‘Money as Debt is a 2006 animated documentary film by Canadian filmmaker Paul Grignon about the monetary systems practised through modern banking. The film presents Grignon’s view of the process of money creation by banks and its historical background, and warns of his belief in its subsequent unsustainability’. Following is the full transcript of the video.
Listen to the MP3 Audio here: Money As Debt – Full Length Documentary
“Some of the biggest men in the United States, in the field of commerce and manufacture, are afraid of something. They know that there is a power somewhere so organized, so interlocked, so complete, so pervasive, that they had better not speak above their breath when they speak in condemnation of it.” – Woodrow Wilson, former President of the United States
“Each and every time a bank makes a loan, new bank credit is created – new deposits – brand new money.” – Graham F. Towers, Governor, Bank of Canada, 1934-54
“The process by which banks create money is so simple that the mind is repelled” – John Kenneth Galbraith, Economist
“Permit me to issue and control the money of a nation, and I care not who makes its laws.” – Mayer Anselm Rothschild, Banker
‘Money as Debt’
Two great mysteries dominate our lives: love and money. What is love is a question that has been endlessly explored in stories, songs, books, movies and television. But the same cannot be said about the question: What is money?
It’s not surprising that monetary theory hasn’t inspired any blockbuster movies, but it was not even mentioned at the schools most of us have attended. For most of us, the question: “Where does money come from?” brings to mind a picture of the mint printing bills and stamping coins. Money, most of us believe, is created by the government. It ‘s true, but only to a point.
Those metal and paper symbols of value we usually think of as money are indeed produced by an agency of the federal government called the Mint. But the vast majority of money is not created by the Mint. It is created in huge amounts every day by private corporations known as banks.
Most of us believe that banks lend out money that has been entrusted to them by depositors. Easy to picture. But not the truth. In fact, banks create the money they loan, not from the bank’s own earnings, not from money deposited, but directly from the borrower’s promise to repay. The borrower’s signature on the loan papers is an obligation to pay the bank the amount of the loan plus interest, or, lose the house, the car, whatever asset was pledged as collateral. That’s a big commitment from the borrower.
What does that same signature require of the bank? The bank gets to conjure into existence the amount of the loan and just write it into the borrower’s account. Sound far-fetched? Surely that can’t be true. But it is.
The Goldsmith’s Tale
To demonstrate how this miracle of modern banking came about, consider this simple story: The Goldsmith’s Tale
Once upon various times, pretty much anything was used as money. It just had to be portable and enough people had to have faith that it could later be exchanged for things of real value like food, clothing and shelter. Shells, cocoa beans, pretty stones, even feathers have been used as money. Gold and silver were attractive, soft and easy to work with. So some cultures became expert with these metals. Goldsmiths made trade much easier by casting coins, standardized units of these metals whose weight and purity was certified.
To protect his gold, the goldsmith needed a vault. And soon his fellow townsmen were knocking on his door wanting to rent space to safeguard their own coins and valuables. Before long, the goldsmith was renting every shelf in the vault and earning a small income from his vault rental business.
Years went by and the goldsmith made an astute observation: Depositors rarely came in to remove their actual, physical gold, and they never all came in at once. That was because the claim checks the goldsmith had written as receipts for the gold, were being traded in the marketplace as if they were the gold itself. This paper money was far more convenient than heavy coins, and amounts could simply be written, instead of laboriously counted one by one for each transaction.
Meanwhile, the goldsmith had another business. He lent out his gold charging interest. Well, as convenient claim check money came into acceptance, borrowers began asking for their loans in the form of these claim checks instead of the actual metal.
As industry expanded more and more people asked the goldsmith for loans. This gave the goldsmith an even better idea. He knew that very few of his depositors ever removed their actual gold. So, the goldsmith figured he could easily get away with lending out claim checks against his depositors’ gold, in addition to his own. As long as the loans were repaid, his depositors would be none the wiser, and no worse off. And the goldsmith, now more banker than artisan, would make a far greater profit than he could by lending only his own gold.
For years the goldsmith secretly enjoyed a good income from the interest earned on everybody else’s deposits. Now a prominent lender, he grew steadily richer than his fellow townsmen and he flaunted it. Suspicions grew that he was spending his depositors’ money. His depositors got together and threatened withdrawal of their gold if the goldsmith didn’t come clean about his newfound wealth.
Contrary to what one might expect, this did not turn out to be a disaster for the goldsmith. Despite the duplicity inherent in his scheme, his idea did work. The depositors had not lost anything. Their gold was all safe in the goldsmith’s vault.
Rather than taking back their gold, the depositors demanded that the goldsmith, now their banker, cut them in by paying them a share of the interest. And that was the beginning of banking. The banker paid a low interest rate on deposits of other people’s money that he then loaned out at a higher interest. The difference covered the bank’s cost of operation and its profit. The logic of this system was simple. And it seemed like a reasonable way to satisfy the demand for credit.
However this is not the way banking works today. Our goldsmith banker was not content with the income remaining after sharing the interest earnings with his depositors. And the demand for credit was growing fast, as Europeans spread out across the world. But his loans were limited by the amount of gold his depositors had in his vault. That’s when he got an even bolder idea.
Since no one but himself knew what was actually in his vaults, he could lend out claim checks on gold that wasn’t even there. As long as all the claim check holders didn’t come to the vault at the same time and demand real gold, how would anyone find out? This new scheme worked very well, and the banker became enormously wealthy on the interest paid on gold that did not exist.
The idea that the banker would just create money out of nothing was too outrageous to believe, so, for a long time, the thought did not occur to people. But the power to just invent money went to the banker’s head as you can well imagine. In time, the magnitude of the banker’s loans and his ostentatious wealth did trigger suspicions once again.
Some borrowers started to demand real gold instead of paper representations. Rumors spread. Suddenly, several wealthy depositors showed up to remove their gold. The game was up. A sea of claim check holders flooded the street outside the closed doors of the bank. Alas, the banker did not have enough gold and silver to redeem all the paper he had put into their hands. This is called a ‘run on the bank’ and is what every banker dreads.
This phenomenon of a ‘run on the bank’ ruined individual banks and, not surprisingly, damaged public confidence in all bankers. It would have been straightforward to outlaw the practice of creating money from nothing. But the large volumes of credit the bankers were offering had become essential to the success of European commercial expansion.