A Letter to My Collection Agency

On how banks don't really loan anything

Below is a real letter a friend of mine wrote and mailed back in his irresponsible youth. Let me explain:

While attending university in Vancouver in the 90’s, he was jumped in broad daylight while innocently strolling down the university concourse by two nefarious individuals in suits. They shoved a credit card into his poverty stricken hands, rubbing their sweaty palms together in glee at the 19.9% compounding interest that would soon be coming their way. His eyes widened when he saw the $3,000 credit limit — an ungodly sum for him in those days when he largely subsisted off the $1 samosa shops that littered the downtown streets. At term end, he wasted no time in booking a cross-Canada rail trip with his girlfriend, a Newfie, to travel to her homeland. He distinctly remembers the day the music died: when his credit card was denied while trying to buy a souvenir Newfoundland sticker. At least he made it all the way across.

Of course he had no money to pay the debt his cross-Canada joyride had racked up. Plus, he felt the bank should be punished for the idiocy of giving a credit card to a 20 nothing student deadbeat. His file was eventually referred to a collection agency. Below is his response to one of their many letters (yes, that’s actually the supposed name of their lawyer). When their letters didn’t work, he started getting threatening phone calls from an aggressive sounding man with an Italian accent (I wonder if they recruit Italians on purpose, or simply give them lessons in sounding like mobsters). He simply hung up on him. Fortunately, he never came to break his kneecaps. I’m sure his file was written off as a business expense.

Dear R. Max Gold, LLB,

Thank you for your recent letter informing me of my outstanding debt to NCO Financial Services Inc. (formerly Financial Collection Agencies), authorized agents for Citibank MasterCard. I really do appreciate the diligence you have shown in reminding me of the money I owe. Without the industriousness of yourself and your colleagues, I should surely have forgotten all about my obligation by now.

Your conscientiousness stands in stark contrast to the state of neglect in which I have left our correspondence. By way of reparations, let me humbly offer an explanation for the tardiness of my payments. Simply put: I never borrowed any money.

Being a lawyer, Mr. Gold, you may not be as familiar as your client no doubt is about how money is created in our society. To best explain this process, permit me to back up a few hundred years.

The practice we now call banking started in several different places and times. But for illustrative purposes let’s take the case of the English goldsmiths of the 16^th and 17^th centuries. In those days gold coins were one of the main forms of money. When people accumulated many coins they would often deposit them with the local goldsmith, who tended to have a secure vault. In exchange for their coins, the goldsmith would issue them a paper receipt showing how much had been deposited. People soon found that, instead of withdrawing their gold to make a purchase, it made a lot more sense to simply sign over an equivalent amount of these receipts to the seller. Once the goldsmiths caught on, they facilitated this by not making their receipts out to any one person, but simply to the bearer. Whoever held the receipt was entitled to the gold. The Bank of England later refined this further by issuing notes in standard denominations, each worth a specific value in gold. And so paper money was born.

At first, depositors only wanted their coins back when presenting their receipts. This was because coins were often tampered with by shaving or “sweating” small portions of the gold off, or recasting them with less precious metals. But when Sir Isaac Newton was put in charge of the Royal Mint, he developed a coin that rang at a certain pitch when struck. Adulterated coins would quite literally not ring true. With the value of all coins now assured, goldsmiths could lump all their deposits together into a common sum.

Seeing this vast pool of gold all in one place got some of the more enterprising goldsmiths thinking: most of the time, their vaults were full of gold. Sure, in theory all their depositors could simultaneously demand their gold back and empty out their vaults. But barring a wide-scale panic, it wasn’t too likely.

Sensing a business opportunity, the goldsmiths began loaning out, at interest, some of this surplus gold sitting idle in their vaults. Of course, instead of loaning the actual gold, it was much more convenient to simply loan out more of those handy paper receipts.

In so doing, the goldsmiths crossed a crucial line – they issued more receipts for gold than they had gold in their vaults. With each new loan they made, they increased the amount of these paper receipts circulating in the economy, thus creating more money.

