Modern Banking, Lending, Counterfeiting, and Theft

Photo from here.

INTRODUCTION

This will likely be my longest post in the series on living free of debt. It's different from the other posts, but I believe it's necessary to understand debt and loans in America.

Today, because of unjust currency, we have an evil banking system. Because of this, modern bank loans involve theft and deceit.

Short Summary

Note: This summary may be tough to understand depending on your prior knowledge of the subject. However, my hope is that it'll act as a road map, showing you a picture of what's going to be covered. After reading the post, it may be useful to reread this summary to help tie everything together.

In the USA, we have a fiat currency (Federal Reserve Notes). The Federal Reserve creates it from nothing. When a bank issues a loan, it also creates "money" from nothing.

From what I've read, it appears all our currency is introduced into circulation either by the Fed creating "money" and then buying debt or a bank issuing a loan. Thus, all of our currency ends up being owed back to the Fed/banks. Because only the principal amount of loans is created, but the principal plus interest is owed back, the only way to pay back the interest is by:

1. Going into more debt.
2. Defaulting.
3. Convincing the Fed/banks to be regular counterfeiters and spend "money" for valuable goods and services.
4. Acquiring the money from another person (in which case this person or someone else is forced to the three options above, except unable to pay even the principal amount on their loan).

Some quotes to whet your appetite:

[S]ome of those who do understand the workings of our monetary system seem to feel they are in possession of secrets which cannot be revealed safely to the public. Unraveling the mystery, they feel, would somehow destroy a money system built on exchanges of paper and not “real” goods such as gold or silver. For this reason, it has been traditional for bankers and other private managers of money to cloak the working of the money system with the mantle of secrecy. And many of our high public officials share this view. Although they are appointed to represent the public interest they seem to feel that it would be somehow dangerous to talk about our monetary system in ways that let the public understand who does what, and why. These officials seem very partial to the turns of phrase that imply that the supply of money—and interest rates—are subject to powerful economic laws over which men have no control.
--Congress, A Primer on Money, p 27

All these things [borrowing] require a functioning financial system that works best when most people don't even think about it very much.
--The Federal Reserve's website page, What is Financial Stability?

"It's a nice little game of extracting wealth from the citizenry without them knowing it." 
--A Christian economist in his answers to my questions about our money/banking system.

BACKGROUND MATERIAL

Where does wealth come from?

If everyone was instantly made a millionaire tomorrow, would anyone be better off? Nope. It wouldn't create food or better houses or better anything. It would simply inflate the currency, making it worth... less. In fact, it would worsen the economy because those who formerly were rich would now have a smaller percentage of the overall money supply, giving them less incentive to create future wealth. Wealth comes from God's blessing. When we work in whatever calling God has given us, that creates wealth.

Gold, Silver, and Counterfeiting:

The Bible treats gold and silver as currency. They were created by God as good, and in the Bible were used as money. There are many advantages to using them: They are stable and prevent inflation and deflation, make counterfeiting hard, and nobody has a monopoly on them.

Gold and silver can be counterfeited (mixed with cheaper metals). Even in the Bible, counterfeiting took place:

Your silver has become dross, your wine mixed with water. (Isaiah 1:22)

Counterfeiting is dishonest and theft. By it the money supply is artificially inflated, so everyone's money loses some value. If the corrupt coins are removed from circulation, then whoever had them last loses out.

Beginnings of Bank Fraud:

In Modern Money Mechanics, the Federal Reserve Bank of Chicago explains early banking:

It started with goldsmiths. As early bankers, they initially provided safekeeping services, making a profit from vault storage fees for gold and coins deposited with them. People would redeem their "deposit receipts" whenever they needed gold or coins to purchase something, and physically take the gold or coins to the seller who, in turn, would deposit them for safekeeping, often with the same banker. Everyone soon found that it was a lot easier simply to use the deposit receipts directly as a means of payment. These receipts, which became known as notes, were acceptable as money since whoever held them could go to the banker and exchange them for metallic money.

Please note that the bankers should not loan out the gold given to them for safekeeping unless the depositors agreed to it: if the bankers loaned it out, then borrowers might default on their loans in which case the banker would no longer have the depositor's gold.

Our Congress explains that this did not stop bankers from loaning this gold, though:

Few people who held the goldsmith's receipts came in to claim their gold. As the goldsmiths realized this, they also realized that they could make loans of the gold which had been left in their safekeeping. That is, they could write out receipts for gold to borrowers who, in fact were not depositing new gold but borrowing the ownership of gold already in the goldsmith's possession. This gold--actually the certificates of ownership--being loaned by the goldsmith was not his to lend. He did not own it. But so long as the calls for gold by the original depositors were so infrequent, the goldsmith felt he could lend without undue risk and earn interest on a certain portion of the deposited gold.

