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Regarding Certain Myths About Money And Debt Slavery

Banks are not run by saints, but they're not THIS bad, or at least not this powerful...

THE OTHER DAY MY WIFE SHARED WITH ME a video that she had come across on an e-zine. The film focuses on fractional-reserve banking, and makes the bizarre allegation that under such a system widespread indebtedness to banks is inherent, increasing and inescapable. The reasoning is that while money is created for the making of loans, none is created with which the interest on the loans can be paid.

The dire prospect warned against in the film is ultimate debt-slavery for everyone, and bank-ownership of all property.

As many criticisms as can be made against fraction-reserve banking (and many can be), the danger of debt-slavery and foreclosure because nothing exists by which interest can be paid is not among them. Nothing inherent in the actual monetary or banking structures prevent enough wealth being available to pay interest on debts. The notion to the contrary expressed in darkest tones in these screeds is a consequence of a failure to understand the true nature of wealth and money. Currency (whether "fiat" or "paper" or even gold) is not wealth. Wealth is goods and services.

WHEN ONE BORROWS-- to build a house, for instance-- one is not really borrowing a basketful of notes. Rather, one is borrowing-- from a warehouse of surpluses previously produced-- the goods and services needed to sustain and reward a labor force willing and able to produce and assemble all the parts of a house. The notes or other trading tokens one receives as a loan simply allow one to buy those goods and services from the warehouse. When one repays the loan with interest one again does so with goods and services-- one's own goods and services, typically, produced over a long course of time into the future.

Other than for the inefficiencies of a prospective homeowner producing and assembling the components himself (due to lack of specialized skills and equipment, advantageous access to materials and similar issues), the labor producing the goods and services with which the homeowner will repay the loan for the next thirty years is the practical equivalent of what he would have needed to build the house himself over the same period. The borrower's labor is fortified with his own specialized skills and comparative advantages, and thus even though unable to literally build his own house in any amount of time, years, he CAN, over the period of a properly-structured loan, produce equivalent value to what is spent in building it.

The loan is simply access to the value of the borrower's own future output, in advance, all at once, and in a liquid form. What is charged as interest is simply the price of advance access to that anticipated future value.

Further, the loan is not access to, and therefore a demand upon, ALL of the borrower's future output. The loan's terms (including the consideration of interest to be paid) are structured to allow the borrower to provide for his own ongoing needs while diverting off the labor output devoted to the house-building expense.

Our home-owner wouldn't build the house himself working sunup-to sundown on that alone-- he would starve to death long before finishing the sort of structure for which he would need a loan. Instead, he provides for his immediate needs and spends a few surplus hours on the house each day. The same is true in paying back (and paying for) the advance of the borrower's future output.

Thus, interest can always be paid. Interest is just an additional expenditure of labor by the borrower, and the availability of currency is irrelevant.

OKAY, THERE COULD BE AN EXCEPTION TO THAT LAST POINT, but only where a legal structure disallows the repayment of a debt in anything except some particular medium. For instance, imagine that a law said debts can only be paid by tender of the state's fiat currency (or a currency nominally issued by a bank, but at the state's direction, like "Federal Reserve Notes"). Under this scenario, only so much debt could be repaid as could be represented by the notes, and the horror story of debt enslavement would loom large.

Of course, also under this scenario, Federal Reserve Notes (FRNs) would become very precious. They would be constantly increasing in value, as people competed for ownership of this uniquely valuable item.

At the same time, the number of FRNs needed to buy sufficient goods and services to sustain and reward the labor needed to build a house would be subject to a corresponding constant downward pressure (that is, it would take fewer and fewer FRNs to build a given house-- or anything else). Thus, the size of loans would be constantly dropping, and fewer FRNs would be needed to repay both the loans and interest...

Nonetheless, despite the amelioration of the pressure as loan amounts declined, under this legal regime FRN deflation would never end. I don't think I really need to point out that this has hardly been the history of the Federal Reserve Note:

Value of an FRN measured in milligrams of gold, 1954 to 2003.  (Source: Wikipedia)


The fact is, there IS no "have to repay debts in FRNs" law. There IS a law declaring that the federal government has to accept FRNs in payment of all debts (not to the exclusion of all else, mind you, just that it has to take them if offered). But no law requires the use of FRNs for any purpose. Here's how the United States Treasury puts it:

The pertinent portion of law [making FRNs legal tender] is the Coinage Act of 1965, specifically Section 31 U.S.C. 5103, entitled "Legal tender," which states: "United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes, and dues."

This statute means that all United States money as identified above are a valid and legal offer of payment for debts when tendered to a creditor. There is, however, no Federal statute mandating that a private business, a person or an organization must accept currency or coins as for [sic]payment for goods and/or services. Private businesses are free to develop their own policies on whether or not to accept cash unless there is a State law which says otherwise. For example, a bus line may prohibit payment of fares in pennies or dollar bills. In addition, movie theaters, convenience stores and gas stations may refuse to accept large denomination currency (usually notes above $20) as a matter of policy.

(Although this language states the legal reality plainly, it takes a shot at being misleading, so read carefully. The Treasury coyly follows "There is, however, no Federal statute mandating that a private business, a person or an organization must accept currency or coins as for [sic] payment for goods and/or services," with references to "cash", plainly hoping that the reader will imagine that a distinction is simply being drawn between FRNs in certain forms-- be it size of notes or as represented by checks, or bookkeeping entries, or whatever. But this is not so.

All that is declared "legal tender" by 31 USC 5103 is "United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks)" and that's precisely what the Treasury is saying no non-governmental entity has to accept. And no surprise; after all, how could a federal statute lawfully command a private business, a person or an organization to accept any particular thing-- regardless of its form-- in exchange for valuable goods and services?)

There is also a federal statute withdrawing government consent to be held to a contract obliging it to pay out something OTHER than federal reserve notes against its debt.

But there isn't anything requiring anyone to use FRNs to repay bank loans or prohibiting banks from accepting anything they like in payment (and I'm betting your banker would LOVE to have you pay in gold, instead of FRNs), nor anything supporting the doomsday scenario of insufficient FRNs and debt slavery.

DON'T RELAX, HOWEVER. There IS another form of slavery, and it really IS a fact in the lives of too many Americans. That's tax slavery, whereby an alien entity (the state, which is alien from you) is made able to lay claim to a portion of your labor output as though it owns you to that extent (and it admits to no limit).

The real tragedy of this very real kind of slavery is that this happens not by despotic command, but only because you MAKE it happen to yourself, personally. I'm not talking about "making it happen by some political process." I'm talking about you personally (and unnecessarily) causing the income tax to be laid on your earnings when in many cases it doesn't apply to them...

Learn the liberating truth about the tax

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Peter Hendrickson

232 Oriole St.

Commerce Twp., MI  48382