Across the country, banks are failing. Without financing obtained, by threat, from the citizens (i.e., “taxpayers”) many of the banks “too large to fail” would have done just that.

But we also are hearing a great deal about the government’s resort to the printing press to solve its economic problems. Money created out of thin air!!! Conservative commentators point out the impropriety of money creation, which simply dilutes the purchasing power of money already created. And they’re right. It seems odd that this has been doing on for decades, and only now, when the results are becoming obvious, that the practice is decried.

A question arises: if money can be created from thin air, how can banks fail? We read, in the literature of the Federal Reserve System, that the actual process of money creation takes place in commercial banks. In other words, if you borrowed ten thousand for a new car, the bank simply added that number to your bank balance. It didn’t subtract it from anyone else’s account, or its own. How can an institution which can create “money” with the stroke of a pen go bust? Can a counterfeiter, especially the official, franchised, and government-approved counterfeiter, run out of money?

In a word, it can’t. But do the anchormen ever remark upon the phenomenon of money-creating enterprises suffering from lack of money? Do we get an explanation of how the nation’s largest money-creating firms can come to bankruptcy? It is remarkable that there is such silence about this paradox. In the absence of any official explanation, we can only theorize about it. My theory is this: if people are to have any confidence in the banking system (and the Fed assures us that it is “confidence” that makes our fiat money system work) then banks must seem to operate as any other business. If banks were to loan money, and not receive it back, and if this were to occur time and again, at least some people might begin to wonder how it was possible. You and I can lend money, but if we repeatedly loaned money to people who did not repay it, we would soon be broke. Yet the banks could continue as if nothing had happened. Eventually the question would be raised: where do the banks get this money which they so freely loan? The answer, of course, is that they simply make it up, as in the example we gave above. This is no secret, but neither is it broadcast. Confidence in the banking system might suffer if people realized that the money they have to work for came into existence out of nothing, created by a banker making a loan. And if people realized that in order to obtain this loan of fictional money, they had to pledge real wealth as collateral, and pay interest as well, they might become disturbed. So banking must appear like any other business: earning money, not printing it.

Thus, as is true of any other business, when the bank’s assets are insufficient to cover its liabilities, it is in trouble. What are the bank’s assets? Mostly, they are the IOU’s of its borrowers. In other words, the note that you gave the bank in return for the 10,000 they created for you is an asset of the bank. When the car dealer deposited that 10,000 in his account, the became a liability of the bank, because the bank if liable to the depositor for the money deposited. Customers’ deposits are liabilities of commercial banks. In this case, everything balances: 10,000 created as a loan--an asset--balanced by 10,000 received as deposit---a liability.

What if you should fail to repay the 10,000?  Nothing much. Even the smallest bank can absorb such a “loss.” But if you were the government of some third-world country, and had borrowed billions, your failure to repay could be catastrophic. To be sure, nothing would be lost, because modern “money” is not a thing. The “loss” is purely a bookkeeping entry. But if the bank is to appear a legitimate business, it must seem to be on the verge of bankruptcy if its most valuable assets become worthless. To prevent this calamity, the borrowers’ IOUs must remain good, and that can be achieved if the borrower continues to pay at least the interest (the profit) on the loan. To enable the borrower to do that, the bank will lend him more money!  This is the idea behind “too big to fail."

The engine driving this process is interest. Banks create money, but only about 5% of what they create is spent by them. The rest is loaned. So virtually every dollar in existence today was borrowed, somewhere, by someone, sometime. You can see that if all the dollars were repaid, the interest would still be due. Additional borrowing makes continued loan repayments possible. In other words, society as a whole is trying to borrow itself out of debt. Obviously (or maybe not!!) that is impossible. Sooner or later---and at the present time, it’s sooner----the burden of interest becomes unbearable, and marginally profitable businesses fail. Unemployment increases, and sales sag. More businesses fail. Even large firms are threatened, and mergers become common. Eventually, the cost of further borrowing cannot be justified by expected increases in profits, and borrowing declines. Continuous borrowing is essential if the system is not to collapse. This may explain, by the way, things like the space program. When businesses reduce their borrowing, Uncle steps in as borrower of last resort. It is a vicious circle, spiraling downward to economic disaster.

What can be done? Nothing. The monetary system in place is unlawful, immoral and even illogical, but really, really, profitable! Interest on the national debt (and interest is the bank’s profit) is billions of dollars every day. The system that produces such rewards is not going to be discarded until the very last minute, and when that time comes, a new system will be established, starting afresh, with the same defective nature as the present one.  Locally, the banks that fail change their names and officers, but then it’s business as usual. It will be no different nationally. A return to tangible money holds no appeal to those benefiting from the present system.