ALL ABOUT CREDIT CARDS

This essay is not intended to be an exhaustive study on modern fractional reserve banking. My
goal is to furnish you with enough information so you can follow the process. If you would like
more information about the banking system I suggest the reading list These books should furnish
you with all the information you need about lending, credit, and negotiable instruments.
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.”
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:
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. <BR>
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.<BR>
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.<BR>