Is debt the new slavery?

Let’s imagine for a moment that you want to buy a family home. Average price in Canada today: $300,000. You go to a friend and ask them if you can borrow the money, but your friend doesn’t have the $300K—not even close. Despite the fact that they don’t have the money, your friend pulls out some official-looking forms and tells you to sign here, here and here. They tell you that your signatures on their special form have now created $300K in brand new money, and that you can take your special paper to the seller’s bank and buy your new family home with it. Next thing you know you’re moving-in, only to spend the next 25 years working real hours at real jobs producing real money to pay back your friend’s imaginary $300K—as well as an equal or greater amount in interest.

Though many people I explain this to still find it incredible or bizarre, the scenario described above is the exact agreement virtually every citizen in every part of the developed world submits to whenever they take out a loan with a recognized financial institution today. It’s an agreement based on a system called ‘fractional reserve lending’ that has guided bankers ever since the Church finally agreed to let them charge interest and make a profit (close to 500 years ago).

If you ask a central bank what fractional reserve lending is, chances are that it will tell you that it’s, well, banking. The following gem of circular reasoning comes courtesy of the U.S. Federal Reserve’s educational tool entitled The Fed Today:

“The fact that banks are required to keep on hand only a fraction of the funds deposited with them is a function of the banking business.”

Very helpful, isn’t it. In the faux-conspiratorial recesses of my mind I imagine shirt-sleeved central bankers besotted with caffeine in some darkened corner office, pacing with anguish and zeal until finally they get that line just perfectly, perfectly meaningless. Banking is great for this sort of stuff, and anyone who embarks on the long road to understanding how it works will likely be amazed at how it manages to have a need for several kinds of reserves, several kinds of money, several kinds of banks, several kinds of everything really as well as an entire lexicon of proprietary terms to describe them.

Though ‘fractional reserve lending’ sounds similarly daunting, it simply means that, depending on how much a bank is wanting to lend, it only needs a very small fraction of that amount actually in reserve as available cash for its depositors. Most countries have regulated and enforced ‘reserve ratios’ but maximum reserve ratios only hover around the 20% range and go all the way down to countries like Canada where there’s actually no legislated limit to how leveraged a bank can become (0% reserve ratio).

In the U.S. it’s supposed to be the law that larger banks maintain a 10% reserve at all times, but, as the sub-prime fiasco and a recent NY Times piece have done a good job to lay bare, there are currently examples to our south such as the formerly public mortgage companies called Fannie May and Freddie Mac (originally created as government sponsored enterprises that guaranteed mortgages for lenders, now simply private banks masquerading as public institutions) that are underpinning a whopping $5 trillion dollars of debt with merely $83 billion in reserves. This amounts to a fractional reserve ratio of just 1.6%, meaning that they have 60 times as much money lent out as they actually control. 

On the face of it this type of activity seems like some ponzi scheme gone bad or the worst sort of uneven playing field. I, for one, would love to be able to make my living by pulling money out of a hat and lending it at interest. The optics of the matter isn’t helped by bankers themselves, who seem to go out of their way to keep the truth of fractional reserve lending obscure and unspoken, preferring the public to plod along beholden to long-standing misconceptions about massively secure vaults full of cash and bullion reserves…

Great for the movies, that sort of thing, but the truth of it, if you’re one of those dinosaurs in a neck-tie who still hasn’t embraced sustainability as a guiding principle for all large-scale human endeavour (another topic, for another essay), is that any growing economy demands an almost constant creation of new money so that the viral growth of ‘healthy’ capitalist commerce can continue unabated.

