Most people are exposed to thinking that banking is, and should be, a private undertaking, as with most businesses. The problem is that people are misled in their understanding of how banking really works. A true understanding of money and banking will lead people to correctly see that a significant activity of banking, the extension of credit, is truly a public function.
1. In our current system, banks create money, “out of thin air,” by bookkeeping entry.
Private banks today, including the Federal Reserve, do not lend money they have on deposit, nor borrow money at a low interest and loan it out at a higher interest rate. Private banks today, through fractional reserve lending, create money–money that is backed by the “full faith and credit of the United States”–out of thin air by bookkeeping entry, whenever anyone, including the government, takes out a loan. As Ellen Brown states in “Web of Debt” (http://www.webofdebt.com): “They merely ‘monetize’ the borrower’s promise to repay.” Believe it. References to this fact abound, even from the Federal Reserve itself. One example, “Modern Money Mechanics,” a publication (http://www.truthsetsusfree.com/ModernMoneyMechanics.pdf), no longer in print but available on the internet, by the Federal Reserve bank of Chicago, describes “the basic process of money creation in a ‘fractional reserve’ banking system.” The well-referenced article, “DOLLAR DECEPTION: HOW BANKS SECRETLY CREATE MONEY,” by Ellen Hodgson Brown, is another good source (http://www.webofdebt.com/articles/dollar-deception.php).
Further, one should note that the credit extended by private banks is not theirs to extend but instead is an asset of the community – afterall, it is currency backed by the “full faith of the United States.”
2. Money is simply a medium of exchange for goods and services and should be fiat by law.
“Money is an abstract social invention that serves the purpose of advancing commerce and trade beyond the barter process,” Jere Hough writes at http://wealthmoney.wordpress.com/. Money can be viewed simply as a means to facilitate transactions—in other words, money can be viewed as a contract, a financial obligation. The contractual nature of money is illustrated by the fact that, while tangible currency (coins and dollar bills) make up less than 3 percent of the US money supply, the other 97 percent exists only as data entries on computer screens (from “Web of Debt,” by Ellen Hodgson Brown).
Money should not be confused with wealth. As Jere Hough writes, “All wealth is a combination of resources and labor.” In “Fixing the System: A history of populism, ancient and modern,” Kuzminski writes, “Money and wealth are mutually exclusive: money itself being only a claim to wealth, and not that wealth itself.”
Zarlenga writes (http://www.monetary.org/treasurytalk.htm) that “both Aristotle and Plato noted the paramount principle – that the nature of money is a fiat of the law, an invention or creation of mankind.” Around 340 BC, Aristotle wrote: “Money exists not by nature but by law.”
Money based on a commodity, such as gold or silver, on the other hand, has several disadvantages: A limited supply needlessly inhibits the exchange of goods and services, large holders of the commodity can have a manipulating and unfair advantage, and a commodity-based system is unworkable in practice. The impracticalities of a gold standard are explained by Ellen Brown in her interview with the Daily Bell (http://thedailybell.com/496/Ellen-Brown-Web-of-Debt.html ), where one major point is the following: Where would the gold come from to exchange our dollars with? Further, Stephen Zarlenga, author of “The Lost Science of Money,” writes, “History shows the so-called gold standard has been a shell game and a ruse and a tool of plutocracy,” where, historically, there has always been more gold-backed notes than the gold to back them (http://www.monetary.org/henrygeorge.htm).
3. The authority to create money should be the sole prerogative of a sovereign government.
A country’s control of its own money supply is tantamount to control of its own destiny. This point is inversely made by Nathan Rothschild, of the Rothschild family private banking dynasty, boasting in 1838, “Let me issue and control a nation’s money and I care not who writes its laws.”
The importance of sovereignty over one’s own currency is demonstrated by the example of the American Colonies. While most may believe that the American Revolution was about “taxation without representation,” Brown explains, in “Web of Debt,” that the real issue was the colonists desired to create their own money rather than borrow it from British bankers. Brown writes: “The colonists’ new paper money financed a period of prosperity that was considered remarkable for isolated colonies lacking their own silver and gold.” After a century of prosperity in the colonies, the British bankers convinced the king to forbid the printing of money by the colonists. Brown quotes Benjamin Franklin as stating the real reason for the Revolution: “The colonies would gladly have borne the little tax on tea and other matters had it not been that England took away from the colonies their money, which created unemployment and dissatisfaction.”
4. In conclusion, public banking is needed for a just and sustainable system.
When money and banking are understood properly, it is clear that the extension of credit, a primary function of a bank, is a public function. While people may express concern about the government in the banking business, it should be noted that a publicly owned bank is answerable to the people, while a private one is not.
Responding to the claim that a public bank represents unfair competition by the government, it should be noted that “money creation” should not be in private hands for profit. The “free market” must exist with a means for the exchange of goods and services: a community-defined, or government fiat, currency. Currency is merely a means to facilitate transactions and should not to be confused with wealth. The free market becomes a manipulated market when the currency is created by private interests, where the authority to create money in private hands leads to preferential access to credit as well as a transfer of wealth, in the form of interest payments, from the people to the private bankers.
In response to charges that public banking is “socialism,” Farid Khavari, Florida gubernatorial candidate, responded (http://centralfloridapolitics.com/2009/11/20/khavari-the-era-of-commercial-banks-is-over-state-banks-are-the-future/): “Are public schools socialism? Public roads, police and fire protection, municipal water? Socialism is where everyone works for the state. In these cases, and with our Bank of the State of Florida, the state is working for everyone.”
Understanding Money 101 