"The Fantasy System", which was posted here on August 5th, has
generated a lot of reader response.
The key point of
Russell's essay can be summed up in the following paragraph: "I say
fantasy because the central banks are able to create money at will, with no
discipline to stop them. This I believe - is immoral, even evil. The current
system allows a central bank to create money out of nothing - whereas I and
my fellow Americans have to work for that same money."
This process of
creating "money out of nothing" is made possible by fractional
reserve banking. As its name implies, banks keep a reserve, i.e., assets, for
only part of their liabilities. For that portion for which they don't keep a
reserve, they can create money (i.e., bank liabilities) out of nothing.
It is important to
understand this process of fractional reserve banking. For this reason, I
append below my correspondence with Denny Jackson, who believes that Russell
doesn't go far enough in presenting the insidious nature of fractional
In my opinion Richard
Russell's article falls short in two respects: He fails to make clear the
distinction between price inflation (or deflation) and monetary inflation,
and his term "fantasy system" glosses over the criminal fraud of
fractional reserve banking, the root cause of virtually all economic evils.
The confusion between
monetary and price inflation (or deflation) is critical because so few people
understand that price inflation is simply an effect while monetary inflation
is the root cause. Indeed, most people have been trained to think that
inflation is synonymous with rising prices, which draws attention away from
the true picture. In fact, in an honest, full reserve, commodity money
system, price deflation would be the norm, resulting from increased
productivity and technical advances. Far from being harmful to an economy,
price deflation under a fixed monetary standard benefits consumers and
producers alike as not only retail prices fall, but the price of raw
materials used by producers also falls. Also, no undue hardship is born by
either debtors or lenders, as monetary values change little over time. On the
other hand, in a monetary system inflicted by fractional reserve banking (of
which zero reserve fiat money is simply the extreme end), the price of money
in terms of other commodities will be continually varying according to the
whims of the bankster managing elite, leaving everyone who uses the money
uncertain as to its value (if any) in the future.
Russell also confuses
the issue when he states that the mountain of debt created requires inflation
to handle it because borrowers become unduly burdened with a falling supply
of money. That again puts the cart before the horse. Ultimately any amount of
debt requires inflation to handle it. There is tremendous pressure against
any monetary deflation in a 100% debt money system such as ours, since
interest on the debt requires the creation of ever more money to service it. Retirement
of the original debt would still leave the interest outstanding which would
require another loan to pay off and the cycle continues. Indeed, payment of
all outstanding debt would leave the nation without any money whatsoever! Monetary
deflation in a debt money system means that someone somewhere is defaulting
on their loan.
The real problem is
not a central bank system per se as Russell implies, but with fractional
reserve banking at any level, especially fictional reserve pure fiat currency
imposed by a crooked government to benefit the banksters who control it. Centralizing
the fraud and making a cartel of it simply makes it impossible to escape it. Theoretically
at least, a central bank could function without harming the nation if it were
restricted to using gold and silver coin (and deposit receipts) as the
Constitution requires, and was not permitted to make loans, a power not
granted by the Constitution.
An honest society
cannot be built on a foundation of dishonest money and a flagrant disregard
of fundamental law. Let's call things by their right names and not call fraud
A wonderful analysis.
May I post your essay to the GoldMoney site?
Your analysis of
fractional reserve banking is spot-on accurate, but I think you are being a
little harsh on Russell. Isn't the 'fantasy' system he describes only made
possible by fractional reserve banking? Isn't the process of creating money
out of 'thin air' - which results from fractional reserve banking - the
process being described by Russell even though he doesn't call it that? Maybe
I'm reading more into Russell's essay than I should, but I know from reading
him over the years that he understands fractional reserve banking and its
I like Russell's essay
very much because it describes in layman's terms how insidious the process of
money creation has become. And it is of course a process made possible by
fractional reserve banking.
You have my
permission to post my piece if you'd like, and feel free to use my name.
Of course you're
right. I didn't really mean to be too critical of Russell, who no doubt
thoroughly understands the whole sorry mess, though I'm not familiar with his
writings. My point is that I think he could, and should, do a better job
explaining it to the average Joe, whom I assumed was the intended target of
the essay. To those who understand the difference between price and monetary
inflation and deflation it is quite clear, but very few people do understand
and the distinction is critical to understanding why fractional reserve
banking is so pernicious. As long as Joe Sixpack thinks that inflation and
deflation are just changes in prices, he never pays any attention to the man
behind the curtain pulling the monetary strings that give rise to the wild
inflationary swings that make his life miserable. Also I just think Russell
could have hit the fractional reserve banking fraud harder. The blow is
deflected by pointing to central banking as the culprit, or at least the main
culprit. The reason central banking is so damaging is due to its power to
monopolize the exploitation of fractional reserve currency and to force it on
everyone under color of law. The real culprit is the total disregard of
constitutional limitations by Congress and the courts, and ultimately the
massive ignorance and apathy on the part of We the People, the only ones who
will ever enforce the Constitution.
fractional/fictional reserve banking system is no fantasy. It's a very real
fraud that needs to have a stake driven through its heart. I understand
Russell's point and it's a good one. It just should be put more clearly. Thanks for listening.
Turk is the founder of GoldMoney
(www.goldmoney.com) and the co-author of The Coming Collapse of the Dollar (www.dollarcollapse.com).
© 2007 by James Turk. All rights reserved.
Copyright © 2008. All rights reserved.
Edited by James Turk, firstname.lastname@example.org
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