If you’ve read my articles on banking you might be wondering if there is some key piece of the story I’ve not bothered to share … yet. The answer is “yes”, there is. I’ve avoided the topic like the plauge because it is so riddled with conspiracy theories and hyperbole, an inconvenient distraction from the Fiducial Economics and Zero-Zero Banking I’ve been trying to discuss. But after hearing so many of my friends (mostly in the real world) ask me to more fully explain the existing banking system, especially here in the United States, I’ve decided to indulge. Of course, I am frankly astonished that a broader public awareness of this doesn’t already exist and I’m sure that eventually it will, so I don’t feel like I’m exposing any grave state secrets here. I’m not going to claim that this is a particularly “big deal”, I’ll just say that it is the reason why many General Federalists like myself continue to use the phrase Final World Order: we know this circus will be closing when the public finally does take it all in. The phrase is somewhat of a parody of the popular phrase used by conspiracists, The New World Order, though it also has an edge of reality to it. You’ll see why in a second.
I. The Banking system we have inherited is antiquated and you are far, far wealthier than you have been led to believe … and the bill for it goes to the bankers. It has reached its penulitmate expression in the proverbial neo-liberal, western democratic system. But I’m going to argue in the defense of bankers and suggest that the hyperbole surrounding this subject and which comes mostly from those who at least have some inkling of what I’m talking about is unjustified and based on an incomplete understanding of what is going on. So, part of this article is to set the record straight as well. The best way to explain all of this is to humor the reader with some history they may or may not already be aware of:
- Banks began a few hundred years ago and the modern banking systems descend from their predecessors in Europe when capitalists, or those holding sufficient capital, decided that they could loan money to others and profit by requiring repayment of the premium with interest added. In that environment, the political powers that existed enforced this scheme making it a viable business model.
- Banks began to take deposits of wealth from their customers, in the form of gold, for example, and would write a note that they designed and printed which basically promised and affirmed that the customer had the amount of gold on deposit at the bank that wrote the note. In this way, the customer could carry around notes, which is much easier to transport and use, and exchange it for other forms of wealth, allowing them to buy products and services on the open market. The fundamental shift and change here was that instead of having to exchange or barter wealth for wealth directly, like by trading gold for lumber to build a house, one could use an abstract, general vehicle for exchange in the form of these bank notes. Bank notes would later evolve into modern currency, but the idea is the same.
- If someone selling lumber to someone bearing and offering bank notes in return, this exchange is called valuable consideration because both parties considered something of value to each of them and agreed to make the exchange. When the person selling the lumber takes the bank notes, he can use them again with someone else or he can visit that bank and demand the gold that it promises.
- Another service these deposit holders, these early bankers, could offer was to loan money to customers with, as we said, a requirement to repay with interest. This would be done by printing notes representing the full amount of the loan requested and would, on that banks reputation, faith and credit, represent wealth on deposit (such as in the form of gold) that they actually owned themselves, not someone else’s deposits. And this made sense because it was the bank loaning the money and it is they who should be able to back their own notes.
- It is key to understand that at that time the likelihood of several note holders coming back to the bank on or about the same time and demanding all of their gold was highly unlikely. In that age technology limited transportation and communication and a bank thirty miles away was a great distance indeed. It took considerable effort to go visit a bank, especially ones well over thirty miles away, and communication with them and the communication of news generally was very slow by modern standards. Additionally, in the case of loans, poverty was so severe and wealth so tight, with the terms of loans so onerous, that the likelihood of a large number of people paying off their loans at once was also astronomically slim.
- These nascent bank owners took advantage of this by realizing a mathematical quirk. Because, for practical intents and purposes, in that day and age, it was essentially impossible for the deposits to all be demanded at once. Thus, the rule regarding backing the loaning money in the form of simply printing extra notes with actual deposits you own on hand could be manipulated and basically, to some degree, ignored. To explain, suppose I hold 1000 dollars-worth of gold on deposit from customers. None of this gold is actually mine and I’ve written notes for all of them promising that I have this on deposit and can honor each of those notes on demand. But suppose I decide that, since it is really impossible for all those notes to be brought up and all gold they represent to be demanded at the same time, I will loan out half of those gold deposits to additional customers. Now, I am writing notes and giving them to the new customers which, like the other notes, promise that I will produce the gold they supposedly represent. But in reality, I am now claiming to be able to pay out 1500 dollars-worth of gold. This I cannot do because I don’t have it. But if I cannot do something that is impossible anyway, what’s the harm? If you can’t make the demand then I don’t need to honor it. It’s a false demand. And this is where my defense of bankers begins. It is important to realize that the current banking systme is inherited from a distant past in which no one at that time really knew of any other way to do this, primarily because of technological limitations we’ll explain in what follows. So the “scheme” is not entirely deliberate or malicious.
