Money is Not Wealth

by R. Nelson Nash

There is a great video named Banking with Life, produced by James Neathery of Alvarado, TX.  It’s less than sixty minutes long and features a dozen or more personalities who are economists or financial people, including yours truly.

Early in the video is Dr. Paul Cleveland, an economist at Birmingham Southern University.  Paul explains that money is not wealth.  Wealth is goods and services.  Money is the medium of exchange whereby we acquire wealth.

You sell someone something or provide valuable services to someone and you are given a token of agreed upon value that we call money. Its the way we keep score of our exchange of goods and services.  Therefore, we can accurately refer to this as “real money.”  The money is a symbol of something you did.

Unfortunately, there is something else circulating in our economy that looks like the same thing — but it is not.  We might accurately refer to it as “funny money”— a product of the fractional reserve banking system.

Jesus Huerta deSoto describes this fact very succinctly on page 118 of his book, Money, Bank Credit, and Economic Cycles.  …. that the nationalization of money and the central bank’s regulation of the banking system and its laws governing it have been incapable of maintaining a stable financial system that avoids economic cycles and averts bank crises.  Thus, we may conclude that the fractional banking system has failed as well, even though it is backed by a central bank.

Perhaps a simpler explanation is the fact that the fractional reserve banking system is all a lie and the whole scheme is backed up by an even bigger lie — the central bank.  It is amazing that this sort of stuff has been going on for a long time.

Maybe this example will help people see the light.  Let’s say that you are Mr. Smith and you have come upon a business idea that will highly benefit mankind.  It is going to require an initial investment of $50.000.00 to get started on this project — but you don’t have $50,000.00 lying around your office in a desk drawer.

You decide to go to a local commercial bank and get a loan.  If you don’t already have an account there, then you will have to open one with them. You have to deposit some “real” money into the account.  You describe your project to one of their loan officers who finally responds, “Yes, Mr. Smith, we will lend you $50,000.00 for this proposed project of yours.  It sounds pretty exciting — but we will require that you put up collateral of $50,000.00 to secure this loan.

(That collateral you assign to the bank is “real wealth” —something for which you have previously provided goods and/or services). You and the loan officer agree on what is appropriate collateral.

Pay close attention to what happens next (don’t let this “go over your head”).  The loan officer secures your signature on a document that assigns your collateral (real money) to the bank.  He also has you sign another document that authorizes him to credit your account with the bank with $50,000.00 (funny money).

He did not loan you $50,000.00.  He simply entered digits into your account as if he lent you that money.  It’s called bank credit.  A more accurate description is “thin air.”  You have assigned collateral (real money) in exchange for bank credit (thin air).  Do you understand?

And then the loan officer tells you that you must repay the loan — “let’s say we amortize this loan over ten years — maybe like $5,000.00 per year plus interest on the unpaid balance.” (You are paying “real money” back for a loan of money that never existed.)  Got that?

So, how does one explain how this phenomenon has been going on for many, many years?   How could this possibly happen?  Do you expect the banking community to tell these facts?  If any other business did this sort of thing the perpetrators would be jailed!

Surely this activity can be described as a “hostile financial environment.”

You can secede from this situation by studying the Infinite Banking Concept —  and adopting its teachings.  A follow-up article explaining the fundamentals will be forthcoming.