Money As Debt

"Money as Debt" is a 47 minute film that uses animation in an attempt to explain some monetary concepts. Though entertaining and engaging, much of the central thesis is false or misleading.

Analysis by section

Section: Opening quotes

Undisputed, however the quote attributed to Mayer Amschel Rothschild ( "Permit me to issue and control the money of a nation, and I care not who makes its laws." ) has eluded verification by historians and scholars.

Section: Intro

But the vast majority of money is not created by the Mint. It is created in huge amounts every day by private corporations known as banks.

Technically true … because of the way the money supply is measured, but could be misleading.

To elaborate… when the Federal Reserve wants to increase the money supply, it buys T-bonds on the open-market using thin-air money. This increase M0, otherwise the monetary base.

However, the components of the Money Supply include both deposits held in bank accounts and loans made from those accounts. So when a dollar on deposit is loaned, it is counted twice in the Money Supply measure.

Because a dollar that is borrowed is usually spent quickly, it will end up deposited again, then reloaned. A single dollar created by the central bank will eventually be re-deposited and re-loaned several times. This is called the deposit multiplier. And though there is a theoretical maximum as to the number of times an M0 dollar can be 'mulitiplied', in practice it tends to be limited to 6-8 times.

Most of us believe that banks lend out money that has been entrusted to them by depositors.

True

But not the truth. In fact, banks create the money they loan, not from the bank’s own earnings, not from money deposited, but directly from the borrower’s promise to repay.

False Banks indeed can onlly make loans from assets on hands such as deposit. They cannot make loans without some money on hand. Typically loans come out of 'excess reserves' the maximum being "Total deposits minus minimum legal reserves", and the more practically and likely being "Total deposits minus necessary reserves to conduct business".

Section: The Goldsmith's Tale

This is a charming story and does illustrate some of the concepts of early bank notes very well. However there are some serious flaws in the story.

The origin of bank notes does indeed stem from receipts for gold on deposit. And caretaking of assets in a vault can be considered a legitimate business.

But if a gold smith gave out gold without permission of the depositer, this would be fraud. It would be similar to putting cash in a safety deposit box and the bank taking it out and lending it. Without such agreement, such an action is illegal. Did it ever happen? Of course. Was it accepted and sanctioned? No.

The banker paid a low interest rate on deposits of other people’s money that he then loaned out at a higher interest.

This is a fair and accurate representation of the how interesy bearing accounts.

That’s when he got an even bolder idea. Since no one but himself knew what was actually in his vaults he could lend out claim checks on gold that wasn’t even there! As long as all the claim check holders didn’t come to the vault at the same time and demand real gold, how would anyone find out?

Again, this describes a fraudulent action if claim checks are issued without sufficient backing.

The limit would still be a number much larger than the actual value of gold & silver in the vault. Quite often the ratio was 9 fictional dollars to 1 actual dollar in gold

This can be considered true if it is the context of the deposit multiplier where money is re-loaded and redeposited.

It would be wrong to interpret it that a bank could make a single loan of 9 dollars from 1 dollar on deposit.

Section: The Money System Today

In the present, privately created bank credit is legally convertible to government issued “fiat” currency, the dollars, loonies and pounds we habitually think of as money. Fiat currency is money created by government fiat, or decree, and legal tender laws declare that citizens must accept this fiat money as payment for debt or else the courts will not enforce the obligation

True

Links:

Unless otherwise stated, the content of this page is licensed under Creative Commons Attribution-ShareAlike 3.0 License