II.Now, let us suppose that someday we no longer use gold or tangible wealth to back these notes and we just use yet more cash as the backing for deposits and loans. Furthermore, lets say that a government comes along and says, this is a great scheme you have going but obviously you can only carry this so far. We’re going to set a limit on how much currency (notes) you can loan out relative to what you actually have on deposit. Suppose they pick a number of around 10%. Thus, in the example given, it would mean that the banker could loan out 10,000 dollars in notes for every 1000 dollars-worth of gold he or she truly, physically had on deposit. Since it is virtually impossible for an instant demand for 10,000 dollars from the bankers reserves to be made, there is really no reason for the banker to guarantee his or her ability to pay that much at once. This will all be true unless and until the technological infrastructure changes and the impediments to transportation, communication and terms of loans become less severe.
- Why would a government, even if the impediments aforementioned were strong, want to allow this kind of leveraged loaning? The answer is simple: an economy that allows this kind of leveraged loaning grows much, much faster. Think about it. If banks can loan out 10000 dollars in currency for only 1000 dollars of reserve, they can enable entrepreneurs and other job creators to do that much more than they could if they only could loan out 1000 dollars of notes. For this reason, this scheme of monetary policy and banking became popular during the industrial revolution becoming known as Fractional Reserve Banking. It is called fractional because banks are only required to maintain a fraction of reserves for what they loan out. In the United States, in the vast majority of cases, that limit is 10%.
- The problem, however, is that this system begins to slip outside any framework of Rule of Law you can place around it when these aforementioned impediments begin to weaken and become less of an issue. Rule of Law comes into play here because any Rule of Law that protects private property and provides remedy for theft can no longer guarantee that, wherever it becomes physically possible to demand these reserves, that those entitled to them will be able to get them. If they cannot, because this system was deliberately constructed this way, it would constitute theft by taking whereby no Rule of Law in that scenario would exist (there is no remedy because the traditional law presumably would not assume that this is theft by taking – there is no law, no rule of law, on the books to deal with this for what it truly is).
- But so far this is just a theoretical problem. The real, serious problems are still to be exposed. Consider what happens when governments decide that they will start printing these notes. This is a good thing because it standardizes the notes and makes them much more versatile and generally usable. But it does generate a slight problem. If the government prints this currency, how will it get it into circulation? In order to do that it needs banks. But here is where urban legend, public myth and a general void of understanding of economics and finance wreaks havoc on the popular understanding of monetary policy evidenced by the innumerable youtube videos on the subject. It is key and vital to understand at this point that,
Currency and wealth are two completely different things.
III. Currency is merely and solely a metric, a measuring stick, for measuring actual, real wealth. Wealth is anything that could be considered of value to anyone in the marketplace, regardless of what it is. Thus currency is just a tool used to facilitate the trading of wealth. While many will nod their heads in agreement to this, it is clear they still don’t quite understand the full implication of this when they claim that, for example, the U.S. Federal Reserve prints money out of thin air. This is grossly false. It is evident that the public is still struggling to figure out what is really going on here. There is more to the story than what most who make this claim apparenlty realize. Therefore, we need to clear the air on these public myths before proceeding.
- A government that decides to take on the task of printing, or minting, currency for use throughout its jurisdiction must do several things. First, it must enact law that demands, under penalty of legal remedy, that this currency be the only currency and that it be accepted on demand; that it be legal tender. If it does not do this not only can others mint their own money and refuse to acknowledge the “governments” money, it means that if other currencies are circulating sound monetary policy becomes impossible because you cannot influence “extra” legal currencies. But this problem runs yet deeper and a brief aside is needed to explain how. Recalling that currency represents wealth, one can easily grasp economics even at the global scale by understanding and following the mantra that currency chases wealth, not the reverse. Therefore, in a stable, healthy economy, all currency in circulation within a jurisdiction (economists call this M1) should accurately reflect all wealth under the auspices of that jurisdiction. This is absolutely vital to understand. And whether or not it is accurate is based on how the market esteems value, making this calculation very hard to perform. So, if some other currency is out there and no law exists to give the governments currency the full faith and credit of Rule of Law (backed by law) then it means that the “nations” wealth is not fully denominated in the government’s currency. Thus any monetary policy will only have a partial, perhaps balkanized effect on the economy. So, this is unacceptable. Imagine trying to get a country out of a financial crisis when you realize, because of all these currencies, or because not all States recognize the currency as legal tender (this would be the case where a State does not recognize the full authority of federal, or central, law, the problem the European Union is facing), you cannot address the crisis because, basically, you don’t have adequate control over the currency circulating in your “country”. This is a simplified explanation of what is going on, but the reality tracks the ideal quite well. Therefore, Rule of Law backing a single currency with the full faith and credit of the regnant government is absolutely essential for a stable, durable economic system to exist.
