By Paul Grignon
What is "cash” and where does it come from? Cash can be the familiar paper stuff, or it can
be credit at the national central bank which banks use to settle accounts
between banks. “Credit cash” at the central bank is always convertible to
“paper cash” upon demand.
So, where does cash come from? Is it just printed by
the government as we are shown on TV?
NO. Cash is created out of thin air by the central bank of the country (which is often privately owned). The central bank can just have it printed for the cost of printing, by the government or privately. The central bank then uses this cash it creates out of thin air to buy interest-bearing public debt in the form of government bonds.
Government debt is perpetual and thus interest paid on
it is perpetual. Therefore a good definition of cash might be: evidence of
public debt on which taxpayers will be paying interest forever.
So what is credit? Everything else that isn’t cash.
Take for example your bank account. Your bank account
tells you how much cash the bank OWES you if you demand it. It isn’t cash
itself. All those numbers in bank accounts are just “promises to pay cash”,
nothing more than IOUs created by banks. However, we typically think of these
bank IOUs, or “checkbook money” as “money”.
Little wonder. This checkbook money, especially in
electronic form, is much more convenient and secure than paper money. Therefore
we can transact all of our business with these promises to pay cash instead of
cash itself.
So… are there more promises to pay cash than there is
cash to fulfill them? You bet. That is because banks usually make what they
call “LOANS” by promising, rather than providing, cash.
With a base of “cash” usually much less than 8% of the
total they will “loan”, banks create their so-called "loans" as
“promises”. How? It is astonishingly simple.
You, the so-called borrower, sign a document that
promises to pay the bank X amount of money over time plus interest on the
outstanding balance. Your promise is backed by the collateral you agree to
forfeit and the effort you will expend to earn the money. Your promise to the
bank is an ASSET to the bank. To balance its books, the bank creates a matching
LIABILITY. The bank promises the borrower X amount of “cash” on demand.
The “loan money” that the bank puts in the borrower’s
account is not “cash”. It is an IOU. It need never be cash unless the borrower
demands cash. And, because we accept these IOUs as money itself, and do almost
all of our business trading these convenient and secure IOUs instead of
inconvenient and risky cash, banks can safely issue many more IOU’s than there
is cash to back them up.
Perhaps the simplest and most "magical"
feature of this system is "net" transactions. Only the net
differences of transactions between banks need to be paid in cash. In theory,
if all the banks are getting as much bank credit coming in as is being
withdrawn, all the IOUs balance each other out at the end of the day leaving a
net difference of zero. No cash required at all, from anyone! In practice,
banks are competing.
Winners can demand losers pay in cash. But that amount
is still only a small proportion of the whole amount of credit issued. The
exception to all this is coins. They don't begin as debt. The government Mint
stamps them and the government sells them at face value to the banks, no
returns. But coins are an insignificantly small part of today's money supply.
The significant thing about coins is that most
people’s understanding of money has not yet developed much beyond the idea of
coins, simple POSITIVE tokens of value.
They fail to see how we have been ensnared by a money
system based on NEGATIVE shackles of debt. The current system pretends to be “money” but is, in truth, a financial
black hole sucking us all in to seemingly inescapable control by our so-called
“creditors. The truth we need to see is that WE are the real creditors,
because it is WE who produce the real value in the world, not the banks.
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