No one went without so that others could be loaned this money; no depositor’s receipts were taken away and given to a debtor. Completely new receipts were printed, in addition to the old ones, with both old and new promising to pay the same gold to the bearer on demand. It was, in essence, a vast game of musical chairs. The only thing holding the goldsmiths back from issuing unlimited amounts of paper money was the fear that there might be a run on their bank, and they’d have to redeem all those receipts at the same time and go bankrupt (from the Italian “banca rotta” or “broken bench” – which is what was done to the benches moneylenders did their business on when they went, well, broke).

Except for a hundred-odd year interval during the 19^th and early 20^th centuries when the world towed the British Empire’s line and adhered to the gold standard – which enforced a one-to-one ratio of gold to money (not a good thing, by the way) – we’ve pretty much stuck to this same system of money creation through debt. The old goldsmith’s fear of a run on his bank has been replaced with government-regulated “fractional reserves”, but these only require banks to possess a small fraction in assets of the total amount of money they loan out.

So just like back in Elizabethan England, when I “borrow” money from a bank these days, that bank conjures new money out of thin air and makes the numbers appear in my account as electronic impulses.

Since this money was not previously owned by anyone, including the bank, it cannot be considered as “borrowed”. It simply appeared, like some immaculate conception, in my bank account. If this money has a creator it is surely I, and not the bank, since it was by my will that this money came into existence. The bank was merely my instrument.

I’m sure you’ll now agree with me that I should be under no obligation to hand over my money to a financial institution in repayment of a loan that – when viewed properly – never even existed. Rather, in light of these revelations, may I respectfully suggest that you should in fact thank me for my noble display of generosity in assuming the awful burden of money creation through debt and spreading the resultant wealth far and wide.

Yours,

Yan O’Donnell

I don’t think R. Max Gold ever replied. I imagine the response of most bankers to this accusation would be silence, too. It’s best this sort of thing is not talked about too widely, lest people start resenting bankers even more than they currently do.

There was a lively debate amongst economists about whether banks really create money or not. Different theories were bandied about, until one economist, by the name of Richard A. Werner, actually decided to run an empirical test. He found a cooperative bank, took out a loan, and traced through their paperwork what happened next. What he found supported my friend Yan’s thesis above: that individual banks really do create money out of thin air every time they make a loan.

This should be common knowledge, but it seems to be not widely known. I wonder why?

Money is the air we all must breath in order to participate in the economy. Few of us can survive long without it. I expect future generations will look back at us and wonder why we paid private businesses a fee called “interest” for the right to breath.

Our current monetary system is the result of haphazard cultural evolution and selfish incentives. Money is just an idea, and we can design any system we think will work better. Werner’s vision for what a better monetary system could look like is worth quoting at length:

Among the many different monetary system designs tried over the past 5000 years, very few have met the requirement for a fair, effective, accountable, stable, sustainable and democratic creation and allocation of money. The view of the author, based on more than twenty-three years of research on this topic, is that it is the safest bet to ensure that the awesome power to create money is returned directly to those to whom it belongs: ordinary people, not technocrats. This can be ensured by the introduction of a network of small, not-for-profit local banks across the nation. Most countries do not currently possess such a system. However, it is at the heart of the successful German economic performance in the past 200 years…In addition, one can complement such local public bank money with money issued by local authorities that is accepted to pay local taxes, namely a local public money that has not come about by creating debt, but that is created for services rendered to local authorities or the community. Both forms of local money creation together would create a decentralised and more accountable monetary system that should perform better (based on the empirical evidence from Germany) than the unholy alliance of central banks and big banks, which have done much to create unsustainable asset bubbles and banking crises.

I now have a massive mortgage for my farm. I’ll be paying hundreds of thousands of dollars in interest over the next 25 years. Fortunately, we were able to get a loan from Desjardins, North America’s largest federation of credit unions. Instead of my interest going to enrich wealthy investors, my money will be paid out in dividends to everyone who banks at Desjardins, and be donated to community groups. Desjardins is also the only Canadian bank not invested in fossil fuels. The future is here now, you just have to look a little harder to find it.