IV.The second thing the government must figure out, as already noted, is how to get this currency in circulation without destabilizing or harming the economy. It will be helpful to first demonstrate how the United States solved this problem. So, we can now return to our discussion of the case of the Federal Reserve System. Here, there are twelve Federal Reserve “banks” scattered about the United States. The Federal Reserve is itself a quasi-private entity to whom Congress has farmed out its minting job. It is accountable to the U.S. Congress and has been audited every year since 1978 (Public Law 95-320). Its relationship to the federal government is essentially identical to the relationship of the United States Postal Service to the federal government. Neither is entirely private since their so-called “Board of Governors” – what they call their company officers – are appointed by the President. So, when the Federal Reserve mints new currency it first deposits it into the Federal Reserve Bank of New York, which is the one Federal Reserve Bank designated for that purpose. Then, the United States government will offer the Federal Reserve financial instruments that denominate the aggregate wealth of the United States, both at present and as a future, speculated value. This is done through a select group of intermediary financial institutions. In exchange, the Federal Reserve pays for this using the newly minted currency by depositing that newly minted currency from the Federal Reserve Bank in New York to United States government private bank accounts. This is called valuable consideration and has nothing to do with printing money out of thin air. Typically, the instrument sold is a U.S. government bond (but generally is any USG Security). Whatever the security involved, they are generally financial instruments that constitute a fractional “metric”, just like currency, but which include speculative future value metrics of wealth (here also called debt). In other words, the United States government is selling speculative national wealth – with the Federal Reserve being its go-between to the private investor market – and being paid for it in return. This is called monetizing debt. The payment in newly minted currency mostly pays for the speculative value of national wealth believed to be imminently created after the print run. Why? Because that is what the print run is all about. The “monetizing debt” part of selling USG securities is a red herring that all too many have fallen for. USG has sold securities to the public for a long time. This is merely the vehicle they are using, as a secondary purpose, to allow actuarially sound valuable consideration for newly printed currency. The newly printed currency reflects the new wealth that this currency itself will soon generate by being loaned out to entrepreneurs around the country. The Federal Reserve can also sell these securities back into the open market to reduce M1, or reduce the currency in circulation. But we must point out that another method of circulating currency not well known to the public is the so-called discount window, a means of loaning newly minted currency to an exclusive bank membership at interest. By adjusting that interest rate, it can influence how much interest banks further down the chain charge. But it can only reduce the interest rate it charges for these loans to some value greater than zero, so it is not a tool for pumping large amounts of new currency into circulation. The irony of this awkward and antiquated system is that USG has to run a deficit in order to push new currency into circulation (when on the gold standard it had to acquire more gold). But this requirement means they have to also go through the full mechanics of establishing a proper paper trail for that debt; the aforementioned red herring. That is why the securities are sold to the Federal Reserve in exchange for the new currency minted. And this is why the phrase “monetizing debt” is used. It’s a backward way of describing what is actually going on. They are in fact indebting money for no other reason than the fact that running deficits is the only way to circulate all the new money fast enough to keep up with their print rate. The discount window isn’t wide enough. And the problem is grossly exacerbated by globalization because the United States Dollar is the reserve currency; meaning the Fed must print money fast enough to denominate vast amounts of new wealth outside the United States as well. And the globalization is driven by capital accumulation. In other words, the United States is running a grossly antiquated central banking system that is so clumsy they have to run massive annual deficits just to mint and emit currency, one of the most basic jobs of any government. And the Cookie Monster driving it is Capital Accumulation, first cousin of the infamous Triffin Dilemma.