--A Primer on Money, p 28

Clever Counterfeiting of Gold and Silver via Loans

Counterfeiting is evil. So is loaning gold you're supposed to be safekeeping. The early banks combined counterfeiting and loans. The next paragraph of Modern Money Mechanics (following the one above) explains:

"Then, bankers discovered that they could make loans merely by giving their promises to pay, or bank notes, to borrowers. In this way, banks began to create money. More notes could be issued than the gold and coin on hand because only a portion of the notes outstanding would be presented for payment at any one time. Enough metallic money had to be kept on hand, of course, to redeem whatever volume of notes was presented for payment."  (Emphasis added.)

In other words, the bankers counterfeited gold certificates, creating more of them than actual gold even existed. Rather than spending these like a normal counterfeiter, they loaned them out. If they had simply spent them, inflation would quickly occur and there would be a bigger chance of people trying to redeem the certificates and discovering the fraud (by noting that there were more certificates in existence than actual gold). By loaning them out, instead, these certificates would continually be paid back to the bankers, canceling inflation. All the while, the bankers would profit from the interest on these loans. Because bankers created the face value of the loans but not the interest, borrowers would have to pay the interest in real gold or take out another loan to pay off the first one.

Clearly, bankers engaged in lying and stealing. If you lived back then and knew of a banker engaging in such fraud, would it be morally acceptable for you to take a loan from him? I think not.

MODERN CURRENCY AND BANKING

Fiat Currency:

Although counterfeiting can occur with gold and silver, it's not too complicated to detect (simply check how much physical gold a banker has compared to gold certificates). Also importantly, it's hard to have a monopoly on the supply of silver and gold.

What happens when you use paper money?

Paper money has had the effect in your State that it ever will have, to ruin commerce—oppress the honest, and open a door to every species of fraud and injustice. 

--From George Washington to Jabez Bowen, 9 January 1787

If silver being debased was a sign of God's judgment (Isaiah 1:22) what about having a currency that is made of numbers on screens or paper, which costs under $0.20 per $100 bill?

How is fiat "money" created in America?

Where does the Federal Reserve get the money with which to create bank reserves? Answer: It doesn't "get" the money, it creates it... [T]he Federal Reserve does not have any money of its own deposited somewhere else on the basis of which it makes its loans or security purchases. It creates money purely and simply by writing a check. And if the recipient of the check wants cash, then the Federal Reserve can oblige him by printing the cash--Federal Reserve notes--which the check receiver's commercial bank can hand over to him. The Federal Reserve, in short, is a total moneymaking machine. It can print money, if that is what is demanded, or issue checks.
--Congress, A Primer on Money, p 34

This is exactly the same thing as counterfeiting, only made legal. Legal or not, however, sin is sin and results in God's judgment.

How does the Fed introduce "money" into circulation?

Counterfeiting is evil: It steals from people by inflating the currency. However, our modern system is worse than that. Like earlier counterfeiters, when the Fed creates money, it doesn't just spend it randomly. Instead, it uses its newly created "money" to buy debt:

"Open market operations (OMOs)--the purchase and sale of securities in the open market by a central bank--are a key tool used by the Federal Reserve in the implementation of monetary policy."
(https://www.federalreserve.gov/monetarypolicy/openmarket.htm)

What's a security? It's a debt instrument. Treasury securities, for example, are a form of government debt. When the government wants to finance something, it might create $1000 "T-bills," which are basically government IOU's. People buy these because the government promises to repay this debt along with interest.

The Fed often buys Treasury securities. For example, during our times, the Fed believes more "money" needs to be in circulation, so as of this week they are buying $10 billion worth of treasuries per day.

When the Fed buys debt instruments, somebody owes a debt to the Fed.

When the Fed buys a $1,000 T-bill, for example, the government receives $1,000 (new currency created from nothing by the Fed) but the government will also need to repay this $1,000 along with interest. This is true of any debt the Fed buys. Thus, every dollar the Fed creates owed back to the Fed.

The Fed buying debt might be a little confusing, but it has the same effect as if the Fed counterfeited "money" and loaned it out: The "money" would be loaned back to the Fed. Interestingly, the Fed actually is now planning to offer loans directly to businesses.

It's impossible to pay all the debts owed to the Fed.

Why is this? It's because of interest.

