Imagine an island with a commercial bank that has been given the right to create the money supply and charge interest on the loans. At the beginning of year 1, it creates €1 million and loans it to the population who then use the money to go about their everyday business. Suppose that the bank is allowed to charge 5% interest. At the end of year one everyone has to cough up, and the bank gets €50,000 in interest charges. As you can see from the table below, a system designed like that would be a total disaster because, after 20 years, all the money has gone.
Another option for the bank is not to require that the interest be paid. Just add it to the existing debt. Thus, at the end of year one, the population of the island now owe the banks €1,050,000. And that means that there will be even more interest to pay the following year. Leave that system running for 20 years, and the debt will have increased to over €2.5 million and the banks will effectively own over 65% of the economy.
But there even more subtle ways of rigging the system, that are maybe even more like reality. In one such alternative scheme, which requires being pretty crafty, the bankers don't just create the €1 million at the start of year one. Instead, they create enough new credit every year to pay the interest that the people had to pay the previous year. If they do this carefully, they can make sure that the total amount of "people's money" in circulation is keep constant. People will actually be paying off all the interest they owe - it won't be rolled over. However, it is just as effective at allowing the bank to take control of the system.
In the next table, you can see that, with this scheme, at the end of year one, the "people" have €950,000 (they've just paid the bank €50,000). But if the bank is careful and creates just enough new money every year, it is possible to keep that number completely stable. People will have the illusion of still having money, and paying off their debts to the bank every year.
To get this to work I had to use a rule where the banks create an amount that is precisely 5.26316% more than the amount of interest paid the previous year. Don't ask me why it has to be that number. There is presumably a way of calculating this value, but my maths skills aren't up to it. Nevertheless, as you can see, by using this magic value, the amount of money in the economy is adjusted so that the amount that hasn't been paid in interest to the banks stays fixed. The "people" have the impression that they still have the same amount of money as they had at the end of year one.
In this case, even after 20 years, there is still the same amount of free money. But you can see that the total money supply has gone up from €1,000,000 in year one, to €2,650,034. The obvious and inevitable consequence of that is inflation. Even if the people are keeping their salaries constant, they will be able to buy less and less every year.
The other remarkable feature is the amount of money that has been siphoned out of the economy in the form of interest charges- a whopping €1,700,034. Effectively, the bank will have accumulated a 64.2% share of all the money in the system.
There's yet another option for the bankers. Instead of just keeping the amount of "people's money" constant, as in the example I just gave, the bank can pump even more credit into the system. Give people even bigger loans to buy houses, flat screen TVs, holidays. That way they get the impression that they are rich. You can even make it seem as if the economy is booming. But, in fact, the so-called boom is illusory. It is simply the result of people getting more and more into debt. In the end, though, the most significant result is that after 20 years, the percentage of the economy that is in the hands of the bankers and their friends will be even higher than 64.2%.
What could the bank do with all the that money that they get from those interest payments? Well there are lots of things that could be done. For example,
- It could use part of the money to pay the people in the bank huge salaries and bonuses.
- It could just move the money to somewhere else (like the Cayman Islands, or to buy other currencies if such things exist).
- It could buy up the media to make sure that nobody gets to talk about what is going on.
- It could pay all the economists not to say anything, even if they do manage to work out what has been going on.
- It could pay the politicians who decide how the system should work and make sure that none of them even dares to suggest that it might just be more sensible for central banks to generate the money supply debt free to governments.
One last point. I stopped the table after 20 years of running the scheme. At that point, the financial system has increased the money supply by 265%. Since there is so much more money around, there will have been massive inflation, meaning that ordinary citizens will effectively be much poorer. It now has control of 64.2% of the economy.
But it won't stop after 20 years. Give the system 100 years, and the money supply will have increased to 471 million. 99.8% of that will be in the hands of the bankers and those in the financial system. And the ordinary citizens will be left with just a few crumbs, unless, of course, they are prepared to play along with the bankers and reap the rewards you get for keeping the gravy train on the rails.
It is clearly time for a change.
1) Money creation by commercial banks should be BANNED. It is demonstrably a complete racket. And I defy anyone to defend it.
2) All money creation should be done interest free by central banks and used directly by governments for financing activities that are in the public interest.