The author has structured the book into six sections that traces the evolution from gold to the Federal Reserve Notes. In the process, this shows how money and debt have evolved together based on the creation of money with privatised debt. That web of debt has now captured all of the major nations.
Fractional Reserve Banking
The creation of debt is traced to 1694 with the creation of the fractional reserve banking system, where banks lend more money than they actually have in deposits. This was achieved by banks observing that many customers put money into the bank but at any one time only about 10% of money was withdrawn. Consequently, they could lend the other 90% and make more money. Originally banks issued money based on a gold reserve but later it became simply a promise to pay. More importantly, the author shows that creation of money was by privatised banks - including the Federal Reserve Bank, which is not federal and has no reserves.
Free Market
The free market is a myth because some banks are considered too big to fail [JP Morgan Chase, Citigroup...] and under the guise of maintaining "investor confidence" the Plunge Protection Team and the Counterparty Risk Management Policy Group are involved in market manipulation. In addition the author makes a case that the use of "short sales" and currency speculation are tools that large players use to force prices lower and then to buy assets more cheaply. The case is based on myths surrounding the Weimar republic and its hyperinflation along with the Asian crisis but especially how Malaysia avoided the worst problems.
Business Cycle
The business cycle is described as a direct result of bank lending increasing the money supply, expansion, or decreasing money supply, contraction. Bank lending itself is shown as simply making money out of thin air by entries simply being made in the asset and liabilities of a bank. However, because the bank wants to get interest back as well as the original loan there is an "impossible contract" that in total can only be repaid by getting another loan. In addition, banks saw the opportunity to speculate on these loans by securitizing the debt and selling it on, creating a massive derivative market. This Ponzi like scheme continues until it is no longer sustainable and like a Ponzi scheme it will eventually simply collapse.
A Workable Alternative
Having explored in detail many aspects of the financial system the author then goes on to show a workable alternative based on:
- Government's taking back the power to create money - without private debt to banks
- A basis for creating new money based on a basket of currencies or prices
- Elimination of fractional reserve banking
These changes would have money additional benefits including funding of government programs, reduced risk of currency speculation forcing countries to devalue their currency. Debt is no longer the same millstone for governments and individuals, which necessarily has resulted in the transfer of wealth to the rich.
In short, a very interesting read with a few surprises based on busting myths about the current financial system.
The Web of Debt: The Shocking Truth About Our Money System And How We Can Break Free by Ellen Hodgson Brown, J.D. Third Millenium Press 2008. IBSN: 978-0-9795608-1-1
Roger Lever - Early career was in Treasury Banking and this led to my interest in financial investment, especially the stockmarket. Enjoy reading widely ...
