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Regular reader Rich writes:
I've read in a couple of places on the internet that
if all outstanding debt was repaid, there would be no 'money' left in our
debt money system. Is this true? If so, what happens to the interest that the
bankers earn?
This is unbelievable to most people, but it is
absolutely true. If all outstanding debts were repaid under our current debt-based monetary system,
there would be no money left in existence. I stress our current debt-based monetary system
because other types of monetary
systems are possible. Most people never stop to think about this (usually because they're too worried about paying their
bills), but our current system (which is controlled by the Federal Reserve)
is just one of many possible money systems. There are in fact a variety of different kinds of monetary
systems. The following illustration of a simple commodity-based monetary
system will help us understand just exactly what money is.
I. The Commodity-based Money System of Prison X
It is well known that in prison, cigarettes often take on the role of what we
traditionally think of as 'money.' In fact, given the circumstances, they are money. Inmates may not be free, but
free markets can spontaneously arise in prison.
Imagine that the warden gives all prisoners at
Prison X a ration of one pack of cigarettes per week. Many prisoners don't
smoke, but the cigarettes they receive are not worthless. This is because many more prisoners do smoke, and they value
those excess cigarettes. This gives the cigarettes an intrinsic value. Even if you don't
smoke, you will still value the cigarette because
it has value to someone else. Furthermore, cigarettes are small, uniform,
easily stored, hidden and traded. In the absence of what we traditionally
think of as 'money,' they become money.
As a commodity in constant demand, they make a perfect medium of exchange. In
fact, this is one part of the definition of money: Money is a medium of exchange.
Money is also a unit
of measure: If you find yourself in Prison X, you might discover
that a large metal file (a vital tool in your plan to escape) will cost you
500 cigarettes. At a pack a week, it will take you 25 weeks to save enough to
get your file (assuming you don't smoke). Whatever you're looking to obtain
in Prison X, you'll find that its value can be measured - i.e. priced - in
cigarettes.
It is also worthwhile to note that different kinds
and brands of cigarettes would undoubtedly have different values, because they taste different (as a smoker for over 10
years, I know this to be true!). American Spirits might be worth the most,
and menthols might be worth more or less, depending on the preference of the
smoking population. The raspy generic brands would no doubt be worth the
least. An internal exchange rate between the different kinds of cigarettes
would spontaneously arise, based on their intrinsic qualities (taste), and
how those qualities were subjectively valued. This exchange rate would be
equivalent to the different denominations
of bills that we have in our system.
Finally - money is a store of value. As long as the number of cigarettes in
circulation remains stable, the monetary
value of each cigarette should remain stable over time. If the
ration of cigarettes were to suddenly jump - say the warden increased rations
from a pack a week to two packs a week - each cigarette would now be worth
less. This is inflation.
Simply put, inflation means more money in the system. As a result of this
sudden inflation, that big metal file you were saving up for would now cost
twice as much. As should be clear from this example, higher prices are not the cause of
inflation they are the result.
Conversely, if prisoners suddenly began smoking
cigarettes faster than they were being issued, the cigarettes that remained
in circulation would increase
in value. This is the definition of deflation.
Deflation just means less money in the system.
II. Our Debt Based Monetary System
The purpose of the brief illustration above is to outline the essence of
money. Some key points are: 1) Nearly anything can serve money, as long as it
has intrinsic value and is therefore in demand by some members of the
population. 2) Money doesn't have to be issued by the government - it will
arise spontaneously as it is needed. 3) Sound money must serve three basic
functions. It must be: a unit of measurement (serve a pricing function), a
medium of exchange, and a reliable store of value. With this in mind, we can
now take a fresh look at our Federal Reserve controlled debt-based monetary
system.
Under our debt based monetary system, money is
backed not by a commodity that is in demand like cigarettes or gold, but by debt. Ultimately it is the debt of the United States
government that backs our currency. Since we
are the government in the United States, or at least that
is how it is supposed to work, it is our
own debts that back our currency. Our paper currency has no
intrinsic value other than that we need it to
pay back our own debts.
