Imaginary Money Equals Imaginary Debt

What is money? No. Seriously now, I’m not joking. Can you say what money is?

I can’t.

I asked this question a good while back and nobody came up with a satisfactory answer then, although it seems to have become a little clearer in the intervening few years that money these days is made up. It’s imaginary.  As Mr Darwin points out, the banks didn’t have to borrow the money they lent to you.  They just invented it.

There was a time when money was based on something tangible, even if that connection was arbitrary. We had the gold standard, which meant that there could never be any more money than there was gold, crudely speaking. But of course, an arrangement like that isn’t convenient for people who wish to make money by charging interest on lending, because it doesn’t allow them to engage in that magical process called leverage.

JP Morgan

What’s leverage? Well, this means that for every euro or dollar or pound a bank has, it can lend nine more.

On what basis, you might be wondering, can anybody lend what he doesn’t have? Well, that’s the very foundation of modern banking and it lies at the very heart of the current financial crisis. It also goes right back to the source of the problem: Wall Street.

These were the people, a century ago, who came together on a private island off the coast of Georgia, and conspired to take over the world, and they succeeded.  Back in 1910, eight powerful men came together on Jekyll Island to devise a new way of banking . Between them, they represented one quarter of the entire world’s wealth, and their business on Jekyll Island was to establish nothing less than absolute control of world finance by the small group that dominated Wall Street. In some ways, it was like an agreement between mob bosses, but a comparison with medieval merchant princes is probably more accurate. Over nine days, these men came up with a plan to set up a private banking cartel which they called the Federal Reserve System. They chose the name carefully: Federal to create the illusion that their creation had some official governmental status, Reserve to hint that it had substance and System to divert attention from the fact that it was solely for the benefit of a few enormously wealthy New York families.

What was their plan? Simple. After years of competing, they decided that enough was enough. What was the point of fighting against each other when there was so much more profit to be made if only they could find a way to unite? Besides, these were civilised fellows who all knew each other. One didn’t wish to to have such unpleasantness in one’s life.

Who were they?

Senator Nelson W. Aldrich, father-in-law of John D Rockefeller.

Abraham Piatt Andrew, Assistant Secretary of the United States Treasury

Frank Vanderlip, president, National City Bank of New York (owned by JP Morgan) , on behalf of William Rockefeller. Also representing Kuhn, Loeb & Company

Henry Davison, senior partner of the J.P. Morgan Company

Charles Norton, president First National Bank of New York (owned by JP Morgan)

Benjamin Strong, president Bankers Trust Company (owned by JP Morgan)

Paul Warburg, partner in Kuhn, Loeb & Company, representing Rothschild banking family. Brother of Max Warburg, the chief executive M.M.Warburg & Co in Germany and the Netherlands

The idea, largely the brainchild of Warburg, was simple but ingenious. Break the link with the gold standard, making it possible to invent money. The US government was constantly running at a deficit and in perpetual need of funds. With a world war looming, the need for dollars would be all the greater and the money would have to come from somewhere. After all, without money, how could there be a world war? These men understood full well that they had a vital contribution to make: without their help, there could be no war, and what a catastrophe that would be.

Ancient kings understood the idea of a war chest. The more gold sovereigns you have in that box, the more soldiers you can send out to fight the king of Spain or France or Portugal or whatever relative you wish to invade, but once the gold is gone, you must bring your troops home. Now, this might have been a restraining influence on warlike kings, but it was bad news for bankers, and the clever men on Jekyll Island knew it. They needed a new plan, and these fellows were up to the task.

Instead of basing money on gold, what about just making it up? What about claiming to have the cash even though you don’t, because money no longer exists, except in the imagination? This means that you have all the money in the world to lend out, and you can collect vast interest on something you never had in the first place. You just made it up. No matter how much money the government asks for by way of loans, you can supply their needs because you’re just making it up. You’re pulling it out of thin air.  And therefore, no matter how low the interest rate is, you don’t care. This is free profit, earned on something you don’t own and never had. You just invented it.

