(2 PM – promoted by TheMomCat)
What is money? Specifically, how is it created?
It’s an amazing thing. We obsess over it. We sacrifice for it. We debase ourselves for it. We spend our lives trying to acquire as much of it as possible, and yet not one in ten people can accurately tell you how it is created. Most people don’t even care how it is created, because getting it is all that matters.
If an alien landed here they would consider this behavior irrational to the point of insanity. And they would be correct.
“The most powerful force in the universe is compound interest”
– Albert Einstein
There is a famous allegory about the Persian emperor who was so pleased with a new game called chess that he offered the inventor a modest reward for his idea. The nameless inventor knew something about math, so he asked for a grain of rice for the first square, twice as much for the second square, and doubling again for each square until all 64 squares had been accounted for.
The emperor quickly agreed. On the 8th day the inventor collected 128 grains of rice. On the 16th he brought home 32,768 grains of rice. By the time half of the chessboard was accounted for the emperor was in debtor’s prison because he defaulted on his debt to the inventor.
A similar analogy would be that one penny invested at 4% interest at the birth of Christ would buy a ball of gold 8,190 times the weight of the Earth in 1990.
The point is that compound interest is an extremely powerful thing. In a society that is heavily in debt, like ours is today, it is the most important force in the economy.
It also shows the mathematical impossibility of ever increasing borrowing with compounding interest. The solution that governments and the corporate media try to sell us is of exponential economic growth – another impossibility on a finite planet. This contradiction has led to innumerable wars and revolutions in our past.
“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.”
– Mark Twain
What is money?
Like interest, money is a subject that everyone thinks they know about, but very few actually do. This ignorance of the monetary system caused famous industrialist Henry Ford to once say:
“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.”
What would cause him to say such a thing? A former Federal Reserve member can explain it better than I.
If all bank loans were paid, no one would have a bank deposit, and there would not be a dollar of currency in circulation. This is a staggering thought. We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money, we are prosperous; if not, we starve. We are absolutely without a permanent monetary system. When one gets a complete grasp upon the picture, the tragic absurdity of our hopeless position is almost incredible-but there it is. It (the banking problem) is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it is widely understood and the defects remedied very soon.
– Robert Hemphill, for 8 years credit manager of the Federal Reserve Bank of Atlanta. January 24, 1939
The enormity of Hemphill’s epiphany is so significant that I’m not surprised that the majority of the public refuse to accept it. “We are absolutely without a permanent monetary system.” That means that the world monetary system will eventually fail all by itself because that is the way it is structured.
Why would it fail? Because of debt levels must increase exponentially in order to grow the economy. A growing economy requires more money, and money is debt. Exponential debt levels are mathematically impossible after a certain point. This isn’t konspiracy theory or blind conjecture – it’s Algebra 1.
“Although capitalism is not a Ponzi scheme, credit-based economies, sic capitalism, and Ponzi schemes share the same fatal flaw. Both must constantly expand or they are in danger of collapse.”
– Darryl Robert Schoon
It wasn’t always this way. When President Lincoln looked to fund the Civil War effort, he issued Greenbacks. This was government-backed fiat currency that was not borrowed into existence. The bankers of London were not amused.
The great debt that the Capitalists will see to it is made out of the war must be used to control the value of money. To accomplish this government bonds must be used as a banking basis.
It will not do to allow greenbacks, as they are called, to circulate as money for any length of time as we cannot control them. But we can control the bonds and through them the banking issues.
– The Hazard Circular – published by London bankers, 1863
This long and information-packed movie goes into more detail.
The dollar value of nature
“After the last tree is felled, Christ will come back.”
– James G. Watt, 1983
Science supports the environmentalist movement. Common sense supports the environmentalist movement. Public opinion supports the environmentalist movement.
So why do the environmentalists consistently get their clocks cleaned by corporate interests?
You would think after so many defeats, and so many decades of engaging in defensive battles that environmentalists would question their tactics. The reason environmentalists lose, and will continue to lose, is because they know lots about the environment, but very little about the economic incentives of their opponents.
In other words, they know their allies but are ignorant of their enemies.
For instance, a primary tactic of environmentalists is to shame corporations by exposing their rape of the environment. But corporations have no shame.
Starting with the Sagebrush Rebellion, continuing with Reagan’s Interior Secretary, James Watt, and the Wise Use Movement of the late 80’s and early 90’s, and finally with the rise of the “free market environmentalism” the Republican base keeps coming and coming for undeveloped land, and they will never stop.
The pro-privatization crowd is very open with their reasoning and logic:
Some object to privatization because they believe that our national “crown jewels” (however defined) are sacred natural treasures and that no price tag can or should be attached to them. Well, one is welcome to one’s beliefs, but value is subjective. Land is worth only what people will pay for it.
[…]
If there is more money to be made by turning the Grand Canyon over to the Walt Disney Co. rather than to an eco-sensitive tourism cooperative, it simply means that the public demand for Disney’s services at the Grand Canyon is greater than the public’s demand for Deep Green Trail Services Inc.
