Key ideas: Published in 2016. This book will help you understand what bad money is and why it is at the core of what is wrong with our society.
Ultimately, the introduction of paper money was an essential factor in the state becoming — step by step — the master of money. While previously it was the role of private goldsmiths to mint gold and silver coins, the state now created a monopoly for itself...
Most people believe that new money is only created by the central banks. But that is incorrect. The biggest part of money growth takes place in the banking system itself...
We live with a fractional reserve banking system. This means that your bank is allowed — by the highest authorities, in other words with legal permission from the government banking authorities — to loan out your money. It merely has to maintain a minimum required reserve ratio, and in the U.S. that is — you might want to sit down — about 10%.
Example
Let’s assume that you have $10,000 in your checking account.[...] Let’s assume that your bank lends $7,000 of the $10,000 in your account to your neighbor. She signs a loan contract at the bank [...] You see her by chance in the lobby of the bank.
She has her statement in her hand, the loan went through and her account now shows a balance of $7,000. Your own statement shows that you still have $10,000. If the money were no longer there in full, you would immediately protest, right?
Let us do some quick arithmetic: $7,000 plus $10,000 makes $17,000. But before your neighbor got her loan from the bank, there was only your $10,000 on hand at the bank!?!?
You will no doubt agree that we are now entitled to ask where those extra $7,000 came from, since they did not exist yesterday. The answer is as short as it is incredible: Out of nowhere!
You have just witnessed how new money is created.
Do you think that the game is over at this point? Not a chance. Let’s go back to your neighbor’s bank statement, which showed a balance of $7,000 after she received her loan. Let us assume that she will be making purchases with this money...
She decides to remodel her kitchen, and she transfers the money for that purchase to the seller. The money is deposited to the account of the kitchen renovation firm...
Let us assume that out of the $7,000 deposited by the kitchen renovator the bank lends $5,000 to a guy who wants to purchase a car. His checking account is credited with $5,000.
Let’s do the math: you still have $10,000 in your account, the kitchen renovator has $7,000, and the prospective car buyer has $5,000 in his account. If the car purchase is made and if the seller of the car deposits $5,000 at her bank, the game can go on to the next round.
Let us assume that the car seller’s bank provides a $3,000 consumer loan to a customer who wants to buy a new flat-screen TV. After the sale, the seller of the TV deposits the amount into his checking account.
Now, the checking accounts hold a total of $10,000 plus $7,000 plus $5,000 plus $3,000. The original $10,000 deposit has now grown to $25,000! And we could continue on from there...
Let us instead use the Fed´s required reserve ratio of 10%.
From the initial $10,000, not $7,000 but up to $9,000 are lent, then at the next step $8,100, then $7,290, and so on. (Each step is 90% of the previous step.) Mathematically, this is an infinite series which has a convergent sum. In the extreme case, an initial $10,000 could grow to become $100,000. The banking system would then have created $90,000 out of thin air. It maintains a cash reserve of $10,000 (namely, your initial $10,000 deposit), in other words, 10% of total deposits.
Our coercive state monopoly monetary system is the biggest case of fraud in human history. Let us be more precise: it is fraud against the people...
And this takes place in a hidden manner through an obscure process so complex that almost no one understands it. Henry Ford put it this way:
It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.
Ask some friends what they understand inflation to mean. Inflation is when everything becomes more expensive. This or something similar will almost certainly be their answer...
Until about the middle of the 20th century, inflation was understood as an expansion of the money supply. The opposite also applied. Deflation meant a decrease in the money supply, not a period of falling prices. Only with the ascent of economist John Maynard Keynes (1883–1946) did the modern equating of inflation with more expensive goods arise...
Virtually ask what the actual reasons for the price increases are. “That’s just the way it is. Everything gets more expensive. Do you know what a scoop of ice cream used to cost? 10 cents.”
Defining inflation as an increase in the prices of goods and services deflects attention away from the real reasons. It is much easier to blame others. Then it becomes the evil capitalist ice cream vendor or the greedy oil baron who have raised prices to enrich themselves.
It is not even a necessary consequence. It would be easy to come to the wrong conclusion that if there are no price increases, everything must be ok. This would be very wrong. Even if the prices do not rise there can still be an increase in the money supply, compensated for by other factors such as a rise in productivity due to innovation, and/or an expansion of the division of labor.
Today’s common understanding of inflation diverts attention away from the expansion of the money supply...
Why people got away from the original inflation definition, understood as increases in the money supply, may now be clear. Someone might ask, “Well, where does all this money actually come from?”
