An excellent critique. Your argument about how bank's redistribute wealth is very similar to what a lot of people have realized about Federal Reserve Printing: It's just a tax delayed to the future. I'd like to play banker's advocate a little, though. The justification for loans in terms of wealth is that immediate investment by smart people can create enough wealth to offset inflation, repay interest, and score a profit for the borrower. The problem with this is that we now have many loans which do not even theoretically produce any real value. A loan to a construction company to fund a development DOES create wealth, probably enough to repay interest and earn a profit and create new spending to offset inflation. A mortgage to a family, however, creates no new wealth. What we have here is essentially a governmentally and privately supported transfer of wealth to families to buy homes. But the family is obligated to repay all of this with interest to the loan provider. So really wealth is being transferred from savers to the bank. Without the bank creating value, or even creating the opportunity for others to create value!
Yeah, the "investment by smart people can generate wealth" is a common defense of the banking system. So the smart bankers decide who gets money to do what, and who doesn't. Money that comes by diluting the purchasing power of all savers, by the way.
Notice that this is the exact same logic communists and all statists use to justify their particular brand of wealth redistribution. If we just let the smart people take all our wealth and make the economic decisions for us, they'll make great decisions and it will be utopia.
Banking is nothing more than another flavor of central planning and wealth redistribution, the flavor that constantly tries to masquerade as "capitalism" while actually being the exact opposite.
That's not true, the mortgage to a family creates wealth in that they get to live in the house they want now instead of having to save for it, and the seller gets the money now instead of having to wait for it. If the house is a worthwhile investment it benefits everyone because the people unlock new potential productivity due to location, space, and amenities.
Now most people don't buy houses with that mindset necessarily and there's second order effects like speculation, and those tend to cause inflation.
Same as the COVID stimulus checks. Everyone thought of them as this way to save middle class and poor people. But where did the money ultimately go? Amazon and Walmart mostly. Who pays for it? Everyone.
Wealth transfer to our business overlords disguised as charity.
A question for you: Let's turn this around. Let's say you profit from the system as it is (or are playing it for business deals and the Cantillon effect). What are the threats to the current process? We would have thought reform unlikely 4 years ago, but now I wonder. OTOH aside from the top of the top, a lot of pigs are still at the trough. Return to a graduated hard money system? (+/- crypto, which is more easily manipulated in the mind of those who barely understand fractional reserve (as you note).
And "real socialist revolution" seems to, at best, eventually recreate this after exploiting just the ignorance you decry, and destroying a lot of everything along the way.
That's a great question, and one I've spent a lot of time thinking about.
My research has taken me one place, and I've found a lot of voices in that space with similar sentiments, for whatever that's worth. I always go back to the reason fractional reserve banking exists to begin with. Its existence flies in the face of every other example we see in monetary history, because throughout history, those using a harder money always end up outperforming those who stick to the more easily debased money.
That trajectory ended with gold, after all the people using silver, shells, glass beads, etc as money basically had their savings debased relative to people who saved in gold. So why go to the fractional reserve banking model that allows the money to be debased, after the world had finally settled on a gold standard? It comes back to the monetary properties of gold and the technological progress of the past few centuries. As commerce became faster and easier, especially after the invention of telecommunications, gold became a terribly inconvenient medium of exchange. You can't send gold over a telegraph or even through the mail, but you can send a bank ledger entry easily and cheaply over any form of communication. And that advantage in medium of exchange properties was so valuable to commerce that it offset the disadvantage of the constant debasement of the money.
But that all changed with the discovery of Bitcoin. Now we have a money with all the hardness (store of value) properties of gold, but also all the transactability (medium of exchange) properties of bank credit. We're in an adoption phase now, but personally I don't see how the fractionally reserved fiat currencies survive a competition with Bitcoin. There's zero reason to fractionally reserve a money that already transacts faster and easier than bank credit. And anyone who tries is doomed to fail, since fractionally reserved Bitcoin banks can collapse to a bank run that can happen in minutes rather than days.
Now that doesn't mean the competition will be a fair fight. There are plenty of incentives to prop up the existing system. But given the game theory as it's played out so far, anyone who doesn't adopt Bitcoin is being rapidly debased versus all those who do. So at some point game theory dictates that it's more profitable to join them than to fight to defend the legacy structures.
That's my optimistic take of one possible outcome. But I'm sure there are plenty of alternative paths with less roses and a lot more blood.
The lies underpinning every so-called bank “loan of credit” are as big as any lie can get. I do mean in the sense of how false they are. The crime is the longest-running and best-concealed accounting fraud in human history. My Substack [https://patcusack.substack.com/] shows documentary evidence of this systemic accounting fraud, printed in bank statements sent to three different “borrowing” customers of three different Australian banks.