- Recalling that currency chases wealth, if the aggregate wealth within a jurisdiction increases over some time interval, call it t, then in order for the economy to remain stable and for the total currency in circulation to accurately reflect the markets perception of what that wealth is worth, the total currency in circulation, sometime during t, must increase by a proportionate amount. Let us repeat that: currency chases wealth. So, the old wives tale of the impropriety of printing money is nonsense. And it usually begins by fixating on the phrase “monetizing debt” and reflects a complete misunderstanding of what that actually means. And this disinformation is being broadcast all over the internet and it is a disturbingly deep misunderstanding of what is going on. It is such a popular myth that even prominent public figures have come to believe it and spread the falsehood. Persons like Ron Paul, G. Edward Griffith and Pat Buchanan continue to spread this falsehood. What matters is how much currency is printed and thus how much debt is monetized; not the mere fact that “debt” is being monetized. Governments must print money because if they don’t, as aggregate wealth increases, which it almost always does in the United States, you will create deflation of the dollar. Let us explain what we mean about how money should be printed.
- Suppose, in this greatly simplified example, the entire currency in circulation in this “country” is just 100 dollars and we begin with a condition in which the market believes (this is better stated as when they engage in exchange in the market their behaviour indicates this belief) that all aggregate wealth in their “country” is worth 100 dollars. Fiscal policy is balanced at this point. Now, suppose the “government” decides to print 100 more dollars. But suppose that the wealth never changed; that is, the same “stuff” is there and nothing new has been created nor did the wealth already there depreciate. This means that we now have 200 dollars acting as the metric for 100 dollars-worth of wealth. This necessarily means that it now takes two dollars to accurately measure the wealth that one dollar used to accurately measure. This is called inflation because the dollar is now “worth” only half what it was before (it takes twice the money to buy the same thing as before).
V. Conversely, if we remove fifty dollars from circulation (reduce M1 by 50 dollars) then the wealth once accurately measured by one dollar now requires only fifty cents to accurately measure. Thus, the dollar is now “worth” twice what it was. This is called deflation and it takes only half as much money to buy the same thing as before.
- The holy grail of fiscal policy in the United States since the founding of national banks like the Federal Reserve has been how to know and accurately print the right amount of currency at the right time to match changes in wealth. That is the key to understanding fiscal policy in the United States and in most other countries. Recalling that currency chases wealth, monetary policy is all about figuring out how much money should be in circulation, which, by indirection, is a game of assessing and tracking aggregate wealth. So, the United States solved this problem in its case by creating a private institution that would, in reality, primarily be tasked with advancing the state of the art in tracking wealth, not just in the simple examples we’ve discussed here, but aggregate wealth as found within specific industries, nationally, internationally, by country, etc. After about one-hundred years of doing this, they have honed this art to a science and are very good at it.
- The scheme of printing money and selling speculative “national” wealth (which, by the way, returns to the U.S. government Treasury as Federal Reserve profit, thus closing a loop of currency circulation consequent to new currency being injected into that loop and thus rendering the whole process sound) continues by taking the proceeds from that transaction, which end up in private government bank accounts, and pumping it into the economy through the only means a government can move money into the private sector; government budget spending. Now we can more clearly see the connection between government spending and rapid increases in national wealth: as national wealth increases government budgetary expenditures must also increase; that is, the pipe through which currency is being channelled into the private sector has to get fatter. Why is this? Because, recalling that currency chases wealth, whenever the Federal Reserve performs a speculative, large print run, the total currency in circulation will, while it is making its way throughout the economy and reaching its final end point, be disproportionately larger than the aggregate wealth it represents. Therefore, this currency must move quickly into the private sector and quickly be converted into new wealth. That is done by the bank loans aforementioned made to entrepreneurs of other creators of wealth. During the time it takes to circulate this currency, call it t, significant inflationary pressure is felt. But in order for inflation to take hold it takes some time. As long as you can get this currency circulated all the way to the point where it is converted to new wealth faster than it takes inflation to take hold, and if the amount you printed is accurately converted to new wealth and reflects all the new wealth created in the immediate past before your print run, you will not see a significant rise in inflation. Currency matches wealth. As you can see, the monetary policy makers are playing a constant game of print, observe, then print again. They print currency and see how far off they were. Then they adjust the next print by taking that into account. Returning to our question, government budget spending in this scheme ultimately becomes unsustainable if the rate at which wealth is being created is too high, because the government spending pipe has to be larger than is financially feasible in order to move large amounts of currency quickly to avoid inflationary catastrophe. Keep in mind that the spending we are talking about here is not from the simple recirculation of revenue, since that is the spending of currency already in circulation. The kind of spending required is deficit spending and that would have been true since the gold standard was removed in the early 70’s. So, this is the real, “secret”, reason that toilet seats cost USG 500 dollars. And it is indeed secret because those that understand this stuff don’t talk about it because so many obvious, unpleasant conclusions will spill out at once. Thus, the unfortunate irony and weakness of this system is that the more prosperous the economy becomes and the bigger it gets, the more government spending is required. And the discount window won’t solve this problem because pumping too much currency through it would require a dropping of interest rates to less than zero. So, the overall system is unsustainable if we purpose to devise an economic system whose growth is unbound.
