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Banks and Credit

THE USE-VALUE of loan capital, which is made available through the banking system, consists of producing profit, and this type of profit is described as interest. The rate of interest is arrived at by competition between lenders and borrowers, or by supply and demand; the lender of loan capital striving to obtain the highest rate of interest for the use of his capital, and the borrower seeking the lowest rate. There is no "natural" rate of interest, nor is there any limit to the rate that can be charged.

A “Clarion” mare’s nest

The Clarion is a comic paper, but never more so than when it treats of economics. Its latest outbreak is entitled, with unconscious humour, “Mind Your Own Business”, and advocates the adoption on a large scale of the Guernsey plan of raising money for municipal expenditure by issuing notes redeemable at term and acceptable in payment of taxes.

The people of Guernsey are reputed to have raised £4,500 in this way, about 100 years ago, calling in £450 annually to be destroyed until this whole had been redeemed, and they are understood to have never repeated the experiment.. The Clarion writer, however, to rid the municipalities of their debts and to obviate all further borrowings, advises the wholesale adoption of the Guernsey idea, no doubt upon the principle that since a man may take a fraction of a grain of strychnine without serious harm, he may therefore take a few ounces with impunity.

Cooking the Books 2: The myth of magic money

One thing that the current banking crisis has done is to explode the myth about banks being able to create credit, i.e. money to lend out at interest, by a mere stroke of the pen. Events have clearly confirmed that banks are financial intermediaries which can only lend out either what has been deposited with them or what they have themselves borrowed or their own reserves. As the US Federal Reserve put it in one of its educational documents:

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