Open secrets about banks, credit and inflation

There are things about money that are well-known to some, but not known and understood by all.

• In the USA (and the UK, I understand), notes and coins represent only 3% of all money; the rest is, in effect, various types of IOU.
• Most money is simply created out of nothing, by private banks, as bookkeeping entries.
• Banks lend out money, and also charge interest.
• Since the banks haven't created enough money to cover the interest, they demand it from the borrowers.
• If the total amount of money in the economy stays the same, and banks always charge enough interest to make a profit, then someday banks will own all the money in the world.
• So banks create and lend even more money. Some of this new money is to provide for the interest they have charged on earlier loans.
• Therefore, banks have caused inflation, and as long as they create new money, they will create more inflation.

This is so simple, but so hard to believe. It's like standing up from a game of Monopoly to find that you've been playing for real. And when you read others who explain the money system in these terms, you get the same emotional sequence:

1. amused, complacent toleration
2. a growing sense of unease
3. dawning, half-incredulous understanding
4. appalled outrage

So it is with one of the latest of these explainers, Ellen Hodgson Brown. But there is a world of difference between diagnosis and prescription. Here is hers, and halfway into here is a riposte from Richard Daughty, aka The Mogambo Guru.
Please note that Daughty is not contradicting the diagnosis, only the proposed solution. He is permanently at stage (4) in the above sequence.
Now, what do we do about it? Daughty's usual response "We're freakin' doomed!" reflects his pessimism about attempts to save the system as a whole, but is generally accompanied by recommendations for individual financial survival, namely, investment in commodities such as gold, silver and oil, merely to protect against end-stage inflation.

The banks cause market bubbles, too

I plan to review Richard Duncan's book "The Dollar Crisis" soon - it's not just time constraints that are the problem, but trying to condense his arguments.

Essentially, Duncan sees the unlimited creation of credit as the mischief-maker in economics. Since the dollar is not restricted by valuation against gold, the government can print as much money as it wants.

But even when there was a gold standard, credit could still be multiplied, because banks lend out many times more cash than they've been given to look after. Banks only retain whatever fraction they (and the regulators) feel is essential to deal with likely withdrawals by depositors.

Then when bad times come, they multiply the problems by cutting back on credit - remember the old saying, "Banks lend you an umbrella when the sun shines and want it back when it starts raining"? I recall hearing (in the recession of the early 90s) of a businessman with a big turnover and a £3.25 million overdraft facility, who received a payment from a customer for £3 million. Acting on head office orders, the bank manager promptly reduced the overdraft to £250,000 and hurriedly left for the day, while the now-ruined businessman grabbed a shotgun and went looking for him at his office.

Have a look at this article by Wladimir Kraus in the archive of the Luwig von Mises Institute, criticising "fractional reserve banking".