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Is The Sky Falling?

R.W. Zimmerer

The present world wide financial crisis has only just begun. There must be fundamental change in finance, which is the creation of money and its allocation. Our US supply of money is created almost entirely by private banks lending it into existence to be spent buying and selling. The process begins when a private commercial bank makes a loan, it extends credit. The bank literally prints new money by writing an amount into a depositor’s account. It is a bookkeeping action; no cash (legal tender), is involved. The bank then “balances” its books by writing a debt into another account – two simultaneous bookkeeping acts not involving cash.

New money now exists as a deposit in a borrower’s account. It is usually spent by writing a paper check which is deposited in somebody else’s bank account – no cash need be touched. The paper check could be cashed at the issuing bank or another bank converting the new money just created by a bank into Federal Reserve Notes issued by the Fed, the Central Bank of the USA.

There is very little legal tender in circulation but the Fed stands ready to make good on the money private banks create. In return the Fed supervises and sets limits on the creation of new money by private commercial banks. The Fed is the US Central Bank and can create new Federal Reserve Notes by printing them much as private banks create new money by a bookkeeping entry. There is no limit on how much money the Fed can create as there is on private banks creating money. The Fed is a unique invention: it is a private bank with federal government power to create money. The US Treasury is the actual printer of Federal Reserve Notes which the Fed distributes. The Fed is the US Treasury’s bank as well as the “bank of all banks” to private commercial banks. Thus the curious situation of the US Treasury borrowing money from its bank, a private bank, to fund the budgets approved by Congress.

The Treasury borrows money from the Fed indirectly by first selling bonds to the public which can then convert bonds into cash by selling them to the Fed. The Treasury prints the US legal tender but does not spend it directly. It must first sell bonds which become the US National Debt and pay interest forever on its own money! It matters not whether the bonds are owned by the public or the Fed, the Treasury must still pay interest on its debt. The US National debt backs the money in commercial use which is nearly all created (“printed”) by private banks. As the US economy grows so too the legal tender supporting it must increase. From 1900 to 2009 the US National Debt increased from $2 billion to some $12 trillion at an average growth rate of 8% a year! There were two sudden jumps of about 6x to finance WW I and WW II.

The National Debt plays an important role in the US Economy. It is a source of secure interest-income to its owners. It is widely accepted as collateral. It can always be converted into legal tender by selling it to the Fed. During the Clinton Presidency with balanced federal budgets (no deficits) the business community became concerned by a shortage of new Treasury bonds and suggested the Fed should start buying high grade corporation bonds like General Motors. If the US Government spent money without borrowing it there would be severe shock to the world of finance. A National Debt is necessary to support private banking. We are hostage to a traditional bookkeeping system of finance.

R.W. Zimmerer, Colorado, USA

– from COMER, April 2009

[I question whether in fact ‘A National Debt is necessary to support private banking’; legal tender is, under present rules, but this can be issued directly by the Treasury, without creating a National Debt. – BL]

 

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