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How the Credit System is Destroying America

By Dan Meador

Revision 1 (Dec. 7, 1999)

Introduction

Jim Prentice of Miami, Florida asked for clarification in response to a memorandum on banking, credit and money that I transmitted over Internet. His request relates to the definition of "credit" found in the Federal Consumer Credit Protection Act and corresponding state consumer acts. In approximate terms, both define "credit" as the grant of authority to defer payment of debt, or to incur debt then defer its payment.

This is what the banking system does: When a bank extends credit, it authorizes people not to pay debt. Instead of paying debt, the obligation is deferred by giving bank credit to whoever provides goods and services. Credit changes hands, not money.

While increasing numbers are beginning to understand that the scheme is detrimental, too few grasp how and why it is destroying America. Among the problems are technical language, obscuration of law, and a wonderful propaganda mill. Unfortunately, nobody has stated the case in a short composition most any literate person can easily understand. My response to Jim was more comprehensive than most, so it is being reproduced for general distribution. Jim's query follows this introduction, then my explanation follows his query. The response has been edited and slightly expanded.

 

Jim Prentice Query

Hi Dan.

I have had a somewhat difficult time explaining what is meant by the phrase "incur debt and defer its payment". I believe I understand it to mean that payment is made with debt which is passed along from one to another which appears to be payment but is in reality the passing of "IOU'S". A 'check' is a promise to pay, Federal Reserve Notes are for all practical purposes IOU'S and are not in fact payment. Unless "Payment" is tendered in legal money, gold or silver, payment is not made and that which has been purchased has not lawfully been paid for. Therefore, ownership is not free and clear, or allodial.

Please correct my understanding if I am wrong or off point. Possibly you can write a much clearer definition or explanation.

Thanks for your time and God bless.

 

Dan Meador Response

To understand the "defer payment" nonsense, suppose I am in the banking business. You open an account with me. You come in one day needing cash, and my cashier tells you, "We haven't printed our money yet, but we're specially marking bills out of a Monopoly game. I'll give you some of that stuff. Tell merchants you spend it with that we will give them credit when they bring it back to us."

Obviously, nothing is paid. The medium of exchange is scrip, or put another way, token money. It has no intrinsic or inherent value. Whoever agrees to accept it for goods and services agrees to take my "credit" in lieu of payment.

Next month you tell me you want to buy a house. You need to borrow a hundred thousand dollars. That's fine, I tell you, so I get you to sign a mortgage, using the house as security, then write out a check to you or whoever you make the purchase from. Probably I "credit" your account with whatever you want to borrow. To me, and you, the "credit" is simply ledger entries effected by writing the sum in the debit column of my accounts book, and a corresponding figure in the credit column of your account. You then write the check to the seller, thereby putting my "credit" into circulation.

What is the check? It is a "bill of credit." There is nothing of substance behind it other than the house. In other words, if the scheme works, you and the seller have invited me to "monetize" the house. The seller must then peddle my credit in order to make other purchases. The only thing of value other than the house is your sweat equity, the returns you receive from whatever service or product you provide in order to earn a living.

In order to implement this scheme, I bribe government officials to take all real money out of circulation so everyone is dependent on my token Monopoly money and ledger-book credit. Nobody ever really pays a debt because there is nothing to pay it with. I impose healthy charges for issuing credit (loan origination fees, account service fees, and interest), and the Monopoly money I circulate is purchased from profits from the credit scheme. The Monopoly money costs next to nothing because it has no stand-alone value. When the scheme finally collapses, you can use it to light your cigars.

There are two adverse general effects. First, we're dealing with arbitrary monetary value, so as I infuse the system with credit, denominated in Monopoly money amounts, the price of goods and services constantly inflates, thereby devaluing the purchasing power of existing checking accounts, savings accounts, whole life insurance polices, retirement funds, and labor. In other words, the purchasing power of your sweat equity and productive enterprise is debased.

This is a musical chairs game played out in real life. The reason is this: I don't lend credit necessary to pay interest. The system never has enough money for everyone to make essential purchases such as food, shelter and clothing, pay debt principal, and make interest payments. Those on the short end of the rope are forced into default by foreclosure, abandonment or bankruptcy liquidation. The farmer, small business owner, independent craftsman, independent merchant, and labor are all ravaged by the scheme. This has an unavoidable consolidation effect. As those on the short end of the rope are liquidated, the scavenger scoops up everything of value at bargain basement prices. This pressure is behind consolidation of major corporations over the last two decades. The big fish eat the little ones until there are no little ones left, then they eat each other. In the meantime, American production and working classes are being driven down the economic ladder to third world status.

In order to stave off domestic rebellion, the banking community cuts deals with elected and appointed public servants. First, we're going to give the system elasticity by making increasingly large loans in order to expand money supply (the Federal Reserve Note and electronic credits in transaction accounts), thereby slowing down the liquidation process. We have to do this to accommodate unavoidable inflation. Second, we will persuade our government shills to implement a social welfare program that provides a subsistence floor for those victimized by our fraudulent credit and monetary schemes. Government will tax the people to pay for the social welfare program. The greatest burden will be levied on middle income classes. Key players will be relatively unaffected by the tax scheme. We'll sell this plan based on the notion that "preservation of capital" is essential. Private borrowing will be supplemented by government borrowing, so government, which serves as the ultimate social welfare program, must continuously expand to compensate for the broadside of private enterprise.

Home mortgages presently secure approximately 70% of the nation's money supply. Precious few Americans have outright ownership of homes. Government borrowing has escalated sufficiently that interest on cumulative federal debt exceeds a quarter of a trillion dollars per year. If government legitimately balanced the budget, the American economy would collapse. The system is as dependent on constant infusion of hypothecated government credit as a heroine addict is on the opium poppy.

The credit-based system is like the wheel the hamster has in his cage. In this case, however, once someone gets started on it, he can't get off. A vast majority of the American people are in invisible credit cages, so most are running the banker's wheel.

We see the same kind of hocus-pocus in judgments against tobacco companies. Were they required to outright pay multi-billion dollar judgments? No, they are increasing the price of tobacco products so consumers pay the judgments out over time. Whether via increased government "sin" taxes or judgments against corporations considered "too big to fail," the consumer is being taxed. The first is a legislative excise tax; the second is a judicial excise tax. The multinational tobacco conglomerate continues business as usual. It hasn't been forced to empty its coffers or liquidate anything.

Banks constantly pass on "inflation" tax that undermines sovereignty and solvency of the nation. The effect of interest on real wealth is like a proverbial black hole. Nothing caught in its gravitational sphere of influence escapes.

The scheme is condemned by Article I, Section 10 of the U.S. Constitution. States of the Union cannot emit bills of credit or make anything but gold and silver coin a tender for payment of debt. Since they are prohibited from emitting bills of credit, it is obvious that they do not have lawful authority to endorse and enforce private bills of credit. But through a complex scheme known as Federalism, the Constitution is subverted and ignored.

Prior to convening the Constitutional Convention, American founders were confronted with the same thing we're dealing with today. Many of the newly independent American states were issuing bills of credit that they couldn't or wouldn't redeem. Speculators made out like bandits while common classes were reduced to pauper status. Trade was disrupted and base industries destabilized. This is the reason Article I, Sec. 10 of the Constitution includes prohibitions relating to credit and money. None of the prohibitions have been amended or repealed.

Accommodation of the mathematically impossible credit and money schemes is accomplished by what is described as color of law. It is appearance of law only. More to the point here, however, is that the schemes will result in economic shipwreck because they defy laws of physical economy that are as certain as the laws of physics.
 

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