"The Truth about your Money, your Bank and your Debt."


UNITED STATES  Bankruptcy Court

For Eastern District of Texas

Plano Division

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DENALORE LEE CANNON &

ROSE ANN HOOPER cannon, plaintiffs

VS.

TEXAS INDEPENDENT BANK, Defendants

Case No. 96-41-347-DRS

Adversary Proceeding No. A-96-4 147-DRS

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Plaintiff’s Memorandum of the Law

ON CREDIT LOANS AND VOID CONTRACTS

To the Honorable Judge of Said Court:

This Memorandum with authorities, law and cases in support, will establish the following facts:  1) Defendant and privately owned banks are making loans of credit with the intended purpose of “creating” credit as “money;” 2) other financial institutions and individuals may “launder” bank credit that they receive directly or indirectly from privately owned banks; 3) such activity and underlying contracts have long been held void by State Courts, Federal Courts and the U. S. Supreme Court.

This Memorandum will show through authorities that credit “money creation” by privately owned bank corporations is not really “money creation” at all, but the trade specialty and artful illusion of law merchants who use old-time trade secrets of the Goldsmiths to entice the borrower and unjustly enrich the lender through usury and other artful techniques.  Issues based on law and the principles of equity, which are within the jurisdiction of this Court, will be addressed.

HISTORY OF MONEY AND BANKING

THE GOLDSMITHS

In his book, Money and Banking (8^th Edition, 1984), Professor David R. Kamerschen writes on pages 56-63:  “The first bankers in the modern sense were the goldsmiths, who frequently accepted bullion and coins for storage . . .  One result was that the goldsmiths temporarily could lend part of the gold left with them . . .  These loans of their customers’ gold were soon replaced by a revolutionary technique . . .  When people brought in gold, the goldsmith gave them notes promising to pay that amount of gold on demand.  The notes, first made payable to the order of the individual, were later changed to bearer obligations.  In the previous form, a note payable to the order of Perry Reeves would be paid to no one else unless Reeves had first endorsed the note . . .  But notes were soon being used in an unforeseen way.  The note holders found that, when they wanted to buy something, they could use the note itself in payment more conveniently and let the other person go after the gold, which the person rarely did . . .  The specie, then tendered to remain in the goldsmiths’ vaults . . .  The goldsmiths began to realize that they might profit handsomely by issuing somewhat more notes than the amount of specie they held.

“These additional notes would cost the goldsmiths nothing except the negligible cost of printing them, yet the notes provided the goldsmiths with funds to lend at interest . . .  And they were to find that the profitability of their lending operations would exceed the profit from their original trade.  The goldsmiths became bankers as their interest in manufacture of gold items to sell was replaced by their concern with credit policies and lending activities.

“They discovered early that, although an unlimited note issue would be unwise, they could issue notes up to several times the amount of specie they held.  The key to the whole operation lay in the public’s willingness to leave gold and silver in the bank’s vaults and use the bank’s notes.  This discovery is the basis of modern banking.”

On page 74, Professor Kamerschen further explains the evolution of the credit system:  “Later the goldsmiths learned a more efficient way to put their credit money into circulation.  They lent by issuing additional notes rather than by paying out in gold, in exchange for the interest bearing note received from their customer (in effect, the loan contract), they gave their own non-interest bearing note.  Each was actually borrowing from the other . . .  The advantage of the later procedure of lending notes rather than gold was that . . . more notes could be issued if the gold remained in the vaults . . .  Thus, through the principle of bank note issuance banks learned to create money in the form of their own liability.”

Another publication that explains modern banking as learned from the Goldsmiths is Modern Money Mechanics (5^th edition 1992), published by the Federal Reserve Bank of Chicago, that states beginning on page 3:  “It started with the goldsmiths . . .”  At one time, bankers were merely middlemen.  They made a profit by accepting gold and coins brought to them for safekeeping and lending the gold and coins to borrowers.  But the goldsmiths soon found that the receipts they issued to depositors were being used as a means of payment.  “Then bankers discovered that they could make loans merely by giving borrowers their promises to pay, or bank notes . . .  In this way, banks began to create money . . .  Demand deposits are the modern counterpart of bank notes. . .  It was a small step from printing notes to making book entries to the credit of borrowers that the borrowers, in turn, could ‘spend’ by writing checks, thereby printing their own money.”

MODERN MONEY AND BANKING

HOW BANKS CREATE MONEY

In the modern sense, banks create money by creating “demand deposits”.  Demand deposits are merely “book entries” that reflect how much lawful money the bank owes its customers.  Thus, all deposits are called demand deposits and are the bank’s liabilities.  The bank’s assets are the vault cash plus all the “IOUs” or promissory notes that borrowers sign when they borrow either money or credit.  When a bank lends its cash (legal money), it loans its assets, but when a bank lends credit, it lends its liabilities.  The lending of credit is, therefore, the exact opposite of the lending of cash (legal money).

At this point, we need to define the meaning of certain words like “lawful money”, “legal tender”, “other money”, and “dollars”.

The terms “Money” and “Tender” had their origins in Article I, Sec. 8 and Article I, Sec. 10 of the Constitution of the United States.  Title 12 U.S.C. 152 refers to “gold and silver coin as lawful money of the united States” and was repealed in 1994.  The term “legal tender” was originally cited in 31 U.S.C.A. 392 and is now re-codified in 31 U.S.C.A. 5103 that states:  “united States coins and currency . . . are legal tender for all debts, public charges, taxes, and dues.”  The common denominator in both “lawful money” and “legal tender money” is that both are issued by the United States Government.

With Bankers, however, we find that there are two forms of money – one is government-issued and the other is issued by privately owned banks such as Defendant, Texas Independent Bank.  As we have already discussed government-issued forms of money, we need to look at privately-issued forms of money.

