The facts about credit cards:
“The process by which banks create money is so simple that the mind is repelled.” – John Kenneth Galbraith
The first thing you need to look at, or at least try and remember, is the application you submitted for the credit card. If it is like all that I have seen, it offers you a line of credit. All you have to do is sign the application, submit it, and if approved, you will be sent a credit card with a specific line of credit which is indicated on the supplemental agreement that your card is attached to.
At some point you will also receive a copy of the bank’s agreement. The agreement further explains your obligations for using your “credit” card and accessing your “line of credit.”
Credit: “The ability of a business or person to borrow money, or obtain goods on time…”
Credit Line: “In banking and commerce, that amount of money or merchandise which a banker, merchant, or supplier agrees to supply to a person on credit…”
Borrow: “To solicit and receive from another any article of property, money or thing of value with the intention and promise to repay or return it or its equivalent.” “The word ‘loan’ is the correlative of ‘borrow.’”
Black’s Law Dictionary, Sixth Edition
The purpose of the above is to impress upon you that everything the bank does, from the solicitation, to the application, to the final agreement, implies the bank is going to lend you money to make your credit card purchases.
Reality check! Banks don’t lend money. They don’t lend their money or their depositor’s money. This isn’t some wild radical idea I have thought up to justify our process or to sell a few books. It is straight from the Federal Reserve Bank of Chicago:
“Of course, they do not really pay out loans from the money they receive as deposits. If they did this, no additional money would be created. What they do when they make loans is to accept promissory notes in exchange for credits to the borrowers’ transaction accounts. Loans (assets) and deposits (liabilities) both rise by $9,000.” Modern Money Mechanics, page 6.
So, if banks don’t lend money for purchases, what do they do?
Simply, they exchange negotiable instruments for checkbook money. Just like the Federal Reserve Bank of Chicago said above. Let me explain how this works.
I have a store. You walk in and buy an item. You pull out your credit card. I swipe it and my printer prints out a charge slip.
When you sign the charge slip you are creating a negotiable instrument. A negotiable instrument is anything that is signed and convertible into money or can be used as money. I take this charge slip, or negotiable instrument, and deposit it in my checking account along with the extra Federal Reserve Notes and checks I have received that day. I can do this because I have a merchants account. All businesses that accept credit cards have to have a merchants account. At this point in the transaction I have been paid for the merchandise you bought from me. I know this because my checking account has increased by the exact amount of your purchase.
This is not the end of the transaction. Your charge slip is then forwarded to the appropriate credit card company, i.e. Visa, MasterCard, Discover, etc. The credit card company then sorts your charge slips and sends them off to your bank. Your bank receives the slips you have signed and credits its asset account the appropriate amount. To keep the books in balance, your bank also debits your transaction account by the same amount. The next step is to credit your transaction account and send the money off to my bank where I deposited your charge slip. To keep the books balanced, your bank then debits your credit card account the appropriate amount.
After all this, what has actually happened? Your bank has exchanged your charge slip or negotiable instrument for check book money. They have lent none of their money nor their depositors money. They have not extended you one dime of credit. They have only done an exchange.
In fact, to make things even more profitable for the bank. Your bank has taken your negotiable instrument and claimed it for itself as an asset, without your permission. Then, to add insult to injury, the bank wants you to repay them the amount they just stole, with interest.
Now that we know what’s what, we can DISCHARGE OUR MORTGAGE.