- Once again, Rule of Law comes into play. If the federal budget is beholden to an arbitrary (arbitrary from its perspective) mechanism for managing fiscal policy then there is no guarantee that Rule of Law will be followed faithfully when actions are controlled by external economic factors deliberately put in place.
- Finally, we can more clearly see what happens if we remove some very old assumptions. Notice that this particular Fractional Reserve Banking scheme is based on assumptions that are technologically grounded. Three hundred years ago there really was no other way to do this, at least not any way that worked well. Having to use banks as the vehicle to mint currency and distribute it was a necessary evil. Using fractional rules was a necessary evil to make economic engines churn. Meanwhile, bankers made unbelievable profits from this system. Banks are basically institutions skimming off the top of national wealth creation. So, keeping in mind that the point of this operation is to mint and distribute currency such that it matches existing, aggregate wealth as accurately as possible, it is useful now to ask if there is a simpler, more just way of doing this that does not undermine Rule of Law. And the answer is refreshingly simple and obvious once you digest it. It’s called Zero-Zero Banking and is an integral piece of General Federalism. But that’s another discussion. But we’ll need to explain this solution broadly in order to better illuminate the nature of the problem with the existing system.
VI. The same process of assessing how much currency to print based on an assessment of new wealth both recently and about to be generated in the macroscopic style in which it is done can also be done microscopically with much greater effect. But to do this requires modern technology not available to bankers even 50 years ago. The solution is to make these assessments, these measurements of wealth, individually, minting a specific amount of currency to match a specific new wealth generation proposal. Thus, a new enterprise is proposed and, just as one does with a bank, a risk and actuarial analysis is conducted to determine the likelihood of both new wealth generation immediately, and new wealth generation long term. If the risk is market tolerable and if it is rendered actuarially profitable, there is no reason why a minting authority cannot simply print the currency needed to start the enterprise with no need to repay the principal or repay with interest. It, in effect, requires zero reserves and requires zero repayment, making it incredibly aggressive as the kind of economic engine Alexander Hamilton dreamed of when he thought about fractional reserve banking. If there ever were “something they don’t want you to know”, it is this. A multi-billion dollar industry would be totally without justification and exposed as a Ponzi scheme overnight if those that understand this stuff were to talk about this (technically speaking, it is not a Ponzi scheme but is rather an earnings swindle). The solution here provided is a mirrored parallel of what is done in the United States today, the only difference being that the math of monetary policy is done per enterprise, not en masse. We call it Zero-Zero Banking (even though there are really no banks in such a system).
- One potential drawback is that if you create a scheme like this it inevitably means that all enterprises must be publicly owned. For how could you justify the government simply printing currency and giving it away? But this problem runs deeper than that. The wealth generated must be publicly owned in order to have a scheme that does not require repayment of any kind. By not requiring repayment, when the government prints new currency that currency is measuring wealth that the nation as a whole actually owns, which includes all the people and the government … everyone.
This also fully eliminates Rule of Law and cannot be permitted in a durable, global scheme. Rule of Law does not exist at all in the United States, and that is why we call their lauding of Rule of Law by so many in this country hypocritical.
VII. Wherever the aggregate wealth of a society is owned by all, the government is essentially now buying wealth (that, by virtue of being the executor of the social contract, presumably has the right to barter on behalf of the community) for cash and deeding it back instantaneously (as part of the transaction) to the community as a whole, the general public, because that is where it got the wealth from. Therefore, one must be very deliberate and careful in how they structure this system. For we can now see why the idea of a Public Trust came so naturally: we sought a way to handle the natural consequence of Zero-Zero Banking without entraining all the foibles of socialist and Marxist economies. The Public Trust is not governmental, is an independent legal entity and the government has only limited, specific Trustee powers over that Trust.
