Download Patriot Corner -- The Credit Grist Mill

Patriot Corner -- The Credit Grist Mill
By Dan Meador
An Australian Internet friend asked for an explanation of current credit and monetary systems. These
subjects concern everybody, yet few people understand either. Because of twentieth century evolution,
virtually all developed nations operate the same way, so answers for one are reasonably consistent with
answers for others.
Here in the United States we have the Federal Reserve System as our central bank, and most other
nations, including England, Canada, and Australia, also have central banks. Via the International Bank for
Reconstruction and Development (World Bank) and the International Monetary Fund, both chartered by
the United Nations, the national central banks are linked in such a fashion that the mode of operation has
to be consistent.
The request was probably made because I've frequently said that Federalism, which is the prevailing
political ideology in the United States, is based on a mathematically impossible economic scheme. The
scheme, whether here or elsewhere, is inextricably linked to central banks.
When our respective nations had gold and silver coin, currencies had value. In a manner of speaking, gold
and silver are wealth depositories. They're worth something. Grains, other metals, and other natural
resource commodities have value, but gold and silver have served as currencies throughout the ages. As
exchange mediums, certain weights of gold and silver might be exchanged for other commodities, goods
or services. The seller would then exchange gold and silver coin for other goods and services he needed.
While gold and silver coins were impressed with unit values of the country where they were minted,
whoever held the coin actually owned it. A government had no more claim to it than anyone else. In the
event the owner owed a tax or some other obligation that made government his creditor, he used his coin
to pay government obligations the same as he paid any other obligation.
Unlike gold and silver, paper currencies now in circulation have no stand-alone value. They represent
credit units, the credit being debt of whatever nation is responsible. But currencies aren't really that
important. A major portion of the money supply is held by financial institutions as account credits and
debits. It wouldn't even require a fire to destroy most of the money supply. Use of computer delete keys
would eliminate most of it. This fact alone demonstrates the lack of inherent or intrinsic value of
contemporary money. It simply has perceived value.
Perceived value rests totally on cultural confidence. If and when confidence in the government
responsible for issuing credit currency is shaken, value can plunge dramatically. For example, the
Confederate dollar isn't worth anything. Had the Confederate government issued gold and silver coin
rather than paper currency, the value of the gold and silver would have survived the Civil War. In the last
few years, values of Russian and Latin American currencies have suffered serious devaluation, and we've
seen significant swings in exchange rates between the American dollar, the Japanese yen, and the
reasonably new Eurodollar. If these various currencies were gold and silver rather than paper, we
wouldn't see the same kind of fluctuation because the currencies themselves would be fixed weights of
valuable commodities.
In the current system, money supply expands as government, business, and individuals borrow from
financial institutions. It contracts as the debt pool shrinks. A debt is never paid, as such. What passes as
money is really a credit unit (someone's debt) which passes hand-to-hand to "defer" payment of debt. In
other words, if Frank owes Harry a hundred dollars for something, he gives Harry a hundred credit units
in lieu of payment, then Harry uses the credit units to purchase whatever goods and services he needs. In
order to sustain this system, the debt pool must continuously expand. If it contracts, the system is thrown
into recession.
The flaw that is injurious to a vast majority is that constant debt expansion is inflationary. The debt/credit
money supply constantly increases relative to available goods and services, so the price of goods and
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services must increase to keep pace. As prices increase, the purchasing power of savings and current
earnings of middle and low income people constantly erodes.
Prices of essential goods and services increased by approximately 400% in the last quarter of the
Twentieth Century. Earnings of working and production classes did not increase proportionately, and the
purchasing power of savings for retirement and other purposes did not increase accordingly. Less than
14% of the population increased household wealth, while the wealthiest 1% enjoyed windfall profits.
Effect has been for government and what amounts to a wealth/political noblesse oblige to consolidate
financial, production, and real assets while working and production classes have been driven down the
economic ladder.
In a sense, the process is mechanical. To see this, it is necessary to understand a few principles of physical
economy.
To attack the problem, we need to understand "income": There are only two income sources. Either it is
earned or unearned. Earned income is substantial. That is, it is something. All new wealth is derived from
a natural resource. Unearned income must be borrowed.
The only cost for earned income is the cost of production. Whatever remains above the cost of production
is deducted is profit, and as the money circulates via spending, it has a multiple or trade-turn factor. Each
new agriculture dollar is worth seven or eight dollars to the overall economy; each new mineral dollar is
worth five to six.
In the absence of earned income, unearned income must be borrowed in order to sustain essential
spending. Whoever lends unearned income invariably demands interest in addition to repayment of the
original loan. Since the lender rarely if ever loans enough to pay interest, debt must continuously escalate
or interest must be paid from earned income. As earned income circulating in the economy is reduced via
transfer to those sitting in the catbird's seat, working and production classes are increasingly driven to the
bankruptcy window where real assets are liquidated at bargain basement prices.
The overall effect can be seen through a few statistics: In 1904, the United States became a net creditor
nation. We remained a net creditor nation until 1985. Since 1985, the United States has become the
largest debtor nation in history. Our cumulative private and public debt now exceeds $25 trillion. With
gross domestic product of about $8 trillion, the cumulative debt exceeds 300% of annual earnings. If all
interest was only 5%, we would still be spending in excess of 15% of gross domestic product on interest
payments.
Effect is disastrous. In 1981, the United States had more bankruptcies than in any year since 1933. In
1990, business and individual bankruptcies exceeded the million mark, and by 1996, individual
bankruptcies alone exceeded 1.3 million.
In the effort to maintain standards of living common in the 1972-73 period, American working and
production classes have been forced to take on increasing amounts of debt, with the liquidation process
being the result.
Possibly the more sinister aspect of the scheme is that financial institutions responsible for individual and
commercial lending, and the central banks, have absolutely nothing invested. The debt/credit scheme is
effected by ledger entry, nothing more. The savings of one individual or business do not secure loans to
another. New credit is created as if by magic. By way of this ritual process, financial institutions colorably
secure a grip on the labor and assets of nearly everyone in all nations participating in the scheme.
For a contract to be legitimate, all parties must make consideration of value. This is where the elaborate
scheme breaks down. Risk and burden alike fall on production and working classes while the institutional
grist mill destroys everyone unfortunate enough to slip on the increasingly steep economic slopes
determined by interest-driven inflation. Where central banks control requirements for lending institution
reserves and base interest rates, which affect the availability and affordability of credit and therefore
money, working and production classes are constantly vulnerable to policy set by directors of the
privately owned cartels. Once Joe Public steps into this synthetic economy, he is on the equivalent to a
hamster wheel where he has precious little control over his own fate.
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