The Fed counterfeits "money" to buy debt at its face value (let's say $1,000) but because interest is owed on the debt, $1,010 might be owed. Where does this extra $10 come from? Well, the Fed has a monopoly on the creation of Federal Reserve Notes* so when the $1,010 is owed back, only $1,000 exists to pay it back. Thus, whoever owes the $1,010 has the following options:

1. Take out another loan from the Fed (by selling it debt) in order to pay the first loan. This is like trying to dig your way out of a hole, as our government does.
   
   
2. Default.
   
   
   What about a third option?
3. Convince the Fed to buy something other than debt.
   First, the debtor is at the mercy of the Fed. The Fed might say "no" or buy less than the interest owed. Second, even if the Fed did this (freeing the debtor from the perpetual debt or default dilemma above), please realize that it would be "regular" counterfeiting, which is still evil.
   
   
   What about a fourth option?
4. Earn the "money" for the interest from someone else.
   This could work for some people, but not everyone. Remember, the Fed has a monopoly on the creation of "money." Thus, if debtor A gets the "money" from debtor B, it's important to realize that this debtor B also got their "money" from the Fed as well. Thus, while debtor A could pay off their debt + interest, now debtor B could not pay their interest or even the principal amount of their debt. It's like musical chairs.
   
   Note that for loans of gold or silver, option four is perfectly valid: Nobody has a monopoly on gold and silver, so debtors are able to earn the interest on their loans from other people--who could have acquired their gold independently, not from a common source/lender.

*Actually they allow lesser banks to counterfeit too, which will be discussed, but this doesn't change anything because those dollars are also debt-based.

By the very nature of the system, the "money" supply and the debt to the Fed must inflate somewhat as people are forced to go into more debt to the Fed in an attempt to pay of their debt to the Fed.

If the Fed counterfeits "money" and loans it too quickly (remember, loaning it is effectively what they do when they buy debt), then the dollar will be devalued too quickly and people will lose confidence in it. The Fed doesn't want this.

If the Fed doesn't counterfeit enough "money" quickly enough, then the "money" supply will deflate because as people pay their debts to the Fed, "money" leaves circulation. As money leaves circulation, it becomes harder and harder to acquire "money" to continue paying back debts, leading to massive defaults and a recession or collapse. The Fed probably doesn't want this either.

The Fed wants 2% inflation. By this, they are able to gradually steal people's wealth.

Individual banks also create "money" from nothing:

Like the Fed, individual banks regularly counterfeit "money" from nothing.

Sound far fetched?

"It may not seem to make much sense, but banks actually 'create' money when they lend it."
--The Federal Reserve Bank of Dallas, Money and Banking, p 9

Suppose John Jones asked for a $50 loan from the bank and the bank approved the loan. The bank would then lend the money to Mr. Jones by simply opening a checking account for him and depositing $50 in it. This is what ordinarily happens when anyone—business or private individual—borrows from a bank. The bank deposits the amount of the loan in the relevant checking account.
In making the loan to Mr. Jones, the bank did not reduce anyone's previous bank balance. It simply credited the Jones account with $50 … The bank has, therefore, issued $50 in “checkbook money.”
The natural question to ask is, Where does the bank get the additional $50 to issue and lend to Mr. Jones? The answer...is that the bank did not “get” the money at all. Money has been created. Of course, the bank's power to create money is limited. And a later chapter will show that the Federal Reserve sets the limits of this power to create money.
--Congress, A Primer on Money, p 19

Banks lend by simultaneously creating a loan asset and a deposit liability on their balance sheet. That is why it is called credit "creation"--credit is created literally out of thin air (or with the stroke of a keyboard). The loan is not created out of reserves. And the loan is not created out of deposits: Loans create deposits, not the other way around.
--"Repeat After Me: Banks Cannot And Do Not "Lend Out" Reserves," a publication by Standard and Poor's

If bankers were allowed to just counterfeit any amount in any way they wanted, inflation would get out of hand very quickly. Thus, banks have rules they must follow:

1. Banks have a limited amount of "money" they can create, based on reserves held by the Fed.
2. The only way they can create "money" is by giving a loan.

Fractional Reserve Banking:

Here's how the Fed limits the amount banks can counterfeit: Let's imagine that the Fed has created $1,000 and put it into circulation loaning it out (or by buying debt with it). Whoever receives the Fed's check will deposit it in a bank. With a 10% reserve requirement (one of the rules of the Fed to keep individual bankers from counterfeiting "too much"), then based on this $1,000, the bank is allowed to create a loan of $900. Whoever borrows this money will likely deposit it in another bank, and that bank can then counterfeit $810 to be loaned out. The process can keep repeating until $10,000 is in existence from the original $1,000. That's how loans create deposits.