This is pure genius. It works in a rising and a falling market.   It works in wartime and it works in a crash. When everyone is going broke, you can buy up all they own for peanuts, and anyway, you just invented that money this morning. It’s in your interests to collapse the market.  You can’t lose.

That was the start of it, and that was how ten or twenty families came to hold ownership of almost the entire world, by sleight of hand.  The US government is now so wedded to the concept of the Fed that most US citizens and even most US legislators think it’s another arm of the administration, which it is not.

The Fed is a private banking cartel, designed to create vast profit for a few out of nothing. It exists solely to ensure that prices keep going up, that governments keep borrowing and that those loans are repaid using taxes. Isn’t it beautiful? Banks overstretch themselves having borrowed phony money from Wall Street. They collapse and governments bail them out using money borrowed from Wall Street.  It repays those loans by taxing ordinary citizens and every single penny of this money goes to the people who invented the cash in the first place. The descendants of those eight men who met on Jekyll Island back in 1910 to play tennnis, smoke cigars, dine well, and carve up the world.

So that’s it? The end of money? Well, yes. Or more to the point, the end of value, because we’ll always have money of some sort, and the more money central banks issue, the more prices will rise. This is why different currencies trade at verious exchange rates.

Of course, inventing money wasn’t the sole domain of the spurious Federal Reserve System. After all, only three years ago we had Irish banks conspiring to pass around a single ball of money with a view to hoodwinking the auditor, by the simple expedient of holding the examination if the books on different days for each bank.

You take it. Ok. Now you have it. Now you.

A travelling roadshow of money creating the illusion that Irish banks were solvent when in fact they were anything but. This was done with the agreement of the banking regulator, who was, of course, an absolute disgrace, but you’d have to wonder if the same thing has been going on right across Europe.

So, all this talk about bailing out the banks by Merkel and Sarkozy is based on the fantasy that money exists outside the imagination of bankers. And all of this austerity here at home is to save these people from losing money they only dreamed up by magic in the first place.  So if money doesn’t exist except in the minds of those who caused the catastrophe, isn’t it about time to ask if debt should likewise be considered imaginary?

Or would we prefer to remain slaves for generations, paying off a debt that might as well be measured in feathers.

41 thoughts on “Imaginary Money Equals Imaginary Debt

  1. Very well presented and as far as I know, fully correct. We now have the choice to make also debt imaginary, or China will own us, our kids and their kids.

  2. I have this idea, which I’d like to be considered by somebody with more understanding of macroeconomics than I have.

    It is that maybe, like energy, money cannot be created nor destroyed, but merely changed from one form to another (or from one person, corporation, government or bank to another, perhaps). In effect, there is a fixed amount of wealth in the world. There always has been and always will be. Sure, there’s fluctuations in the number of dollars swishing around, but the value remains the same as it ever was. If more money is printed and released into the global economy, all that is really happening is that the existing amount is devalued. The net value of it remains the same.

    All that really changes is who has it and who controls it.

  3. Could you explain how a bank can lend money it doesn’t have (leverage)? For example a government borrows money to build a school. They will need to receive that money to pay the builders. How can the bank lend the money to the government I it doesnt have it? Who pays the builders? Excuse my ignorance.

  4. To clarify my comment above, in this instance the money has to appear in the real world as wages.

  5. They were clever guys and their descendants are doing them proud.
    They created a means by which the natural order could be circumvented.
    Today, their successors are doing even better.
    But I think that for any attempt in making debt an imaginary thing, would run foul of these guys.
    After all, many of them are now billionaires many times over, due to their imaginary success.

  6. Excellent post Bock.
    Why should there be such wide disparities in the distribution of wealth, with a small minority holding the majority of wealth? They certainly don’t work harder. I think the French understood this pretty well in 1789.