This is a philosophy that sees absolutely no value in anything that can’t be turned into a buck. The debate is framed so that the environmental movement is forced to argue from a moral high ground of beauty and legacy, while the opponents argue from an economically “practical” background.
This framing is false for several reasons.
#1. The National Parks Conservation Assoc. contracted a study in 2006 that measured the economic effect of the national park system. The results disproved the argument that extracted and exploiting the natural resources of the lands was economically “practical”.
It generates more than four dollars in value to the public for every tax dollar invested by the Federal Government. In addition to that, National Parks support $13.3 billion of local private-sector economic activity and 267,000 private-sector jobs. National parks attract businesses and individuals to the local area, resulting in economic growth in areas near parks that is an average of one percent per year greater than statewide rates over the past three decades.
I don’t know of many private enterprises that can generate four dollars of return on one dollar of investment. So the fact that we are even debating this indicates there is about a larger issue at work.
#2. The debate here is larger than just the National Parks versus private enterprise. It is about the value of nature itself.
Last year the U.N. conducted a study concerning the economic benefit that nature provides us.
Mangroves in Vietnam, it turns out, save annual expenditures on dike maintenance of more than $7 million. And in another example: it would cost $200 million to replicate the services provided by natural springs in New Zealand.
Researchers found that every hectare of coral reef-a modest area of land equal to just under two and a half acres-is worth more than $1 million annually….But what struck Sukhdev and fellow researchers were the high ratios of return when conservation projects were undertaken. With agriculture alone, addressing problems with soil consistency or water contamination would pay substantial dividends, they found-an average global rate of return of $60 for every $1 invested.
Sixty to One. Let that sink in for a moment. There is simply no comparison to returns like that in the private investment world.
It doesn’t stop there. Honeybees, simply by doing what comes naturally, contributes $57 Billion annually to the economy. The dung beetle contributes $380 million annually by getting rid of manure that would otherwise attract parasites.
In fact, if you add it all up, the dollar value of nature’s contributions is immense.
For the entire biosphere, the value (most of which is outside the market) is estimated to be in the range of US$16-54 trillion (1012) per year, with an average of US$33 trillion per year. Because of the nature of the uncertainties, this must be considered a minimum estimate. Global gross national product total is around US$18 trillion per year.
So a general estimate is that the dollar value of nature’s services is twice the value of everything man produces, combined.
Given these facts, why does the corporate world still insist that natural resources must be privatized? For several reasons, all of which involve greed.
For starters, most of the economic benefits listed above are measured by what it would take for private industry to do the same job. Or to put it another way, many of those economic benefits don’t immediately translate into dollars in anyone’s pockets, which is the only way that the corporate world measures anything.
Second, and more importantly, the corporate world is already using and abusing the benefits that nature is giving them and there is no cost associated with it. If the world’s biggest companies were held accountable for their cost of polluting and other damage to the environment, more than one-third of their profits would vanish.
The study, conducted by London-based consultancy Trucost and due to be published this summer, found the estimated combined damage was worth US$2.2 trillion (£1.4tn) in 2008 – a figure bigger than the national economies of all but seven countries in the world that year.
“What we’re talking about is a completely new paradigm,” said Richard Mattison, Trucost’s chief operating officer and leader of the report team. “Externalities of this scale and nature pose a major risk to the global economy and markets are not fully aware of these risks, nor do they know how to deal with them.”
A new paradigm is exactly what we should all be talking about.
Private enterprise cannot make a profit on something until there is scarcity. So as long as clean air is available to all, then the free market has no interest in doing anything but polluting it. The reason is because the current free market, capitalist, economic model exists to commodify natural resources and turn it into consumer goods, while externalizing expenses by doing things like trashing the planet.
However, once the atmosphere is polluted to the point that people with money can’t breath, then the free market will create a solution – but only for those it can make a profit from. The poor die slowly.
We are already seeing this scenario played out with water.
Even when it comes to land, privatization is no solution. For instance, privatization of wetland areas usually means the owner will drain the wetlands for economic reasons. The community will be denied a thriving habitat for wildlife.
To put it another way, the capitalist free market, as it is practiced today, will inevitably destroy the planet’s ecosystem because it cannot privatize the oceans and the atmosphere.
This is one of those inconvenient truth moments that, unfortunately, Prius-driving, middle-class America is not ready to accept. While Glen Beck-watching, truck-driving America will actively fight this conclusion.
However, willful denial or giving up will get us nowhere, and eventually we will find ourselves right back at this very spot again.
That’s not to say that there aren’t more modest intermediate steps that can be taken in the meantime, such as abolishing government subsidies for deep-water fisheries.
Some success has been made from Individual Fishing Quotas. However, this does nothing to solve the problem of pollution.
Even if it was politically possible to fundamentally reform corporations, something I strongly support, and goes far beyond what the mainstream environmental movement is calling for, it would only slow environmental destruction.
