Tuesday, September 23, 2008

The Moral Banker

Throughout history man has sought to manipulate currency levels, first with the clipping of coins, then the slightly more sophisticated debasement of coin content to the fiat banking which we have today. This money manipulation raises many moral questions.

At one time banking deposits used to be backed with gold, meaning if the bank accepted your deposits they had to, by law, maintain that amount of gold in their vaults in case you wanted your money back. All dollars were backed with gold. Then fractional reserve banking took over. This meant that banks only had to keep a certain percentage of their deposits accessible (backed by gold). This allowed the banks greater flexibility in making loans, basically allowing them to lend out the money of their customers and earn themselves interest on that money (which was not theirs in the first place).

The next step was fiat banking. Fiat banking does not require banks to hold onto any certain amount of gold to back deposits, and citizens are required by law to accept bank notes as money. Fiat banking has always been the last step to destroying financial stability of a country (see world history). The western world thinks they have overcome this by guaranteeing deposits via a central bank. The way this vulnerability is overcome is by backing all bank deposits with the Central Bank of Canada. The Central Bank has the power to print notes at its discretion. Now if everyone wants their money all at once, the bank of Canada has the power to print notes to cover everyone’s deposits. As well, bad loans are guaranteed by the taxpayer (central banks can back bad loans by printing more money, which essentially means you and I guarantees loans, because we are the one affected by inflation). This is why high risk massive loans to the third world are more advantageous than mortgage loans.

Having said all of this I want to ask why we pay interest on money created out of thin air? Why does my government (me) pay interest on money arbitrarily created? This is the best racket going. A private institution prints money and then has the right to charge interest on that money! Sign me up. In Canada 15 cents of every dollar collected from income tax goes toward debt financing. Worse yet is the fact I have to produce real wealth (earn real money—this means drilling for real oil, mining for real gold, making real sneakers, baling real hay) to pay the interest on imaginary money that was loaned.

As Canadian we debate Conservative vs. Liberal, left vs. right, capitalist vs. socialist, but is this debate not trivial at best when the rulers have already socialized the money supply. No?


At 8:57 PM, Blogger Powell lucas said...

The fiat monetary system is a plan that was constructed by the large financial institutions and sold to governments as a means to permit those governments to garner the goodwill of the populace by promising them things that, in relity, the nation could not afford. It allowed governments to expand social welfare schemes to unprecedented levels since there was no 'real' money required to finance these grandiose promises. For the large financial institutions it meant increased profitability since the money they loaned was non-existent and therefore was available at no cost to them. The whole thing was based on the borrowers promise to repay.
Last year I completed a first year university program in economics. When it came to the section on explaining how the banking system worked that was the first thing that struck me. When I pointed out to my proctor that I thought the whole thing was a house of cards, he went to great lengths to shoot down my concerns. (Our conversations became rather terse after that)The course then went on, a great lengths, to pooh-pooh the notion that there was a limit to growth funded by imaginary money. According to the course material, growth would continue at an accelerating rate forever. It therefore became only logical to loan money to people with no down payment or real collateral. The money wasn't real so why would you need someting tangible to borrow it.
What these geniuses missed was the fact that the public would soon see the opportunity inherent in the system. If you purchased an item, without having to lay out any cash or valuables, and then used that item to leverage the purchase of another, more expensive item, you soon became very wealthy...on paper.
Like all pyramid schemes, you have to find more people to buy into it at an exponential rate. This led to the loaning of funds to people who had no hope of ever repaying the debt. When this supply of suckers ran out and they started to default, the whole pyramid came crashing down. There was nothing tangible to cover the shortfall.
The sad part is that the folks who didn't get involved in this con game will pay in two ways. Since it appears that the U.S. congress will insist that if the big banks get bailed out then the little guys with home motgages will have to get help as well. Not only will the innocent non-players have to bear the freight for keeping these con men in business, they will now pay for the guy/gal down the street who has never done a thing in his/her life to warrant owning a home. The deadbeat wall street wizards and the deadbeat mortgage defaulters will feast off the poor shmucks who believe in frugality, living within their means, and earning their way.

At 10:13 PM, Blogger angryroughneck said...

Now there's an insightful comment. Bang on. That is why banks are willing to lend any miserable third world country endless amounts of money. They print the money for nothing and then earn real interest while that debt is being paid, and when that country eventually cannot repay their loans, the bank will just loan them more imajinary money which only increases the amount of interest they now have to pay. Brilliant

At 8:55 PM, Blogger Aaron said...

There's a book aththe U of A Law library called "pieces of eight" that essentially backs up Lucas' points.

Democracy becomes tyranny of the majority when 50+1% of the voters vote to pillage the national purse for their ends.

Watch Money Masters. It's long and boring, but outlines the historical narrative quite well.


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