Confused? This is how it works:
If you look at the green bills in your wallet,
you'll notice two things. First, across the top, they all say 'Federal
Reserve Note.' These are FRNs. Also, somewhere on
the right side - depending on the bill - it says in small print, 'This note
is legal tender for all debts, public and private.' In other words, this is
the government's way of telling you that FRNs must
be respected as a medium of exchange. If someone says he wants his debt to be
paid off in FRNs, you must comply. This is the law, by fiat decree. This
is what is meant by 'fiat' money. This is extremely important, as we shall
see later.
Where do FRNs Come From?
FRNs are created in an exceedingly simple
transaction between the US Treasury and the Federal Reserve. The US Treasury (the
government) creates a bond, and the Federal Reserve (a private bank) creates
some money. The Fed loans the Treasury the money it just created and the
Treasury gives the Fed the T-bond it just created as collateral. The bond is
an IOU that serves as backing for the money that was just created.
I know. It sounds circular, confusing and insane, because
it is. It is meant to be so that you don't understand it.
It was this understanding that led Henry Ford to proclaim, '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.' The great economist John Kenneth Galbraith put is even more
succinctly: 'The process by which banks create money is so simple that the
mind is repelled.'
The Similarities and Differences
At this point, lets take a moment to examine the
similarities and differences between our debt money and the prison's
commodity-based cigarette money.
First, the prison warden did not stamp 'this
cigarette is legal tender for all prison debts' on each cigarette. He didn't
have to, because under the
circumstances, cigarettes had intrinsic
value. People could smoke them. There is always demand. The
reason the fiat declaration is stamped on each FRN is because these pieces of paper are otherwise worthless. Who would want this crap?
They were created from thin air, there is an unlimited supply, and they don't
hold their value.
But given that this is true, why do people continue
to use them? Why doesn't another monetary system spontaneously arise, the way
it did in Prison X?
Here is the rub: Since there is no intrinsic demand
for worthless FRNs, the government - specifically
the Treasury, which is on the hook to pay the interest back to the Fed on
those bonds - created one. You have to pay your taxes in FRNs. Nothing else is accepted.
The income tax is the mechanism by which the
government creates artificial demand for an otherwise worthless currency. Is
it a coincidence that the income tax and the Federal Reserve were both
created in the same year - 1913? Emphatically I say, it is
not. As Ron Paul says,
Some Answers
So, to get back to the questions that began this piece: In Prison X, if all
the cigarettes were smoked, there would be no more cigarette money. Likewise,
if all debts were repaid under our current monetary system - all the credit
card debt, auto loans, and mortgages,
all the way up to the national debt - there would be no more debt money,
either. I have explained how the Fed and Treasury create money from thin air.
It is by this same process that money is created by the banking system
throughout the economy. Your debt is the
bank's asset. The interest you pay them is their income stream. The
more assets it has, the more loans it can make. More loans means and increase
in the money supply, and therefore inflation.
Our Competitive World
As for the interest that the bankers earn: first, the bankers don't 'earn'
it. They collect it. There is a huge difference. 'Earning' refers to
obtaining money by doing useful work. The banks, like the Fed, create money
from thin air and 'loan' it to you. However, in creating the principal amount
to loan you (from thin air), they never create the
interest that you are to repay. So where are you supposed to get this extra
interest amount to pay them back?
The answer is that you have to get it from someone
else's principal that they
borrowed. This is why it is such a competitive, dog-eat-dog world out there -
not because of human nature. It is
because the monetary system
requires it of us. Everyone is scratching and clawing at one another, collectively trying to get their hands on more
money than exists in the system. The system itself ensures that a
certain number of people will go broke and lose everything. They have to so
that others can repay their loans to the bankers.
The final thought that I would like to leave you with
is this: If we change our money system, we will change the world. Are you ready for a revolution?
By :
Michael A.
Nystrom
Editor, Bull not Bull
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