous authority and power over monetary policy. This situation is a classic example of doublethink and doublespeak. Somehow, it is believed that the Federal Reserve is an agency of government while retaining its autonomy.

4. Inflation is caused by the government printing too much money. The belief is false because the U. S. Government currently issues no printed money. All money, with the exception of coins and a few existing U. S. Notes, is issued by banks, and the vast majority is not printed as bank notes. The Federal Reserve is limited, by law, to how many Federal Reserve Notes it can print and issue. By law, the Federal Reserve has full autonomy to create as much money as the Fed gurus decide by policy to create as deposits. The money exists as numbers in deposit accounts. Ninety percent, or more, of deposit money is created by the lending activities of commercial banks. The amount of money so created is regulated by Federal Reserve policy, but neither the Federal Reserve Banks nor the government create ninety percent, or more, of the money in deposit accounts. If the quantity of money is a reason for inflation, as commonly believed, (See 5. below) then ninety percent, or more, of inflation is caused by commercial banks. Printing press contribution to inflation is practically nil. (See 1. above and 5. below.)

5. Inflation is caused by too much money chasing too few goods. This myth would be funny if not for the pathological doublethink required to believe such an obviously false "sound bite." Supermarkets, department stores, and malls are full of unsold merchandise. The entire media industry is built on advertising that begs people to purchase more. At the same time, consumer debt has racheted up to more than $1 trillion of purchased and not yet paid for goods. Plainly visible facts are that there is a shortage of money relative to consumer goods. Yet, Federal Reserve guru Alan Greenspan fights inflation harder than a Baptist preacher fights the devil. The self-serving reason for fighting inflation by restricting the amount of money should be self-evident. It enables banks to charge high interest.

That the quantity of money is the cause of inflation or deflation is an economic dogma that is not scientifically proven to be true. All of economics is pseudo-science because economists cannot conform to the requirements of measurability, predictability, and repeatability of science. One does not have to be a scientist to observe the falsehood of too much money chasing too few goods in the United States. One merely needs to open one’s eyes.

That an increase in the money supply would result in price increases seems intuitively logical, but intuitive logic has been proven false so many times that intuitive logic must always be questioned. Intuitive logic would lead one to believe that heavier objects fall faster than lighter objects.

Arguments exist that prices drive up the quantity of money rather than money driving up prices, but both are just unproven arguments. However, in a debt money system, that prices drive up the quantity of money is the more logical argument. In order to get money to purchase or invest, it has to be borrowed. (This is not to deny that money can be acquired, saved, and spent or invested by wages, business, or investment return, but it must be remembered that all money was borrowed into circulation originally.) Loans create principle but do not create money to pay interest. More money must be borrowed to pay interest. Additional borrowing creates additional interest debt that requires more borrowing. Money acquired and saved requires even more borrowing because the saved money is not available to pay off the debt that originally created it. The ultimate result is the exponential increase of debt in all economic sectors, including consumer debt, that we see documented in Federal Reserve statistics. Increase in debt increases interest costs. Increased costs push up prices, so prices drive the quantity of money needed to liquidate them. However logical, this argument is not proven; and the two arguments put against each other are somewhat chicken and egg arguments. The best conclusion is that the debt money system is inherently inflationary.