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Column: Banks, Business And Bear Markets

This story was written by Wiley Combs, Branding Iron


The credit system is an interesting thing. It is the ultimate epitome of the economic ideal of unlimited growth.

Why did the Stock Market Crash of 1929 happen? Most of us learned in U.S. History Class that people were speculating about stocks with money that they did not have. This heavy emphasis on speculation resulted in a market that was largely funded by loans, so much in fact that the $8.5 billion in loaned money amounted to more than the actual amount of currency in circulation.

Of course, the crash occurred because the economic bubble created by this rash of speculation burst unexpectedly. Investors rushed to cash out their speculated stocks, resulting in a nosedive in the New York Stock Exchange, and the worst economic downturn to date. The Glass-Steagall Act, passed in response to the crash, resulting in todays system of separation between deposit banks and investment banks.

Recently, the last of the large investment banks, JP Morgan, received special dispensation from the federal government to enact an emergency change from their traditional role of investment banking to deposit banking. This change was announced on the same Sunday night that the gigantic bank bailout was first proposed. The bank claimed that the investment-banking model did not work.

As we observe the effects of the trillion-dollar bank bailout and consider the potential impacts of providing the same courtesy to companies like GM, one is forced to ask how similar todays economic situation is to that of 80 years ago. What did the banks do with the funds they were given? What followed the passage of the bank bailout bill was the most expedient buyout of smaller banks by larger banking companies in this countrys history.

This is not the solution. The detachment of the dollar from the gold standard, and the subsequent rise of credit in the U.S. after World War II have created an economic bubble, much like the bubble which existed in pre-Depression America. In this instance, however, our speculation has grown to encompass much more than simple stock trading.

By detaching a currency from its actual value, as we do in our system, that currency can be artificially manipulated to magnify the size of your market. The credit system has no relevance to actual holdings; in many instances, when banks mortgage a house, they have no cash currency attached to the value of that holding, simply the equity value of the home. The party taking out the mortgage does not have the money, or else they would not be using a loan to pay for their home. Simple, right? Inconceivably wrong. Neither party had the money to pay for the house, yet it has been purchased legally without a dime being exchanged.

This is the conundrum of the concept of fiat money. Our currency is fiat money, since its market value is regulated entirely by trade differentials, inflation and, to some degree, Federal Reserve interest rates. Without a means of tracking the dollars expansion and contraction with the production, trade and consumption of actual goods, its a shot in the dark to guess what it is actually worth.

Compounding this difficulty is the fact that each dollar of actual cash is loaned from the Federal Reserve, a private bank, to the United States population.

So when you go to the ATM tomorrow night to withdraw cash for dinner, try to envision the chain of money that lead to its deposit in your account. Your paycheck is a representation of your employers holdings in their banks vaults (real or not), which represent in many cases the credit limit a bank is willing to extend your employer. If these holdings are actual cash, they represent a fictional guarantee from the federal government to reimburse fiat with equally valuable commodity. Each dollar of cash is loaed to the federal government, at interest, from the Federal Reserve Bank. If your employers coffers are in cash, it doesnt go far. It will be electronically transferred to your banks vaults (no money exchanged) when you deposit it. When you withdraw that cash (electronically) from your account, there is no cash, no gold and nothing to signify that you actually have money in that bank.

Worried about bank runs yet?

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