Money is something most of us crave for, work hard for, and use in our day to day lives. It will be an interesting, as well as revealing exercise to actually understand where the money actually comes from.
Imagine a money lender who lends out Rs. 1000 to a borrower (by issuing a cheque) and charges interest on the amount, while in reality he has only Rs. 100 in his account. He would be charged with fraud and arrested.
Now for the shocking part – Our modern banking system does pretty much the same as the moneylender we were just talking about, at a much larger scale and gets away with it, because our legal and constitutional framework allows it to do so !! Read on to find out more!
The history of money and banking are interlinked. Hence, it will be helpful and interesting to delve a bit into how our banking system (as we see today) actually evolved.
==Evolution of the Banking System==
The modern banking system has its roots from the early ages when gold was the chief form of currency. Those who owned gold, for fear of being robbed, deposited this gold in the strong-rooms of the goldsmiths, who gave gold owners receipts (promissory notes) for the gold they kept for them in their vaults. So, instead of paying in gold when they purchased goods, these individuals paid with the promissory notes they had received from the goldsmiths, which proved that they had gold in the goldsmiths’ vaults. The one who was paid with these notes was thus becoming the new owner of the gold kept in the goldsmith’s vault, and was free to go and withdraw this gold at any time from the goldsmith. This system was most prominent in England in the 17th century and spread to other countries eventually.
The goldsmiths noticed that most of the people preferred to exchange the promissory notes instead of going to the goldsmiths and withdraw their gold. For example, for one person who actually came to the goldsmiths and ask for his gold, ten people did not come, preferring to exchange the receipts issued by the goldsmith. Simultaneously, many people approached the goldsmiths for loans. Then the goldsmiths hit upon an idea whereby they could issue promissory notes to the borrowers, instead of actual gold coins, as the paper receipts had already become an accepted form of currency. The goldsmiths soon realized that they could thus issue, without risk, ten times more promissory notes than they had actual gold in their vault, as very few depositors actually turned up to claim their gold. This would enable the goldsmiths to loan out 10 times more money (in the form of receipts) than the actual gold they actually possessed, charge interest on the same and make huge profits. As long as the same ratio of people did not show up at their place and ask for their gold, the goldsmiths could go on with their confidence trick, and pretend to have 10 times more gold than they actually had.
This fraudulent scheme continued because of the ‘confidence’ people had on the goldsmiths, and eventually evolved into a more sophisticated ‘Banking system’, where the bankers played the role of goldsmiths and ‘paper currency’ played the role of the promissory notes, and the bankers started lending more money (loans) than they actually had to people and corporates. The bankers/goldsmiths fully exploited the fact that people were preferring to use paper receipts/currency (for convenience) than actual gold. Eventually people figured out the nature of the fraud, and they all started withdrawing their cash/gold, which caused the system to collapse (technically called a ‘Bank run’). However, the greedy bankers wanted to continue their game, hence they tied up with governments (read ‘Corrupt Politicians’) to enable them to continue with their fraud while the government set up ‘Central Banks’ or ‘Reserve Banks’ (such as the Bank of England, the Swedish Riksbank and the US Federal Reserve) to rescue the individual banks in cases of a Bank Run. This system gradually extended to other countries, especially the ones which the British ruled. India had its first Banks in 19th Century when 3 presidency banks were established under the British rule.
Today’s banks operate exactly the same way as described above, because they observed that for one person who came to the bank and wanted to be paid in cash (paper money), about many more people only transfer figures from one account to another one, without using any cash. (Today, all huge monetary transactions are done by cheque or electronic transfer and only small payments are done by cash). This is what allows the banks to lend more money than they actually have. The only restraint to this creation of money is the fear that too many people show up to the bank and ask to be paid in cash, since the bank could only repay in cash to one consumer out of a few. One of the ways for the banks to protect themselves against such a possibility is to encourage depositors to leave their money at the bank as long as possible, by paying higher interest in fixed deposits, which are tied up with a bank for a few years. Besides, Banks and Governments also emphasize on using cheques, demand drafts and electronic transfers for all large transactions, where it is inconvenient to use cash, anyway. Many banks also dole out gifts and rewards to their customers who use debit or credit cards instead of cash for their purchases! Thus, the banks came out with many ideas that discourage people from withdrawing large amounts of cash.
