As pointed out in the first essay of this series credit is the root cause of inflation; when anyone purchases goods on credit a demand for cash with which to repay the debt created. That means cash must be printed and put into circulation; when interest is figured in then more currency must be created. If this is true for individuals then it is disastrous when the US government borrows money at interest from the Federal Reserve. How much is this debt? Certainly many trillions of dollars, accumulated over the course of sixty years or more. The news is rife with reports of the soaring national debt and the burden it puts on tax payers. We are told that we can never repay all that money - and that is true, but it's not the last word.
There are two ways to satisfy a debt obligation; one is to pay the debt, the other to kill the creditor. Think of how many trillions of dollars would be written off if the US Congress abolished the Federal Reserve; something it has the constitutional power to do and to authorize the creation of debt-free currency. It is their mandate under the constitution to "print and coin money and to determine the value thereof." There is a growing movement to do just that - the people demand it and it will be done. But that is only part of the story. We must also deprive banks of the power to create money out of thin air.
When a bank makes a loan it creates money from nothing and counts it as an asset. If the money is deposited in another bank, that bank also counts the money as as asset. The same would be true for a third, fourth,or any additional banks. All the banks participating in this daisy chain of money creation are free to write loans based on these phony assets after deducting the three percent reserve requirement. And it all revolves around the fraudulent accounting methods the banks employ.
The old axiom states: You can't have your cake and eat it too. Well, that's what banks are getting away with - and it must be corrected. Here's how.
A bank is a business like any other. Let's say you're in the household appliance business; you build refrigerators. In any given month you will build 1,000 units and will need a motor for each one. The motors are $300.00 each, so you will pay $300,000 for them. At this point you have the motors but not the capital; make sense? But if you did business the way banks do you would have the money and the motors. Something is wrong with this picture.
In accounting Assets and Expenses increase by debiting; all other accounts increase by credit entries. Cash is an asset, therefore it would be credited by the purchase of the motors.The motors are a cost of doing business and therefore must be counted as an expense. But the motors are also and asset and must be counted as such. That would balance out the assets, but here wold be an expense debit hanging out in space that would have to be reconciled. This is done my crediting a Revenue account by the amount of the motor cost plus the share of the selling price represented by these components. This markup could then be entered as an Accounts Receivable entry. Let's say that the markup for the finished product is 20% and base our calculations on that. It would look like this;
Cash
Debit............. Credit
.................... $300,000
Inventory Expense
Debit............. Credit
$300,000
Revenues
Debit............. Credit
.................. $360,000
Accounts Receivable
Debit.............. Credit
$60,000
Explanation: Your Assets have diminished by $240,000; the $300,000 you spent minus the $60,000 in Accounts Receivable. The capital outlay is balanced by the Expense entry and the Revenues account is balanced by the Accounts Receivable entry. We must bear in mind that this transaction pertains to only one component of the refrigerator and the similar entries would be made for all components, either in detail or collectively.
The banking model would work exactly the same way. The motor in the above model would be the loan instrument or contract held by the bank. The same numbers are use for convenience. The loan instrument is expensed as it is a cost of doing business. Like the motor in the first example, the bank acquires it in exchange for the money loaned and it is an expense item in the very same way.
Cash
Debit............. Credit
.................... $300,000
Loan Expense
Debit............. Credit
$300,000
Revenues
Debit............. Credit
.................. $360,000
Accounts Receivable
Debit.............. Credit
$60,000
This accounting method doesn't prevent a bank from creating money but will halt the multiplication of these funds when deposited in other banks. Comparing the two models gives this relationship;
Refrigerator Manufacture.........................Bank
Motor.......................................................Loan Contract
Markup....................................................Interest
Offsetting the Loan Expense by an entry in the Revenues account is sound accounting practice as revenues are not receipts, but only the anticipation of receipts. When a payment is received the Expense Account is credited (reduced) and the Revenue Account is debited (reduced): both accounts reduced as their balances are lower. In the Assets group Cash would be debited(increased) by the full amount received and Accounts Receivable would be credited (reduced) by the amount of markup or interest. The imbalance as the result of surplus Cash would be offset by crediting a Capital account in Owner's Equity. The books would be out of balance as all accounting procedures are during accounting periods. Balance is restored at the end of the period when the Profit and Loss Statement is produced and the Owner's Equity accounts are adjusted.
It's a start.
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