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- most people think of it as CASH, either in their pockets or stored in their bank accounts
- but how does money get into the bank and how do we pay for things?
- cheques are by far the principal means of exchange in business (over 90% of transactions)
- debit & credit cards are now more popular than cash with consumers
- so aren't cheques and debit cards money? - both access the money in your bank
- and about that money in the bank... the banks don't have nearly enough cash for everyone to withdraw all of their money at once (only less than .25 of 1% is readily available)

So what is money really?

- simply put, money is merely a container for the right to demand or acquire goods and services in the marketplace
- bankers call it a CREDIT when you deposit money into your bank... the bank "credits" your account with the amount you deposit
- cash is really just a container that holds a fixed measure of credit
- a dollar measures a fixed amount of credit just like a measuring cup holds a fixed amount of liquid
- a cheque or debit card transaction is just another type of credit container for a specific amount of dollars
- both are used to alter the total amount of credit held in your account
- the form of payment is not important, but whether or not you have sufficient credit is
- the term credit, however, has been misused so much that it is often confused with DEBT
- your "credit card" and your "credit rating" all refer to debt & borrowing money
- debt is an obligation to supply goods & services or to repay a credit previously loaned to you
- debt is what you use when you run out of your own previously earned credits (so you borrow someone else's)
- money is really just a system of credits that gives you the right to demand goods and services
- they may be earned credits or borrowed credits and the form or container they occupy may vary


- remember now, when we ask where does money come from, we are not just talking about cash, but about all credit... as we have seen, cash is a tiny part of the total credit that keeps the economy running
- if you walk into a bank to borrow $100K for a house and a mortgage is approved, $100,000 is deposited into your account... but where does it come from?
- does someone else's savings account go down by $100K because the bank just gave you their money?
- is $100 removed from the savings accounts of 1,000 other customers?... of course not!
- the bank still has an obligation to make all of its customers savings available but, in addition, you now have $100K to spend
- the bank does not make up a withdrawal slip from one or more accounts to balance the deposit slip to your account... it simply creates a NEW CREDIT of $100K and records it as a deposit to your account
- a new right to demand $100K worth of goods & services is created the moment the loan is approved
- the bank must ensure that it always has enough cash-on-hand to pay out whatever cash is demanded by its customers, but the rest of a bank's financial transactions are merely journal entries or the magic of bookkeeping
- this is one of the main reasons why banks are so eager to make cash disappear altogether... in a cashless society they could never get caught short of cash and they would never run out of electronic digits to transfer
- their confidence game would be infallible and their credit creation power could grow to infinity


- bankers aren't the only ones playing this game
- large corporations, insurance companies and pension & mutual funds are all doing the same sort of thing, with an even more sinister twist
- when a corporation issues stocks and bonds, a new credit equal to the face value of the issue is created
- investors transfer their existing credits to the corporation when they purchase the offering, believing that it will grow in value over time... the corporation acquires buying power equal to the total value of the issue
- the paper certificates the investors receive are a "marketable security" and can be used as collateral for loans... so the investors buying power remains intact
- the total right to demand goods & services in the marketplace increases by the face value amount of the issue
- the sinister twist, however, is that unlike savings deposits in a bank, there is no guarantee from the corporation that the issue will retain its value... if the corporation goes broke, their stocks & bonds become worthless
- it is sinister because so many people who are counting on the value of their pension & mutual funds to be there when they retire have no idea just how vulnerable to loss they really are
- the main players in the credit creation game are the private banks (all of them private corporations themselves) corporations who issue stocks & bonds or who issue credit cards, insurance companies, pension & mutual funds and the federal government through the Bank of Canada (provincial & municipal governments raise funds through private brokers)
- the BoC, however, is a very small player, holding only about $34B of the $5,604B in financial assets
- if the BoC went broke $5,570B of the credit supply, or 99.4%, would remain intact


- whoever gets to issue a new credit gets to enjoy the spread between the cost of producing the credit and the value it can generate in the marketplace
- in the case of a new loan where no one else's money is being used, the value of the spread is nearly the full value of the interest that the new borrower pays (less a small administration cost)
- in the case of a new loan where someone else's money is being used, the value of the spread is the difference between the interest charged to the new borrower and the interest paid to the owner of the money (less a small administration cost)
- in the case of a new share offering, the value of the spread is nearly the full face value of the issue (less a small brokerage fee)

- our federal government borrows only about 5% of its debt from its own bank, the Bank of Canada
- it pays about $44B in interest annually to borrow the other 95% from the marketplace
- the provinces & municipalities pay another $32B annually in credit costs
- $76B of taxpayers money could be saved every year if the federal government would simply use its own bank to finance the credit requirements of our democratically elected governments
- if the BoC supplied the entire credit needs of the nation, government revenues would increase by $319B
- the total amount spent (excluding interest) by all levels of government in Canada is only $272B
- all taxation could be eliminated and the government would still have a $47B surplus
- imagine being able to keep all of the money you earn, without income taxes or PST/GST

For those who may be interested, here (in.pdf format) is the supporting statistical data for the facts and figures presented at the workshop:

ABM stats
Annual flows (Automated Clearing & Settlements System)
Percentage of transactions originating as paper vs electronic
Significance of cash transactions in the economy
Bank of Canada historical data

notes created by Don Findlay for a C.O.M.E.R. workshop held in Kingston, ON