==Fractional Reserve Banking==
To enable banks to carry on with this above mentioned scheme of loaning much more than they have, a practice called “Fractional Reserve Banking” was introduced. This practice allowed banks to keep only a fraction of their deposits in reserve (as cash and other highly liquid assets) and lend out the remainder, while maintaining the simultaneous obligation to redeem all these deposits upon demand.
The catch here, is that when the initial deposit money is loaned out by the bank to a borrower, and deposited into the account of the borrower, the amount in the borrower’s account is again treated as “Fresh Deposit”, which allows the bank to give out more loans based on this ‘Fresh Deposit’, which itself was a loan in the first place! Each such loan given out again gets treated as ‘Fresh Deposit’ against which even more loans can be given out! Thus, the banks can loan out many more times the money they actually have in their reserves. This means, banks are practically creating money out of nothing (‘thin air’) and giving them out as loans to corporates (business loans) and individuals (home loans, car loans etc). As we know that most corporates take huge loans and use them for business expansion as well as meeting their expenses (such as employee salaries), this means that most of the money currently being circulated in most economies is actually ‘debt’ disguised as ‘real money’!!
The lie is that the figures on the computer screen represent the value of gold and/or silver. This is not true anymore, as most of the world’s currencies have been taken off the gold and silver standards decades ago. The last currency that was supposed to be backed by gold (i.e. the US Dollar) was officially taken off the gold standard in 1971 when the then US President Nixon refused to pay gold to countries in exchange for US Dollars, as the US had already printed far more dollars than the gold they actually claimed to possess. If the money created by the banks really represented gold or silver, the banks would legally be bound to pay all of us in gold or silver coins in exchange for our notes, anytime we chose to opt for such an exchange!
All this means that when a person or company applies for a loan, the bank does not loan out the amount from actually existing deposits. The bank clerk just types some digits into the computer screen against our account (or makes an entry into the account books) and the loan is “set up” out of nowhere. From that moment, we are legally bound to repay the ‘amount’ (with interest) that never existed, failing which the bank would take away our possessions or take legal action until we repaid back the ‘non-existing’ amount!!
The total amount of money that infiltrates into the economy is calculated by the following mathematical equation:-
D + (D* (1- F/100)^1) + (D* (1- F/100)^2) + (D* (1- F/100)^3) + ………… + D* (1-F/100)^N
Where D is the initial deposit into the bank, F is the fractional reserve requirement in terms of percentage, and N can go upto as high as 70. We see that apart from the first term in the equation (D), the other terms have been created out of “thin air” by the fractional reserve banking mechanism!
This loaning out of money beyond the bank’s existing reserves expands the total money supply in the economy. For instance, for the third quarter of 1995, the Canadian chartered banks held $3.1 billion in cash, and lent, for the same period, $216 billion (non-mortgage loans) – seventy times the amount of cash they actually held! In the US, as on 2009, the base money supply (Actual physical Currency + central bank currency) was approximately 0.9 Trillion USD, whereas the actual money under circulation, including the debts/loans given out to the commercial sector and retail sector was more than $11 trillion USD! In India, the total base money (reserve money) as on 2007 was Rs. 5,00,000 crores, whereas the total money under circulation, including loans to commercial sector was 3,000,000 crores.
==Consequences of Fractional Reserve Banking==
===Concentration of Power===
This empowerment of Bankers to create money out of ‘nowhere’ and loan them out allows them to gain control over corporates, people, and the economy as a whole. This is especially true in western countries such as US and Europe where central banks are operated from behind the scenes by private bankers which authorizes them to print money and lend them to the governments. This means, that the bankers control the state as long as they can keep the government under debt! This also allows them to control the economy by creating economic booms or recessions (by increasing or reducing the money supply). The Bankers of course work ‘hand in glove’ with the corrupt politicians who are ready to sell off their countries in return for tremendous selfish gains, and hence enact laws that allow bankers to run the show. A classic example of this is the ‘Federal Reserve Act’ that was enacted in 1913 in the US, giving the private bankers power to control the nation’s money supply via the “Federal Reserve”. Therefore, the REAL power in such cases is with the multinational bankers, and not the governments or the people! Institutions such as the World Bank and IMF are operated from behind the scenes by these powerful bankers, who control the foreign policies and economies of countries which borrow funds from them.