- Finally, we need to point out another reason why we project that, given sufficient but foreseeable time, neo-liberal western democracy will fail badly, at least if it maintains any of the existing, traditional economic systems to include both Capitalism and Marxism. To explain this, we first note that two theoretical constructs called “Capital Accumulation” and the “Triffin Dilemma” are in fact two sides of the same coin. Capital accumulation was an idea made popular by Karl Marx and is one of the few things of Marxist flavor that economists generally agree is probably true. The Triffin Dilemma however, appears on the surface to be a completely different idea. Capital accumulation avers that any capitalist system, given sufficient time, will tend to create and accumulate new capital disproportionately into the hands of a minority of capital holders thus denying the majority access to the same. Given sufficient time, the majority ends up with too little to survive and the system will necessarily fail. The Triffin Dilemma, on the other hand, says that if trade becomes too imbalanced for too long, the world’s capital flows will become unnatural and will push all the world’s wealth into the United States, a fatal act to global trade and all economies. What is not obvious on the surface however, is that this is just a recasting of capital accumulation at the global level. What it is showing is that Capitalism tends to cause capital to accrete in the hands of a minority and that this is, ultimately, a fatal trend. The United States has managed to deal with capital accumulation remarkably well. First, it promoted a massive increase in consumption, which serves as a tap to draw off some of that excess wealth that causes capital accumulation. Once this played out they moved to credit, particularly unsecured credit. And when that played out they began literally killing the consumer in the United States when the machine turned to producing highly disposable products using a concept called planned obsolescence; basically manufacturing goods whose useful life was unnecessarily short. Finally, when everything got about as cheap as it could get, that same machine turned to globalization and the beginning of the Triffin Dilemma; the last great “adjustment” available before the entire earnings swindle collapses in which the capital in the rest of the world is similarly sucked dry and accreted into the hands of the capitalists. The capitalist machine keeps adapting but its running out of aces and at some point must fail. This is the 800 pound gorilla in the room that few are talking about but a beast that is going to rule the house at some point in the future. The well-respected academic David Harvey spoke of this same recent tactic of globalization as a tool to ease capital accumulation when he referred to it as solving the accumulation problem by “outsourcing” industry in the United States to locations overseas. This is just one way of saying the same thing.
- Capital accumulates in the hands of the capitalist investors, a minority of the population, because in order to invest in business one must apply capital. The whole idea behind capitalism is that as a result, when you succeed, you generate more new capital from that enterprise than the amount of capital required to start the enterprise. Thus, capital grows over time. But since the capitalist is the one doing the investing and reaping the profit, all this capital remains in their hands. Ultimately, most capital starts out as natural resources. If we assume that capital is finite, which is not a certainty but is probably practically true, eventually all of the world’s capital will end up in the capitalists hands and everyone else will have none. If non-capitalist have no capital they will die. They will die because you can’t lease everything. Food, for example, cannot be leased or owned by someone else if you eat it. Thus, before reaching this point, the argument goes, capitalism must fail. But even if you could render the majority without any wealth whatsoever, the capitalists would no longer be able to invest as all the capital would be in use. Consequently, the economy would fail. It is certainly true that there are several variables one can play with to make this game last longer. For example, the pay and hours worked by employees can be improved, which just slows down the accretion of capital. You can recycle capital once is depreciates sufficiently (but the return on this is still finite). Or, you can find new markets from which you can siphon and extract yet more capital by doing things such as globalizing the economy (where the newly accessible wealth is also finite). That is what capitalism is doing today to compensate for an over-accretion of capital already present. But Marx’s point was that this system must ultimately fail. Globalization of the economy, as one compensatory mechanism, is where the Triffin Dilemma enters. If capital accretes by a net trade deficit (bringing in more wealth than you are sending out) at an uncontrollable rate, the Triffin Dilemma theorists have noted what Marx did: the economies will all collapse because the countries outside the United States cannot participate in trade if they have no wealth and that in turn would bring down the U.S. economy. With no hint of irony, the die-hard capitalists talking about the Triffin Dilemma are just validating Karl Marx. You cannot run an earnings swindle of this kind that accretes capital without bound since the earnings ultimately depend on the laborers retaining capital.