Banks over the centuries have thus become the custodians of world currency, creating new money through loans at the commercial bank level or in mints at the central bank level. This has vast political and economic repercussions, especially when governments fail to regulate and enforce the ratios that proscribe the difference between what a bank lends or creates and the actual amount of real money it has to back-up those loans or its deposits. One quote that circulates a lot on conspiracy sites is attributed to Mayer Amschel Rothschild, who bailed out princes and kings. He’s purported to have said:

“Give me control of a nation’s money supply and I care not who makes its laws”

Trying to find a verifiable source for that quote is unfortunately almost as difficult as understanding the banking system. One quote that is pertinent and attributable in this sense can be traced back to Woodrow Wilson, who while president fought against the establishment of the U.S. Federal Reserve by private banking interests in his time. Wilson said in his book The New Freedom:

“A great industrial nation is controlled by its system of credit. Our system of credit is privately concentrated. The growth of the nation, therefore, and all our activities are in the hands of a few men who, even if their action be honest and intended for the public interest, are necessarily concentrated upon the great undertakings in which their own money is involved and who necessarily, by very reason of their own limitations, chill and check and destroy genuine economic freedom.”

In other words people with money and power tend to exercise that power, and because power naturally tends to concentrate itself in fewer and fewer agents our elected systems of governance become less than accurate reflections of how things are actually working. This is a very dense subject, as noted purposefully obscured and avoided by central banks and requiring much longer than we have here to analyze and substantiate. What does interest me is the fact that banks undeniably rely on debt to create profit, and how even when our societies go through periods of what economists and ministers term economic ‘prosperity’, the levels of indebtedness marketed to and consumed by the nation’s citizenry continue to rise unabated.

This tells me that debt and borrowing have become something much more than mere economic necessity and a method for banks to create profit. What this more clearly indicates is that debt in our time reflects the same unavoidability and helplessness that we would associate with serfdom or slavery—certainly not any kind of freedom that we should be fighting wars to help others enjoy.

Canadian banks alone spend billions in aggregate funds each year creating and very aggressively marketing new debt products to ordinary citizens. Therefore on the one hand we have the most financially powerful groups in the nation creating and cultivating debt, while on the other we have economists and public officials telling us that a financially healthy nation or healthy household is one that has as little debt as possible. This is perhaps the most glaring and important disconnect between economic policy and economic practice affecting each and every one of us on a day-to-day basis, and yet no public leader has the courage to stand up to confront it and even the un-elected pundits blithely ignore it for fear of their own marginalization.

It’s telling that today economists can also legitimately refer to something called the ‘real’ economy. You may have noticed over recent months experts of one stripe or another talking about how the meltdown in the U.S. economy “still hasn’t quite worked its way down to Main Street—into the real economy”. The real economy being referred to here is the one where you and I are working for a living creating those real products and real services from real raw materials for real consumers.

Tacit in the acknowledgement of this as the ‘real’ economy is the understanding that there is also a parallel economy of ‘unreal’ wealth, wealth supposedly derived from obscure financial products and mathematical techniques that take advantage of the sheer scale of the financial markets in order to siphon away profit. Most banks would have you think that this unreal economy is centred around newer and shadier financial products and techniques—such as ever-oblique ‘derivatives’ of one stripe or another or the now ubiquitous and parasitic hedge funds.

The truth of the unreal economy is that it is much more involved with those day-to-day loans and credit products that average people are now fully subservient to. When the reserve ratios we discussed above are not seriously regulated or enforced, when our central and commercial banks stop being the responsible custodians of our money supply that they claim to be and start looking a lot more like sideshow hucksters pulling stacks of bills out of magic hats, our entire economy reveals itself as something much more unreal and even frightening.

When it becomes inarguable that these same banks are beholden to systems and policies that require us all to be in as much debt as possible for as long as we live, we must collectively admit and confront the fact that something has gone terribly wrong with the social contracts that determine the scope and substance of our existence.

We are pathetic as a race when we allow ourselves to become toiling and unquestioning automatons. Our only true courage and nobility is that which we muster in the face of those who would presume to impede on our freedom and our dignity. Justice is supposed to be concerned with protecting that dignity and those freedoms, but it has failed us in our time and the failure rests with our elected leaders first, but with all of us second.

No matter how much they might tell us that our current system is necessary and good, when its unavoidable result is that billions are toiling each and every day to service debts we must begin to question with more vigour and specificity who we are actually working for and why. The asking of this question and the discovery of its answer form the basic equation of human freedom, and no amount of available consumer goods or entertainments should divert our attention away from it.

In the words of Disraeli: “Justice, is truth in action”. The time for both in the practice of money lending is long overdue.