The reason is because the nature of the monetary system: it requires infinite growth due to interest on the debt which backs every dollar.
A stable economic system that exists in harmony with the planet is not possible in today’s monetary system.
Simple as that.
In this environment of seemingly insurmountable problems, the IMF quietly released a radical working paper that draws on forgotten ideas from our past.
One could slash private debt by 100pc of GDP, boost growth, stabilize prices, and dethrone bankers all at the same time. It could be done cleanly and painlessly, by legislative command, far more quickly than anybody imagined.
The Chicago Plan
Irving Fisher will forever be remembered for this infamous quote:
“Stock prices have reached what looks like a permanently high plateau.”
-Oct. 17, 1929
Fisher’s reputation was permanently discredited. However, the 1929 Crash and Great Depression inspired Fisher, and other economists, to fundamentally rethink the monetary system. The product of this was a mostly forgotten paper called A Program for Monetary Reform (also known as The Chicago Plan), possibly Fisher’s greatest contribution to the field of economics.
The conjuring trick is to replace our system of private bank-created money — roughly 97pc of the money supply — with state-created money. We return to the historical norm, before Charles II placed control of the money supply in private hands with the English Free Coinage Act of 1666.
Specifically, it means an assault on “fractional reserve banking”. If lenders are forced to put up 100pc reserve backing for deposits, they lose the exorbitant privilege of creating money out of thin air.
The nation regains sovereign control over the money supply. There are no more banks runs, and fewer boom-bust credit cycles.
Some readers may already have seen the IMF study, by Jaromir Benes and Michael Kumhof, which came out in August and has begun to acquire a cult following around the world.
Professors Henry Simons and Irving Fisher were working in the field of pure theory back in 1936 when they created the Chicago Plan. They lacked the computing and research power that the IMF has at its disposal.
The finding is startling. Simons and Fisher understated their claims. It is perhaps possible to confront the banking plutocracy head without endangering the economy.
The obvious advantages of this plan are:
1) complete elimination of bank runs
2) the end of credit-fueled bubbles
3) a reduction of interest burden on government finances and a dramatic reduction in government debt
4) a dramatic reduction of private debt levels
Credit, especially socially
useful credit that supports real physical investment activity, would continue to exist.
What would cease to exist however is the proliferation of credit created, at the almost
exclusive initiative of private institutions, for the sole purpose of creating an adequate
money supply that can easily be created debt-free.
The IMF study makes a point that it is the private issuance of money that is normally associated with major societal problems, due to usury associated with debts. The debt inevitably lead to systemic defaults, forfeiture of collateral, and therefore the concentration of wealth in the hands of lenders. It is for this reason that Middle Eastern religions prohibited usury.
Even the great free-marketer Milton Friedman supports the call for 100pc reserve backing.
There are several reasons why the Chicago Plan will not be implemented in the near future. First of all, it would eliminate the power that Wall Street holds over Washington. Thus Wall Street would stop at nothing to defeat the idea.
Secondly, it would give the federal government a great deal more control over the economy. Thus conservatives would oppose it at every step.
Finally, there would be risks and it is hard to understand. Thus it would be easy to scare the electorate into opposing it.
There is no logical reason why private banks are totally in control of the issue of money. Nor does it make sense why all money must be backed by debt.
That’s why it is important to know that there are alternatives. Better alternatives. Alternatives that would make the world a better place for the 99%.
4 comments
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Probably too long for many readers here.
At any rate the Chicago Plan because, on the surface, makes sense, it cannot be considered. My sense is that we live at a time that rejects actual solutions to actual problems–we don’t want any of that which is why political and economic change is, at this point and with current cultural conditions, impossible. All we can do is to keep on keeping on as we are. To put it another way, as long as our mythological framework tells us that we are consumers not upright human beings who live under a code of ethics that equates money with virtue and whose supreme deity is called “The Economy” current frameworks including our monetary system will be maintained no matter how bad things get and will be maintained by increasing degrees of force. Should the values change, somehow, then things might improve.
It’s about time gjohnsit. I always enjoy reading your stuff and as you know I have been advocating this for some time. You finally are on Bill Still’s bandwagon (author of the “Secret of OZ” video and the even better one before that “The Money Masters”).
One argument that I find that persuades people is that it was Lincoln who really tried it out and made it work when the bankers wanted 24 -36% interest to finance the civil war. It was so successful that before the war was even over the Banks put enough people in Congress to stop it with the Banking Act of 1864. I follow that up with the fact that the Americans averaged $50 per capita after the civil war and that number had declined to $6 per capita by 1885.
When the government prints the money there is enough to go around and when the private sector does it through debt instruments, there are periods when there is enough and then there are periods when there is not nearly enough.
Such a simple solution but as you say, the financial powers that be will probably never let it happen.
What gets me though, is that it never seems to be seriously considered by economists. I believe there is some Australian economist that is now advocating it, but you certainly don’t see the Krugmans or Stigliches doing it as far as I know.