How today’s fiat currency systems work
In all the world’s fiat currency systems, all currency is created by the act of borrowing. Currency is initially created by the government borrowing currency from its central bank (or ‘reserve’ bank), which the central bank creates out of thin air (the act of borrowing is inseparable from the act of creating the currency out of thin air, so we say the currency is ‘created by borrowing’) Also the use of the word “borrowing” conveniently hides from the population that money is simply being created from nothing.
However bank lending creates most currency:
• The bank can lend about 90% of deposits made to it out. This system is called ‘fractional reserve banking’, because the bank retains a fraction of deposits as a reserve then lends out the rest.
• The depositors still have their currency in the bank, while borrowers also have currency to spend. Hence, borrowing creates new currency.
• The borrowed currency nearly always ends up as a deposit in a bank, where 90% of it can be lent out again. And so on. In this manner, for each dollar that is deposited, up to $10 of loans i.e. new money can eventually be created by the banking system.
• As a loan is paid off the principal part of the loan is destroyed, that money ceases to exist. The bank however keeps the interest.
• The system is safe enough as long as not too many bank depositors withdraw their currency at once and defaults are few.
• Money in bank accounts securing loans remains available to be spent because, most spending is by card, cheque and electronic transfer; this money does not leave the banking system but is still available to be spent over and over.
By the way, ‘printing’ only creates physical notes or coins to be substituted as required for the currency created by borrowing—printing does not actually create the currency. At least 97% of currency exists as numbers in bank accounts.
• All fiat currency is someone’s debt. Someone out there is paying interest on every unit of fiat currency. Most people are surprised to learn that in today’s system if every debt were repaid there would be no money.
• A fiat currency is essentially a system of IOU’s, a system of credit.
• Lower interest rates encourage borrowing and thus increase the rate of growth in the amount of currency.
• Higher interest rates discourage borrowing and thus decrease the rate of growth in the amount of currency and after a delay price inflation rate slows in response.
• The amount of currency owing on loans (the amounts borrowed plus interest) is more than the total amount of the fiat currency in existence (the amounts borrowed). So either the amount of fiat currency must continually increase, or there will be many failures to repay loans. A fiat currency system must expand to survive.
Some quotes on this system.
"The bank hath benefit of interest on all moneys which it creates out of nothing."
William Paterson, founder of the Bank of England in 1694, then a privately owned bank.
"Let me issue and control a nation's money and I care not who writes the laws." Mayer Amschel Rothschild (1744-1812), founder of the banking House of Rothschild.
"The few who understand the system will either be so interested in its profits or be so dependent upon its favours that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests." The Rothschild brothers of London writing to associates in New York, 1863.
"Banking was conceived in iniquity and was born in sin. The Bankers own the Earth. Take it away from them, but leave them the power to create deposits, and with the flick of a pen they will create enough deposits to buy it back again. However, take it away from them, and all the fortunes like mine will disappear, and they ought to disappear, for this world would be a happier and better world to live in. But if you wish to remain slaves of the Bankers and pay for the cost of your own slavery, let them continue to create deposits." Sir Josiah Stamp, President of the Bank of England in the 1920s, then the second richest man in Britain.
"I am afraid the ordinary citizen will not like to be told that the banks can and do create money. And they who control the credit of the nation direct the policy of Governments and hold in the hollow of their hand the destiny of the people." Reginald McKenna, as Chairman of the Midland Bank, addressing stockholders in 1924.
"The banks do create money. They have been doing it for a long time - I doubt very much whether you would get many prominent bankers to attempt to deny that banks create it." H W White, Chairman of the Associated Banks of New Zealand, to the New Zealand Monetary Commission, 1955.
"I believe that banking institutions are more dangerous to our liberties than standing armies." Thomas Jefferson, US President 1801-9.
"When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain." Napoleon Bonaparte, Emperor of France.
"If the American people ever allow private banks to control issue of their currency, first by inflation, then by deflation, the banks and the corporations will grow up around them, will deprive the people of all property until their children wake up homeless on the continent their fathers conquered. The issuing power should be taken from the banks and restored to the people, to whom it properly belongs." Thomas Jefferson in the debate over The Re-charter of the Bank Bill (1809).
"Money plays the largest part in determining the course of history." Karl Marx writing in the Communist Manifesto (1848).
“The surest way to overturn the existing order of society is to debauch the currency, all the hidden forces of economics are unleashed on the side of destruction in a way that not one man in a million can diagnose”. Karl Marx.
"The government should create, issue and circulate all the currency and credits needed to satisfy the spending power of the government and the buying power of consumers. By adoption of these principles, the taxpayers will be saved immense sums of interest. Money will cease to be master and become the servant of humanity." Abraham Lincoln, US President 1861-5. He created government issued money during the American Civil War and was assassinated.
"The death of Lincoln was a disaster for Christendom. There was no man in the United States great enough to wear his boots and the bankers went anew to grab the riches. I fear that foreign bankers with their craftiness and tortuous tricks will entirely control the exuberant riches of America and use it to systematically corrupt civilisation." Otto von Bismark (1815-1898), German Chancellor, after the Lincoln assassination.
“It is well enough that the people of the nation do not understand our banking system, for if they did, I believe there would be revolution before tomorrow morning” Henry Ford
"Of all contrivances for cheating the laboring classes of mankind, none has been more effective than that which deludes them with paper money." -- Daniel Webster"