That is Banking!

L. Ron Hubbard Article: And That Is Banking!

L. Ron Hubbard You might be interested to know something about banking and money that bankers and governments don't know: BASICS!

These are very simple basics. They are also very, very O--L--D basics.

Money can be said to be a lot of things. Itcan be said to be an idea backed by confidence. It can be said to be asystem of exchange. It can be said to be something easier to carryaround than a side of beef or a bushel of wheat. Money can be said tobe a lot of other things.

But from the viewpoint of a banker and solidfacts, you get the basic law of banking and the basic definition ofbanking and money.

MONEY IS A NEGOTIABLE RECEIPT FOR DEPOSITED GOODS.

In order to understand this, you have tounderstand the original function and practices of (surprise!)goldsmiths! You see, goldsmiths simply used gold as a commodity. Itwent like this:

The goldsmith took in a commodity of oneunit of gold. He gave a receipt to the person who gave him the gold. Hedid this several times. He then had, let us say, six receipts - sixguys had given him gold to hold and he gave them each a receipt. Thesesix guys could then use those receipts as currency sinceit was gold on deposit with the goldsmith. This is a one-to-one basis.One receipt given out for one unit of gold taken in.

Now the goldsmith, because he assumed andhoped that all six wouldn't want their gold all at the same time, couldthen issue additional receipts against the gold - against the same goldfor which he issued the first six receipts. So he would issue receiptson, let's say, a three-to-one basis - he issued three receipts forevery one unit of gold he had on deposit. These receipts were trustedbecause people knew he had gold on deposit.

So you see the goldsmith issued more receiptsthan he had gold on deposit. He could then loan out these receipts(currency) that he had created. People "borrowed money" from him byobtaining one of these receipts and now they would owe him what theyborrowed plus interest. AND NOW THE GOLDSMITH WAS INTO BANKING. IT WASTHAT STEP THAT PUT HIM INTO BANKING. You see, there were other thingsthis goldsmith could do. He could issue receipts and buy property orkeep his business running or something. But the moment he issued andhanded out a receipt to people who used that for currency, why, he wasnow into banking.

And that is banking.

Now you can do the same thing withcommodities. You have a warehouse and you're into banking. If everybodyputs his commodity in the warehouse and the banker issues a receipt forit, he can now issue on a three-to-one basis, as the
goldsmith did, or twelve-to-one, which is getting pretty risky but theydid that. But, you see, he can do the same thing with commodities. Idon't care if they're shoes or whatever. Now, because he's got shoes(and other things) in the warehouse, he can issue general receiptsagainst these goods on a basis of one-to-one, which is just thedepositors, on up to twelve-to-one.

And he can take those receipts and he canissue them to a manufacturer who can then buy with those receipts theequipment necessary to set up his plant. But everything themanufacturer makes is a commodity deposit. The manufacturer makessomething and now he has a commodity deposit. When you realize that thebanker is not taking in all this commodity, you realize it startssitting all over the place in all kinds of different warehouses and soforth. But it is consigned to the bank. It belongs to the bank. Itbacks up the receipts. The guy who the banker loans the money to, justout of the blue sky, doesn't have any commodity there. The bankerloaned out money (a commodity receipt) to a guy without any commodity.Well, that guy has got to put a commodity there. And this is the basisof banking. If that guy now doesn't manufacture a commodity, the bankeris out of luck. In other words, he doesn't produce the commodity he'sloaned money to produce. The banker now only has the plant.

So now we're off into the banker loaning against the plant. We've extended it from the deposited goods to what makes the goods.

And that is banking. And that's all there is to banking.

And that's why you see bankers favoringshort-term loans. They're not interested really in a real estate loan.That's a secondary stage. They're interested in the cars sitting on thelot at Chrysler.

I noticed that when a European automakerrecently went to blazes, a fleet of their cars turned up as being soldto a bank in America, after that company went defunct. In other words,their manufactured cars became, just as Chrysler's would become, theproperty of the bank.