It looks like they don’t want us to look too closely. Not everyone needs to know that money is created out of thin air, goes the thinking. At the end, the citizen might want to know why they need to work for their money while others create it with a snap of their fingers.
Falling prices are the natural result of economic growth. This is the natural way for most people to take part in advances in productivity...
What a clever strategy: To claim that falling prices would be a catastrophe and to propose as the solution … well, you can predict what that will be. Right: an expansion of the money supply. And the new money should come to those proposing this, thank you very much. Then the economy will supposedly also prosper.
This phobia against falling prices is meant to legitimize inflation. And with inflation debtors profit at the cost of savers and creditors. Those who obtain the new money first are the winners.
The gold prospectors look for gold every day, but new finds are very rare and small. Gold in the ground, which makes prospecting and digging profitable, appears to have dried up. Thus the gold supply only increases at a very low annual rate. The people in the city are hardworking and because the quantity of goods produced is always increasing, while the quantity of gold remains almost the same, the purchasing power of gold continually rises. The prices of goods fall...
What the gold prospectors do not know at the moment is that with their gold finds they have put themselves into a really comfortable position. In the beginning, they are able to make all of their purchases and investments at yesterday’s prices, because the new money flows into the market for the first time.
If a prospector finds new gold, he is the first recipient and the winner in the monetary increase game. This is because the gold prospector can make purchases with his new money at the old, still unchanged prices. If he and his friends buy more beer in their favorite bar located right next to the mine, then the beer prices will have a tendency to rise.
The next person to benefit is the bar owner who profits from the money supply increase — if somewhat less than our fortunate gold prospector. Due to increased income, the bar owner now has more money. And he can spend the money himself to buy roses for his wife, for example. The price of roses increases. The new money makes its way to the florist, who spends it. The money slowly is distributed throughout the economy. Prices rise.
To make the redistribution specific: the beer that the later recipient of the money used to be able to buy and which he cannot afford to buy now, is instead enjoyed by the gold prospector.
The gold prospectors became richer. Those who were second or third in line to receive the new money also gained, but less. All those who obtained the new money later became relatively poorer. The true losers from the increase in the quantity of money are those whose income grew slower than the prices. Those who were harmed the most were those who were the last to enjoy the new money, or who obtained none of it...
When the money supply is expanded — or inflated — it is of critical importance who gets to use the new money first. The first recipients of the new money have clear advantages over the later recipients and of course over the last recipients. Those who obtain the new money first can make purchases at prices that have not started going up yet.
Those who get the money last are the losers in this game. They can only buy at increased prices and receive less and less for their money.
If you are a wage earner, a salaried employee, or a retiree, then you should probably view yourself as one of the losers. By the time the newly created money gets to you, the first recipients have already invested it. They have bought real estate and invested in corporate stock.
By the time it is your turn, the real estate that you would have liked to buy is now too expensive...
A small aside: The effect triggered by the increase in the money supply resulting in a redistribution of wealth is called the Cantillon Effect, named after the Irish banker Richard Cantillon (1680–1734), who witnessed the results of a massive monetary expansion on a “live subject.”
Because your subjects far outnumber you, you need at least their tacit support. You need to invent some story to legitimize your authority, because the use of force to maintain your privileged position will not work over the long term...
You want to make various groups dependent on you to ensure their support. You grant privileges, subsidies, and simple transfers to buy and keep popular support. The more public servants you have indebted to you, the better. You can be assured of their support because they get their income from you...
Other means of strengthening your power are control over the public pension systems, health care systems, and social transfer systems...
But there is a catch. Maintaining power is very expensive! How to pay for this power?
People are seldom happy about paying taxes. Taxes show that the good deeds of the state are not really free...
If only there was a way to finance state expenditures without raising taxes! A way to make citizens pay without them realizing it. A system to allow money and wealth to be extracted from the citizens without them being aware of it, and so convoluted and complex that only a few could understand it.
As it happens, there is such a system. In its most pernicious form, it is our current paper money system. The monetary system is a sector of the economy which is of strategic importance to the state, and one it has interfered in from the very beginning We turn to Roland Baader:
In any case, the state needs huge quantities of money to exercise its authority. Because the required amounts have risen to such astronomical heights, taxes are no longer sufficient. Everywhere around the world, the state has therefore monopolized the printing of money in order to create gigantic sums of money out of thin air.It is now understandable why the state has such a great interest in getting away from gold.
In a state paper money system, going into debt is as easy as pie for the state. Recall that loans are created out of nothing. And the state is in control of this never-ending source of money. That is the main reason why the state has no problem going into debt.