- The solution to the above is that any durable, sustainable system must have a means by which the community, through a representative process bound in Rule of Law, can plan an economy to some limited degree, preferably by controlling only what and how much of what is produced, leaving the rest to market forces. By having some deliberate say in what is produced one can control or limit the over-accretion of capital, control consumption rates of energy and natural resources, manage capital already in use, recycle it and ensure that basic needs are met first. If the only thing pursued were basic needs capital accretion would immediately become a non-issue. We’ve touched on this subject in our discussion of the Public Trust, but the key idea here is to minimize interference in natural laws (economics) by taking care to only inject tools minimally sufficient to expose these natural laws to Rule of Law and general equity. Our analysis of the failure of various socialist economies, such as the economy of the USSR, indicated that this was one area of economic planning that had no significant impact on the causes of the collapse. The failure of these systems was overwhelmingly associated with the means of production; that is, governmental control over how capital gets used, businesses are run and valuable consideration occurs. Conversely, the what of production in the USSR, which is what we propose to subject to Rule of Law, outperformed that of the United States. The statistically analysed economic history of the USSR is a tragically schizophrenic story in which in some ways the economy set world records for performance and in other areas set world records for failure. By invoking this more focused and narrow form of centralized planning, we are planning only with respect to what we “dig out of the ground”; we’re concerned only with the best use of the Periodic Table and the various useful minerals Earth has to offer, something academics call “optimum allocation”.
VIII. A final note about Fiducial economies and Zero-Zero banking is that we have exposed something that the astute reader might have already noticed. Start with no economic theory or assumptions at all and assume a technological and industrial infrastructure already exists. Then why couldn’t we just set it up so that everyone could just go to factory x, request that x manufacture a product y and give it to us? Because, after all, when people from factory x come to the factory where I work, say, factory z, I will do the same for them? This would work with two limitations. One, the economy would have a ultimate limit in that it could only honor requests like this up to its capacity to produce the products requested in the time frame desired. This would necessitate a queue into which we must place our request. And if a request made by some random person and maybe a law to go with it was all one had to motivate them, it is not likely they will be very productive. Second, some means of balancing the queue would be needed because otherwise someone who can make more requests faster could get more stuff than anyone else. To make it equitable, we need to “load balance” these queues. But of course, in order to do these two things we might as well introduce currency, which would solve both problems. But alas, this is exactly what Fiducial economics is. Fiducial economics is simply a way of reducing an economy to its simplest possible form, which in turn allows us to eliminate outdated schemes that hugely profit a minority of participants; in other words, banks. Because the technological capacity to create a Fiducial economy didn’t exist in the past, banks were the only way to do this and the massive profiting of bankers was a necessary evil. But this is the 21st century and these elaborate and complex schemes for minting and emitting currency; speculative instruments, fractional loaning, principal that must be repaid and interest on principal are all unnecessary with today’s technology. All we need is a queue of requests in which laborers are motivated and the queues are balanced equitably and directly with currency.
Finally, we can return to the current dilemma and more fully explain what is going on. The natural question comes up, “then what are the banks in the United States doing exactly?” Since banks in the United States and in fact in every so-called “free market, neo-liberal system” are loaning money and requiring repayment not just of the principal but of interest as well, clearly there is more to this story. Indeed. Recall that when I spoke of the Public Trust under a Fiducial economic system that every laborer is, by their labor, appreciating the market value of the wealth held in Trust. In other words, all of the gains one sees in new wealth upon every currency print run is generated by every working individual in the country. Some of that comes from the expoloitation of new natural resources, but this is really only a small fraction of that total. What the banks today are doing is they are using the fractional reserve rules to “assist” the Federal Reserve with its print runs. This is why they have the discount window in the first place. If the Federal Reserve wants to match currency to weatlh, their primary job, they need a way to influence private banks into either increasing or decreasing their loan rates. The private banks are, in effect, “minting” money on behalf of the government when they loan money they don’t actually have to borrowers (recall that under the U.S. Fractional Reserve Banking system the banks can loan 10,000 dollars for every 1,000 dollars they have on deposit). And now you know the rest of the story. The principal and interest repaid in fact is the currency representing the appreciation of the aggregate wealth of the U.S. economy by laborers, not bankers. It properly belongs to the former. Rule of Law is now violated because de facto theft is occurring even though no laws changed, what General Federalists call “technological deregulation”.
To be perfectly clear, the bonds USG sells to the “Fed” are in turn sold to the public. Then the Fed takes the money it receives from the buyer who paid with money already in circulation and sends it back to the U.S. Treasury. Thus, USG is selling bonds on the open market – to the public – by using the Fed as an intermediary. This increases USG’s revenue however, this payment is based on bonds which are essentially IOUs repaid with interest. So, the citizen is getting bilked from two directions. First, the loan principal and interest repaid is not paid in such a manner as to remove the money from circulation. Rather, it is paid by the citizen – the laborer – to the private banks that loaned the money. So, the currency loaned, the newly generated currency, continues to reflect increases in the aggregate wealth of the country and remains in circulation. But what has happened is that, due to this repayment of principal and interest, the new wealth that the citizens generated is redistributed to the capitalists who own the banks. On top of that, the citizens will have to pay the taxes over the many years over which the bonds mature in order for the government to make good on its IOUs. But this is also a wealth redistribution scheme because the citizen is transferring their wealth via currency and taxes to the original investors who bought the bonds. And both of these kinds of redistribution are fraudulent because the wealth being redistributed through currency was created by the laborer – the citizen – not the banker.