Now what is inflation? INFLATION ISDETERMINED BY THE RATIO BETWEEN THE DEPOSITED GOODS AND THE NUMBER OFRECEIPTS ISSUED. This present society has got it up to several thousandto one. In banking, I would never go above three to one. That is soundbanking.

All right. Let's recapitulate. We started byissuing receipts for deposited goods. Then we extended it to what makesthe goods. And we're going to issue receipts on a safe, intelligentbasis - a three-to-one basis, for example. All right. This is
sound banking.

But these current "bankers" extend it out onwhether or not they think the guy's credit is any good. They extend itout on whether or not he's going to issue stocks or shares of his own.(His own issued "receipts." And then they're going to keep those assecurity and, honest to Pete, you're now up here in froth. That isstrictly froth. This whole current banking system is in froth. Even theAmerican Federal Reserve. They write down a figure in a little book andtell the US government that it can now print that much money. (You maythink I'm kidding - I assure you, I'm not.) To back that money, theFederal Reserve issues Federal Reserve stock, called Federal Reservebonds and so forth, which is bought by the public. Just recently, two"issues" have gone out on the same transaction which was based onnothing to begin with.

In other words, they don't just issue ahundred million dollars in currency. They issue a hundred million incurrency and a hundred million in bonds. So regardless of theircomputations, they have not really issued a hundred million, they havereally issued two hundred million, which doubles instantly the amountof paper in the society on the same transaction. Result: moreinflation.

Hold on, it gets crazier.

Of this transaction, only half of it iscovered by interest - only the bonds. So they feel they're getting onlyhalf the interest because the total issue of paper was two hundredmillion, and they're only drawing interest on the bonds, one hundredmillion. So, "of course" they have to get twice as much interest on thebonds. And there shoots up the interest rates and now money becomes tooexpensive to borrow in order to manufacture something and there goesyour new and future commodities and eventually there goes your society.

And (currently) that is banking (unfortunately).

But don't you be confused. It is really very,very simple. For instance, if you can get the idea that you would takeall of your household goods and give them to a bank and they would putthem in their basement and then they would give you a receipt for thehousehold goods and then you could give that receipt to somebody elsefor some negotiated action - you wanted something they had or would dofor you - why, then you'd understand banking.

And if you can get the idea that that otherperson that you gave your receipt to could then go claim thosehousehold goods if he chose to, then you'd understand banking.

And if you can get the idea that that otherperson might not (probably wouldn't) go claim those household goods,but instead that he might transfer the receipt that you gave him (thatyou got from the bank) to somebody else for something that he wanted,then you'd understand banking.

And if you can get the idea that even thoughthis other fellow didn't take your receipt and go claim the householdgoods, that the receipt does, in fact, represent those items ofhousehold goods that it is for and that the receipt is backed up bythose household goods, why, then you'd understand banking.

And now we go a bit further and if you canget the idea that we don't bother to put those household goods in thebank's basement - we leave them in your home - but that in essence youhave sold them to the bank for the receipt they gave you (and this iswhat is known as collateral), then you'd understand banking. And now wego way upstairs and if you can get the idea that the bank would printup and issue receipts on a greater than a one-to-one basis(three-to-one or six-to-one, for example), and then loan these receiptsto someone so that he could exchange them for manufacturing equipment,for example, and produce a commodity and that then these receipts thathad been issued to the manufacturer were now, in fact, backed up bygoods, then you would understand banking, REAL banking. And you wouldunderstand that banking, real banking, can all by itself, increaseproduction. And lo and behold, THAT WAS THE ORIGINAL PURPOSE OFBANKING!

And that is banking. That's all there is to it. That's the basics. That's it!