All privately issued forms of money today are based upon the liabilities of the issuer.  There are three common terms used to describe this privately created money.  They are “credit”, “demand deposits”, and “checkbook money”.  In the Fifth edition of Black’s Law Dictionary, p.331, under the term “Credit”, the term “Bank credit” is described as:  “Money bank owes or will lend individual or person”.  It is clear from this definition that “Bank credit” which is the “money bank owes” is the bank’s liability.  The term “checkbook money” is described in the book I Bet You Thought, published by the privately owned Federal Reserve Bank of New York, as follows:  “Commercial banks create checkbook money whenever they grant a loan, simply by adding deposit dollars to accounts on their books to exchange for the borrower’s IOU . . .”

The word “deposit” and “demand deposit” both mean the same thing in bank terminology and refer to the bank’s liabilities.  For example, the Chicago Federal Reserve’s book, Modern Money Mechanics says:  “Deposits are merely book entries . . .  Banks can build up deposits by increasing loans . . .  Demand deposits are the modern counterpart of bank notes.  It was a small step from printing notes to making book entries to the credit of borrowers which the borrowers, in turn, could ‘spend’ by writing checks.”  Thus, it is demonstrated in Modern Money Mechanics how, under the practice of fractional reserve banking, a deposit of $5,000 in cash could result in a loan of credit/checkbook money/demand deposits of $100,000 if reserve ratios set by the Federal Reserve are 5% (instead of 10%).

In a practical application, here is how it works.  If a bank has ten people who each deposit $5,000 (totaling $50,000) in cash (legal money) and the bank’s reserve ratio is 5%, then the bank will lend twenty times this amount, or $1,000,000 in “credit” money.  What the bank has actually done, however, is to write a check or loan its credit with the intended purpose of circulating credit as “money”.  Banks know that if all the people, who receive a check or credit loan, were to come to the bank and demand cash, the bank would have to close its doors because it doesn’t have the cash to back up its check or loan.  The bank’s check or loan will, however, pass as money as long as people have confidence in the illusion and don’t demand cash.  Panics are created when people line up at the bank and demand cash (legal money), causing banks to fold as history records in several time periods.

The process of passing checks or credit as money is done quite simply.  A deposit of $5,000 in cash by one person results in loans totaling $100,000 to other persons at 5% reserves.  The persons receiving the checks or loans of credit totaling $100,000 usually deposit these checks or loans of credit it in the same bank or another bank in the Federal Reserve System.  These checks or loans are sent to the bookkeeping department of the lending bank where book entries totaling $100,000 are credited to the borrowers’ accounts.  The lending bank’s checks that created the borrowers’ loans are then stamped “Paid” when the accounts of the borrowers are credited “dollar” amounts.  The borrowers may then “spend” these book entries (demand deposits) by writing checks to others, who in turn deposit their checks and have book entries transferred to their accounts from the borrowers’ checking accounts.

However, two highly questionable and unlawful acts have now occurred.  The first was when the bank wrote the check or made the loan with insufficient funds to back the check.  The second is when the bank stamps its own NSF check “paid” or posts a loan by merely crediting the borrower’s account with book entries the bank calls “dollars.”  Ironically, the check or loan seems good and passes as money – unless an emergency occurs via demands for cash – or a Court challenge – and the artful illusion bubble bursts.

DIFFERENT KINDS OF MONEY

The book I Bet You Thought, published by the Federal Reserve Bank of New York says:

“Money is any generally accepted medium of exchange, not simply coin and currency.  Money doesn’t have to be intrinsically valuable, be issued by a government or be in any special form.”  [Emphasis added.]  Thus, we see that privately issued forms of money only require public confidence to pass as money.  Counterfeit money also passes as money as long as nobody discovers it is counterfeit.  Likewise, “bad” checks and “credit” loans pass as money as long as no one objects.  Yet, once the truth is discovered, the value of such “bank money”, like bad checks, ceases to exist.  There are, therefore, two kinds of money – government-issued legal money and privately-issued money, by agreement of the parties.

DIFFERENT KINDS OF DOLLARS

The dollar once represented something intrinsically valuable made from gold or silver.  For example, in 1792 Congress defined the silver dollar as a silver coin containing 371.25 grains of pure silver.  The legal dollar is now known as “United States coins and currency”.  However, the Banker’s dollar has become a unit of measure of a different kind of money.  Therefore, with Bankers there is a “dollar” of coins and a “dollar” of cash (legal money), a “dollar” of debt, a “dollar” of credit, a “dollar” of checkbook money or a “dollar” of checks.  When one refers to a dollar spent or a dollar loaned, he should now indicate what kind of “dollar” he is referencing, since Bankers have created so many different kinds.

A dollar of bank “credit money” is the exact opposite of a dollar of “legal money”.  The former is a liability while the latter is an asset.  Thus, it can be seen from the earlier statement quoted from I Bet You Thought, that money can be privately issued as:  “Money doesn’t have to . . . be issued by a government or be in any special form.”  It should be carefully noted that banks that issue and lend privately created money, demand to be paid with government issued money.  However, payment in like kind under natural equity would seem to indicate that a debt created by a loan of privately created money can be paid with other privately created money, without regard for “any special form” as there are no statutory laws to dictate how either private citizens or banks may create money.

BY WHAT AUTHORITY??

By what authority do state and national banks, as privately owned corporations, create money by lending their credit – or more simply put, by writing and passing “bad” checks and “credit” loans as “money”?  Nowhere can a law be found that gives banks the authority to create money by lending their liabilities.

Therefore, the next question is:  If banks are creating money by passing bad checks and lending their credit, where is their authority to do so?  From their literature, banks claim the