    And Golem’s recent post on debt cancellation makes perfect sense also.
    The more debt a bank owns the more ‘assets’ it sppears to have. They all owe to each other, can’t repay so are demanding the money from governments. We’re paying them back money that they owe to eachother that they never had in the first place.

    Why not cancel out the debts, as you say?
    Why should people have to suffer so much to keep a corrupt system in place that benefits the few?
    Why don’t the politicians care about the people they are supposed to serve?
    Greed I guess.

  7. Just a point on the politicians.. If I hear another one of them say ‘meeting the people on the ground – they’ve been saying to me…I’ll sort out them bankers… one million dollars for everybody’
    On the fucking ground wha? Did they descend down from high above to meet the plebs ‘on the ground’. I thought they were on the ground as well.

  8. Thank you for finally putting simply and succinctly,what I have trying to explain to friends for years and in the process confusing everybody including myself.I read a book some years ago by Tom Clancy called Debt of Honour,in which the hero comes to realise the illusory nature of money can be used by his side to avoid a trade war that was leading to world economic breakdown and eventual armegedon.When the powers that be, meet next month at the G-20,this book should be included in their goody bags.

  9. Patrick, as far as I understand it, the government sells bonds to the bank in order to borrow. The bank then prints money to the amount of the bonds, which is now our debt. This new money/debt is lodged within the banking system for the government to draw on and because of the fractional reserve system can be loaned out at multiples of the original amount i.e. the government sells bonds/borrows to the amount of 1 million, lodges it with the bank who can lend 10 million on the basis of the 1 million lodgement and the government pays the builders.

  10. The notion that you can just print money to solve a real economic crisis, well, its obvious that you’re not creating wealth, just more paper. As best I can make out, you are right, the problem we have right now is a result of fraud comitted by leaving the gold standard. Niall Ferguson in his book “The ascent of money” explains Patrick’s query on leverage very well, I’d recommend it to anyone who is interested/confused by this stuff.

    It seems to me also that this type of weapon (the ability to expand and contract the money supply, control interest rates etc) can be, and is being used to conquer sovereign countries, in place of conventional warfare. Just look at our situation: We were given access to dirt cheap money, which created a property bubble and inflated wages, and we all know what happened next. Now our state assets, infrastucture, land, will be sold off at rock bottom prices, to the people who lent us the cheap money – QED – Ireland bought without a shot fired.

    You may argue that we were architects of our own downfall, nobody forced us to borrow the money, there is some truth in this at an individual level. However the fact remains that if you offer cheap money to a large group of people, it only takes a few to bite for the rest to be under huge pressure to follow suit in order not to get left behind.

  11. It does appear very unfair that these shenanigans ultimately have to be paid for by ordinary working people and small business.

  12. I had always thought that the FED stories were conspiracy theories.But you made me curious so I rooted around in the ether and lo and behold you are right.
    On money I was told that it is an expression of man’s time.All materials come
    from the earth and are therefore free – apart from the time and effort taken
    to process them into something desirable or useful.The problem being that
    some people set more value on their time than on ours.

  13. Of course, there’s no reason why a conspiracy theory should be automatically wrong just because it’s a conspiracy theory. Conspiracies do happen after all.

  14. Interesting article, very like “Zeitgeist” but unfortunately, like the documentary, incorrect in its conculsions.

  15. I suppose it’s better to be wrong occasionally than not to be thinking at all. If you could explain where it’s wrong, we could debate it better.

  16. If I have two cattle and I breed them to create a third, I’m not taking that calf from anyone, yet my wealth has increased.

  17. “I suppose it’s better to be wrong occasionally than not to be thinking at all. If you could explain where it’s wrong, we could debate it better.”

    I agree, except that you present this article as factual, when in fact it hinges on the assumption that the meeting (which did take place) was part of a conspiracy. There is no proof that this was the case.