You see, violations of these basics are whatgot the current bankers and governments in their present predicaments.Oh sure, they have this plan and they have that plan. But let me pointout to you that they had those plans last year and the year before thatand that last year was not as bad as this year! So maybe there'ssomething a little wrong with their plans. Well, yes, there is a lotwrong with their "plans" - their basics are out.

As a banker you can stretch thatthree-to-one, like the goldsmith did, to five-to-one, or twelve-to-one.But when you get up to astro-ratios like these current bankers, boy,are you in trouble. You can get a run on a bank. A run on a bank iswhen all the guys who hold receipts suddenly believe the goldsmith isabout to blow or leave town so they all go in and ask for their gold atthe same time. Well now, of course, he can't pay it out because he isnot holding that much commodity. So if he had issued receipts on atwelve-to-one basis, NOW his receipts are worth 1/12 (one-twelfth) whatthey had been worth, just like that.

Anyone who can recall back to the 1930s will tell you ... "and that was banking!"

These basics would be known by the wizards ofWall Street, you would think, but maybe not. They certainly are notknown to London's Parliament. They might say, "Yes that's interesting,but we do things differently now... sort of inapplicable..." Well, Inotice that inflation, loss of purchasing power, economic chaos, etc.,aren't being created any differently. They manage to keep these actionsgoing at a high roar. So maybe these basics ARE applicable! OH, YES,they are applicable all right - you can bet your house, car, job andfuture on them.

All right, we had the goldsmith, then we hadthe banker who issued receipts for deposited goods. Now, we've got anew factor - the governments produce nothing really and yet they printmoney. What backs it up? NOTHING! Governments never do produce anythingto go into the depository that then backs up the receipts (currency)and that they then can pay back.

So you wonder why there is inflation? Well, it is just the ratio of the amount of money against the goods.

I've already told you that there is a limit onthe issuing rate in banking. Anybody that is going for a twelve-to-oneratio (twelve receipts for one unit of goods) has got his neck stuckout. It is going to cost more money for a commodity because there ismore money around than commodities.

All right, look at your tax collector. Whentaxes start going up to certain percentages that penalize the company(and worker) and give it an unmanageable burden, make it difficult toservice the machinery, make it difficult to introduce new tools andequipment for a new product, etc., why, the tax man starts puttingbusinesses out of business. They've been doing that in America and arenearly finished with the job in England. When a company folds thatproduces shoes, let us say, there is then going to be less shoes on themarket and therefore the shoes that remain are going to cost more,again for the same reason as in the previous paragraph - there is moremoney around than commodities.

Ideally, a company should work itself out ofdebt, not into it. But because of suppressive, penalizing taxpercentages and bank interest rates, a company works itself into debtso one could say that the tax collector is in collusion with the bankerin these sectors. This brings about inflation because it is anunproductive 25 or 50 percent of the price of goods. The government isnot furnishing anything to account for that. So this now goes back intothe banking aspect because the company or the individual can neveraccumulate enough money to buy new machines, so the banker has tocontinuously loan him money to enable him to get his new machinery. Butthen that's got interest on it so the tax collector ... You see? Theguy can never get enough money to buy a new plant, he'd never makeenough money. He's either got to get his new plant or his replacementmachinery and so forth, either from the bank or just not do it at allwith the tax collector.

There is another twist to this. What dogovernments (and sometimes even banks) do with these tax collectionsand other pounds of flesh gouged from the carcasses of people trying toget on with their jobs? They hand them out as "foreign aid," the dole,welfare and other activities designed to degrade.

All of that gets added to the price of commodity and that is what inflation is.

Simple. So simple. It's too simple for theseidiots not to be able to con everybody in the society into believingthat it's very complex. But they don't want the public to understandthis because they've got a racket going and they know it's a racket.They are a goldsmith with a 2000 to 1 receipts to goods ratio and itsimply doesn't happen to matter what theory or explanation they dreamof. The facts remain. Period.

And so do the basics remain.

L. Ron Hubbard, 2 September 1982

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