As banks keep increasing the money supply as described above, this leads to inflation’ and currency devaluation, with too much money chasing fewer goods, commodities and services. This phenomenon of inflation gradually eats away into the purchasing power of our money, and we observe that the cost of living is always increasing. However, the salary hikes, in most cases, find it hard to keep pace with this inflation (unless we are employed in a niche sector such as IT or Finance) because companies that pay our salaries try to keep as much profit as possible for themselves and view employees as overheads instead of assets.
As a result of these banking practices, today’s paper currencies have no inherent value in them, as it is no more supported by precious commodities such as Gold or Oil. In fact, as we have seen earlier, most of the so called ‘money’ in circulation is infact merely ‘debt’ disguised as real money.
===Increasing Gap between rich and poor===
An important point that we need to understand is that the actual purchasing power we possess depends on the ‘percentage’ of the total money in circulation that we possess, and not the actual ‘quantity’ of money we possess. When the banks create money out of nowhere and more money is introduced into circulation, our purchasing power gets reduced. This phenomenon, however, hits the poor people much harder. When a bank increases the money supply by giving loans, they usually loan the money out based on the repaying capacity of the recipient. They loan the newly created money (as explained earlier) mostly to rich corporates (for business expansion) and to some extent to the middle class (home loans, car loans, etc). These fresh loans tremendously increase the purchasing power of the rich people (who run the corporates) as now the rich people have a much larger percentage of money under circulation. This marginally reduces the percentage of money that the middle class now possess (inspite of the small loans given to them) and drastically reduces the percentage of money (and hence the purchasing power) that the poor possess. With each cycle of fresh loans, this disparity keeps increasing.
It is akin to a pumping mechanism which constantly drains out wealth from the lower rungs to the upper rungs of the money chain. It is clear that the banks of our world are not here to distribute wealth. They are there to increase differences and to concentrate all the money/wealth/resources into the hands of a very few on the top of the money chain.
==How do the bankers and Politicians get away with this?==
The main reason for this is ignorance of the general public. A few that do know, do not want to upset the applecart. The fields of economics and finance have been deliberately made complex, filled with too many jargons, so that common people would not be able to make out what is going on behind the scenes. The mainstream media, which is anyway owned mostly by powerful politicians and corporates, chooses to ‘conveniently’ remain silent on the issue.
These modern banking practices are supported by governments, media and corporates under the garb of ‘rapid economic development’, ‘industrialization’ and ’employment generation’. Hence, even finance experts who are aware of these modern banking practices fail to understand the long term implications of these practices on the people and economy, as they are swayed by the short term benefits.
==Quotes from famous personalities on Modern Banking Practices==
“It is well that the people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.”
– Henry Ford, founder of Ford Motor Company.
“The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in inequity and born in sin. Bankers own the earth. Take it [earth] away from them, but leave them the power to create money, and with the flick of a pen they will create enough deposits to buy it back again. However, take away from them the power to create money and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money.”
– Sir Josiah Stamp, former director of Bank of England.
“Give me control of a nation’s money supply and I care not who makes it’s laws.”
– Mayer Amschel Rothschild, founder of Rothschild Banking dynasty in 18th Century.
“I sincerely believe, with you, that banking establishments are more dangerous to our liberties than standing armies; and that the principle of spending money to be paid by posterity, under the name of funding, is but swindling futurity on a large scale.”
– Thomas Jefferson, former US President
“I am afraid that the ordinary citizen will not like to be told that 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 hands the destiny of the people.”
– Reginald McKenna, former Chairman of the Board, Midlands Bank of England.
“We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon.”
– Robert H. Hemphill, Former Credit Manager of the Federal Reserve Bank of Atlanta
==The Vedic Observer: Vedic Solutions==
The Vedic times were characterized by more stable economies with a robust monetary system that had very little scope of money laundering. Some of the salient features of the Vedic economic and monetary system were as follows:-
===Resource based Economy: Stable and Tangible Assets for People===
The Vedic economy was more “resource based”, as opposed to the modern economy, which is “money based”. This means people leveraged on replenishable natural resources to produce their needs. In the Vedic times, Agricultural Land and Cows were considered to be major assets, based on which a person’s wealth was measured, as opposed to the modern days where money (in the form of paper currency) is considered as a sign of wealth. With Agricultural land, people produced enough food to sustain themselves as well as sell off the excess produce to maintain a comfortable standard of living. Cows would produce nutritious milk as well as many by products that served as medicines as well as manure. All other needs were met using a “cottage industry” model where items were produced locally from raw materials procured from nearby forests and fields. Each town was mostly self sufficient. In this resource based economy, there is practically no need for anyone to artificially manipulate the monetary system in order to make gains.