    And even if there were, it’s disingenuous to portray these men as some kind of shady overlords who wanted the world to dance as they jerked their strings; that they did what they did showed they well unserstood that the gold standard was not only arbitrary but severely limiting because it guaranteed that wealth could not be created – the FRS gave ordinary people the ability to have and create “wealth” (admittedly, another arbitrary notion) which in turn gave us the global economy; that others have abused this system for their own gain is kind of irrelevent to their deeds.

    The fact that the great wealth these people obtained –and distributed– happens to “belong” to a small group of their descendants is again nothing more than a by-product of the system. Why would these people have any interest in having more wealth? They already have everything that they could possibly want. No, they keep this wealth so that they can continue to invest it. If they gave it all away, it would be useless.

    I do agree that the situation re our bailout is scumbaggery of the highest order, and more and more I find myself wondering why we can’t tell the speculators to go fuck themselves at least a little bit….and I would bet my hat that if the men who attended that meeting in 1910 were alive today, who continued to pay their factory workers from their own pocket during the great depression and had enough deceny to swallow their losses, they’d agree.

  18. There’s every sort of evidence that it was a clandestine meeting and a conspiracy, from the concealment of the participants’ identities using ludicrous cloak-and dagger evasions to the chicanery adopted in getting the Bill passed through congress. Those details are outside the scope of this post, but I may well return to them in another context very soon.

    I’m sorry but it’s not good enough to say there’s there’s no proof. It exists in abundance, not least in the books written years later by some of these men.

    As to your other question. Why would they wish to continue accumulating money? Simple: power. The same reason Wall Street, in the person of these same men, assisted both Stalin and Hitler to consolidate their positions. And if you think there’s no evidence for that, a quick glance through the literature concerning, for instance, IG Farben, might shed light on it. You might also look into how the Nazis came into possession of technology for producing lead tetraethyl and synthetic rubber, two vital elements for a war economy such as Germany’s at that time.

    Anyway, it matters little what was in the men’s heads. What was important is the net effect: the creation of a privately-owned bank issuing unsupported credit to US governments and banks.

  19. Steve, RE: “The fact that the great wealth these people obtained –and distributed– happens to “belong” to a small group of their descendants is again nothing more than a by-product of the system”

    What do you mean nothing more? Are you saying it was inadvertent?

  20. “What do you mean nothing more? Are you saying it was inadvertent?”

    FME, I’m saying that it was not specifically designed into this grand “conspiracy”. Anyone can accumulate wealth these days and become a distributor of this wealth. As opposed to beforehand, whereby wealth was the sole preserve of a lucky few born with it. Look how many self-made million and billionaires we have in the world nowadays.

    Bock, godwin’s law, FTW – I think this is the fastest reference on the blog so far :)Not going to disagree with you re some of them doing business with hitler and stalin, except to say, so what – I never said the men were perfect or that the never did a crooked deal.
    Fractional Reserve Banking is indeed a horrible thing when it breaks – as we all now know.
    The difference here is that you are painting it as this shady conspiracy cooked up by these people to control the world – which is just not true.
    They were businessmen, in the business of making money and, more importantly, of spreading it around and why is it then a suprise that they should be the ones who come up with an idea to improve how the system works. I suppose you could say that they are responsible in many ways for having set up money and its acquisition as a “false idol” but to say that this was their motive is stretching it.

  21. Steve — Don’t be so glib, trotting out the handy Godwin accusation. I tried to answer your question and their support of Hitler is well documented. Did you want an answer or did you not?

  22. “I’m saying that it was not specifically designed”.
    So it was an accident then is it? How fortuitous – for them.

    The fact that there are more self made millionaires/billionares probably goes to prove the point that it’s all imaginary and it’s of little comfort to anyone struggling to put food on the table because they don’t have a job or they’re being taxed to the hilt to keep the fat cats from taking any loss.

    And the rich are getting richer.
    Posted by Mr.Darwin in a thread here – ‘Engineering the great depression’.