This process is explained in many places. The Federal Reserve Bank of Chicago's Modern Money Mechanics is one place. Congress' A Primer on Money is another. Still another is Money Facts--169 Q&A on money, which is a supplement to the Primer on Money.

Update: The Fed now no longer has a reserve requirement. See at the end of this article.

If one bank makes a lot of loans and borrowers deposit this newly-created "money" in a totally different bank, the first bank will still be able to create more "money" if people ask for loans. This is possible because the bank that has excess reserves will loan those reserves to the bank in need of them.

Remember, deposits are not loaned out. Don't get lost in the details. If a bank has $1,000 in reserves, it doesn't loan out $900 from these. Instead, it creates the $900 from nothing, as the John Jones example above and the following quote make clear:

"Of course, they [the banks] do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers' transaction accounts."

--the Federal Reserve Bank of Chicago, Modern Money Mechanics, p 6

Our "money" is owed back to the banks.

Because "money" is introduced into circulation via loans, in one sense, the public never really owns the fiat "money." After all, people must continually repay these loans. When this occurs, "money" constantly leaves circulation. This makes deflation a very real possibility.

Interest is owed, creating a perpetual debt system:

Remember how the Fed forces those who sell it debt to issue more debt to pay the first debt? The very same thing happens with the "money" created by bank loans. If a bank creates a $100 loan with 5% interest, $100 enters circulation, but not the $5 to pay the interest. In order to pay the interest, we are back to these options:

1. Take another loan from the bank.
2. Default.
3. Convince the banker to give you $5 for something of value. In other words, ask a banker to be a "normal" counterfeiter. As with the Fed, you're at the banker's mercy, of course. If he gives you less than $5, you're still in a bind.
   
   Again, you might ask:
4. How about getting the $5 from someone else, by something good such as working? Because all our "money" entered circulation via loans, when someone gives you $5, that someone (or someone else along the line) will not be able to pay the interest on their loan or even all the principal. Someone (or many people) must face the three options above.

Because of the way the system is set up, new loans must be taken to pay off old loans. Thus, inflation (at least of debt) is inevitable. If loans are taken out too fast, inflation occurs too quickly and people lose confidence in the dollar. If loans aren't taken out, people will be unable to pay their debts. If inflation occurs gradually, people are forced to be in debt perpetually and the banks constantly steal a portion of people's wealth.

Let's briefly explore what happens when someone defaults:

If someone defaults and has collateral, the bankers get the collateral (valuable) in exchange for a loan from thin air.

If someone takes a loan, wastefully spends the "money" from it (this means other people have it), and defaults, then: If he is freed from his debts, the "money" brought into circulation via his loan is no longer owed to the bankers. If enough people did this, there would be enough money for the people who didn't default to pay their "loans" and not need new ones. That's why banks prefer people to take out new loans rather than defaulting, but they don't want just anyone to take out loans.

Conclusion of this:

All in all, the American people are economic slaves of the banks by virtue of our currency and banking system. Some people are forced to take out bigger and bigger loans perpetually or default. (Ever notice that America and Americans seem to always increase debt? In part due to bad choices, but in one sense, it's forced.)

Would it be right for you to create a counterfeit currency that you have a monopoly on, loan it out, and create a system whereby you continually extract wealth from people because they must perpetually come back to you for more loans? Would it be right to take a loan from someone you knew was doing this? Definitely not.

WHAT'S THE ANSWER?

Repentance. People do need to repent of happily taking loans and idolizing the "dollar." The bankers need to repent of their evils of theft, deceit, and virtual enslavement of image-bearers of God. Pray for this. Pray against the wicked system.

One thing you can do right now is to choose not to take out traditional bank loans. Then you, at least, will be free of the system to some degree. If everyone did this, it would end very quickly.

Should loans be repaid?

If my analysis is correct, then unless the Fed/banks become "regular" counterfeiters and spend the "money" they create instead of only loaning it, it's actually impossible for all loans to be repaid (at least the interest, if not the principal, because the system has been around a while and the hole has been growing larger). The bankers should restitute what they have stolen according to God's law. Exactly how this should occur, I'm not sure. It's definitely complicated and care must be taken. (If someone carelessly took out a million-dollar loan for a house and had their debt canceled, that wouldn't seem just. On the other hand, saying that all loans should be repaid to the bankers is naive, an impossibility, and unjust.) I do know that silver and gold should be used as currency.

Should you dispute your loans?

If the bankers were repentant or we had just courts, it would be right and perhaps Biblically mandated to do so. We do not have repentant bankers or just courts, though.

If you want a pragmatic answer, then "no, you shouldn't dispute your loan." I know multiple people, some of them quite well, who disputed their home loans based on the above. What happened?