I can also tell you that (i) banks don’t “make loans”, (ii) what they pretend to lend are not “bank deposits”, and (iii) they don’t simply “type the amount of the loan into the borrower’s account balance”.
Bank accounts I’ve examined show: (i) there is no loan (and no debt) since no cash is paid out, (ii) the $200.000 credit balance they put in a bank liability account is not a “bank deposit” of $200,000; it’s the accounting result of the customer’s deposit – the $200,000 mortgage document he just signed and handed over to the banker, and (iii) as you rightly say, banks do enter the “amount of the loan”, but they do it twice; first as a debit balance (in a bank asset account) and then as a credit balance (in a bank liability account). If they don’t do it twice, their books won’t balance.
On point (i), only *assets* can be lent out. Any competent practicing accountant will tell you, “You can’t lend a liability”. If you don’t believe your accountant, the Bank of England confirmed this in its 2014 Quarterly Bulletin (Q1), on page 16.
So, that $200,000 credit balance (in the bank liability account) can’t be the basis for a “loan”, unless the bank deliberately writes FALSE WORDS in their accounts to make the *customer’s $200,000 deposit* look like a *$200,000 bank withdrawal*, which is what they actually do. They have done it in the three cases I’ve examined on my Substack [https://patcusack.substack.com/].
The monetary value of the customer’s deposited $200,000 document is represented by the $200,000 debit balance in the bank’s asset account. The matching $200,000 credit balance (in the bank’s liability account) is what the bank owes him IN CASH. No CASH; No LOAN; No DEBT; just a debit balance, the result of the customer’s promise. A $200,000 credit balance is the bank saying “IOU $200,000”, not a loan of $200,000. Only our ignorance of these accounting facts allows banks to pass these bank IOUs around within the banking system without ever having to honour them in CASH.
All of the bank’s assets (which it could lend) - like cash, etc. - are recorded as “debit balances”, but that $200,000 “credit balance” is the customer’s asset, always. And the bank can’t lend him what is already his asset. That is, they can't do that without pretending his $200,000 asset belongs to the bank, and convincing him that is the case. That is a masterful deception indeed. TRUE MAGIC.
Call a “credit balance” in a bank liability account “money” and you’ve lost the game even before the first ball has been pitched. Such “credit” is the banks’ alternative to, and in direct competition with, “cash”.
This is a very rudimentary take on how this system works, and features some key omissions.
First the bank does take a risk when giving loans, specifically the risk that the borrower can't pay the loan back. This is why loans tend to be backed either by people having money or collateral, as well as a reputation (credit score).
Second is that savers aren't inherently screwed because they can be lenders as well, like investing in stocks or bonds as well as regular assets.
Third is that loans tremendously benefit anyone who needs capital. Otherwise they'd have to get it from individual investors or wait to accumulate savings. So if your company needs a new machine to keep making parts a loan can be the difference between life and death, so there can be real value on the line.
Now everything I listed also gets subverted by banks and society in various forms, but I'm saying you need to paint a more complete picture than saying banks create inflation through lending. Actually they technically don't even do that if the loans are used to create new wealth or assets.
The bank takes "risks", which is why banks demand a central bank. Because the central bank can create the new base money to bail them out whenever they blow up. Which is exactly what happens when something like the 2008 financial crisis happens. Did any bankers suffer as a result of the "risk" they took going south? Or did they cash their multi million dollar bonuses and fly off into the sunset in their private jets?
What the bank doesn't take is opportunity cost, as I said in the article.
Where does the money go when the saver invests in a stock or bond?
Of course loans benefit people who need capital, that's not my objection. And of course if it's for a productive business it can be beneficial. That's not the point. You can make the exact same argument for communism. If you take wealth from someone and redistribute it, you benefit the person who receives the confiscated wealth.
The point is, centrally planned wealth redistribution sucks and is immoral and I object to it completely in all forms. I don't care if it's Bolsheviks kicking my door in or bankers stealing my purchasing power through inflation, I don't want it. I don't care how good their intentions are, corruption is inevitable, and central planning is less effective than free market interaction.
I agree that the bailout aspect makes their risks negligible, and they also have a lot of other tricks to offset their like bundling loans and selling them. But that's not a mechanism of the bank itself, that's something our government did/allowed, so you should direct your blame there.
If you want to invest without using up money you can use mechanisms like short selling or options, but those are really dangerous moves if things go bad. They're also dangerous moves when the bank uses them.
