In today's complex financial ecosystem, credit cards remain an enigma for many, a tool used every day but understood by few. Their pervasive influence on our economy and personal lives cannot be overstated, yet the inner workings of credit cards and the process of applying for one seem to be shrouded in mystery. This blog post seeks to unravel these mysteries, casting light on how credit cards function, how banks handle applications, and some crucial legal precedents. For those seeking to deepen their understanding of the banking system, lending practices, credit, and negotiable instruments, this article is a must-read.
Firstly, a credit card application, under [U.C.C. Art. 5], is considered a letter of credit. The application forms a request for credit, certificates, or securities. A Letter of Credit (LC) is essentially a written commitment made by a bank or a financial institution on the applicant's behalf. It is a promise to pay a certain amount to a seller if specific terms and conditions are met, often requiring the submission of documents that validate the seller's adherence to the agreed contract. For buyers and sellers alike, LCs offer a level of security and risk mitigation, particularly in global transactions where differing laws and unfamiliarity between parties pose significant challenges.
Once an application is approved, a credit card is issued with a predetermined credit limit, explained in an attached supplemental agreement. The bank provides an agreement detailing the cardholder's responsibilities when using the card and accessing the line of credit. However, the notion that a bank lends money to fund the cardholder's purchases is, surprisingly, a misconception.
Contrary to popular belief, banks do not lend their own money or their depositors' money. Instead, they facilitate the exchange of negotiable instruments for 'checkbook money'. This system operates in a complex, but ingenious way.
When you purchase an item using your credit card, you create a negotiable instrument - the charge slip. This slip travels from the merchant to your bank via the credit card company, causing a series of transactions in which your bank effectively swaps your negotiable instrument for checkbook money. Banks are not extending credit; they're merely conducting an exchange.
The bank then takes ownership of your negotiable instrument as an asset without explicit permission. Following this, the bank expects you to repay the credited amount plus interest. So, while it may appear as a loan, it's merely an exchange, and it's how banks can remain profitable without actually lending money.
Supporting these principles are key legal precedents like "Bowen v. Needles Nat. Bank," "Countrywide Home Loans, Inc. v Taylor," and others, all of which maintain that a national bank cannot lend its credit to another person or entity. These court decisions underscore that a bank does not become the holder in due course by simply crediting the depositor's account.
The crux of the matter lies in the fact that the bank receives the equity in the home you're buying, in exchange for an unpaid bank liability. The bank, effectively, receives your mortgage note without investing or risking a cent. This note acts as money and is sold by the bank to receive cash or an asset that can then be converted to cash. The bank never actually gives up the money but issues a liability (check) it has no intention of paying.
This mechanism reveals a disconcerting truth: in the alleged loan process, banks create unpaid liabilities that are used as a new form of currency. We, as customers, must labor to earn this bank currency (unpaid liabilities) to pay back the bank. And what the bank received for free, the individual lost in equity.
This is where the notion of 'fraudulent conversion' comes into play. The bank deposits your mortgage note, creating an asset and a Direct Deposit Account (DDA), a liability. It then demands you cannot use the same currency (promissory notes or mortgage notes) to discharge your mortgage note.
Instead, banks insist on payment in legal tender (checkbook money), while using the mortgage note as money to acquire your property in foreclosure, often at no cost.
When a bank claims it gave you credit, they are referring to the fact that they credited your transaction account, not that they deposited other depositors' money in your account. They actually deposited your money (the mortgage note). It is here that fraudulent conversion arises - the bank uses your funds for their benefit without your signature or authorization.
Banks continue to profit from the equity in our homes, farms, ranches, and businesses, repeatedly refinancing every few years to extract the ever-increasing value created by inflation. It is a subtle deception that has profound effects on the economy and our lives. Several presidents, including John Adams, Thomas Jefferson, Abraham Lincoln, and James A. Garfield, understood the danger posed by banks to our liberties and economic stability.
The Chicago Federal Reserve Bank's book, “Modern Money Mechanics”, explains precisely how banks manipulate the checkbook money supply, driving people into foreclosure. Our financial landscape would transform if contracts were upheld, and we were afforded equal protection under the law of Contract. Until then, we must labor to understand the system and navigate it as best as we can.
Credit cards are indeed much more than plastic; they represent a complex system of 'checkbook money' exchange that often leaves the consumer at a disadvantage. The power dynamics that underlie credit cards are often skewed towards banks, who profit enormously from our collective misunderstanding of these systems. It is time for this knowledge to be democratized, for every person to understand how their credit card works, and for every person to make informed financial decisions.
With this newfound understanding, you are now better equipped to navigate the convoluted world of credit cards. Remember, in the realm of finance, awareness is the key to empowerment. Keep this wisdom at your fingertips, and let it guide your financial journey!