Where the Money Went

Why the savings you think you have
in the bank aren't really there

By The Intentional Peasant
Baltimore, Maryland

Strictly speaking, there is not much money in this or any other country today. Almost none of it circulates. What we call money, the Federal Reserve "notes", are sometimes called fiat scrip. This means that it is money only by fiat or decree of the sovereign. It is money because the State says it is.

Further, the green "dollar bills" we think of as money represent only a small fraction of the currency that circulates. Most money exists only as bookkeeping entries in computers. One can get dollars if one wants them, but if many of us wanted them at one time we would create a "bank run", where they had too few physical dollars in stock to cover the public's demand. In such a case we'd have to wait until the Federal Reserve sent more dollar bills to the bank to cover the problem.

Strictly speaking, money has no value in and of itself. Gold and silver money does exist, but it doesn't circulate at face value because it is much more valuable as metal. Also, as Gresham pointed out, bad money drives out good. Paper notes have driven money, properly so called, out of the marketplace. This makes modern economics largely a psychological game and explains why the State is so anxious to keep a happy face on the economy.

Before getting to where the money went, we need to cover where the money came from.

All legal tender money is created by banks. No exceptions. It is created by bank loans. When John and Mary or International Cat Food get loans, they are put on the bank's record as both a debit and a credit-both an in and an out, so to speak. The bank gives the borrower a check book or a check for the amount borrowed. When John or Mary write checks from this amount they are really behaving like a sort of mini-mint, creating money as they go, money which never existed before.

When the borrower repays the principle of the loan, the money disappears again. It is "extinguished" from the bank's records. In this country, there is money in circulation only because it has been borrowed into existence. In bankspeak this is "monetizing the debt." (You thought David Copperfield was a magician?)

If the public fails to borrow enough, there is less money being created and the government has to give a war or something to make more debt.

An important thing to remember about this is that the bank can lend out from six to eleven times the amount of its deposits. This is possible because we all keep our money in the bank. It matters not whether bank A or bank B, because they balance their accounts out between themselves every evening, called bank clearing. The bank can then legally lend out this "float" many times over.

Not only is the legally required bank reserve very low: it doesn't actually exist. This is because banks can and do borrow from European banks-the so called Eurodollar market.

Because cancellation of a loan cancels six to eleven times the amount of money that was created by that loan, banks like to make increasing numbers and amounts of loans. This brings us down to where the money went.

When the public is maxed out and can't possibly support any additional monthly loan payments, we have a situation where the money supply cannot expand unless the government sends a truckload to Israel, Brazil, Uganda, or someplace. I am indebted to my daughter Merrilee for pointing out that if Mexico and Brazil suddenly repaid their bank loans in full, we would have a severe problem because six to eleven times the amount would suddenly be extinguished from the money supply.

In a similar way, if we had a depression where enterprises were going belly-up at a great rate, loans would be extinguished and vast amounts of money would disappear from the system. This is because a loan default is like a loan repayment. They are both cancellations of the loan and thereby six to eleven times the loan amount in created money. After all, loans are always repaid-by either the borrower or the lender.

The State gets its messing-around money (what it spends over and above its tax revenues) in the same way John and Mary did. But instead of going to Nevvafale National on the corner, it goes directly to the Federal Reserve. The Fed lends the State what it needs and the State gives the Fed its IOUs called bonds.

But what about the US mint? Don't they print the money?

Yes they do, but the State doesn't get to keep it. They give it to the Fed for a small printing fee.

Why, you ask, do we do such a thing?

Was there some doubt in your mind about who owns the country?

(Taken from Countrysidemag.com.. See link)