• Every time, the banks ignored their questions, treated them as in default, and foreclosed. They even added to their sins by sending blatantly forged documents, robo-signing, and more.
• The courts acknowledged that some people didn't like our credit system, but ignored evidence, blatantly disregarded their own laws when convenient, misrepresented those questioning the banks, and supported the banks (even Roy Moore).
• Law enforcement pretended to be sympathetic to those who disputed their loans and said the bankers could go to jail for document forgery  (a felony) but did nothing to help and instead forced people from their homes.
• Friends, even wise Christians who see problems with the banking system, usually did not support those who disputed their loans, but instead criticized them and thought they were just trying to get free houses. This happened even though in several cases, those who disputed had already repaid the value of the loan principal and offered to repay the full amount (or give their home) if such proved to be just.
• Uninformed friends and acquaintances responded poorly: because on the surface it appears anyone who disputes their loan is greedy and borrows without repaying (Psalm 37:21), slander occurred.

Of course, pragmatics aren't ultimate. However, it may be better at this time to dispute the loan in writing, but continue to pay under protest while praying for repentance. Also, share with others. You have a duty to care for others and the more people know, the closer we are to freedom.

TWO THINGS I WANT TO LEAVE WITH YOU:

Is it possible to be free from debt?

It's possible for some people. Not for everyone in a system such as ours unless many defaults occur, if my analysis is correct, but some people can. Try to be one of those people. Working hard, saving, and accepting delayed gratification, still do yield results.

Is not taking out new loans hurting those who are in debt? It's similar to refusing to invest in a Ponzi scheme: The scheme may fail faster when you don't participate, which will hurt those who do participate, but you should choose not to be involved in a Ponzi scheme. Anyway, the Ponzi scheme would fail even if you did participate.

Don't seek bank loans.

Loans in general seem to be discouraged by the Bible. How much more then, loans by which men and women are made economic slaves? You may be forced to use a fiat currency (I think it would be neat to challenge this assumption, or at least explore what's possible.) but please do everything to avoid these loans which fuel the evil system. Because they create loans from nothing, banks can give very low-interest rates and private loans might be more expensive (reflecting the reality that it's risky to lend money you don't create from nothing), but if you must take a loan, seek a private one. Should numbers or moral principles guide decisions?

EDIT(s):

Here are 20+ ways to have housing without a mortgage.

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As I see more confirmations of my analysis, I may post them here:

"The people who preach the evils of debt do not understand that debt is essential to the American economy. Whether that is good or bad is debatable, but what is not debatable is that without debt, our entire economy would collapse. Our entire economy is based on steady inflation. And the way in which we encourage that inflation is through debt."

--Robert Kiyosaki, (author of Rich Dad, Poor Dad) on this page which was accessed on 5/18/20.

Obviously, I don't think our economy will collapse by following God's law, nor do I think it's necessary to be debt slaves forever. The quote does show my analysis to be correct, though. If everyone tries to pay their bank loans in full and not default, they will be forced to go into more debt (which inflates the currency) to pay their first debts, and the vicious cycle continues. This shows that the status quo cannot forever continue: people eventually must dispute their loans or bankers repent of their own accord. Although keeping our word is important as Christians, even in some cases of fraud (e.g., the Gibeonites), there are some cases (e.g., vows of celibacy, vowing to sacrifice a child, or contracting to be permanently in debt) that we must break or dispute biblically.

Here's an article that shows how our currency is debt-based and created by loans. It does not discuss interest rates, though: https://mises.org/library/our-money-based-debt

Update 4/18/21:

A few thoughts:

• The Fed eliminated reserve requirements. To me this would seem to encourage lending increase the chances of runaway inflation.
• Due to the socialist type of responses our government has had in response to Covid (both inflating the currency by exponentially increasing the debt to the Fed via stimulus packages, and by opposing productivity by stay-at-home orders), we may see runaway inflation.
• Have you wondered why the Fed changing the interest rate affects so much in our economy? After learning out our debt-based currency, it makes sense to me.
• Why do things seem to continue normally despite this system? One answer is that there is a measure of productivity and actual wealth creation in our country. When the Fed steals some of this every year, it definitely hurts things, but won't necessarily crash the system. It's more that we never get to see how much better things might be if there wasn't a parasite constantly sucking some wealth. On the other hand, certain people definitely feel the harmful effects of the Fed more than others. Just because you're ok doesn't mean others are fine. Also, due to the inflation we are currently seeing, things may spiral out of control. But only God knows. Best to be prepared for potential bad situations, but not be worried (Matthew 6:25-44). Keep focused and seek to move God's kingdom forward!