By VennerRoad, 12th Jan 2018
If you ask Peter Schiff, he’ll tell you it comes out of savings, but that is only part of the answer.
Peter Schiff
The standard theory goes something like this: people need to refrain from spending, so this money can be invested – loaned to entrepreneurs, as Schiff says. The reality is that the money people save through the bank is not loaned out to business people and corporations. As Major Douglas pointed out back in the 1920s, banks do not lend money.
A detailed explanation of how a bank loan really operates can be found here – see from note (2). At one time this explanation was scoffed at, but as it is backed up by a mathematical proof, it is irrefutable, and with the rise of the Internet the secret has long been out, whatever conspiratorial explanation it is wrapped up in. As Darius Guppy put it in 2010, our world balances on a sea of debt. This debt is continually expanded by the creation of new money through the banking system, not by governments issuing their own credit debt-free and spending it into circulation on infrastructure and worthwhile projects that benefit the entire community, but by quantitative easing. Again, this is a rather complex process but it can be simplied as follows:
The central bank buys bonds (ie debt) from the commercial banks. It does this by drawing a cheque on itself. These bonds are often what is appropriately called toxic assets. The money created by this process is deposited in the commercial banks. Simultaneously, the central bank buys government bonds lowering the yield on them. The commercial banks having been in effect given large quantities of money for nothing can either sit on it – receiving no interest – or lend it to the business community, which will hopefully stimulate the economy. This works to a degree, but as Darius Guppy said, this is all debt. Money should not be debt but a medium of exchange and a store of value.
The bottom line is that if the commercial banks refuse to lend, the economy grinds to a halt. When one considers the real wealth of the community – the goods and services people and companies can supply, plant, infrastructure, the computer you are using to read this article...it becomes clear just how absurd this scenario is. But there is more.
Consider the world situation both the day before and the day after the great crash of 1929, or if you wish, the 2008 crash which is well within living memory. How was the world different the day before and the day after? With the usual caveats, there was the same volume of goods and services in the world – ie real wealth. The only thing that had changed was the perceived value of pieces of paper, or today, blips in cyberspace. That was all, nothing else, yet the former led to mass (so-called) unemployment, hunger, even suicides. But it gets worse.
The Great Depression was “cured” by the Second World War. Where before there was no money to house the homeless and feed the hungry, suddenly money and gainful employment was conjured up out of thin air to rearm Germany, for the Allies to arm, and for – eventually – the world to wage a six year long war that led to the deaths of tens of millions of people and the destruction of trillions of dollars of property – everything from clothing and personal chattels to houses and infrastructure.
This is the perceived wisdom of the dismal science. Indeed, we have seen this, albeit on a smaller scale, in the modern era. War is the big exception for government finance. Clearly something is terribly wrong with the current financial system, which is why we need not only to rethink it but to take the power to create credit away from the banks and place it in the hands of responsible national governments so that no country will ever be short of investment, for either the public or the private sector.
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