One more thing to note is that the Fed – and most people who benefit from this system – astutely avoid mentioning this wealth-currency connection openly or explicitly and prefer to refer to money as deriving its value from the “confidence” the market has in its integrity. But this is just a vague way of saying that it is based on wealth because “confidence” derives of wealth. In order for money to have value one must be confident that some real wealth as the market percieves it exists out there to back it up. In fact, that’s all gold is, just one specific, narrow form of wealth. It’s pathetic to hear economists talk out of both sides of their mouths when discussing this; noting first that currency is a metric of weatlh, then referring to money’s “value” as being derived of market “confidence”. It’s an absurd exercise in semantic calisthenics. The secret of Oz – the secret of how neo-liberal monetary policy works in virtually all countries today – is that currency chases wealth. The minute one understands this the vile depth of the fraud of the system becomes obvious and clear.
Finally, I should note that the Fed rule regarding reserves is a bit tricky and misleading at first. It has caused many to get confused over exactly how it works. When a deposit is received at a bank, call it bank A, and the amount is x, then what the Fed rule actually says is that bank A, upon the act of depositing x, is authorized to “flip a switch” and loan out 0.1 * x of that deposit amount. In other words, the actual money deposited in the amount of x is not actually used for the loan, it merely authorizes the creation of 0.1*x dollars to produce a loan in valuable consideration of a promissory note. I won’t call this deliberate but it certainly lends itself brilliantly to misleading those who work in the banking industry into believing the rule as simply requiring that banks are required to set 0.1 * x aside as reserves upon any and every deposit of any value x. This is not what the rule says, however. It isn’t that any deposited money is set aside, it is that the deposited money, by virtue of the fact that it was deposited and has an amount of x, authorizes the crediting of an account by (1 – 0.1)x upon consideration of a promissory note. So, by example, if the Fed deposits 10,000 dollars into an account at bank A, then bank A can prove a promissory note in the amount of (1 – 0.1) * 10000 = 9,000 USD. Should the recipient redeposit this amount, say, in bank B, then bank B can repeat the process. But this time, as the rule stated requires, bank B is authorized to credit another account by 9,000 * 0.9 = 8100 upon the proving of yet another promissory note. This process can repeat ad infinitum until the bank is unable to loan any remaining fraction. Since banks are for-profit institutions, this will likely be aggressively exhausted. The Fed has to estimate how much actual currency this will create and match that to changes in wealth if it is to avoid disastrous inflation or deflation. And it uses the discount window to speed up or slow down this loaning process (like adding or taking away nitro from a race car). I’ve taken the time to add this clarification because I’ve seen youtube videos of apologists for the system claiming that the scheme only requires that 10% of all deposits be set aside as a reserve. And that is a half-truth. And as I stated, it is brilliant in that it tends to mislead one precisely in that direction.
So, finally, in defense of the bankers, what would we expect them to do as the 20th century rolled on and it became evident that it was technologically possible to abandon this old scheme and do something that might be not a little fairer, like, say, Fiducial economics? Do we think they were just going to get on the radio with FDR in a fireside chat and tell us, “oh, just kidding, we can fix that now”, and willfully surrender billions upon billions of profits for all bankers nationwide? They couldn’t do that. No one person had the power to fix that system. They still don’t and they are terrified you are going to figure all this out and start raising hell.
A friend of mine has very generously offered his time to do a video series on my document, “Introduction to General Federalism” which explains all of this in more detail. It provides the entire story of the public myth of neo-liberal western democracy and is worth the time to view. You can find it here (look for the video series, “World Government and General Federalisim” found on the first page). So, there you have it. No one is printing money out of thin air and no one is deliberately enslaving you. But it certainly is an unsustainable Ponzi scheme. In any case, this age-old dilemma that no one wants to have to deal with is the 800 pound gorilla in the living room, the nasty, perverse in-laws no one wants to discuss, that is going to blow this can wide open. And this is why I’m hoping to set the record straight and disabuse anyone of any of the popular urban legends and conspiracy theories that are cropping up as a result of greater awareness generally of this issue. I hope it was helpful.