This resource based economy easily lends itself into a trading system called “Bartering”, where goods produced were exchanged for other goods. For example, a rice farmer could exchange his excess rice produce (barter) in return for some clothes produced by a cloth weaver. This system, while ensuring that the needs of everyone was met, also reduced the dependency on money/currencies that are subject to manipulation. All trades done under the bartering model ensured that parties on both sides received some commodity of value, unlike today’s paper currencies which do not possess intrinsic value.
===Bullion Currency Model (Gold)===
Gold was used as a currency medium in Vedic times. This system is less prone to manipulation compared to the modern paper currency system, where it is easy to print currency and devalue the same. The control of the monetary system was the responsibility of the Kings who held gold reserves in the kingdom’s treasury. Modern day Vedic Scholars such as Srila Prabhupada have also insisted that gold is real money whereas “paper money” is bad money and is subject to misuse.
===Limited Debt based on actual currency reserves===
This is technically called Full Reserve Banking, which is sadly not being practiced anymore. In the Vedic times, the emphasis was for people to live within their means, and take loans only in case of emergency. These loans were given out in form of actual gold, unlike in modern banking, where virtual money is created out of nothing.
===Varnashrama System – Less Corruption prone===
If we examine the problems above, one major cause has been greed and corruption. According to the Varnashrama system, the Kings were elected by the brahmanas (priestly class) who were well versed in scriptures and selflessly offered themselves to the service of the society without any expectation of remuneration. Thus, they practiced self restraint and were less prone to corruption. This ensured that they would train and elect Kings who were similarly dedicated to the welfare of their citizens. Such rulers would be less inclined to manipulate the monetary system or exploit the people for selfish motives, quite unlike modern politicians who have betrayed their citizens for personal gains.
===Recognizing and Understanding the Supreme Proprietor===
The root cause of the above problems has been a failure to recognize the Proprietorship of the Supreme Lord and claims to false proprietorship over everything we survey. These groups of multinational bankers and business tycoons are greedy for accumulating as much wealth as they can, at the cost of others. However, their agenda doesn’t stop there. There is emerging evidence that they are working on a secret plan to take over control of the entire world’s economies and enslave the masses, with full co-operation from the governments, corporates and media. The Vedic scriptures describe such persons as “demons” who try to claim false proprietorship and control over the world which rightfully belongs to the Supreme Lord. It is this demoniac tendency that causes much of the problems around. The Varnashrama system ensures that the rulers understand the Proprietorship of the Lord and do not get into the wrong attitude. Hence, they would consider themselves as mere caretakers (on behalf of the Lord) of the kingdoms they ruled, and served as guardians of the people who are trusted into their care, instead of exploiting them.
A combination of the solutions mentioned above is the key to a world free of exploitation.
Just as in the corporate world, we work for the satisfaction of the proprietor of the company who in turn takes care of our needs, saints have advocated that we work for the satisfaction of the proprietor of the world (The Supreme Lord) who in turn provides us (via nature) with our needs. Hence, performing one’s duties in the right spirit, as an offering to please the Supreme Proprietor (the Lord) is the key to happiness for everyone.
[http://upload.wikimedia.org/wikipedia/commons/4/4a/Modern_Money_Mechanics.pdf “Modern Money Mechanics” by Public Information Center, Federal Reserve Bank of Chicago]
[http://mises.org/books/mysteryofbanking.pdf “The Mystery of Banking” by Murray N. Rothbard, Mises Institute, Alabama]
[http://126.96.36.199/eps/mac/papers/0203/0203005.pdf “Fractional Reserve Banking as Economic Parasitism” by Z. Nuri]
[http://en.wikipedia.org/wiki/Fractional-reserve_banking Fractional Reserve Banking]
[http://en.wikipedia.org/wiki/Money_supply Money Supply]
Written by [[Authors#vivek_d|Vivek Devarajan]]