    ‘Worlds wealthiest now richer than before the credit crunch’.. while everyone else is struggling. Is that an accident too Steve?

  23. FME, it is not an accident.
    Of course it isn’t. But these are the same people who will be distributing that wealth. Scattered to the winds as it was, it’s of no long term use to anyone. Plus, I never said that the people today are nice or that the current crash should have happened or was a good thing – I was talking about the original intentions of the men who have been painted in Bock’s post as being some kind of world-domination bent cabal.

    Bock; either you missed the :) – surely you are aware that Godwin’s isn’t serious – did I miss the “no humour” tag on the article? Or perhaps you have a problem with me questioning your version of the truth. I sincerely hope it is the former?

  24. Steve — Well now, you’ve been coming here a while, so what do you think?

    As regards Godwin’s Law, I’m afraid you’ve misapplied it, since the whole point is to construe your opponent as a Nazi. I just happened to mention, in passing, that these guys were strong supporters of Hitler, which is a well-researched and documented reality.

    What’s more, the reference was made following a tangential and largely irrelevant point made by you. Irrelevant in the sense that the post is not about these men’s motivations, but about the consequences of their actions. It’s a red herring and a dead end at the same time. A dead herring. We’ll discuss it no more.

    However, on the face of the facts, the Jekyll Island meeting was a clear attempt to secure a monopoly for the New York bankers, and it succeeded.

    I think I’m correct in saying that most people believe the Fed is a governmental organisation. I also think I’m correct in saying that they can dream up money out of nothing despite being a private consortium.

    Therefore, going back to your first comment, what conclusions in this post are wrong?

  25. Yes, fair enough I misapplied it. In a joke. Sorry, I didn’t realise my humour was so structurally unsound

    To answer your question – your article seems to hint that the global financial meltdown is as a result of the system these men designed and the general thrust of the article is that it was a cynical ploy to ensure that us common or garden slobs would always be held in usury
    The reality of the situation is that the system was developed to try to avoid this kind of thing happening; that the current problems are because of other people’s greed and the stupid stupid credit culture we have been cultivating (starting with handing power to the banks in this country back when the ‘ra were robbing post-offices left right and centre – this is why your wages go into the bank and why the banks have been able to become so powerful by essentially forcing the nation to live on credit)

    So that’s where I feel your conclusions are incorrect.
    But then again, I could be wrong.

  26. Focus please. This post is not about the IRA. It’s not about borrowers, stupid or otherwise.

    This post is about a banking system that lends non-existent money.

    That’s all it’s about.

    This post is about the system devised by the men who visited Jekyll Island in 1913, and its consequences for the world.

  27. The “value” of this imaginary money, be it fractional reserve or other, is the promise of the borrower to repay it. The borrower (unless it happens to be another finacial insitution, in which case the process is simply delayed, passed on) will generaly preform some actual work or create something of actual value in order to repay the loan. It’s the old cliché of Money as Debt. Each fictional dollar/euro/yen… created is someone somehere’s debt… plus interest of course.

  28. I came across this and thought it apt;

    ““The study of money, above all other fields in economics, is one in which complexity is used to disguise truth or to evade truth, not to reveal it. The process by which banks create money is so simple the mind is repelled. With something so important, a deeper mystery seems only decent.” John Kenneth Galbraith (1908- ), former professor of economics at Harvard, writing in ‘Money: Whence it came, where it went’ (1975).”

  29. Excellent article and discussion, Bock. I was unaware of the Jekyll island story.
    I have struggled with the idea of money since I was a kid, since it was no longer convertible into anything tangible, and therefore had no limits to its creation.
    If money (or credit) becomes a claim on wealth, which is harder to create, then clearly owning or being paid in scarce assets (gold, land, patents, copyrights, factories) or having the right to create those claims (banking) is a better place to be than being paid in assets that are being created without limit (euros/dollars), especially if there is a competing pool of low cost labour elsewhere.
    Grim for the working and middle class in the West, better for the owners of assets, and wonderful for politicians or financiers who control printing presses since they can effectively redistribute wealth away from the taxpayers in real terms without appearing to do so.
    Echoes of the economic causes of the fall of the Roman and Russian Empires.