An excellent critique. Your argument about how bank's redistribute wealth is very similar to what a lot of people have realized about Federal Reserve Printing: It's just a tax delayed to the future. I'd like to play banker's advocate a little, though. The justification for loans in terms of wealth is that immediate investment by smart people can create enough wealth to offset inflation, repay interest, and score a profit for the borrower. The problem with this is that we now have many loans which do not even theoretically produce any real value. A loan to a construction company to fund a development DOES create wealth, probably enough to repay interest and earn a profit and create new spending to offset inflation. A mortgage to a family, however, creates no new wealth. What we have here is essentially a governmentally and privately supported transfer of wealth to families to buy homes. But the family is obligated to repay all of this with interest to the loan provider. So really wealth is being transferred from savers to the bank. Without the bank creating value, or even creating the opportunity for others to create value!
Yeah, the "investment by smart people can generate wealth" is a common defense of the banking system. So the smart bankers decide who gets money to do what, and who doesn't. Money that comes by diluting the purchasing power of all savers, by the way.
Notice that this is the exact same logic communists and all statists use to justify their particular brand of wealth redistribution. If we just let the smart people take all our wealth and make the economic decisions for us, they'll make great decisions and it will be utopia.
Banking is nothing more than another flavor of central planning and wealth redistribution, the flavor that constantly tries to masquerade as "capitalism" while actually being the exact opposite.
That's not true, the mortgage to a family creates wealth in that they get to live in the house they want now instead of having to save for it, and the seller gets the money now instead of having to wait for it. If the house is a worthwhile investment it benefits everyone because the people unlock new potential productivity due to location, space, and amenities.
Now most people don't buy houses with that mindset necessarily and there's second order effects like speculation, and those tend to cause inflation.
Same as the COVID stimulus checks. Everyone thought of them as this way to save middle class and poor people. But where did the money ultimately go? Amazon and Walmart mostly. Who pays for it? Everyone.
Wealth transfer to our business overlords disguised as charity.
Fractional reserve is externalising theft into the future.
A question for you: Let's turn this around. Let's say you profit from the system as it is (or are playing it for business deals and the Cantillon effect). What are the threats to the current process? We would have thought reform unlikely 4 years ago, but now I wonder. OTOH aside from the top of the top, a lot of pigs are still at the trough. Return to a graduated hard money system? (+/- crypto, which is more easily manipulated in the mind of those who barely understand fractional reserve (as you note).
And "real socialist revolution" seems to, at best, eventually recreate this after exploiting just the ignorance you decry, and destroying a lot of everything along the way.
That's a great question, and one I've spent a lot of time thinking about.
My research has taken me one place, and I've found a lot of voices in that space with similar sentiments, for whatever that's worth. I always go back to the reason fractional reserve banking exists to begin with. Its existence flies in the face of every other example we see in monetary history, because throughout history, those using a harder money always end up outperforming those who stick to the more easily debased money.
That trajectory ended with gold, after all the people using silver, shells, glass beads, etc as money basically had their savings debased relative to people who saved in gold. So why go to the fractional reserve banking model that allows the money to be debased, after the world had finally settled on a gold standard? It comes back to the monetary properties of gold and the technological progress of the past few centuries. As commerce became faster and easier, especially after the invention of telecommunications, gold became a terribly inconvenient medium of exchange. You can't send gold over a telegraph or even through the mail, but you can send a bank ledger entry easily and cheaply over any form of communication. And that advantage in medium of exchange properties was so valuable to commerce that it offset the disadvantage of the constant debasement of the money.
But that all changed with the discovery of Bitcoin. Now we have a money with all the hardness (store of value) properties of gold, but also all the transactability (medium of exchange) properties of bank credit. We're in an adoption phase now, but personally I don't see how the fractionally reserved fiat currencies survive a competition with Bitcoin. There's zero reason to fractionally reserve a money that already transacts faster and easier than bank credit. And anyone who tries is doomed to fail, since fractionally reserved Bitcoin banks can collapse to a bank run that can happen in minutes rather than days.
Now that doesn't mean the competition will be a fair fight. There are plenty of incentives to prop up the existing system. But given the game theory as it's played out so far, anyone who doesn't adopt Bitcoin is being rapidly debased versus all those who do. So at some point game theory dictates that it's more profitable to join them than to fight to defend the legacy structures.
That's my optimistic take of one possible outcome. But I'm sure there are plenty of alternative paths with less roses and a lot more blood.
Excellent primer
For more information on this subject that will really let you see how much corruption there is, including the language of "money" see: https://www.courageouslion.us/p/blood-running-in-the-streets-mobs and https://www.courageouslion.us/p/credit-is-debt-is-slavery and https://www.courageouslion.us/p/thank-you-federal-reserve and https://www.courageouslion.us/p/a-caveat-against-injustice Hopefully your head doesn't explode!
