A comprehensive explanation of how the current creation of money works how the Davis Plan would change it for the better.

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Thomas Hedin's picture
Thomas Hedin
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Joined: Jan 28 2009
Posts: 815
A comprehensive explanation of how the current creation of money works how the Davis Plan would change it for the better.

These is an attempt to answer the questions that ccpetersmd asked and darbikrash request for a flow chart showing exactly how the money functions now and how the Davis Money plan would function.  The questions were asked in this other thread.

 

To explain the creation of money, let’s go to The Story of Banks published by the Federal Reserve Bank of New York.

Where it states

The Story of Bank states clearly that the banker takes the borrower’s promise to pay and creates a new demand deposit.  (Checkbook dollars)

How does the bank create a new demand deposit?
                                                            
Russell L. Munk, Assistant General Counsel in the office of the General Counsel of the Department of the Treasury informed us in a personal letter to a friend that the bank creates a new demand deposit as follows “It simply makes book entries for its loan customers saying you have a deposit with us”.  In other words it simply adds numbers to a checking account.

How do you loan a promise to pay?
You simple add numbers to a checking account as a liability to your self and that is what the bankers do.

The banker takes the numbers that are written down on the borrowers promise to pay the bank (not including the interest). Let’s say $1000; the banker writes those numbers into the borrower’s Loan account as an asset to the bank and a liability to the borrowers. See first T chart:

Then the banker writes the numbers 1000 into the borrower’s checking account as a liability to the bank and as an asset to the borrower.   See second T chart:

When the borrower writes checks against these new numbers he moves the newly created money into circulation.
"The actual creation of money always involves the extension of credit by private commercial banks."  Russell L. Munk - Department of the Treasury

From the Congressional Research Service, The Library of Congress in Report No. 83-125 E Money and near-Monies: A Primer written by John B. Henderson, Senior Specialist in Price Economics we read “Money is created when loans are issued and debts incurred; money is extinguished when loans are repaid.”

As we have just seen “The process by which banks create money is so simple that the mind is repelled.” John Kenneth Galbraith

 
   “The study of money, above all other fields in economics, is the one in which complexity is used to disguise truth or to evade truth, not to reveal it.” John Kenneth Galbraith

Next is how simply the banks extinguish money.  This does NOT include any interest and does NOT deal with the interest issue at all.

If you have $1000 in your checking account and you write a check for $1000 to pay off your $1000 loan (not including interest) your check acct. balance will go to 0.  When the bank gets your check and applies the payment to your loan acct. your loan is paid off and your loan account goes to zero and the money created by that loan will have been extinguished.

The money is extinguished when principle of the loan was repaid.

There in several great flaws in having money created this way.  First, all banks charge interest on their loans.  Using this method for the creation of money there is only a procedure to create the principal of the loan.  As we have just seen there is no procedure to create the money needed to pay the interest charged on the loan.  So as soon as the interest is added to the loan the debt owed to the bank grows but the money supply does not grow. 

The only way the first borrower can pay his loan plus the interest on the loan is for someone else to borrow some more money from a bank.  John M. Yetter, Attorney advisor for the Department of the Treasury stated this very well when he said “the money that one borrower uses to pay interest on a loan has been created somewhere in the economy by another loan”.  This type of money system puts the people into perpetual slavery to the creators of the money.  This is why no economist will ever address the effects of interest on the economy.  The Economists job is the keep the people confused, not to enlighten the people to the truth.

We are now entering into an area that very few people understand.  We all understand that most people borrow so that they can spend the money.  Some people believe they only borrow to spend the money in ways that will generate more money.  Some people borrow for things like vacations and cars that they know will not generate any monetary income.  The truth is that either way the same thing must happen.  After they borrow then spend the money they most go forth and do something to capture back the money they spent plus some more to pay the loan plus the interest to the bank.  Either way the money they capture must come from someone else’s borrowed principal.   If one borrows to make widgets and sells enough widgets to capture the money to his borrowed principal plus the interest needed to service the loan plus enough to have a good profit it still has to come from someone else’s borrowed principal.

We all should understand that there are some people who have some money that have never borrowed any money themselves.  This only means that they have the money and no debt but that somewhere someone else has a debt and no money.  That is the reason that there are so many bankruptcies.   Under this type of money system the debt must constantly grow and each generation must get deeper into debt than the generation before it or the system must collapse.  This is an unsustainable money system.

To have the amount of commerce we have we must have a money system.  We need a sustainable, moral, freedom producing prosperity producing money system, not one based on slavery.

This is why we need what Leslie calls the Davis Money Plan or the Minnesota Transportation Act.  While it is not a complete monetary reform, it is the best place to start.

This background information was given to you to enable you to understand the concept of and the need for this plan.

The first point is that banks can and do create what we use for our medium of exchange.  This includes state chartered banks that are chartered and controlled by their state laws.  At this time they only create our medium of exchange as interest bearing debts to the people.  With a small change in the law or bank regulations and a few changes to accounting procedures these same banks could create our medium of exchange as final payment, based on the production of the people.

This concept is as simple as the creation of money itself.  The state chartered banks simply add numbers to a checking account just like they do now; only they enter these numbers into checking accounts as an asset to the people.  Not as a liability to the bank.  See the chart below.

The State's checking account goes to zero.

 

Yes this will increase the money supply but as some of the people pay down their debts this will decrease the money supply.  In the long run the money supply should stabilize because the debt will go out of the system but the wealth money will replace it.  We would still have the money but not the debt.

 

Thomas Hedin's picture
Thomas Hedin
Status: Platinum Member (Offline)
Joined: Jan 28 2009
Posts: 815
Re: A comprehensive explanation of how the current creation ...

If anyone would like to ask Byron Dale any questions directly there is a tele-conference happening at 1pm CST today.

Dial in Number 1-218-936-4700

Access Code  452413

DrKrbyLuv's picture
DrKrbyLuv
Status: Diamond Member (Offline)
Joined: Aug 10 2008
Posts: 1995
Re: A comprehensive explanation of how the current creation ...

Thanks for the tele-conference, I always learn a lot when I listen to you and Mr. Dale.  I hear and read so many negative things about the future and find it very refreshing to hear about practical solutions. 

Your above explanation of the mechanics of the Davis plan makes a lot of sense.  Thanks again!

Larry

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