    Apologies for the rambling comment, I just find the subject fascinating. Great post, Bock, as usual.

  30. I assume the picture above is not really JP Morgan. Its Seán Gallagher, isn’t it, with a comedy nose and forehead mask thingy.

  31. Be careful Bock. A lot of the literature surrounding debt/money/banks/finance etc is very US focused, and in particular focused on their own peculiar and in many ways pathological system involving the Federal Reserve. If you read too much literature around that, you risk morphing into one of those wide eyed libertarian lunatics endlessly postulating about the illuminatii, big government, etc.

    To respond to your question on the nature of money:

    What we call “money” comes in two principal forms: Cash, and Credit. Cash is printed notes and coins. There is not much actual cash in circulation. For example, I believe there is only about UK£1.6 trillion in denominated bills and coins. The total money in the UK economy is at least 50 time that.

    Most money in the modern world takes the form of credit. Credit is simply an agreement between one party and another to allow some form of payment in the future. Credit comes from the latin “credo”, to believe, and is at its heart only as good as the belief that one party has or will have the ability to make payment.

    The easiest way to see the distinction between cash and credit is to consider the modern bank account. Let us say that you are paid €1000 for the month, into your bank account. Did you receive €1000 in cash? Some will say yes. However, few people will ever actually hold this €1000 in their hand, in notes, all at once. Instead, what you actually received was €1000 in credit from your bank, who in turn received the same from your employer. You can then use an ATM at the bank to exchange this credit for actual cash.

    Some people will say that this is only a pedantic distinction. “It’s all just money”, or “It’s all the same” they might say. However, if you imagine that, say, your bank–Bank of Ireland say–goes bust the morning after you have been paid, then the distinction becomes clear. You will walk up to an ATM one morning, attempt to exchange your credit at the bank for cash, and you will be told that this is currently impossible as the bank is no longer credit worthy and its cash reserves are now in receivership. This is the dreaded ATM apocalypse that so abjectly terrifies the ruling classes in Ireland.

  32. Where does credit come from? It is indeed created out of the air by banks and select institutions; but these are all licences by the government to do so. In theory, a bank can create an amount of credit up to a certain multiple of its cash reserves; around 10 times in theory and law, but ends up at around 50 to 100 times in practice. When credit is created, it of course creates a corresponding debt, leading to the adage that “Money is Debt”, which really should be “Credit creates debt”. This is all the theory behind the system of fractional reserve banking. I say theory because this is not how the system actually operates at all.

    In reality, the banks create credit now, and find “reserves” to justify it later. These reserves usually take the form of “money”, not cash–that is, they are mostly credit reserves. Contemplating this for a moment, it will occur that when a bank creates credit in the form of a loan, that credit must “go somewhere”. And that “somewhere” is of course almost always into another bank account, where it becomes part of another–or even the same–bank’s reserves. Thus, through the creation of credit, the banking system seemingly creates the foundation for yet more credit creation, as the system feeds back on itself.

    The problem is that, as noted earlier, every piece of credit created generates a corresponding debt somewhere. A lender must pay back the credit they gained in their loan. The bank must pay out the credit in your account in the form of cash.

    Some people get caught up on this point and claim that the whole system is unstable. In fact, it is perfectly possible for this system to be stable. However, it can become unstable–highly so–if for example a euphoric credit bubble emerges, then pops. These kinds of scenarios (which occur cyclically in practice) create instabilities in the system which are usually only resolved by inflation or debt write-offs. The responsibility for these instabilities lies entirely with the banks.

  33. A fascinating post, thank you. It would seem power hunger was the prime mover then, and still is.

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