Why do you call money history's most successful con game?
Most people, including most economists, have no idea how money is created. I once had an image in my head of money being created when rolls off the presses of the U.S. Mint. Most of the world's money, however, is created when a bank issues a loan. The basics are quite simple. The bank opens an account in the name of the borrower and enters a number in that account against which the borrower can make withdrawals in cash, write checks, or order electronic transfers. That number, created by an accounting entry, becomes an addition to the money supply that the borrower must eventualy repay to the bank plus interest. Usually the bank must have some money on deposit in its account with the Federal Reserve, but in practice the bank can issue more than ten dollars in loans for every dollar it has on deposit with the Federal Reserve.
Essentially, the borrower is renting from the bank the money he or she then puts into circulation. Virtually every dollar in circulation is created out of nothing by a bank then rents it to a borrower. This makes banking a very attractive business.
Two Devastating Dynamics
Two dynamics are build into this system. The first is an inexorable concentration of control over real wealth. The second is an imperative to keep growing the economy irrespective of human need or environmental consequences in order to stimulate sufficient new borrowing to put enough money into circulation so that borrowers will be able to pay the principle and interest due to the bank as payments become due. Since the original loan creates only the money required to pay back the principle, if total debt does not continue to expand, many borrowers are forced into default. If many borrowers default, the sytem, which is essentially a legal Ponzi scheme, collapses. See also "The ABCs of Finance Capitalism."
Recommended Videos
This 47 minute animated video "Money as Debt" provides a clear and accessible explanation of how it works and the inexorably consequences.
The three and a half hour documentary "The Money Masters" provides a more elaborate account with a deeper historical and political perspective.
Case Study: The Sub-Prime Mortgage Scam
The recent Sub-Prime Mortgage meltdown is only one manifestation of the financial games facilitated by inadequately regulated financial markets that allow the big players to collect huge profits and commissions for reckless financial deals that pass the risk off to the unsuspecting. Basically the participating banks and investment firms created a system by which they reaped the profits from irresponsible mortage lending to unqualified borrowers and passed the risk on to the unsuspecting, including innocent pensioners. The video below uses a Power Point presentation to cut through the obfuscatory language of the financial world to spell it out in simple, graphic language. I also recommend the This American Life segment on "The Giant Pool of Money," which features candid interviews with players who profited handsomely from the wheeling-dealing.
The capitalist money game centers on creating fictitious assets to serve as collateral for borrowing to put more money in the hands of the biggest players in financial arrangements that direct the profits to the big players and the losses to people simply trying to make an honest living. The Sub-Prime Morgage game is one example.