The lies underpinning every so-called bank “loan of credit” are as big as any lie can get. I do mean in the sense of how false they are. The crime is the longest-running and best-concealed accounting fraud in human history. My Substack [https://patcusack.substack.com/] shows documentary evidence of this systemic accounting fraud, printed in bank statements sent to three different “borrowing” customers of three different Australian banks.
I can also tell you that (i) banks don’t “make loans”, (ii) what they pretend to lend are not “bank deposits”, and (iii) they don’t simply “type the amount of the loan into the borrower’s account balance”.
Bank accounts I’ve examined show: (i) there is no loan (and no debt) since no cash is paid out, (ii) the $200.000 credit balance they put in a bank liability account is not a “bank deposit” of $200,000; it’s the accounting result of the customer’s deposit – the $200,000 mortgage document he just signed and handed over to the banker, and (iii) as you rightly say, banks do enter the “amount of the loan”, but they do it twice; first as a debit balance (in a bank asset account) and then as a credit balance (in a bank liability account). If they don’t do it twice, their books won’t balance.
On point (i), only *assets* can be lent out. Any competent practicing accountant will tell you, “You can’t lend a liability”. If you don’t believe your accountant, the Bank of England confirmed this in its 2014 Quarterly Bulletin (Q1), on page 16.
So, that $200,000 credit balance (in the bank liability account) can’t be the basis for a “loan”, unless the bank deliberately writes FALSE WORDS in their accounts to make the *customer’s $200,000 deposit* look like a *$200,000 bank withdrawal*, which is what they actually do. They have done it in the three cases I’ve examined on my Substack [https://patcusack.substack.com/].
The monetary value of the customer’s deposited $200,000 document is represented by the $200,000 debit balance in the bank’s asset account. The matching $200,000 credit balance (in the bank’s liability account) is what the bank owes him IN CASH. No CASH; No LOAN; No DEBT; just a debit balance, the result of the customer’s promise. A $200,000 credit balance is the bank saying “IOU $200,000”, not a loan of $200,000. Only our ignorance of these accounting facts allows banks to pass these bank IOUs around within the banking system without ever having to honour them in CASH.
All of the bank’s assets (which it could lend) - like cash, etc. - are recorded as “debit balances”, but that $200,000 “credit balance” is the customer’s asset, always. And the bank can’t lend him what is already his asset. That is, they can't do that without pretending his $200,000 asset belongs to the bank, and convincing him that is the case. That is a masterful deception indeed. TRUE MAGIC.
Call a “credit balance” in a bank liability account “money” and you’ve lost the game even before the first ball has been pitched. Such “credit” is the banks’ alternative to, and in direct competition with, “cash”.
This is a very rudimentary take on how this system works, and features some key omissions.
First the bank does take a risk when giving loans, specifically the risk that the borrower can't pay the loan back. This is why loans tend to be backed either by people having money or collateral, as well as a reputation (credit score).
Second is that savers aren't inherently screwed because they can be lenders as well, like investing in stocks or bonds as well as regular assets.
Third is that loans tremendously benefit anyone who needs capital. Otherwise they'd have to get it from individual investors or wait to accumulate savings. So if your company needs a new machine to keep making parts a loan can be the difference between life and death, so there can be real value on the line.
Now everything I listed also gets subverted by banks and society in various forms, but I'm saying you need to paint a more complete picture than saying banks create inflation through lending. Actually they technically don't even do that if the loans are used to create new wealth or assets.
The bank takes "risks", which is why banks demand a central bank. Because the central bank can create the new base money to bail them out whenever they blow up. Which is exactly what happens when something like the 2008 financial crisis happens. Did any bankers suffer as a result of the "risk" they took going south? Or did they cash their multi million dollar bonuses and fly off into the sunset in their private jets?
What the bank doesn't take is opportunity cost, as I said in the article.
Where does the money go when the saver invests in a stock or bond?
Of course loans benefit people who need capital, that's not my objection. And of course if it's for a productive business it can be beneficial. That's not the point. You can make the exact same argument for communism. If you take wealth from someone and redistribute it, you benefit the person who receives the confiscated wealth.
The point is, centrally planned wealth redistribution sucks and is immoral and I object to it completely in all forms. I don't care if it's Bolsheviks kicking my door in or bankers stealing my purchasing power through inflation, I don't want it. I don't care how good their intentions are, corruption is inevitable, and central planning is less effective than free market interaction.
I agree that the bailout aspect makes their risks negligible, and they also have a lot of other tricks to offset their like bundling loans and selling them. But that's not a mechanism of the bank itself, that's something our government did/allowed, so you should direct your blame there.
If you want to invest without using up money you can use mechanisms like short selling or options, but those are really dangerous moves if things go bad. They're also dangerous moves when the bank uses them.
Amazing can you write an article on how ordinary citizens can ptotect themselves